Monitoring equity managers: Interview with Zurich Insurance Group

Please describe your monitoring process.

We have quarterly performance reviews with all our managers (consisting of more quantitative analysis), and annual relationship meetings with key managers that hold multiple mandates (consisting of more qualitative assessments, and covering more aspects of the manager’s practices).

We are discussing ESG in both these contexts. We have an internal scoring process that is based on a qualitative assessment of the managers. Every local investment team and our regional investment managers will score asset managers on a number of dimensions, including performance, service, ESG integration etc.

What information do you source during the monitoring process?

Whilst the selection process is about the managers’ capabilities and what their process looks like, the monitoring process is about what the managers actually do in practice and what is happening in the portfolio.

We look at investment performance and any changes to investment style, whether the portfolio is conforming with the mandate and how proactive the managers are when issues arise. We want to understand the composition of the portfolio and how integrating ESG factors has impacted it.

How do you assess the ESG integration practies of your portfolio managers?

ESG integration is always discussed at annual relationship reviews and, since 2015, we discuss ESG performance of specific portfolios at one of the quarterly performance reviews every year.

There is an additional step for responsible investment in the broader process: a questionnaire is sent out once a year that includes questions based on the four elements mentioned above.

Some of the questions are:

• List all the staff that manage our assets.
• Disclose if they have received training on ESG issues.
• Disclose what data they have access to.
• Describe the investment process used by these staff members.

Based on all these steps, managers are then evaluated on ESG integration as part of our internal manager scoring process.

How do you identify which of your portfolio managers are fully integrating ESG factors into their investment decisions?

It is not hard to find out how attuned a manager is with ESG issues and to identify those who integrate ESG factors into investment decisions and those who do not. We can immediately tell when asking questions such as:

• Why do we have security XYZ in the portfolio?
• The portfolio possesses a security with a poor ESG rating: tell me a bit more about it.
• What outcome did you expect from COP21? What impact will it have on the holdings of the portfolio?

A manager should understand what drives an ESG rating and should be able to explain why security ABC is in the portfolio despite any ESG issues. It’s really the conversation about specific portfolio holdings that reveal the strength of the process. When someone just talks about the ESG rating without going any deeper and assessing what this actually means, then that may be a start, but it is not ultimately sufficient.

We acknowledge, though, that this takes time and sometimes it boils down to the individual rather than the process. We find that, particularly with large asset managers, the quality of the conversation can vary greatly for different portfolios managed in different parts of the organisation.