Sustainable Investing for Financial Mutuals Conference PM slide deck... · COP21 sends a strong global signal France sends a strong regulatory signal The French government involves

Shade Duffy, Head of Corporate GovernanceAXA Investment Managers

5 June 2018

Sustainable Investing for Financial Mutuals

Not for Retail distribution. This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Circulation must be restricted accordingly.

Sustainability and the role of insurance

2

Risk carrier role

(financial risk management)

Sustainable development challenges & opportunities

Risk manager

role

Investor role

(physical risk management)

(asset management)

For illustrative purposes only. UN Environment’s Principles for Sustainable Insurance Initiative – Butch Bacani, Programme Leader, Global Insurance Supervision Conference, 2017.

3

Sustainable InvestingEnvironment, Social and Governance (ESG) – Key Influencers

Environment Social Governance

Carbon emissions

Energy efficiency

Fines due to pollution

Labour / management relations

Occupationalsafety

Supply chainmanagement

Independence of the board

Protection of shareholders rights

Remuneration

For Illustrative purposes only. Source: AXA IM as of 31/12/2017.

4

ESG is the ‘Front Page’ you want to avoidGreater risk of substantial financial consequences

For Illustrative purposes only. Sources: *The Guardian as of 16/01/18 ** CNN Money as of 24/12/17 ***The Guardian as of 07/06/17 ****The Guardian as of 14/07/17 *****France 24 as of 17/01/18

*

**

***

****

*****

5

For young generations, the first objective is to improve the society before generating profits

““• Energy transition law

in France• Global initiative of the

FSB to increase transparency

• New financing instrumentseg green bonds

• Strong growth sectorseg green real estate, green infrastructure, clean tech

$2.7Bn: Googleof market capitalisation erased in 2017

Antitrust rules violation for its online shopping practices: monopoly abuse

Condemnation: BPIn 2018, the courts condemned BP in the Gulf of Mexico spill

Regulation

Cost

Generational shifts

Reputation

Green economy

Structural trends

of Millennialsare interested in responsible & impact investments**

86%

$68 trillion AUM represented by signatories to the UN-supported Principles for Responsible Investment (PRI), as of 2017*

80% of Global AUM

ESG

ESG: Sources of risks and opportunities

For Illustrative purposes only. * Source: UN-supported PRI – 2017, PWC Asset & Wealth Management Revolution: Embracing Exponential Change’ – 2017 ** Source: Morgan Stanley Sustainable Signals

Why Sustainable Investing?Sources of risks and opportunities

6

Changing how capital markets operate

Changing consumer priorities

Greater financial consequences

Changing how we invest

2Increasing regulation

3Increasing social

conscienceRisk mitigation

1

New investment opportunities

4

Source: AXA IM. For illustrative purposes only.

Risk mitigation - Greater financial consequences

Social Governance

Environmental disaster

Deepwater Horizon

Supply chain management

Rana Plaza accident Bangladesh

Governance failure€26bn in market cap

erased in 2015

ESG

Source: AXA IM. Examples are for illustrative purposes only. No representation is made that these examples are past or current recommendations, that they should be bought or sold, nor whether they were successful or not.

7

Real financial impactESG factors are intertwined, affecting competitive advantage and performance

Environment

Samarcodisaster

8

Regulation is an important driver Changing how capital markets operate

COP21 sends a strong global signal France sends a strong regulatory signalThe French government involves the financial sector

The French Energy Transition law - the details

Following the law passed in August 2015, the decree specifies the conditions and application criteria for all concerned investors

Energy transition law enters into forceExplain and demonstrate the integration of ESG criteria into investment decisions

Focus on the means used to contribute towards the transition to a low-carbon economy

Creating ESG labelsThe French government created two financial products labels incorporating ESG criteria

December2015

June2017

December2015

January2016

For Illustrative purposes only. Source: AXA IM as of 31/12/2017.

