The ESG criteria are sustainability criteria that insurers as institutional investors are increasingly incorporating into their investment and risk processes (see expert articles on the BaFin website dated 4 December 2017 and 3 July 2018). The abbreviation ESG stands for environmental, social and governance.

Dialogue with the industry

In the first workshop on the topic (see July 2018 edition of BaFinJournal – only available in German) representatives of large and medium-sized undertakings reported on how the ESG criteria could reasonably be taken into account in risk management. The second workshop, which took place in Bonn in November, focussed on smaller undertakings. BaFin Director-General Dr Kay-Uwe Schaumlöffel and other BaFin experts discussed proportional approaches with representatives of these companies. Representatives of the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft – GDV) and the German Association for Occupational Pensions (Arbeitsgemeinschaft für betriebliche Altersversorgung – aba) were also present. Both confirmed that the industry is currently engaging intensively with the topic of sustainability in investments.

New regulatory requirements

BaFin's Senior Advisor Nadine von Saldern began the November workshop by outlining the regulatory changes relating to sustainability that are currently on the horizon. The focus here lies, in particular, on the legislative proposals of the European Commission published in May (see July 2018 edition of BaFin Journal – only available in German).

The relevant provisions of the Directive on the activities and supervision of institutions for occupational retirement provision (IORP II Directive) are also relevant to institutions for occupational retirement provision.

Both the European Commission’s legislative proposals and the IORP II Directive contain sustainability requirements for Pensionskassen and Pensionsfonds (occupational pension schemes and pension funds) which go beyond the existing requirements. For example, Article 30 of the IORP II Directive stipulates that Pensionskassen and Pensionsfonds prepare a written statement of their investment policy principles. This statement must also address the question of how the investment policy takes environmental, social and governance factors into account.

Industry feedback

The company representatives reported on their previous experience and planned activities relating to the sustainability of investments. This focussed on the question of how ESG criteria could be integrated into risk management.

Some company representatives with many years of experience in this field presented possible approaches. They described their previous experience in taking account of ESG criteria in investment decisions and in risk processes and shed light on the challenges, for example in preparing positive and negative lists.

The insurance undertakings emphasised the importance of a subjective approach that is unique to each undertaking in the definition of ESG criteria. Customer interests, the individual values of the undertaking and also the field of activity of the sponsoring undertaking play a decisive role in this, they stressed. In the consideration of ESG criteria, the secure financing of insurance payouts must be a priority.

Giving examples, the company representatives illustrated how their undertakings take ESG criteria into account at the level of the respective investment classes. In the case of direct investment in property, value is attached to environmentally-friendly building processes for energy-efficient buildings, for example, and in decisions to buy sovereign bonds, the respective state’s democratic constitution, approach to human rights and its measures to counter corruption are checked.

The representative of one Pensionskasse explained how institutions for occupational retirement provision are at present required to disclose ESG criteria to current and future beneficiaries. Here he discussed section 144 (1) sentence 1 no. 1 (f) of the VAG, in accordance with which life insurance undertakings that offer occupational retirement provision must, at the start of the pension contract, provide information on how the provider takes account of environmental issues when using the contributions paid in.

The speaker also dealt with future information obligations which, against the background of the European Commission’s legislative proposal, are currently a key focus in the insurance industry. The proposal provides for specific requirements concerning the disclosure of information, including information on how insurance undertakings and institutions for occupational retirement provision take ESG criteria into account in their investment decisions and risk processes.

Another company representative emphasized in his report that insurance undertakings and institutions for occupational retirement provision have long taken ESG criteria into account in their investment decisions. He argued that these undertakings are long-term investors and, as such, are inherently oriented towards sustainability.

Scenario analyses and climate stress tests

Marc Wolbeck, Head of the BaFin Division Basic Issues relating to Investments, announced that in 2019 BaFin will discuss the implementation of scenario analyses and climate stress tests in supervisory interviews with selected insurance undertakings and institutions for occupational retirement provision. Scenario-based analyses and stress tests can be helpful tools to quantify risks (see expert article on the BaFin website dated 3 July 2018). Conducting scenario analyses and climate stress tests will allow undertakings to better identify, assess, monitor, manage and control their environmental risks. Around six percent of insurance and reinsurance undertakings – with the exception of funeral expenses funds – and institutions for occupational retirement provision that fall within the scope of BaFin’s supervision already use climate stress testing as part of their investment risk management. This was revealed in an industry survey conducted by BaFin at the beginning of the year (see July 2018 edition of BaFinJournal – only available in German).

Conclusion

Concluding the workshop, Dr Schaumlöffel stated that, based on the industry feedback and the discussions held with the participants, BaFin is under the impression that many undertakings are already dealing intensively with the topic of sustainability, although their level of experience in this area may vary.

The discussions showed that the undertakings are positive about the future regulatory requirements. However, the participants argued in support of the freedom to choose their own method of taking ESG criteria into account in investment decisions and risk processes.

Footnotes