Bernadette: Sustainable investing means that fund managers go beyond purely financial factors when screening potential investments and also assess a company or institution’s track record in environmental, social and governance criteria. The purpose is
to better manage risks and
generate sustainable, long-term returns. This is the definition of the
UNPRI, the United Nations Principles of Responsable Investing, co-signed by AG.
The strategy is all about incorporating ESG criteria (Environmental, Social and Governance) in the investment decision. Important considerations include, for example, a company’s pollution record, its regard for human and children’s rights, its avoidance of fraud. It covers far more than just the environment and climate change, topics that have been in the news and up for political debate over the past few months. The concept has a much deeper meaning.
Bernadette: As a long-term investor, AG has made
considerable efforts since 2007 to apply the principles of sustainable investing. Obviously we comply with the legally prescribed exclusions, such as investment in countries subject to international sanctions or in manufacturers of controversial weapons, as required under Belgian law. We also refrain from investing in tax havens, as such practices conflict with our core values. And we recently added investments in weapons, tobacco and coal to our exclusions list.
This year,
we have taken things up a notch at AG Insurance and AG Employee Benefits by further incorporating ESG criteria in all of our investment decisions, whether in Branch 21 or Branch 23. The signing of the UNPRI serves as additional tangible proof of our commitment.
Is the signing of the UNPRI simply a reflection of AG Insurance’s own values?
Wim: Exactly. The UNPRI very closely mirror AG’s core values. The advantage of the UNPRI is that we have to actually show what we’ve done every year.
Actions speak louder than words. Not to mention that the criteria get increasingly stricter with each passing year.
Bernadette: Signing the UNPRI also promotes
greater transparency. Our internal managers apply the guidelines, and our external managers also need to sign and uphold the UNPRI. For this reason, we do business solely with managers that are sensitive to ESG issues and incorporate them in their investment decision process, so that our customers can also reap the benefits.
Bernadette: Before we can assess the ESG criteria, we first need to have a clear overview of the situation. To assist us with the process, we work with an independent international external partner that supplies us with specific ESG data. If a company has controversial business dealings, this information will be flagged and we will be notified accordingly. In addition, our managers also compile
the necessary information themselves so that they can make informed decisions. This includes, for example, keeping up with press releases and independent financial analyses as well as meeting key people at the company itself.
Bernadette: Yes, there is a process in place that requires the manager to take both factors into account.
We incorporate the ESG score in our analyses and check how it stacks up versus our own benchmark. If the company earns top marks, it’s full steam ahead with the investment opportunity. If the company scores below the minimum threshold, investing in the company may still be an option, but the manager will need to justify the decision and have it approved by an ESG Committee. With this strategy, companies that scored less well in the past but have since made strides to improve can still be included in our investment portfolio. This is due to our role as an insurer and our focus on the long-term.
Wim: Yes, the investment of your premiums and reserves is also sustainable, whether you have opted for Branch 21 or Branch 23.
We incorporate ESG criteria across our entire portfolio, simply based on common sense. I think we can all agree that if you invest in a coal mining company, you need to be aware of the many long-term risks involved in the repayment of, say, a 15-year bond. Not to mention the many sectors we refrain from investing in, as we feel that the long-term risks and reputational considerations clash with our values, such as tobacco and weapons.
Wim: In the past, if you really wanted to apply ESG criteria to your decision-making process, your range of investment opportunities was quite limited. With the growing popularity and rising demand for sustainable investing, there is now much more data available. In the long run, I expect that the differences will be very small or even positive. That is what research has shown in any case. It’s no longer an "either…or" proposition:
with sustainable investing, you get to pursue both sustainability and ROI.
Bernadette: Sustainability is not a flash-in-the-pan fad. It has been top of mind for certain insurance market players, such as AG, for over 10 years. Actually, it’s our legislation that is still lagging behind. Starting in 2015, EU initiatives have been taken and international treaties signed to incorporate sustainable practices, and in 2018, the European Commission launched an action plan to develop a more sustainable economy.
Sustainability has received a fair amount of attention in Belgium as well. For example, the National Bank of Belgium supports the transition to a less carbon-intensive economy and has called to incorporate climate risks in risk management practices. And
banking industry representative Febelfin has launched a quality standard for sustainable investment that includes specific ESG factors, that distributors and producers of financial products can voluntarily strive to achieve.
Wim: This showcases the
growing importance of sustainable investing. See for yourself: all investors need to keep sustainability in mind!