Comments on the Commission s Public Consultation on Institutional Investors and Asset Managers Duties Regarding Sustainability German Insurance Association ID-Number 6437280268-55 Gesamtverband der Deutschen Versicherungswirtschaft e. V. German Insurance Association Wilhelmstraße 43 / 43 G, 10117 Berlin Postfach 08 02 64, 10002 Berlin Tel.: +49 30 2020-5440 Fax: +49 30 2020-6440 51, rue Montoyer B - 1000 Brüssel Tel.: +32 2 28247-30 Fax: +32 2 28247-39 Contact: Tim Ockenga Head of Investments E-Mail: t.ockenga@gdv.de www.gdv.de
Executive Summary Insurance and reinsurance companies are one of the largest institutional investor groups. The German insurance association GDV therefore welcomes the opportunity to comment on the Commission s public consultation on institutional investors and asset managers duties regarding sustainability and provide technical input on insurers investment processes. Due to the very detailed and often company specific questions in the consultation GDV has focused on important highlevel comments on the consultation. The German insurance industry supports initiatives to foster efficient asset allocation and sustainable financing and to help the recognition of ESG criteria in institutional investors asset management in the European Union. Insurance companies and pension funds are inherently long-term oriented due to their business models with often long-term liabilities. Consequently, the industry is increasingly engaged in long-term sustainable financing and has equally increasingly incorporated ESG criteria in their investment and risk management processes. We would like to provide a set of high-level comments on the consultation: GDV believes that current regulatory requirements under Solvency II do not systematically lead to a short-term bias in insurers investment decisions. According to Art. 132 of the Solvency II Directive insurance undertakings are obliged to invest their assets in accordance with the prudent person principle. Assets have to be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole. The long-term and economically sustainable nature of insurers investments is reflected by very low default rates in the investment portfolios and an increasing duration of assets. GDV believes, the current understanding of insurance investors regarding their fiduciary duties does not lead to significant misallocations or poses any risk for financial stability. In implementing the prudent person principle insurers have a large degree of individual responsibility and discretion. Therefore, there should be no binding guidance for insurers on the methods and processes that undertakings follow to consider whether ESG aspects are viewed as material with regards to a potential impact on the security, quality, liquidity and profitability of the portfolio as a whole. In GDV s opinion fiduciary duties already require insurers to reflect ESG aspects and long-term sustainability in their investment and risk management process if these aspects are deemed financially Page 2 / 10
material. ESG aspects are viewed as financially material if they have an impact on the core investments principles of security, quality, liquidity and profitability of the portfolio as a whole. The current investment principles are seen as most suitable to serve the main obligation of insurers which is to guarantee commitments arising from contractual obligations against its policyholders and beneficiaries. Accordingly, GDV sees no necessity or benefits from explicitly integrating a regulatory requirement for insurers to consider material ESG factors and longterm sustainability. While insurers are significantly increasing investments in sustainable projects and increasingly integrate ESG criteria in the investment process, GDV still sees a number of barriers for further recognition of ESG aspects that need be addressed. The availability and quality of ESG data is viewed a major constraint for considering adequately ESG factors in investment and risk management strategies. Universally valid standards and definitions for ESG factors could be reasonable to address this problem and increase transparency for both institutional investors as well as issuers. Page 3 / 10
I. Introduction GDV has informed its members and encouraged companies to answer the Commission s consultation paper. Given the very detailed and often company specific questions raised in the consultation paper GDV has decided not to answer every single question but to focus on a set of highlevel comments. The German insurance industry supports initiatives to foster sustainable financing and to help the recognition of ESG criteria in institutional investors asset management in the European Union. GDV believes that such recognition of ESG aspects in the investment process is inherent by the social stewardship of companies as well as the long-term and sustainable business model of insurance and reinsurance undertakings. To inform its members and in order to give insurers guidance, GDV has published in March 2015 a brochure with non-binding references on how to integrate ESG criteria in insurers investment processes. 