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Institution / Asset owners

Mapfre: “Tsunami” of ESG rules could stymie climate progress

The chief investment officer of Spanish insurer Mapfre says EU regulators' attempts to supervise sustainable assets are too prescriptive, in that they lack essential interpretative context. This, he adds, is also partly why external ESG ratings fail to add major value.

Mapfre CIO, Jose Luis

Mapfre CIO José Luis Jiménez says ESG regulation should not be prescriptive and allow for professional investors to deliver on key political priorities in their own way. (Photo courtesy of Mapfre)
  • The CIO of insurance firm Mapfre feels EU regulators should provide guidance rather than the current “tsunami of new regulation”.
  • The Spanish company shuns external ESG ratings and has built its own database and methodology for assessing sustainability impact.
  • It has been measuring and reporting the impact of its portfolio against the UN’s Sustainable Development Goals for nearly three years.

When company executives say regulators are moving too fast or being overly prescriptive, they are often seen as resisting legislation or making an excuse for continued inaction. That does not seem to be the case for the chief investment officer of Spanish general insurance firm Mapfre, who last week raised concerns about Europe’s “tsunami of new regulation related to sustainable investment”.

The package of proposals under the EU Green Deal – from the green taxonomy to non-financial reporting disclosure – are “all about trying to do the right thing”, said José Luis Jiménez at the Future of Climate Finance event hosted by Capital Monitor on 23 November.

He is in full agreement that insurers must take climate risk seriously. Mapfre has a reinsurance business, so it sees climate change reflected “every day in our P&L [profit and loss account]”, Jiménez said. Indeed, the company – which has €44.9bn ($50.6bn) under management, 70% of which is in fixed income assets – has in the past decade seen an increase in environmental risk in the form of payments to policyholders as a result of natural disasters, he added.

But without an analysis of the significance to business or the broader economy, he warned, Europe’s environmental regulatory measures “lack an essential interpretative context”.

Repsol is making a huge effort to transition to renewable energy. I’m happy to provide capital to them, as long as they are committed and have a plan. José Luis Jiménez, Mapfre

In short, regulators should not be too rigid about the kind of assets that investors should hold, by effectively pushing them to divest carbon-intensive companies – as other insurance firms also argue.

Under the latest proposals for Europe’s Solvency II rules, unveiled in September, insurers and reinsurers would have to identify any material exposure to climate risks and assess the impact of long-term climate change scenarios on their assets. The intention is clear: the European Commission wants polluting assets to be more capital-intensive for insurers to own.

Rules obstructing positive change?

Such an approach may obstruct real change by removing capital from where it is needed to reduce emissions or by funding companies that may not be as green as they appear, Jiménez suggested.

He cited Mapfre’s ownership of Spanish energy company Repsol as an example. “Repsol is making a huge effort to make a transition to renewable energy. I’m happy to provide capital to them, as long as they are committed and have a plan. We engage with them. We follow up on what they do to make this transition.”

Yet on the flipside, technology giants such as Apple or Microsoft tend to score very highly in ESG ratings, Jiménez pointed out. “It’s true that these companies pollute less than companies related to mining or aluminium production,” he added. And yet miners and aluminium producers “provide the basic inputs for Apple or Microsoft to run their businesses”.

A further issue in respect of ESG rating providers is the huge variance between how they score different companies, said Jiménez. The difference between rating agencies when it comes to assessing corporate risk or sovereign risk tends to be minimal, he pointed out, “maybe one notch up or down, but if you look at the different providers when they measure environmental issues, the gap is incredible”.

Other big investors agree that ESG ratings are unreliable and some are likewise using their own sustainability analysis. Japanese giant Nippon Life Insurance is a good example, as Capital Monitor has reported.

Admittedly, for investors seeking to measure and manage ESG risk in their portfolio, the simplest – and thus most common – approach is to use external rating or scoring systems or databases, Jiménez said. “But I think that most players are missing the big part of the picture.”

Mapfre’s proprietary ESG database

Mapfre has focused on building a proprietary ESG database. Through its 2017 purchase of a 25% stake in French sustainable investment boutique La Financière Responsable, the insurer acquired a team that has specialised in this area for 30 years.

The insurer now follows up to 145 different ESG indicators that it integrates into its investment process, Jiménez said. “Many are related to environmental issues, but they also incorporate social and corporate governance factors.”

The first step was to put such a database in place, he added; the second is use it to assess corporates on a broad, global basis.