Section 1 – ESG criteriaRequires the annual disclosure of integration of ESG criteria in the investment policies of concerned investors

Section 2 – Climate changeRequires the annual disclosure of the means implemented by concerned investors to help the transition towards a low-carbon economy

Explaining the

approach

Measuring risk

exposures

Actingon the

investment policy

Energy Transition Law

European Commission Action Plan: Financing Sustainable Growth

For Illustrative purposes only. Source: European Commission as of 31/03/2017

9

Foster transparency and long-termism in

financial and economic

activity

Reorient capital flows

towards sustainable

investment, in order to

achieve sustainable and

inclusive growth

Manage financial risks stemming from climate

change, environmental

degradation and social

issues

1 2 3

The action plan has significantly leveraged from the recommendations of the High-Level Expert Group’s

Final Report, and sets out a strategy and roadmap for further work which combines both

legislative and non-legislative actions with a timeline of initiatives to be taken between Q2 2018

and Q3 2019

Three main objectives

Source:1 Morgan Stanley Sustainable Investment Trends , April 2016. 2 The 2016 US Trust Insights on Wealth & Worth® Survey, based on a survey of 684 individuals in the US with at least $3 million in investable assets. 3 UN PRI 2011-2015. 4 Mercer Global Investor Survey on Climate Change, 2013.

10

Increasing social conscience Changing consumer priorities

A major generational shift regarding the role of finance

Capital markets have to adapt to changing needs

Global megatrends

Globalisation & technology

Resource scarcity

Changing demographics

82% of High Net Worth Millenialsare interested in sustainable investments1

+70% increase in PRI

signatories, representing

$59 trillionin AUM

53% of US Women either own or expressed an interest in Impact investments2

81%of asset owners and

68%of asset managers view climate

change as a material risk or opportunity across

their portfolio4

11

Investment opportunities Changing the way we invest

2 Bank of America Research, Dec 2015.

Impact investing is expected to grow from $50bn (estimated) to between

$1 to $2 trillion by 2020/251

The green bond market in 2015 is $100bn2 and projected to reach

$350bn in 2018

3 US Green Building Council Study, 2015.4 McKinsey Global Institute, Sept 2015.5 KPMG & CB Insights, The Pulse of Fintech, Q3 2016,16/11/16.

$50bn

$1 trillion

$2 trillion

$100bn

$350bn

New markets New instruments Thematic opportunities

1 What is the Market Potential of Impact Investing? (Issue brief). Global Impact Investing Network.

Green certified buildings can command up to 30% price premium3

Green infrastructure gaining traction

+30%

Gender diversity$12 trillion could be added to global GDP by 2025 by investing in the advancement of women’s equality4

FintechNew technology is enabling low-cost financial inclusion.

Global funding for finteachtotalled $17.8bn at the end of Q3’165

Fiduciary dutyFour major considerations

For illustrative purposes only. Source: 1 Stranded assets illustration - Carbon Tracker Initiative. 2 2013 Cone Communications Social Impact Study

High-Level Expert Group (HLEG) on Sustainable Finance in Europe

REGULATIONRISK MANAGEMENT & STAKEHOLDERS

12

Millenials are more likely to buy from those companies that support solutions to specific social issues 2

89%of Millenials2

HUGE ADDRESSABLE MARKETSFossil fuel energy which, at some time prior to the end of their economic life, are no longer able to earn an economic return1

STRANDED ASSETS

The Changing Investment Paradigm

*PRI: Principles for Responsible Investment: initiative of the Secretary General of the United Nations, set up by the United Nations Environment Program Finance Initiative (UNEP FI) and the UN Global Compact.

