How Allianz is approaching ESG investments

Gregg Lutz, Head of US Asset Liability Management at Allianz explores what ESG investing means for him, how the pandemic has impacted responsible investments and what changes the firm has made to its investment decision making process

Sara Benwellposted on Monday, November 09, 2020

Gregg Lutz will be speaking at the Insurance Asset Management Virtual Summit, North America 2020 in December. To register for the event click here.

Insurance Investor: What does “ethical investing” mean to you? 

Gregg Lutz: It has been evolving for the time that I have been in an investment career. Most of my work has been institutional fixed income related. Here it is a very corporate ethical standard that is driven at a higher, more aggregate level, versus someone who has much more interaction with the transactions.

It is more in tune with a specific customer rather than 700,000 policy holders who you are investing for to provide benefits for them and profits for shareholders. 

It has always been evolving and has become more ethical, so that you are investing in companies who don’t regularly do things bad against their customer base.

Insurance Investor: Has there been more of an emphasis on ‘Social’ and ‘Governance’ compared to before the pandemic?

Gregg: There has already been some level of ESG integrated into our enterprise risk management facility. However, this has been more ring fencing i.e. don’t invest in these types of corporations. Here it is more about what most of our customers and policy holders want out of where their money and benefits are going to come from.

I wouldn’t say that the pandemic has changed anything, as we have been evolving this ESG framework across the worldwide organization of Allianz for a few years, so that we have some consistency.

"Each major entity of Allianz is looking at making a much more rigours framework"

It is still going to vary for each local entity due customer base and local rules, and this is something that is always tricky to navigate. That being said, each major entity of Allianz is looking at making a much more rigours framework that is less about not buying something, and more about why you want to buy certain other things and why they fit into a new framework.

I don’t feel that this is related to the pandemic but more poignant because of Covid-19 but I feel that the global effort, particularly in local U.S, is picking up steam and energy.

Insurance Investor: Have your attitudes to these concepts changed and do you think this will continue to impact investment decision making in the long-term?

Gregg: Allianz has a lot of third-party asset managers who they rely on and work with and through these conversations.

The awareness of augmenting their portfolio and investment strategies for us inside their investment guidelines is such that they are working with us at the table to elevate our understanding of what ESG means, not only for us, but across the industry.

When you have a lot of information like this in a topic that is emerging, you get a really nice mix. However, it can lead to tough decisions and too much information.

I am not seeing this as the case right now, but rather as more of an understanding on how particular components of ESG investing can be integrated and these are all growing in force.

Insurance Investor: What are the tangible changes you have made to your investment decision making process in-light of the global market volatility caused by the pandemic?

Gregg: Oddly enough, since 2008 Allianz globally has been very risk off, particularly with regard to structured products because they are so maligned in most of the Solvency II models in Europe.

We had finally broken this down a little bit in the past couple of years to be able to bring on some more of the risk, and being able to go a little bit deeper into the stack where other companies were well ahead of us in this particular area.

"As we take on risk, we want to make sure we are getting paid for it appropriately"

I wouldn’t say that we are diametrically opposed as both companies are trying to make sure that their positions for getting the right return for the risks they are taking, and we aren’t maximising our return for the level of risk we could be taking.

As we take on risk, we want to make sure we are getting paid for it appropriately and to understand that risk.

The rating agencies and regulators will be looking even more at the asset side of the business and seeing that these things are headed on a downgrade path due to the impacts from the pandemic and this is going to last for the next couple of years.

"We made some smaller investments in companies who are working with insurance companies or other corporations that help reduce their carbon footprint"

On the margins, there are little opportunities for venture capital and/or seed money investing that helps out the insurance industry that focuses on this particular topic.

We made some smaller investments in companies who are working with insurance companies or other corporations that help reduce their carbon footprint or make eco-friendly office furniture.

These are areas that wouldn’t have been considered in the past, but now due to this growing ESG awareness, these are actually options because they are more viable then they once were.

Insurance Investor: How will the volatility and its impact on assets drive future investment returns?

Gregg: This will vary widely and if the collective thinks that investing in companies who mine coal is a bad investment, there are going to still be institutional investors who will still invest in these companies because they are going to get paid for that.

More than likely, larger corporations who have instituted these ESG frameworks will say no as not much of their revenue comes from coal and they won’t want to be seen investing in these kinds of companies because of the environmental impact that comes from mining coal.

Gregg Lutz will be speaking at the Insurance Asset Management Virtual Summit, North America 2020 in December. To register for the event click here.

 

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