Net-zero in investments

father and daughter in front of a windmill

Net-zero in investments

We are committed to transitioning our own investment portfolios to net-zero by 2050.

Every business and asset will be affected by climate change, and collective action is needed to mitigate or adapt to it. Unfortunately, our analysis suggests that we are currently likely to miss the Paris Agreement’s target of limiting global warming to 2°C or below, and more action is needed. As an insurance provider, we are already witnessing challenges associated with climate change affecting our customers across the globe. As an insurer and investor, we have a direct interest in sustainable global economic growth and in supporting communities to become more resilient to environmental and social challenges. Therefore, we are committed to transitioning our own investment portfolios to net-zero greenhouse gas emissions by 2050.

Zurich has defined a holistic strategy to reflect climate change in its investment approach and we are committed to action in eight areas

How we deal with climate change

Net-zero portfolio by 2050:

We are dedicated to transition our investment portfolios to net-zero greenhouse gas emissions by 2050, consistent with a maximum temperature rise of 1.5°C above preindustrial temperatures, taking into account the best available scientific knowledge. Science-based interim targets for 2025 have been set for listed equity, corporate debt and real estate. Additional asset classes will be added as methodologies become available.

Scenarios:

It is hard to take action without context. Scenario analysis is conducted using an integrated modelling approach for both investment management and underwriting portfolios to ensure that, to every extent possible, assumptions are used consistently across both portfolios. In addition, our Market Strategy and Macroeconomics team has defined high-level scenarios and is monitoring developments with the help of a scorecard that is updated regularly.

Strengthen ESG integration:

Given its complexity and long-term nature, climate change represents a particular challenge for ESG integration. We will constantly evaluate additional data and tools to raise awareness among investment professionals and to support integration in investment strategies.

Benchmarks:

ESG integration practices for passive investment portfolios can only be managed through benchmark adaptations. We launched a first pilot on policyholder money in the UK, where we use a customized benchmark that incorporates a climate risk assessment. We will evaluate the application of such benchmarks for new and existing portfolios on a case-by-case basis.

Finance the transition to a climate neutral economy:

As part of our ongoing commitment to impact investing and our target to help avoid the emission of 5 million metric tons of CO2e per year, we will evaluate climate solution investments (impact investments and green real estate) across different asset classes on an ongoing basis.

Drive change through advocacy:

Public and private sectors need to take decisive action. We have defined clear positions on topics such as transparent risk disclosure, carbon pricing, etc.

Engagement:

As part of engaging with the companies in which we invest, climate change is reflected on the agenda of our bottom-up engagement approach. In addition, we drive a top-down climate engagement campaign for net-zero target setting, and consider climate change in voting actions.

Selective exclusions:

Recognizing the particularly harmful impact of coal on the climate, we have developed a Group approach on selectively excluding from our underwriting and investment activities companies related to the mining of, or electricity generation from, thermal coal, oil sands and oil shale.

Journey towards net-zero 2050

We strongly believe that asset owners like Zurich must act now to leverage capital markets to fund solutions to the most pressing environmental issues of our time. Since becoming the first insurer to sign the UN Global Compact Business Ambition for 1.5°C pledge, we joined the UN-convened Net-Zero Asset Owner Alliance as a founding member - an important step in transitioning toward a carbon neutral economy and true to our philosophy of advancing together.

Zurich has committed to transitioning its investment portfolios to net-zero greenhouse gas emissions by 2050.

Decarbonizing our portfolios is a massive undertaking – but a necessary one. As we start this journey, a lot of expertise and innovative thinking will be required to design the methodologies and tools necessary to decarbonize in a way that is both prudent and effective. As stewards of large portfolios, asset owners are in a unique position to start and shape this journey. But none of us can do it alone. We invite you to join us in doing the right thing for people and planet. Read more here about the UN Net-Zero Asset Owner Alliance.

A thirty-year journey must start with first steps. Accordingly, we have set interim targets for engagements, financing solutions and emission reductions in a variety of asset classes, which will be broadened as suitable methodologies become available. See details described in the chapters below.

Zurich strongly believes that simply divesting from companies with carbon-intense footprints is less effective than engaging with them to drive the shift to sustainable practices. Many of these companies have the knowledge and engineering capabilities required to make a green transition and harnessing this can benefit sustainability goals. Zurich will:

engage with top 65% emitters of financed emissions that have not set science-based targets,
require these companies to set targets aligned with the Paris Agreement, and
collaborate with asset managers in highlighting best practice for climate-conscious active ownership and work together for a just transition.

