CCR Group: how ambitious investment helps fight climate change

As part of one of the industries most exposed to climate change, a number of re/insurers are at the forefront of taking action to tackle it with environmental, social and corporate governance (ESG) investment programmes, according to Sébastien Jallet, chief investment officer at French state-owned CCR Group.

The industry can be ambitious on ESG investment, said Jallet, particularly as climate change is top of the agenda for many businesses right now.

“The re/insurance industry is working to understand ESG, as it relates to investments, and to implement ambitious ESG policies. Moreover, the insurance industry is perhaps the most exposed to climate risks, which today have the most developed criteria for investors to assess their choices, until social taxonomy—an EU-wide standard defining socially sustainable activities or companies—emerges.”

In Europe, he added, until now ESG regulation has been focused on the asset side.

The next step will be the phasing in of the EU’s Corporate Sustainability Reporting Directive (CSRD). This has already started and will continue until 2023. Under the new regulations, the reporting requirements of the EU’s existing Non-Financial Reporting Directive (NFRD) will be tightened and improved. Its aim is to increase investments in truly sustainable activities across the EU.

“By including more companies in reporting on ESG issues, CSRD will allow the ESG data pool to grow while estimation proxies (an approximation of the missing data when a company did not disclose) will progressively be used as the last recourse option,” Jallet said.

However, he warned, certain unintended consequences that could arise from these refreshed regulations must be avoided.

His biggest concern is greenwashing. “If the companies look to comply with the regulation without making ambitious climate commitments, it could lead to missing the target set by the Paris Agreement, meaning an acceleration of global warming.”

ESG at CCR Group

CCR operates as a state-owned group with a general interest purpose to offer coverage for risks which cannot be insured by the market. It acts as an international reinsurer, CCR Re, and as an institutional investor.

“This specificity makes CCR a unique player in the market that must systematically monitor the risks weighing on its financial balance sheet in the event of natural catastrophes or extreme events,” Jallet said.

Since CCR Group’s creation in 1946, this unique role has led it to establish a responsible strategy for the assessment of risks related to natural catastrophes. This is more important than ever as the nature and intensity of nat cats has increased in recent years as climate change has taken hold, he added.

“The group applies this risk integration strategy to its reinsurance underwriting policy (liabilities) and its investment policy (assets), thus opening the door to new opportunities to support companies and financial players in the transition to a low-carbon society.

“This trend is supported by the French prudential regulator, Autorité de Contrôle Prudentiel et de Résolution (ACPR), with its recommendations on climate change risk management,” Jallet said.

Within this strategy, CCR Group focuses on three principles: solidarity; prevention and reinsurance of physical risk; and societal support.

For the principle of solidarity, CCR Group gives companies and individuals access to affordable coverage for exceptional events and reimbursement in the event of claims through its public reinsurance scheme.

The group prevents and reinsures physical risk by taking a leading role in the scientific study and management of physical risk linked to nat cats. It is also a multi-specialist player in other classes of insurance.

Where nat cat risks affect whole populations, raising the need for societal support, CCR Group covers these exposures and helps cedants to maintain an affordable insurance offer throughout French society, particularly in the most vulnerable regions.

Assets and liabilities

Drilling down into the group’s framework and investment guidelines, Jallet explained that on the asset side CCR has built an ESG investment philosophy based on three pillars: transition risk prevention; adaptation to physical risks; and societal transition support.

Under the first pillar, transition risk prevention, the group analyses the contribution of its investment portfolios against the targets set in the Paris Agreement, the international treaty on climate change signed by world leaders in 2015. It also looks at measures relating to carbon footprint and global temperature rises.

“Green” bond investments are a key part of this pillar. Between 2016 and the end of 2020, the group’s green bond investments increased by 57 percent. On December 31, 2020, the amount in green bonds represented 6.7 percent of all the group’s directly owned bonds.

CCR Group’s formal coal policy is another area of this first pillar and it includes a commitment to exit coal by the end of the decade. The key climate ambition for the group is to help drive an exit from investment in thermal coal for Organisation for Economic Co-operation and Development (OECD) and non-OECD countries by 2030.

“To achieve this, - It will not finance any company which holds existing coal-related capacities over 10 gigawatts (GW). This limit will be lowered to 5GW in 2026,” Jallet said.

