Selecting equity managers: Interview with Zurich Insurance Group

Please describe your selection process.

We have an in-house asset manager selection team that selects and monitors the external managers. We do not usually recruit investment consultants. Our process consists of:

1. Defining the guidelines for the portfolio: It is crucial to start the selection process by defining:
   a. the specific investment objective of the portfolio or portfolios that will be part of a mandate;
   b. the type of manager we are looking for;
   c. the desired characteristics of the portfolio, including any ESG integration requirements.
2. Issuing Request for Information (RfI) and/or Request for Proposals (RfP): To create a large pool of candidates for a particular mandate, we send out an RfI and then an RfP. (Depending on the circumstances, for example how well we know the market, we will sometimes only issue a RfP.) We will then select the successful candidates for due diligence reviews.
3. Conducting due diligence: This consists of on-site visits and presentations.
4. Selecting a candidate: After evaluating the short-listed candidates, a manager is selected for the mandate. We may ask for additional data after the due diligence review has been performed.

These procedures are conducted by the manager selection team and overseen by a manager selection committee. The composition of the committee can change depending on the type and nature of the mandate, but typically involves all the stakeholders, including a local chief investment officer, balance sheet representative and regional investment manager.

What information do you source during the selection process?

We look at: track record, investment performance, investment style, firm structure and investment process, investment beliefs, ESG integration and many other aspects (including fees, of course). We give all these aspects a weight in our assessment of an external manager. ESG consideration is typically weighted 5%, depending on the mandate, and the responsible investment and manager selection teams work together on the assessment of ESG performance.

How do you assess the ESG integration practices of potential portfolio managers?

The ESG element of our assessment is not treated any different to the non-ESG element of the assessment and is part of the core process at the RfI, RfP and due diligence stages.

What do you look for when you are assessing potential portfolio managers’ ESG integration practices?

We focus on integrated analysis as we believe that ESG issues are relevant factors from a risk and return perspective, and we want to make sure that they are part of the managers’ security selection process. We look for four elements that are absolutely critical for an integrated analysis approach, which are applied to both our external and internal managers. These four elements form the framework for our questions in RfIs and RfPs as well as in the appointment and monitoring phase.

1. Training and awareness – As ESG issues are complex and not always intuitive, managers should receive training to correctly identify material ESG factors.
   - Please describe any relevant ESG-related training that managers and equity analysts receive.
2. Access to information – Once you understand what ESG issues are all about, analysts and managers should analyse these issues, which requires access to ESG data, ratings, analysis and research.
   - What resources (research, analytical tools, etc.) are available to managers and analysts to assess ESG factors?
3. Investment process – Once you have the training and have access to research, there should be a process that integrates material ESG factors in a systematic way into your security analysis and selection.
   - Please describe how you integrate environmental, social and governance (ESG) factors into your investment process, particularly with respect to security/asset selection and risk management.
   - Using a specific example of an ESG-related risk or opportunity, describe how the process in place has influenced the decision-making.
4. Active ownership – Managers are expected to actively execute proxy votes based on best-practice policies addressing ESG issues, and to integrate relevant ESG issues in discussions with investee companies, either as part of regular company meetings, or through separate channels.
   - Do you discuss specific ESG issues as part of engagements with investee companies’ management? If yes, please describe the process and provide three examples. If no, please explain why not.

In evaluating answers, it’s important to understand how these ESG integration practices apply to the specific mandate and staff in question, not just how they relate to a high-level position statement that the manager may only apply in certain regions or strategies.