Over a period of at least two years, Zurich will engage with companies directly and through organizations such as Climate Action 100+. We focus on engaging with carbon-intensive companies, such as those operating in the oil and gas sector, on the need to set science-based emissions targets. Should engagement fail and companies refuse to set targets after due dialogue, Zurich will vote against board members at shareholder meetings and where relevant, as a last resort, will divest.

In addition, we will keep advocating for, and engaging on, industry action, as well as public policies, for a low-carbon transition of economic sectors in line with science and under consideration of associated social impacts.

The transition to a net-zero economy will require financing for the development of new and replacement of existing technology. The scale of the changes required will vary from industry to industry, with some sectors requiring more investment than others.

As one of the world’s largest asset owners, Zurich will leverage its investments to help mitigate climate change. Our investment strategy aims to benefit society and the environment through, for example, impact investing. We mitigate environmental risks by supporting a climate neutral economy and increasing community resilience.

Zurich’s targets for financing climate solutions enhance our existing long-term commitment to provide green financing solutions under our impact investing strategy announced in 2017. We will:

grow allocation to climate solution investments,
avoid 5 million metric tons of CO2-equivalent emissions per year through impact investments, and
contribute to a market environment that enables a growing pipeline of climate solution investments suitable to institutional investors, based on the experience from building a multi asset class impact portfolio over the years.

We are financing the transition to a climate neutral economy by investing in the following asset classes:

Green bonds: green bonds enable capital-raising and investment for projects with environmental benefits. These may include renewable energy, energy efficiency, biodiversity conservation, pollution prevention and control, and others. As one of the largest private sector investors, Zurich invests in green bonds that follow the Green Bond Principles.
Private equity funds: Zurich invests in Impact Private Equity funds that support a zero-carbon economy and encourage environmentally friendly technologies to help mitigate environmental risks.
Impact Infrastructure Private Debt: we finance clean energy infrastructure and energy efficiency projects to transition to a zero-carbon economy, as part of our direct private debt lending portfolio.
Real Estate: As a leading sustainable real estate investor we are transitioning our global real estate investments towards net-zero greenhouse gas emissions by 2050. This includes developing and investing in certified green buildings.

Zurich’s emission reduction targets cover both listed equity and corporate bond investments as well as direct real estate investments. By 2025, Zurich aims to:

reduce the intensity of emissions of listed equity and corporate bond investments by 25% (metric tons CO2-equivalent per USD million invested), and
reduce the intensity of emissions of direct real estate investments by 30% (kilograms CO2-equivalent per square meter).

All targets are set against a 2019 baseline, based on latest available emissions for December, 2019: 136 metric tons CO2-equivalent per USD million invested (market value based) for listed equity and corporate bond investments; 32 kilograms CO2-equivalent per square meter for real estate investments.

Zurich will continue to take a leading role in the development of CO2-reduction methodologies and initiatives for other asset classes, such as sovereign debt and infrastructure.

Carbon intensity for investments portfolios

Zurich defines the carbon emissions intensity of an issuer as metric tons of CO2-equivalent greenhouse gases emitted (under scope 1 and scope 2 of GHG protocol) per USD millions of capital deployed, aligned with the Asset Owner Alliance target setting protocol. For non-financial companies, capital is defined as enterprise value, and for financial companies, market capitalization is used as a proxy. This is multiplied by Zurich’s outstanding investment amount of that issuer. To derive portfolio level intensity, we use the simple mathematical average of total portfolio carbon-equivalent footprint per million USD in portfolio market value.

Coal, oil sands and oil shale

While we have a strong preference for ESG integration and engagement, there are certain areas where we believe strict exclusions for certain activities are justified. We stand by our position on thermal coal, oil sands and oil shale, established in 2017. A description of our current position can be found here, stating that Zurich generally will no longer underwrite or invest in companies that operate above our defined thresholds.

In accordance with the thermal coal, oil sands and oil shale policy, all initial engagements were concluded by midyear 2021. All companies covered by the thresholds have either been cleared, excluded or are under continued engagement depending on whether they presented credible transition plans. Progress on these targets is monitored and can be revoked if companies fail to meet their transition targets.