“The policy bans new investments on companies with more than 10 percent of their sales coming from coal-related activities—except if there is a clear commitment to comply with the OECD’s ‘Paris alignment’, matching greenhouse gas emissions reduction in line with a global warming below 1.5ºC.”

The second pillar, adaptation to physical risks, is being actioned by analysing the exposure of the group’s directly-owned real estate assets to climate change, using a proprietary tool. It has also established methodology and modelling tools to understand the wider impacts of a warming world.

CCR Group contributed to the first climate stress test pilot exercise led by the ACPR in 2020, where it advised the prudential regulator on calibrating the physical risk.

For the third pillar, societal transition support, the state-owned group conducts ESG risk analysis on portfolios, investing in social and sustainable bonds, and contributes to L’Observatoire de l’immobilier on estimating the climate durability of directly-owned real estate assets.

The ESG climate investment policy is part of a continuous improvement process, Jallet said, adding: “In 2022, CCR Group will enlarge its ESG climate policy to include a hydrocarbon policy, which will encompass the exit strategy for fossil fuels, and biodiversity protection.

“The ESG climate policy aims to deliver new commitments on these issues, while monitoring risk through an ESG score analysis, controversy risk monitoring (which helps investors identify companies involved in sustainability scandals), and normative exclusions (which weed out firms that have broken international conventions on social or environmental issues from a portfolio).”

The ESG and climate risks will be implemented in the investment guidelines as risk guidance, so the investment universe will evolve to comply with financial and non-financial risk guidelines, he added.

Pull together

The adage “If you want to go fast, go alone, but if you want to go far, go together”, is particularly apt for CCR Group with its large network of external collaborators and partners. Jallet said these connections are key to meeting CCR’s challenging targets.

The group works with a plethora of organisations. For example, climate consultancy Ecoact helped edit CCR’s previous ESG climate report, and Carbon4 will help with the 2021 exercise.

The group is working with Sequantis, which has set up an ESG climate platform with a look-through analysis of its investment portfolios.

Data provider Sustainalytics provides support for the group’s general non-climate-related ESG topics, such as ESG scores and controversy monitoring, while Carbon4 offers similar support for climate including biodiversity, carbon footprint and temperature.

To build the thermal coal exit list, the group used the Global Coal Exit List of German non-profit environmental and human rights organisation Urgewald. French sustainable development consulting company Ekodev works on the greenhouse gas assessment on CCR’s real estate assets, and Citron provides the energy consumption figures for the group’s directly-held property assets.

European independent corporate governance and proxy adviser Proxinvest helped produce a survey of the voting policy among the portfolio management companies CCR works with, and the organisation collaborates with professional body France Assureurs, and regulatory supervisors ACPR and the Autorité des Marchés Financiers, to build best practices with other institutions.

Open to opportunity

There are plenty of opportunities in this arena. In terms of investments, Jallet said that CCR Group worked throughout 2021 to find the best infrastructure fund related to energy transition.

“We are proud to announce that €100 million will be invested in an impact fund dedicated to green hydrogen infrastructures, called the Clean H2 Infra Fund (CHIF).

“In the context of persistent inflation, real assets represent a real opportunity. CHIF combines a very good expected return, around 14 percent, with protection from rising inflation rates, while having a positive effect on global warming,” said Jallet. “So there are opportunities for impact investments which have a very good financial return and a positive effect on climate change.”

The challenges of climate change should not be underestimated as its devastating consequences are everywhere, Jallet urged.

“Temperatures are rising leading to environmental degradation, natural disasters, weather extremes, food and water insecurity, economic disruption, conflict, and terrorism. Sea levels are rising, the Arctic is melting, coral reefs are dying, oceans are acidifying, and forests are burning.

“Nat cat costs increased by 24 percent in 2021, according to Swiss Re’s March 2022  Sigma report, and the frequency and intensity of events will keep on increasing in the future. (For CCR specifically please read the scientific report on our website.)

“Now is the time for an ambitious collective action. I hope that most countries will take part in it as there is only one planet,” Jallet concluded.

Sébastien Jallet is chief investment officer at CCR Group. He can be contacted at: sjallet@ccr.fr