13

2007

2010

2013

2015

20011998

1st RI Mandate

Creation of a dedicated RI team

AXA IM signs PRI*

Mainstreaming of ESG strategy into

investment process

Integration of ESG criteria for AXA Group

Launch of ImpactInvestingprogram2008

RI SearchPlatform

International Award for Best Investor

Reporting on climate-related risks : AXA

Group

2016 1st Wave

SRI

“Best in class”

2nd Wave

ESG

“Integration in financial analysis”

3rd Wave

POSITIVE IMPACT 2017

Label SRI and TEEC obtained for several

RI funds

Sources: FT.com, The Guardian, reit.com, Harvard Business Review, The Prudential Regulation Authority , Reuters, Money Marketing, Asia Insurance Review

14

A better tomorrow starts today

16

Important Information

This document is intended for Professional Clients under MiFiD (2004/71/EC) only and must not be relied upon by retail clients. Circulation must be restricted accordingly.

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2004/39/CE), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

The views expressed do not constitute investment advice, do not necessarily represent the views of any company within the Group and may be subject to change without notice. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.

All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions.

Past performance is not a guide to current or future performance. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short-term holding.

Issued by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX.

© AXA Investment Managers 2018.

ROBERT WHARTON

IMPLEMENTING THE SENIOR MANAGERS &

CERTIFICATION REGIME5 June 2018

IMPLEMENTATION OF WHAT?New rules effective from 10 December 2018

• BUT no PS yet. Expected Summer 2018

• PRA and FCA each have own PS to publish

• July 2017 PRA CP 14/17 and FCA CP17/26 set out draft rules

• Feb 2018 PRA PS 1/18 and updated SS35/15

• Applies to all SII insurers and large NDFs

• Stream-lined proposals for small NDFs

Talk as if all set out in proposals is confirmed

YOUR REVIEW FOR IMPLEMENTATION

3 key components

• Senior Management Functions and individual approval by PRA/FCA

• Conduct Rules to hold individuals to account

• Certification Regime of employees who could cause significant harm

SENIOR MANAGEMENT FUNCTIONS

• To be called SMFs not SIMFs/CFs/SIFs for both PRA and FCA

• Some CFs get renumbered by FCA. PRA no change

• New SMF 3 Executive director

• Extended compliance oversight function SMF 16

• New money laundering reporting function SMF17

• New overall responsibility SMF 18 (CP17/26 guidance)

SMF2

Allocation of prescribed responsibilities

Management responsibilities maps

Scope of responsibilities

Handover procedures

DO WHAT?

New scope of responsibilities

Overwrite current governance map to management responsibilities map

Review key function holders (see SS35/15)

Oversight of outsourcing

CONDUCT RULES

Consist of -- Individual rules and senior manager conduct standards (PRA)

-- Individual rules and SIF holder conduct rules (FCA)

To be extended to -- all staff who are subject to certification

-- all employees (save ancillary staff)

Direct enforcement by regulator

You must notify regulator if you take disciplinary action

WHAT ARE YOU GOING TO DO?

Training of staff in the rules, initial /ongoing and induction

Watch for final transitional rules

Obtaining references?

CERTIFICATION REGIME

Newest /most work sapping part of the new regime. A Certification function is:

Applies to employees who are in a “significant harm” function (FCA)

• Client money oversight

• Significant management

• Functions needing qualifications

• Dealing with clients (CF30)

• Managers of any of the above

Applies to all key function holders (PRA)

• Investment management

• Claims management

• Underwriting/pricing

• Operations and control

• IT/technology

CERTIFICATION REGIME 2

Does not apply to SMF holders or NEDs or non employees

BUT effect extends the fitness & propriety regime to senior management/NEDs

so that the firm takes responsibility.

What are you certifying? Format?

WHAT ARE YOU IMPLEMENTING?

Processes to identify certified staff

Collect info on them ready for certification

New staff process now

Certify at year end.