For those companies that neither had science-based targets to decarbonize nor a credible plan for a transition from thermal coal, oil sands or oil shale, we have stopped writing new business, initiated the transition to an alternative insurer, divested from equity holdings, stopped investing in new debt and let existing holdings run-off.

Furthermore, we will only consider new clients or investee companies that are already below those limits or have near-term commitments in place to bring them below the limits.

In line with our overarching net-zero targets for our insurance and investment portfolios, our performance management focus will move from individual sector exclusions to tracking our overall portfolio decarbonization and engagement targets.

Oil & Gas

For Zurich’s investments in private debt1, we have dedicated fossil fuel guidelines agreed with our asset managers. In line with the group wide guidelines, Zurich excludes any thermal coal related assets in these portfolios. Further, these portfolios will not finance oil and gas assets which are not aligned with science-based or government-issued regional/national 1.5°C pathways.

¹ Excluding CLOs and Real Estate

Zurich’s fossil fuel guidelines for private debt investments

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Pioneering circularity; Zurich invests in NG Group for the journey to a world with no waste

As a responsible investor, Zurich uses capital markets to fund solutions to many of the pressing social or environmental issues of our time. Zurich is committed to reduce the carbon intensity of its investment portfolios to net-zero by 2050. We also set intermediate targets for 2025 for listed equity, corporate bond and direct real estate investments. Furthermore, Zurich invests in various climate solutions via impact investment assets around the globe.

Through its private equity investments, Zurich directs its resources to generate positive impact. We follow the Global Impact Investment Network definition of impact investing as investment opportunities that allow us to intentionally target a specific positive social or environmental impact and allow us to measure the impact achieved. These investments target to generate a market-rate financial return commensurate with their risk.

Private equity as an asset class is particularly suited to impact investing. The companies receiving capital from private equity investors usually tend to be small and agile and more easily evaluated against impact objectives. Zurich typically invests in private equity, including impact investments, through fund investments. An in-house specialist team is responsible for selecting private equity fund managers which are then approved by an investment committee overseeing alternative investments. Zurich will generally not consider investing with fund managers targeting below-market financial returns, or first-time fund managers with no proven track record of value creation.

An example is Zurich's investment in a private equity fund that holds equities in NG Group (NG) since 2018.

NG Group is contributing to sustainable development by repurposing waste from households and industries. Its services extend from waste sorting to mass recycling, including separating contaminated and dangerous waste in order to provide appropriate treatment. Such services are essential to ensure that potentially heavy polluting waste is safely processed, and not discarded to have a harmful impact on people or the environment. On the other end of its processing line, NG Group has an ambition and responsibility to ensure that as much waste as possible is sent to recycling and material recovery, and enable access to recycled materials in the market to reduce the pressure on natural resource extraction. This is core to their mission of regenerating resources and abolishing waste and is a major step towards the circular economy. In 2022, Zurich’s investments helped to avoid approximately 12,000 metric tons CO2e through NG Group recycling activities, such as sending waste to recycling and material recovery compared to extracting virgin materials.

The global waste landscape presents a significant challenge with waste generation expected to increase by 70 percent by 2050¹. In Norway, where NG Group is headquartered, a total of 12.07 million tons of waste² was generated in 2022. However, for Zurich and NG Group, the circular economy represents an opportunity to minimize waste, promote reuse, and enhance the use of secondary raw materials in the production of new goods.

With around 20 processing sites across Norway, Sweden, Denmark and Poland, NG Group handles 2.3 million tons of waste annually, of which 96 percent is sent to recycling, material and energy recovery. As one of Scandinavia’s largest providers of recycling and environmental services, serving over 40,000 commercial and municipal customers, its key business areas encompass recycling, green metals, urban re-use, circular and digital solutions, services related to environmentally friendly waste management and raw material extraction throughout the value chain. Zurich's investment in NG Group is aimed at facilitating innovative business models that enable the repurposing, reutilization, and repair of materials already in circulation for a transition to the low carbon economy.

¹ Global Waste to Grow by 70 Percent by 2050 Unless Urgent Action is Taken: World Bank Report
² Waste accounts – SSB

Planet

Zurich has invested in a highly sustainable building in the Dutch affordable housing sector on behalf of its German life business.