1 In its comments on the consultation of the 2017 mid-term report of the EU High- Level Expert Group on sustainable finance GDV asked for the development of a consistent and coordinated European sustainability strategy and welcomed initiatives for a clear framework and definition of sustainable finance. Moreover the industry has asked to improve the supply of adequate projects in order to foster such investments in the EU. German insurers are increasingly engaged in sustainable financing to optimise long-term value for its policyholders. To give an example, at yearend 2016 long-term investments in renewable energy projects amounted to c. EUR 6 bn. Insurers are the most important institutional investor group in Europe in onshore wind farms. ESG strategies can contribute to the creation of new markets like green bonds, etc. Moreover, according to a survey amongst members German insurance companies already consider ESG criteria for around 50 % of total investments of more than EUR 1.5 trillion. Also, insurers with assets of around EUR 614 bn have signed the United Nations Principle of Responsible Investments. Despite the industry s positive contribution to a long-term oriented financial and economic system GDV is concerned that such a contribution is increasingly viewed as the main task of insurers by some stakeholders. The primary task of insurers has to be to guarantee the commitments arising from contractual obligations against its policyholders and beneficiaries. Therefore insurers should not be pushed to invest in certain asset classes. At the same time, insurers should not be prevented from investing long-term in certain assets if they have the interest and ability to do so. 1 http://www.gdv.de/wp-content/uploads/2015/03/gdv_hinweise_nachhaltigkeitskriterien_kapitalanlagen_03-2015.pdf Page 4 / 10
II. Comments on Insurers Investment Practices 1. No Systematic Short-Term Bias in Investments from Solvency II Insurance companies and pension funds are inherently long-term oriented due to their business models with often long-term liabilities. According to Art. 132 of the Solvency II Directive insurance and reinsurance undertakings are obliged to invest their assets in accordance with the prudent person principle (PPP). Insurers are only allowed to invest in assets and instruments whose risks the undertaking concerned can properly identify, measure, monitor, manage, control and report. Assets have to be invested in a manner that ensures the security, quality, liquidity and profitability of the portfolio as a whole. Moreover, investments have to be appropriate to the nature and duration of liabilities and in the best interest of policyholders and beneficiaries. In implementing the prudent person principle insurers have a large degree of individual responsibility and discretion. GDV believes that insurers follow the prudent person principle thoroughly. With their investments insurers often follow a long-term buy-and-hold strategy. Invested assets are aimed to generate stable, low risk and low volatility returns for insurers policyholders and beneficiaries. As a consequence, overall investments are very cautious with a clear focus on fixed income instruments of high credit quality and very low default rates. The nature and duration of liabilities is reflected by a significantly increasing duration of assets in recent years. To give an example the modified duration of German life insurers total investments has increased from around 6 in 2009 to around 10 in 2017. While acknowledging that some regulatory requirements in Solvency II may contribute to short-term investment decisions GDV does therefore not believe that current regulatory requirements do systematically lead to a short-term bias in insurers investment decisions. The evolution of insurers financial returns, defaults and duration of assets does not indicate that insurers follow short-term profit maximisation strategies. GDV supports further investigations of the Commission on the reasons for potential short-term investment behavior of insurers. 2. Recognition of ESG Aspects The German insurance industry believes that recognition of ESG criteria in the investment process can have a positive impact on portfolio structuring and risk management, in particular on the assessment of tail-risks. ESG analysis provides additional information on systematic risks that goes Page 5 / 10
beyond pure financial ratios. Various studies indicate that within ESG Governance may be the most material criterion and value driver in this respect. In GDV s opinion insurers are already required to reflect ESG aspects in their investment and risk management processes if these aspects are viewed as financially material by the insurer. ESG factors are viewed as financially material if they have an impact on the core investments principles of security, quality, liquidity and profitability of the portfolio as a whole. While the recognition of financially material ESG aspects is seen as a fiduciary duty and therefore a must for insurers, the recognition of non-material ESG aspects is not seen as an immediate fiduciary duty. However, insurers may still opt to recognize such aspects as part of a wider ESG investment and / or risk management strategy ( can ). The investment principles in Solvency II (security, quality, liquidity and profitability) are seen as most suitable to serve the main obligation of insurers which is to guarantee commitments arising from contractual obligations against its policyholders and beneficiaries. Accordingly, GDV sees no necessity or advantages from explicitly integrating a regulatory requirement for insurers to consider material ESG factors and long-term sustainability. 