APPLICATION OF NEW REGIME TO INDIVIDUALS

RoleFit and proper assessment by regulator

Fit and proper assessment by firm

Conduct standards apply directly to individuals

Conduct standards applied by firm

Regulatory references

Required DBS checks

PRA SMF or FCA SMF

Pre-approval Y All All Y Y

Notified NEDYes, post appointment

Y Limited Limited

Key function holder (other than a notified NED)

Yes, post appointment

Y All All Y X

Certification function (other than a key function holder)

X YIndividual conduct rules only

Individual conduct standards only

Y X

Performing a key function

X Y XIndividual conduct standards only

X X

Other employees X X X X X X

PROPOSED EXTENDED SM&CR FOR INSURERS AT A GLANCE

Tools Solvency II & large

NDFs

Small NDFs & small run-off

firms

Senior management

functions Y Y

Duty of responsibility Y Y

Prescribed responsibilities 19 9

Statements of

responsibilities Y Y

Responsibilities maps Y X

Handover procedures Y X

Overall responsibility Y X

Certification regime Y Y

Fitness and propriety Y Y

Conduct rules Y Y

SUMMARY OF ACTIONS TO IMPLEMENT

My suggestions (in very short)

• Set up a project team with HR, legal, risk and compliance.

• Identify employees who will perform a certification function.

• Consider how to embed into the employee lifecycle, recruitment, ongoing training, and performance reviews.

• Consider whether there will be any new senior manager roles.

• Consider any changes to employment contracts.

• Train all conduct rules staff on what this means for them in performance of their roles.

• Establish systems to record breaches and reporting of conduct rules.

t 020 33 19 3700

w www.keystonelaw.co.uk

FOR FURTHER INFORMATION

ROBERT WHARTON

O7836 678134

e [email protected]

THANK YOU FOR YOUR TIME

www.keystonelaw.co.uk

Practitioner Perspective

A panel discussion chaired by Russ Piper of Sovereign Health Care, with:

• Caroline Whitehead, NED for Wiltshire Friendly

• Roger Turner, NED Shepherds Friendly

• Tim Birse, NED Healthy Investment

STRATEGY, MARKET DEVELOPMENT,

RISKS INCLUDING NON-

QUANTIFIABLE RISKS

Kathryn Moore and Stephen Dixon

AFM NED Conference 5 June 2018

A presentation in two parts: 1

• Part One:• NED’s role in strategy

• Good strategy development

• How to spot poorly thought through strategy

• Spotting the risks

• Non-quantifiable risks

– Steve Dixon

A presentation in two parts: 2

• Part Two:• How do you manage risks

• How to get the best from MI

• Your role in holding management to account

– Kathryn Moore

Part One: Steve Dixon

• NED’s role in strategy

• Good strategy development

• How to spot poorly thought through strategy

• Spotting the risks

• Non-quantifiable risks

StrategyStrategy is not

• Details

• Pay scales

• What colour the logo is

Strategy is

• Vision of direction

• Key components

• A key board responsibility

• Your job!

Strategy requires….Target Market

Distribution method, renumeration, control

Products

Insurer’s skill set

Market perception

Staff buy in

Poor strategies….• No definition of target market

• No clear view of distributors or their needs

• No reason why target market needs the product

• No reason why distributors feel comfortable with product

• Insufficient margins for distributors and for insurer

• No internal expertise on the product or the market

• Or the distribution method

• No real link between product / market and how insurer is perceived – what it does

• Staff demotivated by “yet another initiative”

Example of new direction…..Internal expertise

• Bought existing Lloyds broker in car insurance

Perception

• Advertising, new brand

Distribution model

Product fitted for distribution and target

Awards, success and new future

New directions…..

• Take time

• Take focus

Controls on management

• Ensure you believe in the strategy

• Do they?

• Are all the key points in place?

• If not – why not?

• Spend to achieve but

– Check that spending is productive

Key issues…..

Target market is achieved – demo

study on sales

Knowledge of distribution and good feedback

Products right, sales coming through, no

increase lapses

Skills, no extra delays in admin,

no rise in complaints

Market surveys, staff satisfaction

Non-quantifiable risks

• Nearly every major loss or company failure has its roots in the Board

• Nearly all have come from events not expected

• Roads to Ruin….

