BlackRock aims to raise $2.3bn+ for ESG fund that targets cat bonds

Giant asset manager BlackRock is aiming to raise more than $2.3 billion for its new environmental, social and governance (ESG) investment fund strategy that includes catastrophe bonds as one of its target asset types.

As we were the first to cover back in August, the investment manager is marketing the soon to launch BlackRock ESG Capital Allocation Trust, a closed-end fund strategy focused on equity and debt securities, at least 80% of which will be expected to meet specified environmental, social and governance (ESG) criteria.

The strategy will see BlackRock’s portfolio managers for the ESG fund screen out certain issuers and focus on bonds that are demonstrably ESG appropriate.

This can include, where a securities proceeds are going to be used in a green manner, while other allocation criteria will also be used to identify ESG appropriate bonds to invest in.

Different categories of securities are detailed in the BlackRock ESG Capital Allocation Trust prospectus as potentially appropriate for the fund to allocate to, and one of these is event-linked bonds, including catastrophe bonds and certain other securitized ILS or reinsurance instruments.

As ESG investing gains followers and is expected to be a major driver of asset flows over the coming years, the inclusion of catastrophe bonds, or other insurance-linked securities (ILS) and reinsurance linked assets within the strategies of broader, multi-asset class funds like this is notable, as these funds could eventually become a contributor of a growing amount of capital to the ILS market.

It also seems these funds will invest direct, so cat bonds and reinsurance assets with liquidity would likely be the focus.

As we said, when we were first to write about the launch of BlackRock’s new ESG fund, it is the first specifically ESG-focused fixed income and closed-end fund we’ve seen where catastrophe bonds are explicitly named as an asset class that the fund can invest in.

We’ve now learned just how big a fund strategy BlackRock’s ESG Capital Allocation Trust could be after its initial fund raising closes, as the investment giant is targeting the sale of at least enough shares in the fund to raise just over $2 billion, but if underwriters over-allotments are taken in full, the strategy will have roughly $2.34 billion of assets to deploy into ESG appropriate fixed-income securities.

It’s a significant size for an ESG fund from launch and demonstrates the attraction to these strategies that major investors have.

Of course, the amount raised will be deployed across numerous asset classes and securities that meet the fund’s ESG mandate, of which catastrophe bonds is just one.

But it does mean that additional capital will be targeting the cat bond market after this new BlackRock ESG fund launches, although given its ESG investment mandate it is likely to be more selective than a typical cat bond specialist strategy might be.

The more a catastrophe bond or other ILS security gets viewed as ESG appropriate, the more capital we can expect to seek out positions in the market.

This capital could come with a different cost attached, compared to traditional cat bond investors, so it is another dynamic the market will need to watch out for.

For sponsors and potential sponsors of cat bonds, this is something to consider. As issuing a cat bond with ESG credentials may result in tighter spreads than one without, given a different set of funds and investors could be keen to allocate to it.

As ESG investing gains broad appeal, this has the potential to be a notable dynamic, of new capital and different investor appetites, for the cat bond and ILS market over time.

The big questions then being, whether ESG funding flowing into the cat bond and ILS market could have a dampening effect more broadly on catastrophe reinsurance rates in future?

Or, whether this will just remain a niche segment, of the more ESG credentialed cat bonds within the overall ILS universe?

ESG investing is a growing focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.