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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
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.
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
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
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.
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?
How do you manage 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
How do you manage risks?
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
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
Telephone: 01372 739034
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
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
What does good look like?
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
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
How does Solvency II help?
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
What does good look like?
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
What does good look like?
Challenge is important
Known Knowns
Unknown Knowns
Next Month’s Sales
This Month’s Sales
What does good look like?
Challenge is important
Known Knowns
Unknown Knowns
Unknown Unknowns
Next Month’s Sales
This Month’s Sales
What does good look like?
Challenge is important
Known Knowns
Unknown Knowns
Unknown Unknowns
Next Month’s Sales
This Month’s Sales
2008 Credit Crunch
What does good look like?
Challenge is important
Known Knowns
Unknown Knowns
Unknown Unknowns
Unknown Knowns
Next Month’s Sales
This Month’s Sales
2008 Credit Crunch
What does good look like?
Challenge is important
Known Knowns
Unknown Knowns
Unknown Unknowns
Unknown Knowns
Next Month’s Sales
This Month’s Sales
2008 Credit Crunch
Worry about Colin
How does Solvency II help?
The Board can press for better reporting
Leading to better challenges
and thus better governance
Areas of Interest
• ORSA
• SFCR
• RSR
How does Solvency II help?
The Board can press for better reporting
Leading to better challenges
and thus better governance
Areas of Interest
• ORSA
• SFCR
• RSR
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
How does Solvency II help?
The Board can press for better reporting
Leading to better challenges
and thus better governance
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(!)
How does Solvency II help?
The Board can press for better reporting
Leading to better challenges
and thus better governance
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