* Has shifted 90 pct of portfolio from traditional benchmarks
* Will not exclude any specific sectors or firms
By John Revill
ZURICH, July 6 (Reuters) - Swiss Re is switching the entire $130 billion it holds in liquid assets to track ethical indices, the latest move towards principled investments by the insurance industry.
The world's second-largest reinsurer is 90 percent of the way through shifting its holdings from tracking traditional benchmarks, a process it expects to complete by the end of the third quarter in 2017.
It said taking social and governance (ESG) criteria into account reduced the risk of losses especially for long term investors.
"This is not only about doing good, we have done it because it makes economic sense," Swiss Re Chief Investment Officer Guido Fuerer told Reuters on Thursday.
"Equities and fixed income products from companies and sectors with a high ESG ratings have better risk-return ratios."
Institutional investors are increasingly looking at how companies perform on environmental, social and governance-related issues, given the potential for poor behaviour to lead to a share price hit.
A Bank of America Merrill Lynch Equity and Quant Strategy team last month said ESG-based investing reduced bankruptcy risks for U.S. stocks, while companies with the widest credit default swap spreads are the ones with the weakest ESG credentials, according to research by Hermes Investment Management.
The MSCI ESG Leaders Index has gained 11.2 percent in 2017, slightly outperforming the MSCI International World Price Index, which has risen 9.6 percent .
The decision by Swiss Re follows moves by peers to weave ESG into their own investment processes. For example AXA, France's largest insurer, last year said it would stop investing in tobacco and divest all of its 1.8 billion euros ($2 billion) of assets in the industry.
At the time AXA called tobacco "the biggest threat to public health in the world". Unlike its rivals, Swiss Re said it would not be shifting its investments away from any particular industry or company.
"It is very delicate to exclude whole sectors, keeping diversification in mind. The ultimate point is to put incentives to companies to become more sustainable over time," said Swiss Re's Fuerer.
He said Swiss Re is the first insurer to base its whole portfolio on ethical principles, with portfolio managers being told to use MSCI's environmental, governance and social indices when making investment decisions.
MSCI rates companies according to various ethical criteria, with the score combined with market capitalisation weight to create an index. That means companies with a more ethical performance have a greater weight in the index.
$1 = 0.8814 euros Additional reporting by Paul Arnold in Zurich and Simon Jessop in London; editing by Duncan Miriri