Key areas of risk

• Board skill and NED control lacking

• Board risk blindness especially on reputation

• Poor leadership on ethos and culture

• Defective communication

• Excessive complexity

• Inappropriate incentives

• Risk “glass ceilings”

Example 1: AIG

• Greenberg (CEO) punished those who didn’t achieve the growth / profit targets

• Hidden losses by creative reinsurance

• Fraud

• Lost AAA rating

• More collateral needed

• Losses on CDS market

• Board made up of loyal friends and the great and good.

Examples reputational risk

• Arthur Andersen and Enron

• Network Rail and incompetence to repair track

• Passport Office

• Firestone tyres and defective tyres

• Northern Rock and “run on the bank”

• EADS Airbus A380 and wiring

• Shell overstating its oil reserves by 23%

Ethos and Culture

• Arthur Andersen and Enron

• Enormous fees from consultancy

• Queries on independence

• Shredded files before case launched

• No moral compass.

Defective communication

• Not listening to outside experience

– Independent Insurance results “too good to be true”

– Ignored by actuary, auditor and board

• Northern Rock required continuous market in its Granite paper

• Zurich had assumed that South African sibling company would adhere to its data protection standards – data loss ensued.

Complexity

• Always makes it very difficult to manage the business

Incentives

• BP executives had 70% of bonus on financial measures and 15% on safety….

• AIG’s subsidiary had 50% of bonuses on short term performance

• Arthur Andersen rewarded those who doubled audit fees with consultancy fees and punished those who didn’t

• Shell had incentives based on the oil reserves

Glass ceiling

• Societe General

– Lots of queries on Kerviel, none followed up

– Compliance officer not able to challenge superiors or Kerviel

Part Two: Kathryn Moore

• How do you manage risks?

• How to get the best from MI

• Your role in holding management to account

How do you manage risks?

What is your Risk Strategy?

• A document which is reviewed every year?

• A process followed by the risk department to produce MI presented to the Board?

• How the business manages its risks?


What should your Risk Strategy do?

• Support the business strategy

• Enable the business to identify the risks associated with the business strategy

• Enable the business to agree how much risk to take

• Enable the business to manage the risk by monitoring its exposure


Risk Strategy

Risk Appetite

Risk Monitoring

Identify

risks

relevant

this year

Assess

risks to

accept

Manage and

Monitor risks

How to get the best from MI

Risk Strategy

Risk Appetite

Risk Monitoring

How to get the best from MI

Risk Strategy

Risk Appetite

Risk Monitoring

Risk Universe

Risk Assessment

Risk Trigger Points

Risk Appetite

Risk Assessment of

Business Plan

Risk Management Framework

Stress and Scenarios

ORSA Results

ORSA Strategy

Risk Strategy

Capital Management Plan

What is Management Information?• Those monthly reports we see at every meeting

• Tables and tables of numbers

• The Accounts and Regulatory Returns

• Board Papers

What is Management Information?• Those monthly reports we see at every meeting

• Tables and tables of numbers

• The Accounts and Regulatory Returns

• Board Papers

What is Useful Management Information?• It answer your questions

• It is relevant

• It is timely

• It supports decision making

COMPLETE ACCURATE APPROPRIATE

What is the Board’s Role?

• To ask the questions

• To challenge the business strategy

• To understand the potential risks

• To understand the impact of future events

• To ensure that questions are answered

• To ask for evidence that historic commitments have been followed through

• To use wider experience to suggest alternative solutions

For more information, please contact

[email protected]

[email protected]

Telephone: 01372 739034

mailto:[email protected]

mailto:[email protected]

How Solvency II can be useful in the Boardroom

5 June 2018

Paul Harwood, CFO & CRO, Holloway Friendly

Contents

Background

Who would choose to be a NED?

What does good look like?

Assessing Effectiveness

NED job design & challenge

How does Solvency II help?- ORSA, SFCR & RSR

Summary

How does Solvency II help?



