Next-Finance : What were your motivations for participating in the implementation of the Principles for Responsible Investment “PRI”?

Yann Duvaud-Schelnast : The Principles for Responsible Investment (PRIs) have become a natural step in our approach as a responsible institutional investor by providing a structural framework for the incorporation of ESG criteria in decision making and asset management processes. As such, we are glad to be part of the initiative since 2007. PRI are promoting actions to drive our investment activity without forcing the investors in their effort to define ESG paths and take decisions. These principles are voluntary and this is, from our point of view, how Sustainable Finance will improve and will be part of every step all along the investment value chain for both Asset Owners and Asset Managers. Being PRI signatory shows, at least, the commitment to some efforts to incorporate sustainability within our daily job and that is why it has become one of the criteria we are looking at when choosing the right partner to develop Investment Strategies.

Concretely, what commitments were made?

First, the PRIs helped us to improve our own ESG Strategy. They helped us promoting dialogue and exchange with issuers as well as promoting our actions within our market. It helped us to have more frequent interactions with other signatory entities to exchange ideas, practices and also being part of new sustainable initiatives.

As part of discussions with our asset managers, this allowed us to raise awareness and start the discussion on their ESG approach / strategy. This goes hand in hand with our three forms of ESG criteria applicable to our entire investment portfolio.

The first form is responsible investment by exclusion of harmful products based on ESG criteria: We generally do not invest in coal-based business models and banned or controversial weapons.

The second form is ESG investment, where ESG factors are actively addressed to lead to, at least, no harm on environmental and social aspects. We integrate ESG factors across asset classes: ESG scoring for listed assets and ESG referral process for unlisted assets. We consider ESG factors along investment lifecycle: governance; asset manager selection, monitoring and review; knowledge exchange with different stakeholders; voting and engagement.

The third form is impact investing where consideration of ESG criteria leads to measurable positive environmental and/or social impacts along with market-rate returns. The launch of our newest impact investing product, Citizen Capital Impact Investing (CKI²) is the illustration of our effort to deploy the full Investment ESG strategy.

A few years ago, former AXA CEO Henri De Castries said that a 4 degree warmer world will be impossible to insure. Is the insurance sector one of the sectors most at risk in the event of global warming? How do you factor this risk into your portfolios today?

Over the last years, it has become scientifically evident that the ones who still challenge global warming are on the wrong side of the debate. It is also obvious that as an insurer and a strong actor in everyone’s daily life, we have to be very serious on the topic. It shouldn’t come as a surprise that the link between our insurance activity and global warming and all its impacts is strong. We insure goods as well as companies whose production units may possibly be in a CatNat risk zone (storm, seismic fault, flood, etc.).

As an investor, we are facing two types of risks, transition risks and physical risks. On this basis, our team at Allianz France has internally developed the “carbon smart” approach through an instrumental framework to tackle the subject. It is a triple-loop around three pillars: Identification, Assessment and Management. In practice, each pillar is an input for the next, and the result is a roadmap and a checklist for us to address both climate risks and opportunities, evolving over time.

We identify transition risk factors such as policy and technology, and assess transition risk by relevant metrics, for example: portfolio carbon value at risk, which defines the gap between current carbon prices and future carbon price targets, varying by sector and geography, reflecting exposure to carbon pricing regulation risk; portfolio alignment with climate scenario, which assesses and compares historical and projected carbon profiles of investee companies against levels of decarbonization required in a low carbon scenario.

We identify physical risk factors as acute and chronic climate hazards, and assess physical risk by relevant metrics. For example, supply chain risk scoring, which measures the risk in countries that contribute to sector production and export activities as well as the level of sector’s dependency on climate-sensitive natural resources.

Identification and assessment of good quality lead to better management, as an investor, we have two levers for climate change: investment and engagement.

Are you looking to reduce the carbon footprint of your portfolios? What methods do you use to measure this carbon footprint in your portfolios?

Carbon has been on our agenda since some years now. Our ambitions can be measured through our recent engagement in the AOA (Asset Owner Alliance), where we are a founding member and which has rapidly expanded to include several large institutional investors (19 in total). Our objective is not only to understand the ins and outs of the carbon thematic, but also to set ourselves strong targets to challenge ourselves and find out the best possible alternative. Our public commitment, in September 2019, to achieve carbon neutrality within our asset portfolio by 2050 shows our ambitious agenda on the topic.

Carbon is quite a long journey with a high amount of complexity. The first evident step was to understand how to evaluate our portfolio. For this, we have identified and assessed the different methodologies and data providers in the market to determine the carbon value of our portfolio (carbon footprint and other climate metrics). We chose to use data from CDP as well as TruCost and EcoAct.

As per today, the total portfolio value covered in our 2018 carbon footprinting is EUR 61 bn. As shown below, compared with the year 2017, the carbon performance of Allianz France aggregate portfolio in 2018 improved on both carbon intensity metrics. We keep track of our portfolio level carbon performance and steer our investment towards carbon neutral. We are also looking at the financed emission and the Weighted Average Carbon Intensity metric - main metric recommended by the TCFD (Task Force on Climate-related Financial Disclosures).

In parallel, we advocate engagement with different stakeholders such as asset managers, issuers, policy makers and NGOs to fully assume our role as both solution provider and solution facilitator.

Do you have a target of a 100% SRI / Green / ESG allocation?

The main objective of Allianz France is to ensure the resilience of its assets in the interest of clients. Our entire portfolio - whether on listed or non-listed asset - is subject to an ESG analysis / review. For all new investment opportunities, we conduct, in parallel to the financial analysis (done by a separate team within the investment unit), our ESG analysis for which the Sustainable Investment and Innovation department is accountable.

Do you invest in green bonds? Directly or via dedicated funds?

Green Bonds is an interesting and innovative asset class. Naturally, we hold Green Bonds like most of our competitors, which indicates a certain appetite on the part of our asset managers for this asset. But this is not sufficient – proactively, we wanted to go one step further and take stronger engagement last year and we have mandated Allianz Global Investors to manage a Green Bonds fund on our behalf.

Swiss Re has recently changed the traditional benchmarks of its investment portfolio to ESG benchmarks, has this reflection been started in your country?

We are indeed looking at the subject of benchmarks. The European Commission, through the TEG working groups, is looking at the subject. At this stage, it remains to be defined what is a real ESG or climate benchmark and what is hidden there. We are not negative about benchmarks but prefer to analyze them and understand them better before having them adopted by our Asset Managers.

What are your main subjects of interest and axes of development in the short and medium term?

The topic of ESG in an asset portfolio is becoming more and more complex. First of all, in order to meet our responsibilities, we must continue to strengthen our expertise and prioritize the work to come. Beyond what has been mentioned above with the desire to develop the AOA and to work collectively on decarbonization methodologies of an asset portfolio, we will carry out various projects in 2020.

First of all, we at AZ France always keep in mind that transparency towards our end customers is key and we seek to share with them the various initiatives and actions that we are carrying out. The reporting part and in particular a solid response to article 173 on the energy transition law must be continuously improved. The definition / structuring of products that we consider in line with our ESG strategy becomes more and more important.

Our capacity for entrepreneurship must be strengthened. In this sense, we remain alert to any new investment opportunities. New themes will gain in importance and the subject of biodiversity in particular (linked to the carbon subject) will be at the heart of our studies in the coming months. Finally, in the wave of 2019, we will be careful how we improve our approach to impact investing, which is a subject very dear to our ESG strategy.