3. Question II. 7: Barriers for Integrating ESG Factors While insurers are significantly increasing investments in sustainable projects and increasingly integrate ESG criteria in the investment process, GDV still sees a number of barriers for further recognition of ESG aspects: A barrier for expanding ESG investments and strategies is seen in a continuing uncertainty and lack of information on the financial attractiveness of long-term ESG investments and strategies after costs. Despite a large number of studies on the financial impact of ESG on corporate financial performance there is still a lack of studies that examine effects of ESG strategies specifically from an investor / portfolio perspective. Some institutional investors are also uncertain in how far ESG strategies could materially decrease the investment universe. Insurers as the largest institutional investors are dependent on diversified investments at global capital markets in order to fulfill legal obligations against policyholders and beneficiaries. Adequate ESG strategies must therefore preserve an attractive global investment universe. To implement such strategies is more complex and cost- Page 6 / 10
ly than to simply limit the investment universe (for example with the help of negative lists or exclusion criteria). Finding the right approach for integrating ESG in the investment and risk management processes is complex. Therefore investors have to build up additional human resources and specific expertise to develop and integrate such strategies. Larger undertakings are often ahead of smaller entities in this respect. For smaller entities building up expertise can be viewed as overly cost intensive and adequate human resources may not be available after all. Regulation should therefore adequately take into account the different resources and speed of institutional investors in this regard. The long-term perspective of ESG strategies helps to strengthen the portfolio for the future based on more comprehensive riskreturn assessments. However, the recognition of ESG in the investment process leads overall to additional costs, for example for obtaining information from external ESG agencies, building up specific expertise, internal and external monitoring and control processes etc. Against the background of the current low interest rate environment the sometimes significant launching costs can prevent investors from introducing such strategies. Although there is a large and growing amount of ESG data available to cover investment portfolios and provide basis for ESG assessments, GDV views available and consistent data as a potential constraint for further integrating ESG aspects. Against the background of their large and diversified investment portfolios institutional investors find it sometimes difficult to implement ESG strategies due to inconsistent, non standardised and / or lacking data. In this context, a clear framework including a definition of sustainable finance is still lacking. Clear definitions are desirable to increase transparency for both investors and issuers. A common understanding about sustainable finance and clear definitions could significantly help to develop the market for such sustainable assets. Despite sometimes different comments from interested stakeholders such as NGOs retail customers are often not asking explicitly for sustainable products or ESG investment strategies. However, GDV expects growing importance of ESG also for retail customers, Page 7 / 10
since there are clear indications that especially younger generations put more emphasis on sustainability in all aspects of their life. Another key lever for increasing investments in sustainable projects is ensuring an adequate supply of such assets. Sustainable investments could be best fostered if there were available sustainable projects meeting the strict quality and security requirements of large as well as small and medium-sized insurers. Therefore GDV welcomes the European Commission Investment Plan for Europe. Efforts to create investable long-term sustainable assets should be continued. In order to succeed in creating investable projects and a credible pipeline, crowding-out of private investors should be avoided with strong governance rules in place. This is seen as particular important if a Sustainable Infrastructure Europe (SIE) entity particularly is created similar to efforts in the field of infrastructure. Further steps should be considered to achieve a harmonisation of subsidies and tax policies in Europe in order to make sustainable infrastructure projects safer and more reliable for investors. Appropriate tax advantages for certain ESG investment could lead to more inflows, helping to fill project pipelines and providing more investment opportunities. 