Goldman Sachs to push catastrophe bonds for climate resilience

by Artemis on November 3, 2015

As part of a new environmental policy at the investment bank, Goldman Sachs will focus on developing new models and use-cases for catastrophe bonds, aiming to help clients mitigate climate risk impacts as well as for financing resilience.

Goldman Sachs has been a leading structuring and investment banking firm in the catastrophe bond space since the market began in the mid to late 1990’s, driving institutional investor capital into the asset class through its bookrunning services.

Catastrophe bonds continue to shift beyond simply being a diversifying source of insurance or reinsurance capacity for insurers or reinsurers, with them increasingly seen as a way to transfer climate, weather and catastrophe risks for sponsors such as public entities and corporates.

Goldman Sachs is set to focus not just on bringing risk transfer and risk capital to those bearing risks using cat bonds, but also to explore the links between risk transfer and resilience, developing new models for catastrophe bonds to be applied to.

In total, just over the last ten years since 2006, Goldman Sachs has structured over $14 billion worth of catastrophe and weather linked catastrophe bonds, making it among the most prolific capital markets service providers to the sector and the leading investment bank, according to Artemis’ data and chart here.

As part of a new environmental policy for the next ten years Goldman Sachs says it will work to increase the use of environmental financing, such as green bonds and clean energy investments, to around $150 billion. It will also work to facilitate climate risk transfer, citing catastrophe bonds and resilience financing as initiatives it intends to commit to grow.

Clearly, an investment bank with the stature, reach and scope of Goldman Sachs can marshal significant sums of capital from investors into these sectors, so its commitment to further develop the catastrophe bond market is encouraging.

Goldman Sachs environmental policy states that it will help client “More effectively manage exposure to climate impacts through capital market mechanisms, including weather-related catastrophe bonds, and identify opportunities to facilitate investment in infrastructure resiliency.”

The investment bank sees opportunities for itself in advisory, financing, investing and being a market maker in both climate and weather risk solutions, including catastrophe bonds and related structures.

As the effective management of weather and climate related catastrophic risks becomes increasingly important, Goldman Sachs will work to develop innovative solutions to hep clients to better manage these risks.

One particular area of focus will be on catastrophe bonds as a mechanism for resilience.

“Given the increasing focus on resiliency measures by policymakers and the need for greater investment in this field, we will also establish partnerships to develop new models for catastrophe bonds that can better evaluate the benefits of increased investments,” the investment bank explained.

One example might be factoring the enhanced physical resilience of infrastructure, such as flood barriers, storm water detention structures, or other infrastructure that enhances the ability to withstand physical weather events, into the pricing and financial return models of catastrophe bonds.

This is something Goldman Sachs has already been working on through its involvement in the RE:bound initiative, which looks to design and structure new risk transfer solutions that provide a mechanism for resilient infrastructure project financing.

The catastrophe bond, given its direct link to many of the risks that resilient infrastructure projects look to reduce, is an ideal financial instrument to look to leverage both for risk transfer and resilience building.

Goldman Sachs has also been heavily involved in the issuance of two key catastrophe bonds that provided insurance risk transfer and protection for infrastructure exposed to storm surge risks, one of the key perils that resilience needs to be increased for.

The examples of the $200m MetroCat Re Ltd. (Series 2013-1) cat bond for the New York Metropolitan Transportation Authority and the more recent $275m PennUnion Re Ltd. (Series 2015-1) for Amtrak, both clearly show the ability for cat bonds to enhance insurance and reinsurance coverage for climate and weather related risks to infrastructure owned by public entities or corporations.

The fact that an investment bank such as Goldman Sachs cites catastrophe bonds within its new environmental policy as an area for increasing effort and focus bodes well for the market.

Any new developments that Goldman Sachs facilitates could bring more risk to cat bond and insurance-linked investors, while also bringing new risk transfer and resilience financing options to insurers, reinsurers, corporates, public entities and governments. That would be positive for everyone.

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