Allianz Investment Management LLC CEO, Todd Hedtke discusses why the time has come for social investing to reach the same level of maturity as climate-investing.
Last year you highlighted the social aspect of ESG as an area where you could see Allianz US begin to transform its portfolio going forward- where are we today?
In terms of the social investment, obviously Allianz being part of the Net-Zero Asset Owner Alliance the 'E' has been a huge focus, and rightfully so. But as I've always said, in the United States, the social investment side of things is also a key topic, and we've seen that really ramp up even more in recent years.
A key question is: 'how do we differentiate between philanthropy and investing activities?'
We're looking to do both. We've done a lot of housing type of things. We've worked with groups from Community Capital Management and Impact Share who who put together an ETF that looks to fund housing (OWNS). We've also been doing a couple of things in our very local area
Another important question, linked to the first one, is: How do we figure out as an industry, or as adjacent industries, ways to make capital more efficient, and able to flow into this 'S category'?
The most obvious area is in some form of housing, and that's been explored. But then other things like healthcare and education, how do we bring industry players together to be able to affect social change?
That's the next call it wave, if you will, of social investment. That's really where the power is going to be. If you look at climate risk, we can measure carbon, we can understand it pretty deeply now. And so we can start to build mechanisms and investments around that.
The social side is just earlier in that maturation. That will change as like minded industry players or leaders come together to find solutions.
How do you, or did you, approach making that differentiation between philanthropy and investments?
We're still thinking about it. The first step is to just realize some things are going to be by their very nature philanthropic. Once you made that realisation you need to ask yourself if you want certain pockets of money for investment that you use for philanthropic activities.
And for activities where you can make an investment case, things like public private partnerships, then that's your social investing where you look to get a return.
But that definition is probably to be done on a firm by firm basis, at least for now. I don't think there is a universal answer.
And for the second question you were asked, why do you feel we now reached the point where the industry needs to come together on this?
As an insurer, when we look at investments, one of the very basic things is what are our various costs to do investments, one of them being costs of capital. If we're going to be able to make real sustainable change, we should make sure we are all on the same level—but then also, that we're working with those who regulate us so that we all have the same understanding of how to view these investments.
Everybody moving in the same direction is the key.
What are you advocating for here? Sort of an equivalent to the NZAOA but for social justice?
I don't want to label anything per se. But in principle yes, having like-minded individuals come together and think of ways and solutions - it will ultimately spur new ideas. It will also gather more momentum.
When you say 'think of solutions', what are you thinking of?
It's probably too early to say. But for example on the housing front in the US we're big investors in so-called low income housing tax credits - a program where these investments come with a lower tax burden. This is very popular investment in the US, particularly with insurance companies.
But that's housing, which is to the social investment kind of what carbon is to the environmental piece. But there are other aspects, like education and healthcare on that social side. The idea is to try to find ways to take some of these very structural challenges society faces, and turn them into an investment case, where those of us who have a lot of capital to put to work can invest not only to help our policyholders and our constituents on the investment side, but can also help solve some of these very structural social issues.
There is more and more talk of a 'just transition', but some say that any transition by nature is unjust. So, this might be a philosophical question, but what is a just transition exactly? And is it achievable?
That's a big question. I'm not sure I ascribe to the idea that any change is by definition not just. But there are oftentimes trade-offs. And you can see it with sustainability, where on one hand, you might be doing something very good for society, and on the other hand, that might not be so good for the environment, for example.
And yes to make change, we do see, not intentional, breakdowns in other places. There are challenges with this, and we've seen some in our social investments.
It feels the reason that sustainability is such a big topic today is that along the way some have managed to make a business case for it, demonstrating that there was a risk to the P&L, and that was down mainly through climate. Is there a similar case for social? Or is social the remit of policymakers and governments?
To be honest, that's very much tied into the employee value proposition. And it's just not as obvious to the P&L.
Going back to pure investment decisions, one of the big topics is always data. What's the situation with S investing? Do you have enough data? What sort of data are you missing?
We never have enough data, I suppose. But we do have a challenge, frankly, from a data standpoint. But that is one piece of it. We also have issues with measurements – what you do with the data.
How do you measure the social good that you're doing? And the impact?
I can tell you we've created X number of new living units. But what does that mean to people?
What about investment opportunities in social investing?
I definitely see areas for opportunity. I mentioned earlier housing, healthcare and education. Housing to some degree has been done. There are opportunities in those areas but they need further attention and development. There's definitely more political vetting that needs to take place.
It seems that insurers approach social investing as more of a localised thing around where they are based.Is that just the nature of it? Or do you think that it will evolve, and we might see more national or even global social investing plans?
Global might be too aspirational. But national, I think is very possible. The Low Income Housing Tax Credit Program is a national program. It has different flavours in different regions in the US, but it is a national type of solution.
Some of these issues are very local, largely, because they're labor intensive and you can only do a few. So it makes sense to do a project in our local area that gets a certain level of attention in a market where we are an employer. There is maybe more of a draw to do it there for those shorter term wins, if you will, but we shouldn't lose sight of the more nationalistic type of approach.
We talked a lot about green or brown capital charges in the past. What about a regulatory capital charge that incentives social investing? Is that a good idea?
I would love to see that. Remains to be seen how it would be formulated, but I would love to see a regime where the regulator encourages these type of investments.
