Investing towards a resilient world
In Chinese, the word "crisis" is composed of two characters - one meaning danger, the other opportunity. This analogy fits today.
Every crisis reveals who has succeeded in strengthening their resilience in good times and who missed their chances. At the same time, every new crisis provides an opportunity for sustained improvement. The current COVID-19 crisis is no exception.
It will take some time before the COVID-19 storm gives way, even with vaccines available, but we can already see some lessons learnt. For us at Swiss Re, one thing is very clear – sustainability drives resilience. During this year, our investment portfolio weathered the storm better than it would have if we had not been decisive about taking environmental, social, and governance (ESG) criteria into account early on. Our credit and equity benchmarks outperformed their traditional equivalents not only during the big market sell-off in March 2020 but throughout the year. Overall, the ESG equity index outperformed traditional benchmarks by 1.1% in der first 9 months of the year and ESG credit investments by 0.2% for the same period.
Lower downside risk and better risk-adjusted returns over the long run are the main drivers for Swiss Re switching to ESG benchmarks three years ago. Now knowing that the advantage can hold true in periods of extreme volatility only reinforced our conviction that it was the right decision. With what we have learnt so far from this year's environment, our commitment to sustainability has only strengthened.
Currently, the world economy is in its deepest recession of our lifetime. Government response to the crisis is unprecedented: Gigantic sums are getting poured into the system, more than ten times higher than what the response was during the 2008/09 financial crisis. It is key that countries not only spend more but spend it better. To that end, investments should focus on productivity-enhancing areas such as infrastructure or technology and on solving long-term challenges such as climate change.
The capital market players can contribute to this by acting as a catalyst, redirecting capital flows into sustainable investments. As institutional investors we should assume a responsibility beyond managing our own portfolio. We are doing this as a founding member of the Asset Owner Alliance (AOA). We have committed ourselves to bringing the greenhouse gas emissions of our portfolio to net-zero by 2050 and contributing to the Paris Agreement of limiting global warmth to 1.5 degrees. What started with a handful of members, has grown to more than 5 trillion assets under management. Engagement, an important tool for working with the real economy, thus takes on a different relevance: If both we and the companies we invest in pursue a net-zero strategy, a global transition is possible, and we truly move towards a more resilient world. This is what we call the domino effect, an important and meaningful change the AOA kicked off.
The time to invest responsibly has never been better: The crisis has proven once again, that there is no contradiction between responsible investing and economic gains. By investing responsibly, we get the benefit of protecting our own portfolios, while contributing to a more resilient world – helping ourselves, our societies and the world around us.