Responsible investing has many aspects. A holistic Responsible Investing strategy should also consider climate-related activities as an integral part. With ours, we actively support the transition to a net-zero emissions economy and mitigate climate-related risks.
Swiss Re is a long-term investor. As a result, it is important that we also take a long-term view on the risk factors that may have an adverse impact on our portfolio, such as climate change. We therefore address climate change to make our portfolio more resilient.
As a founding member of the UN-convened Net-Zero Asset Owner Alliance (AOA) launched in 2019, we are committed to having a net-zero emissions investment portfolio by 2050 in accordance with Article 2.1c of the Paris Agreement. Through our dedicated climate actions, we are working to achieve this by setting intermediate targets every five years and regularly reporting on progress.
Climate-related risks can impact the value of our investments and are therefore considered an important part of our Responsible Investing strategy. One of the key risks faced by asset owners is that a changing regulatory environment may result in a specific company or a particularly exposed industry becoming a stranded asset in investment portfolios, ie the devaluation of investments driven by unfavorable changes, such as increased taxes or new regulations. The market environment is expected to shift to address mitigation and adaptation requirements to limit a global temperature rise to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C.
To support this goal, we align with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and publish a dedicated TCFD section in our Financial Report.
As part of our mitigation strategy, we have implemented pre-defined thermal coal as well as oil and gas (which also includes oil sands) related exclusion thresholds and monitor related investments that are below these thresholds. Our dedicated approach to climate risk management involves the systematic monitoring of the carbon footprint of our government bonds, corporate bond and listed equity portfolio.
To enhance how we assess the alignment of our portfolio with the 1.5°C target, we have further strengthened our approach, taking additional forward-looking indicators into account. Companies may mitigate exposure to climate risk by adapting to market forces or adhering to new and evolving requirements. The forward-looking indicators allow us to analyse climate risk-exposed industries down to the issuer level. They inform us about the preparedness of companies for a transition to a net-zero emissions economy and identify potential leaders and laggards in such a transition. Although aware of the limitations related to data quality and coverage, we assess the sectoral temperature alignment of our corporate bond and listed equity portfolio. The evaluation of the companies' alignment is based on the pre-defined 1.5°C carbon budget considering their reported as well as modelled future emissions. This informs us about the sectoral trajectory related to the transition to a net-zero emissions economy and hence the alignment with the 1.5°C target. While many issuers have set carbon reduction targets, are actively working towards lowering their energy consumption or are already on a pathway consistent with the targeted temperature trajectory, others continue to contribute substantially to excess emissions not consistent with the 1.5°C target. Even though our analyses show that a transition to a net-zero emissions economy may be challenging and costly, we consider developments as identified to be encouraging.
Our long-term objective for 2030 is to fully exit coal-related assets, such as coal mining and coal-based power generation, for our listed equity and corporate bond portfolios via normal portfolio reallocations. To increase efforts to mitigate transition risks in our portfolio, we have also begun to limit investments in companies active in coal mining or coal-based power generation that are planning to expand their capacity. To further strengthen our mitigation strategy in less liquid asset classes, we developed dedicated fossil fuel guidelines for our infrastructure loan and our private placement portfolios in 2020. This is particularly important as both have a long-term investment horizon. For upstream (exploration and production), midstream (transportation and storage) and downstream (refinement and distribution) investments, we are limiting the maturities for fossil fuel-related assets. The guidelines ensure an investment universe that is in line with our commitment to a net-zero emissions investment portfolio by 2050.
As Swiss Re committed to have a net-zero emissions investment portfolio by 2050 we established an intermediate portfolio emission reduction target for the period of 2020 to 2025. Informed by IPCC’s pathways consistent with the 1.5°C target, we defined a carbon intensity reduction target of –35% for our corporate bond and listed equity portfolio, to be achieved by 2025 with 2018 as the base year. Furthermore, we set a carbon intensity reduction target for our Swiss and German real estate investment portfolio of –5% with 2018 as the base year, to be achieved by 2025.
Further, we analyse the impact of climate-related risks on our real assets, such as real estate or infrastructure, as they could be exposed to hurricanes, tropical cyclones or floods. In addition to considering physical risks when acquiring new properties, we analyse these exposures across the investment portfolio based on our proprietary modelling capabilities used for our re/insurance underwriting. In 2020, we have extended this analysis to our private debt investments, including infrastructure loans and commercial mortgage lending, as well as commercial mortgage-backed securities. The results of both analyses suggest that, under current conditions, our real asset holdings have a very low exposure to natural perils in general and to climate related perils in particular.
