Helping central banks meet their responsible investment objectives
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An interview with Iker Zubizarreta Abando, Chief Investment & Financial Officer at FLAR (The Latin American Reserve Fund).
“Central banks view it as an innovative, collaborative project” says Iker Zubizarreta Abando, Chief Investment & Financial Officer at FLAR, reflecting on the ETF that FLAR co-designed with Amundi to meet central bank needs.
Amundi in conversation with investors around the world.
In June 2024, Amundi introduced the Amundi Global Corporate SRI 1-5Y Highest Rated UCITS ETF, launched with an initial investment from Fondo Latinoamericano de Reservas (FLAR – the Latin American Reserve Fund).
Leveraging Amundi’s extensive expertise in collaborating with public entities worldwide, the ETF was co-designed in partnership with FLAR, to help central banks meet their responsible investment objectives.
We recently had the opportunity to speak with Iker Zubizarreta Abando, Chief Investment & Financial Officer at FLAR, to explore the origins of the ETF and how it aligns with FLAR’s mission within the region. In addition, to discover more about FLAR’s future plans and aspirations.
Could you give us an overview of FLAR and the core mission that drives it?
FLAR – the Latin American Reserve Fund, is a supranational organisation comprised of nine central bank members across Latin America, dedicated to contributing to the financial and economic stability of the region. To fulfil this mission, we provide balance of payments and liquidity loans to our member countries, while also working to improve the investment of reserves and public resources for both member countries and those beyond our membership.
Over the past 45 years, FLAR has established itself as a highly technical and credible institution, positioning us as a natural hub for connection and collaboration within the central banking and official institutions community .
Can you share some insights into your role at FLAR?
As the Chief Investment Officer at FLAR, I oversee the management of our investment portfolios, spearhead the development and execution of investment strategies, and ensure alignment with the organisation's overarching goals.
I also lead our approach to responsible investing and collaborate closely with FLAR’s central bank members to optimise their investment outcomes.
How integral is responsible investing to FLAR’s strategy, and how does it align with the investment goals of your central bank members?
Responsible investing is a hugely important component of our strategy, though the opportunities for us to incorporate ESG are more constrained than other institutions due to our specific mandate. Central banks prioritise monetary stability above all else, meaning no investment objective, including sustainability, can take precedence. Moreover, both FLAR and our members are required to invest in highly liquid, high-quality, and low-risk securities, further restricting our investment universe. This creates additional challenges in integrating responsible considerations into the investment of international reserves.
Despite these limitations, we continuously seek ways to align responsible investing principles with the traditional reserves management investment guidelines – security, liquidity and return objectives, ensuring that we operate within these constraints while advancing our responsible objectives.
What key trends have you noticed in central banks’ approach to responsible investing over the past few years?
The emphasis on responsible investing among central banks has steadily grown in recent years. A clear sign of this trend is the rise of initiatives like the Network for Greening the Financial System (NGFS), of which we are proud members. Through our discussions with various types of institutions, across the region and beyond, it is evident to me that this trend is irreversible.
We have also observed other trends in central bank responsible investment practices, such as the inclusion of green and labelled bonds within thematic investment strategies. Additionally, many central banks and other official institutions are adopting negative screening lists to exclude specific investments, and increasingly, mandates for external managers now incorporate responsible investment criteria and require detailed corresponding reporting.
As with any significant initiative, there are growing pains and adjustments to be made along the way, but I firmly believe that we are on a positive path toward greater sustainability in central bank investments.
FLAR co-designed this ETF with Amundi. What inspired this collaboration, and how does the ETF address the specific needs of your central bank members?
The idea for this ETF originated from a conversation with our Board of Directors, where we sought their input on how to incorporate responsible investing into our own portfolios. During the discussion, some directors recognised that we were ahead of the curve in responsible investing knowledge and encouraged us to explore solutions that could benefit both our member countries and the broader region. This prompted extensive discussions with most of the region’s central banks and several external asset managers, to identify ways of adding value in this space.
From these conversations, it became evident that central banks and official institutions were interested in responsible investment options for their reserves, but lacked suitable alternatives to invest in. It was this realisation that gave birth to the project.
As for meeting the needs of our central bank members, the ETF’s co-investment element is hugely important. Central banks view it as an innovative, collaborative project, and our role in providing the seed funding for the ETF was pivotal in fostering this dynamic.
Additionally, while the ETF’s primary objective was responsible investment, it also produced some valuable spillover effects, enabling some institutions to expand their investment toolkit by gaining approval to invest in ETFs and corporate bonds.
How important was the ability to co-design the fund? Was opting for an off-the-shelf solution ever viable?
Co-designing this ETF was essential for us. Off-the-shelf products typically cater to a broader audience, and may not always align with the specific needs of central banks and official institutions like our members. By co-designing the ETF, we were able to tailor the investment strategy, risk parameters, and responsible objectives to meet the precise requirements of our members.
This customisation ensures that both we and other reserve managers have access to a product that is closely aligned with our shared objectives, thereby maximising its value for our member institutions.
Additionally, the training and knowledge transfer component, a crucial aspect of the project, would not have been possible with a standard off-the-shelf solution.
Why did you choose to partner with Amundi for this initiative?
The decision to partner with Amundi followed a comprehensive RFP process, in which we invited institutions that we considered to be the leading exponents of best practices in both ETFs and responsible investing.
What set Amundi apart in the selection process was their profound understanding of our specific goals and the needs of our member institutions.Their demonstrated expertise in the ETF market, coupled with a genuine commitment to responsible investing, made them an ideal partner. Moreover, Amundi's proposal for support in areas such as training and capacity building further distinguished them from the competition.
Looking ahead, what does the future hold for FLAR? Are there any exciting projects or initiatives on the horizon that you can share?
This collaboration with Amundi, alongside our project partners, showcases the power of our organisation to create collaborative hubs and deliver accessible solutions that benefit our member countries, central banks, and official institutions across the region. Looking ahead, I believe that the challenges central banks face today are markedly different from those faced over the past 45 years. We are in the midst of significant disruptions, driven primarily by new and transformational technologies that pose significant challenges, but also immense opportunities for our institutions.
FLAR aims to play a pivotal role in the region by identifying emerging trends and developing innovative solutions—whether from external sources or within our own institutions. We see ourselves as facilitators and enhancers in advancing these initiatives across the region and beyond, ultimately helping our institutions adapt and strengthen during the transformational times ahead.
In your view, what role will ETFs play in shaping the future of asset management?
Looking ahead, I believe ETFs are powerful tools for constructing diversified, liquid, and both operationally and cost-efficient asset management solutions. If I were tasked today with building an investment portfolio from scratch for an institution without any operational or investment legacy, I would make ETFs the core foundation. They offer the advantage of rapid deployment with minimal costs and reduced personnel and system requirements, creating a lean and efficient structure. This approach provides efficient beta exposure within the portfolio, freeing up resources to focus on identifying and implementing value-added alpha opportunities in asset classes or geographies that might be beyond reach under traditional investment models.
The views expressed in this interview are the views of the interviewee and do not represent the opinion of Amundi ETF.
Information on Amundi’s responsible investing can be found on amundietf.com and amundi.com. The investment decision must take into account all the characteristics and objectives of the Fund, as described in the relevant Prospectus.
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below and in the fund’s Key Information Document (“KID”) and prospectus available on our website www.amundietf.com.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
COUNTERPARTY RISK - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index components. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
CREDIT WORTHINESS – The investors are exposed to the creditworthiness of the Issuer.
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