Resilience: promoting economic growth and generating long-term sustainable returns

Swiss Re is a long-term global investor and risk knowledge company whose vision is to make the world more resilient. It lives up to this vision most visibly through its re/insurance activities, but the investment side is equally important. Specifically, Swiss Re can support economic growth and job creation by channelling funds to the productive areas of the real economy at a time when more private market solutions with stronger involvement of long-term investors like insurers or pension funds are urgently needed.

Sharing knowledge

Eight years have passed since the global financial crisis, but economic growth remains modest. Central banks have entered uncharted territory by cutting interest rates to record low levels and launching large-scale asset purchase programmes. In the meantime, governments have failed to implement much-needed structural reforms. Swiss Re argues that the capacity of capital markets to act as a buffer against adverse shocks has been hampered by these developments. Moreover, the global debt over-hang, declining productivity and demographic changes as well as growing income and wealth inequality also weigh on economic growth.

In December 2016, Swiss Re published the flagship report “Growth Recipes” as part of its Long-Term Investors’ series. The report proposes policy measures to strengthen private capital markets and support financial market resilience. It also puts forward a comprehensive policy agenda that includes unwinding central bank crisis policies in an orderly manner, concrete structural reforms and targeted fiscal stimulus in infrastructure with supporting innovative private market solutions.

Furthermore, the report argues for a consistent, clear and reliable regulatory framework as a pre-condition for sustainable economic growth. Regulators should aim at increasing transparency and undertake regular studies of the cumulative and cross-sectoral impact of regulatory changes.

Swiss Re further encourages more standardisation to establish new asset classes, in particular with regard to infrastructure investment, which can support higher potential economic growth. A universal template for infrastructure debt documentation and disclosure requirements could help to overcome these hurdles.

In addition to a lack of standardisation, the project pipeline is slow and investor rights are weak. Strengthening investor rights is particularly important for investments with a long-term nature, such as infrastructure assets, which are prone to policy changes across political cycles. Possible ways forward could be a harmonised dispute resolution mechanism, international arbitration, and the use of bilateral investment treaties.

Public-Private Partnerships (PPPs) are another essential ingredient for long-term investments in infrastructure, and they can be highly beneficial for economies more broadly. A PPP structure with clearly defined roles of involved parties could enable financing through recycling of existing assets or make project loans more accessible to the capital markets.

In a world with a record-high level of debt, Swiss Re is also advocating risk-sharing sovereign bonds as an innovative financing solution. In particular, GDP-linked sovereign bonds would offer optionality for pay-outs and act as a countercyclical stabiliser. The pay-out of GDP-linked sovereign bonds would be driven by the actual GDP outcome with the coupon floored at zero similar to US Treasury Inflation-Protected Securities (TIPS). Governments would benefit from more fiscal flexibility, making the implementation of longer-term, growth-friendly policies easier. Positive public policy actions would feed through GDP-linked sovereign bonds and could therefore incentivise good government behaviour.

Building resilience through its own investments

Through its investments, Swiss Re aims to generate sustainable and attractive risk-adjusted returns. This is entirely consistent with the idea of building resilience because sustainable sources of value would not be discernible without a clear view on the underlying drivers and risk factors. For this reason, Swiss Re integrates Environmental, Social and Governance (ESG) criteria as a key component of its investment process — a priority that is also reflected in being a PRI¹ signatory since 2007.

Swiss Re’s ESG integration builds on the Group-wide Sustainability Risk Framework, which is used to define its investment universe by excluding countries and companies that do not meet sector or issue criteria defined in that framework² (see also Corporate Responsibility).

Additionally, Swiss Re continues to build up its exposure to investments that support the transition to a low-carbon economy. In particular, Swiss Re channels part of its fixed income portfolio consciously into green bonds, issued under the broadly accepted “Green Bond Principles”. Swiss Re also allocates a portion of its infrastructure investments to renewable energy operations.

Swiss Re continues to integrate ESG considerations across the entire investment portfolio. As a critical further step on that journey, best-in-class ESG benchmarks for credit and equity portfolios are being implemented. The adoption of ESG benchmarks is a natural development to support our main goal to generate long-term sustainable investment returns, allowing financial performance tracking relative to the ESG profile.