If there is no commitment from the top [to sustainability], if this is not in the backbone of the company, the philosophy and so on, forget it. José Luis Jiménez, Mapfre

“You might ask: ‘Would you invest in a copper miner?’ Maybe or maybe not,” Jiménez said. “Our ESG scoring is not that constrained. Sometimes we invest in companies that get a low score from rating providers. When we invest in different asset classes, we like to have our own view. It doesn’t matter what other people say.”

The ESG database has helped Mapfre with another part of its sustainability strategy: measuring the progress of its impact against the United Nations’ Sustainable Development Goals (SDGs). In 2017 it created a working group focused on setting SDG priorities and goals, which led to the company prioritising seven of the SDGs.

Since last year Siena University in Italy has been helping Mapfre measure the degree of SDG materiality of its asset holdings. The insurance firm assesses how the activities in its portfolio are affecting the company’s impact in relation to the SDGs or if it will succeed in reaching the goals by 2030, Jiménez said. “Because if we are not in such a position, we have to take action.”

Mapfre conducts this measurement across its entire portfolio and in the past two years has seen an improvement, he said. “We are advancing in the right way to achieve our 2030 goals,” Jimenez added, without providing more detail.

The insurer publishes its own objectives in respect of its priority SDGs and figures on its impact progress against the goals (see chart below).

Despite the SDGs' widely accepted limitations, various other major investors are also measuring and reporting their own progress against the goals. They include Norway’s sovereign wealth fund, Dutch pension fund managers APG and PGGM, and Australian retirement funds such as Cbus and Aware Super.

In order to drive positive change – such as by reducing emissions – within its investee companies, Jiménez sees engagement as key. Many corporates are setting ambitious net-zero goals without a good idea of how they will achieve them. But there is no point companies merely paying lip service to this area, by talking about sustainable objectives without taking concrete action, he said.

In Jiménez’s view, such action must be driven by management: “If there is no commitment from the top [to sustainability], if this is not in the backbone of the company, the philosophy and so on, forget it.”

Pollution-reduction efforts

Mapfre is making efforts to shrink the carbon footprint of its own operations, he said. “We check to ensure we behave in the same way as we want our companies to be behaving.”

For instance, a few years ago the insurer was consuming 350,000 plastic bottles of water every year – that number is now zero. Moreover, it looks to invest in intelligent, energy-efficient buildings, he added, while at group headquarters in Madrid it has photovoltaic plants to cover its power needs. “We plan to produce enough energy in Madrid for our own consumption,” Jiménez said.

Mapfre has also been stepping up its direct investment in renewable energy development, an area that only recently started to gain traction among asset owners. Others with a substantial focus on this area include Canadian retirement fund CDPQ and Denmark’s PensionDanmark.

We are just at the beginning [of implementing an emissions-reduction strategy], but we should make our best efforts to achieve Scope 3 [cuts]. Otherwise, we are playing tricks. José Luis Jiménez, Mapfre

Mapfre formed a strategic alliance in April with Spanish energy company Iberdrola to invest in renewable energy infrastructure. They have since jointly launched a renewable energy fund in July that is open to co-investors. The alliance – in which Mapfre has an 80% stake and Iberdrola 20% – started as a 325MW co-investment vehicle. Their aim is to keep incorporating green projects until they reach the 1,000MW mark.

The insurer is, then, striving to address Scope 1 and 2 emissions – that is, those created by the company itself and from its energy and heat sources. But what about Scope 3 emissions – those generated by activities in its supply chain?

“We are just at the beginning [of working on this], but we should make our best efforts to achieve Scope 3 [cuts]. Otherwise, we are playing tricks,” said Jiménez. Doing so is very difficult, he conceded, given that some companies provide more and higher-quality information than others on their carbon footprint.

“Imbalance” between environmental and social focus

Yet even as environmental issues are a key priority for Mapfre, Jiménez worries that they may be overshadowing social problems that need addressing.

“Sometimes we are trying to run so fast that maybe there is an imbalance between the [focus on the] environmental issues and the social issues,” he said. “And the problem right now is that due to the [Covid] pandemic, the social problems have grown a huge amount. So we need to look for a balance.”

Ultimately, what is needed from regulators and policymakers is guidance on sustainable investment rather than prescriptive rules, Jiménez concluded. Other large investors have also stressed the importance of policy certainty and stability in respect of sustainable assets.

“For me, the [right approach to] regulation is more the Anglo-Saxon approach: give some guidance and probably everybody knows what the right thing is to do. If you go into specifics, you get lost in the detail.”

Joe Marsh

Joe Marsh is managing editor of Capital Monitor and brings with him 25 years of investment and risk-management journalism experience.