It puts the Board in charge

It describes frameworks for financial soundness and good governance

Who’d be a Non-Executive Director?





Non-Executive Director is nowhere to be seen

Dangerous?

Despite NEDs being:

• Talented & successful

• Personally robust

• Proficient business sense

• Experienced

• May have expertise

• Willing to commit, to help

• Keen to be part of a team

• Putting in the hours

The reality is:

• The role is part time

• Information is asymmetric

• The risks are significant

• The public is not sympathetic

• The demands are unrealistic

• The pay is poor for risks(?)

• Always take the blame

• On the hook


Job of the Board• To appoint the Executive team

• To agree the strategy

• To drive the culture

• To challenge management

• To ensure effective risk management, internal control & governance

• To monitor performance

• To balance stakeholder needs

• To be held to account by the regulator


This Not this

Questions about effectiveness

1. Do Board and Committee papers help you do your best work?

2. If the materials were better, could you challenge better?

Solvency II supports the first and expects the second


Because you are in charge, you can

- ask for synthesis, not analysis

- insist management is clear about:

- what you are being asked to do

- why you are being asked

- ask to see the challenges that have already been made

- plenty of time to read papers

- do the spelling and punctuation test outside the meeting


Challenge is important



- the number of challenges is limited

- challenges can be documented

- challenges need not come just from NEDs

- Solvency II provides ample scope for challenge





Known Knowns



Known Knowns

This Month’s Sales



Known Knowns

Unknown Knowns




Known Knowns

Unknown Knowns

Next Month’s Sales




Known Knowns

Unknown Knowns

Unknown Unknowns





Known Knowns

Unknown Knowns

Unknown Unknowns



2008 Credit Crunch



Known Knowns

Unknown Knowns

Unknown Unknowns

Unknown Knowns



2008 Credit Crunch



Known Knowns

Unknown Knowns

Unknown Unknowns

Unknown Knowns



2008 Credit Crunch

Worry about Colin





Enough money


Enough money

Good governance


The Board can press for better reporting

Leading to better challenges

and thus better governance

Areas of Interest

• ORSA

• SFCR

• RSR





Areas of Interest

• ORSA

• SFCR

• RSR

ORSA

ORSA

Can you meet the regulatory requirements in an 8-page report?

ORSA

Can you meet the regulatory requirements in an 8-page report?

No: it takes at least 12

ORSA

12-page ORSA (report available on request)

• Most ORSA contents are included to prove that a compliance process has been followed

• Follow a structured process, and compliance is assured

• The resulting report can be more focused

ORSA

12-page ORSA

• Process invites Board engagement

• It captures diverse attitudes

• The compliance burden is reduced





Areas of Interest

• ORSA

• SFCR

• RSR

SFCR

Dire document or good induction material?

- Regulator prescribes headings and content

- No-one reads

- Dry as dust

SFCR

What does the Board need?

- to present its governance effectiveness in public

How does this enable challenge?

- more understanding=>more engagement

SFCR

Holloway approach

- Try and make it readable by policyholders

- A communication exercise

- Reaction differed(!)





Areas of Interest

• ORSA

• SFCR

• RSR

RSR

Not really SFCR+

- Some insightful and meaningful questions posed

- The Board’s chance to demonstrate high standards of governance to the regulator

- Use the template as an ongoing report?

RSR

What does the Board need?

- to understand performance, what drives performance and governance standards

How does this enable challenge?

- it is the report that the regulator will use

Conclusions

Solvency II puts the Board in charge

- Directors can push for better reporting

Better reporting supports effective challenge

- Using the ORSA (financial management)

- Using the SFCR & RSR (governance)

Implement for meaning, value and insight

How Solvency II can be useful in the Boardroom

Thank you for your time

THE END

Sustainable Investing for Financial Mutuals Conference PM slide deck... · COP21 sends a strong global signal France sends a strong regulatory signal The French government involves

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