BlackRock launches ESG fund with cat bonds a targeted asset

Investor demand for environmental, social and governance (ESG) appropriate investment opportunities and asset classes is expected to become a key driver for the insurance-linked securities (ILS) market going forwards and a new fund launch from giant asset manager BlackRock only serves to reinforce this belief.

While there are still very few insurance-linked securities (ILS) or catastrophe bonds that are considered to be fully ESG aligned, this is expected to increase over time.

However, ILS and catastrophe bonds in particular, are seen as having inherent ESG related qualities.

They are vehicles for provision of disaster risk and recovery financing, are seen to protect society against the environmental impacts of weather and natural disaster events, and they are issued out of a highly regulated marketplace with strong governance already in-place.

All of which means that, as institutional investors increasingly look for ESG relevant asset classes, ILS and catastrophe bonds are set to take a share of global ESG allocator flows.

As we explained recently, the focus of ESG investors on ILS and cat bonds has already become a driver for issuance activity, according to Fermat Capital Management’s John Seo.

But, when it comes to how ESG flows may help to drive market issuance, a future driver could come from the multi-strategy investment fund world, as increasing numbers of traditional investment fund managers look to add ILS or catastrophe bonds to their ESG fund portfolios.

Enter BlackRock, the giant investment manager that has over $9 trillion in assets under management, as of Q1 2021.

BlackRock has a range of sustainable investment funds and ESG strategies, from equities through to ETF’s.

But the manager is also launching new ESG strategies and beginning to market them to potential investors, one of which is the 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 specific environmental, social and governance (ESG) criteria.

The strategy will seek to screen out certain issuers and focus on bonds that are demonstrably ESG appropriate, or where their proceeds are going to be used in a green manner, while other criteria will also be used to identify ESG appropriate securities to invest in.

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

Given the perception that ILS and catastrophe bonds can be relevant under ESG investment guidelines, it’s perhaps no surprise to see them included as one of the asset types this new ESG fund from BlackRock can invest in.

But this is the first specific ESG focused fixed income and closed-end fund we’ve seen where catastrophe bonds are explicitly called out as one of the areas that the fund’s assets may be deployed.

It suggests we will likely see ILS and catastrophe bonds included as relevant asset types for other more generalist, mutli-strategy ESG investment funds, which could become another driver of ESG flows into the ILS market and into reinsurance as a whole.

A similar trend was observed around a decade back, when numerous multi-strategy and mutual funds started to add event-linked bonds, so catastrophe bonds and certain other ILS or reinsurance linked assets, to their prospectuses.

This resulted in new capital flowing into the market and many fixed income focused multi-strat investment strategies now include some cat bond exposure.

While some multi-strat investors sold out of the cat bond market when the pandemic hit in 2020, finding the liquidity available and the fact cat bond prices didn’t move much as an attractive feature that allowed them to service investor liquidity needs, the same may not be true in future with ESG funds.

ESG fund strategies could be much more focused on buying and holding catastrophe bonds, especially the more remote risk, or top-layer focused cat bonds in the market.

For the ILS market, which continues to strive to add ESG specific features to issuance, this is something to note.

As the more ESG appropriate ILS and catastrophe bonds become, the more interest we’re going to see from traditional asset managers and those operating multi-strategy funds.

If you thought that ESG as a driver of interest in ILS and cat bonds was a significant factor in the market right now, it looks set to be much greater in years to come, as a widening cross-section of the investor and institutional market looks to ILS as an asset class that fits into their ESG strategies.

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