The land and future property was acquired on behalf of Zurich Deutscher Herold in 2021 and construction was completed in January 2023. The De Baak building is a highly sustainable, energy-efficient residential tower boasting 127 apartments in Amsterdam’s mid-market segment, which is part of the affordable housing sector in the Netherlands.

The De Baak building is fully in line with Zurich Insurance Group (Zurich)’s ambitious sustainability targets as it combines a variety of sustainability solutions in its objectives to achieve an exceptionally good energy-savings level of -0.25 (EPC). With that, De Baak is not only sustainable in terms of its use of materials, but it also produces energy with solar panels on the roof and the balustrade of the building. Several features ensure a very low energy consumption, such as the highest quality insulation in the shell, triple glass with sun protection properties as well as an overlapping design of the balconies to provide shade. In addition, the building and the surrounding garden collect rainwater in order to reuse it. The building also offers car sharing, electric vehicle-charging stations and a large number of parking spaces for bicycles to enable tenants to commute sustainably.

The Zurich real-estate team is proud to offer urgently needed affordable apartments to families and others eligible for the mid-market segment, who could otherwise not afford to rent such a high-quality apartment in an attractive location close to the city center. This means the investment is in line with the social aspects of ESG (environment, social and governance) as well as with our environmental targets.

In addition, the De Baak building represents a low-risk investment with stable cash flow due to the increasing demand for affordable apartments in Amsterdam.

“This acquisition demonstrates Zurich’s strong commitment to sustainable investments in the real estate sector. We manage a EUR 14 billion real estate portfolio and aim to reduce the intensity of emissions of our direct real estate investments by 30 percent, in terms of kilograms of CO2e per square meter, until 2025. By 2050, the direct real estate portfolio aims be net-zero, meaning it no longer emits any CO2.”

Matthias Hübner, Head of Real Estate Europe at Zurich

Planet

Zurich supports the decommissioning of the last two remaining coal power plants in New Jersey

Zurich’s private debt investment with MetLife Investment Management has a significant effect on New Jersey’s transition to clean energy generation.

Zurich Insurance Group (Zurich) invested USD 24 million in a USD 200 million financing by MetLife Investment Management (MIM) to support the phase-out of the last two coal-fired power plants in New Jersey, USA. The decommissioning is expected to result in the reduction of 3.9 million metric tons of CO2 in the atmosphere, the equivalent of eliminating over 750,000 passenger cars a year and an estimated USD 30 million cost savings to Atlantic City Electric (ACE) customers. The transaction also supported New Jersey’s Energy Master Plan.

The structuring and financing of the loan were overseen by MIM’s Private Capital team on behalf of MetLife and its institutional clients, including Zurich. The financing allowed Starwood Energy Group, the majority owner of the two plants, and ACE, a regulated electric transmission and distribution utility serving approximately 600,000 customers in New Jersey, to retire power purchase agreements between ACE and the coal-fired plants¹. Both plants ceased generating coal energy by the beginning of June 2022².

“Zurich is proud to be part of a project that will lead to cleaner energy production by transitioning away from the last two coal plants in New Jersey, which reinforces our progress on our own impact investment targets, which include avoiding five million metric tons of CO2-equivalent emissions, and separately improving the lives of five million people per year,” according to Johanna Köb, Head of Responsible Investment at Zurich.

The USD 200 million loan was attractive to investors for a variety of reasons, such as credit quality, the valuation and maturity of the deal, and the counterparty involved, AEC. Moreover, the ESG component of the deal and the fact that the deal’s payment obligations were already pre-approved by both utility regulators and AEC were additional attractive factors for investors³.

As a responsible investor, Zurich uses capital markets to fund solutions to many of the pressing social or environmental issues of our time. Zurich is committed to transitioning its investment portfolios to net-zero greenhouse gas emissions by 2050 and set interim reduction targets for its corporate portfolio for 2025. Furthermore, Zurich invests in various climate solutions investments via impact investment assets around the globe.

¹ https://www.newprivatemarkets.com/metlife-funds-starwoods-200m-decommission-of-nj-coal-plants/
² Logan 31 May 2022
Chambers 7 June 2022
https://www.pjm.com/planning/service-requests/gen-deactivations
³ https://www.infrastructureinvestor.com/metlife-funds-starwoods-200m-decommission-of-nj-coal-plants/