Please refer to our KPI tab for an overview of our climate targets and related measurements and metrics.
We expect our consistent and broad-based integration of environmental (which also considers climate change), social and governance (ESG) criteria along the investment process to contribute to an improved risk/return relationship in our investment portfolio, particularly over the longer term. Climate change does not just create risks, but also presents new investment opportunities, which are another integral part of our Responsible Investing strategy.
Alignment with the 1.5°C target
At Swiss Re, we believe that engagement with the real economy is an integral part of our contribution to limiting global warming to 1.5°C. In 2020, we implemented our newly developed Engagement Framework, to support our investee companies in strengthening their business performance and achieving shared long-term goals for responsible investing. For more information on our engagement approach, please refer to the Stewardship (Voting and Engagement) section.
As part of our climate strategy we consider investment opportunities that enable a net-zero emissions economy, such as green bonds, renewable energy infrastructure loans or green real estate.
Green bond proceeds are used exclusively to finance environmentally sustainable projects that address key areas of concern, including not only climate change, but also natural resource conservation, biodiversity conservation, and pollution prevention and control. We support the transition to a net-zero emissions economy by investing into green bonds following the ICMA Green Bond Principles. For our green, social and sustainability bond mandate we have set an investment target of USD 4 billion to be achieved by the end of 2024.
Renewable energy infrastructure loans
For our infrastructure loan allocation, we work with best-in-class managers to gain access to, and provide financing for, renewable energy projects that reflect our risk appetite, generate attractive long-term returns and help build a more sustainable energy supply for the future. In 2020, we established a new target to deploy an additional USD 750 million to renewable and social infrastructure loans by the end of 2024.
Green real estate
For real estate investments in Switzerland, we apply the following sustainability metric and criteria: energy sources as a percentage of market value and MINERGIE® certifications, a Swiss sustainability label for new and refurbished buildings.
The externally managed real estate portfolio is predominantly invested in Australia, CEE, the UK and the US, and contains 50% green buildings based on regional energy labels. The Australian portfolio is the most advanced, followed by the UK portfolio. In Australia and the UK, the investment managers’ approach to sustainability includes the National Australian Built Environment Rating System (NABERS) rating scheme and the Building Research Establishment Environmental Assessment Method (BREEAM) certification framework, respectively.
In the US, our approach to sustainability includes some of the most recognized certificates and guidelines such as the LEED (Leadership in Energy and Environmental Design) certification from the US Green Building Council.
Please refer to our KPI tab for an overview of our climate targets and related measurements and metrics.
Targets & KPI
In accordance with the Net-Zero Asset Owner Alliance's Inaugural 2025 Target Setting Protocol, we set targets for the years 2020 to 2025.
For the carbon footprint, we use the metric “weighted average carbon intensity”, which defines the portfolio carbon intensity based on relative investment share.
Net-Zero Asset Owner Alliance
Swiss Re is a founding member of the United Nations-convened Net-Zero Asset Owner Alliance. Along with some of the world's largest institutional investors we thereby committed to transitioning our investment portfolio to net-zero emissions by 2050. The commitment is in line with a maximum temperature rise of 1.5°C as addressed by the Article 2.1c of the Paris Agreement.
We believe that engagement with the real economy is an important component to help limit global warming to 1.5°C. We therefore seek to achieve the commitment made by advocating for business and industry actions and public policies to promote a transition to a decarbonisation pathway compatible with the goal of the Paris Agreement. As part of this, we also call for consistent data and methodologies as already mentioned in our Responsible Investing publications. However, in certain cases, we are required to take a more risk averse approach and thus need to consider divestments. For more information on our engagement approach, please refer to the Stewardship (Voting and Engagement) section as well as our Overview of Swiss Re Asset Management's Stewardship Approach.
Swiss Re was instrumental to the development of the Alliance's Inaugural 2025 Target Setting Protocol, a guide for individual and collective target setting and reporting by Net-Zero Asset Owner Alliance members for the period 2020 to 2025. In accordance with the Target Setting Protocol, we have defined targets for financing the transition, our engagement activities, the sub-portfolio, and investments in the coal sector, taking scientific evidence into account to the extent possible.