4. Question III. 11-17: Information and Transparency As pointed out in the section above (Question II. 7) the availability and quality of ESG data is viewed a major constraint for considering adequately ESG factors in investment and risk management strategies. It should also be noted that the significance and validity of various studies on the attractiveness of ESG strategies for institutional investors are affected by this condition. Q11: Online surveys amongst customers could provide some additional information for investors. However, in practice customers are generally only willing to accept surveys at the time of the conclusion of the contract. After that, customers are most of the time not willing to answer such surveys. Moreover, in most cases policyholders will lack the necessary information to be able to advise institutional investors on adequate recognition of sustainability factors. Also, the information that forms the basis for investment decisions is often very complex, non-public and company specific, e. g. actuarial information on product liabilities, credit Page 8 / 10
risk and duration of investments, etc. Instead, customer preferences could be tested in market surveys conducted by professional service providers. Q12: As mentioned previously, according to Art. 132 of the Solvency II Directive insurers follow the prudent person principle (PPP) and are therefore only allowed to invest in assets and instruments whose risks the undertaking can properly identify, measure, monitor, manage, control and report. Assets have to be invested in a manner that ensures the security, quality, liquidity and profitability of the portfolio as a whole. Moreover, investments have to be appropriate to the nature and duration of liabilities and in the best interest of policyholders and beneficiaries. Integration of sustainability factors and competitive returns are not mutually exclusive. Similar to an investment in a government bond with negative yield, the investment in an instrument with a relatively lower yield due to the recognition of ESG factors can be justified if the above guidelines and regulation are respected for the portfolio as a whole. Q13 / Q14: In many cases information provided by companies is seen as not sufficient. This is in particular true for smaller nonlisted companies with a shorter operating history. Larger (and) listed companies often provide ESG information. At least as important as the sheer availability of ESG information is the quality of such information. Processing of available ESG information is often hindered by inconsistent and / or incomparable data. To give an example, published ESG ratios are different from company to company or similar ESG ratios are calculated inconsistently. Due to inconsistent, non standardised and / or lacking data institutional investors with large and diversified investment portfolios sometimes find it difficult to implement ESG strategies. Q16: One approach could be to put such an investment on a watch list and increase monitoring by risk management. Active engagement with the company could serve as another example. Especially large investors can influence management behavior and strategies of their invested companies if they engage in a dialogue with them. However, the reaction of investors in the case that ESG factors are viewed as material for an investment instrument will always be very company specific. For good reasons, Solvency II provides a large degree of individual responsibility Page 9 / 10
and discretion in this respect. A key element of the Solvency II framework is an undertaking s Own Risk and Solvency Assessment (ORSA). ORSA already provides for the identification of relevant sustainability risks since it requires insurers to put in place processes that are proportionate to the nature, scale and complexity of the risks inherent in its business. Companies have to be able to properly identify and assess the risks they face. Therefore, there should be no binding guidance for insurers on the methods and processes that undertakings follow in such cases. Q15: Universally valid standards and definitions for ESG factors would be reasonable to increase transparency for both institutional investors as well as issuers. Comparability could be improved by standardized definitions of for example green bonds, sustainable investment funds, etc. Also, the development of a suitable carbon factor could be beneficial in order to better assess the risks from transformation and decarbonisation of companies and the European economy. Generally, a common understanding about sustainable finance and clear definitions could foster the development of the market for such sustainable assets. Q17: There are several national requirements in this regard in the Member States. Moreover, larger companies and groups are already required by Directive 2014/95/EU to disclose certain nonfinancial information on the way they operate and manage social and environmental challenges. In order to limit the complexity and burden of various national and international ESG disclosure requirements it should be considered to ask the ESAs to develop an overarching guidance for ESG disclosure requirements. Such guidelines should be developed in an open dialogue with relevant stakeholders and internationally coordinated. Moreover, such overarching guidelines should constitute conformity with already existing national disclosure requirements. Berlin, 22 January 2018 Page 10 / 10