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ESG expansion a growth opportunity for ILS: Rivaldi, ILS NYC 2021


The already large environmental, social and governance (ESG) investor community is poised to expand further, but in order for the insurance-linked securities (ILS) sector to really take advantage of the opportunity it needs to address certain challenges, says Marcus Rivaldi, Managing Director of Analytics, Twelve Capital.

Marcus Rivaldi, Twelve Capital, ILW NYC 2021Amid a heightened and lasting focus on sustainable investing, Rivaldi closed day three of Artemis ILS NYC 2021 with an in-depth look at the future of ESG in ILS.

A recent PwC report found that by 2025, ESG funds could represent upwards of 40% of the total mutual fund assets under management (AuM), which would require a CAGR of more than 20%.

In light of such a strong growth projection, Rivaldi explained that in his mind, we should be expecting ESG investors to look for new routes and opportunities to deploy capital.

“So, with that in mind, I think the big win for the reinsurance industry, ultimately, is greater financial flexibility for being able to tap into this substantial and deep investor base,” said Rivaldi.

“Meanwhile, for the ILS community, the big opportunity here is growth, which comes from being part of that investment process of ESG investors getting involved in the reinsurance space, but also take a more prominent role in that transmission between capital markets and the insurance industry.

“So, ultimately for both, interest and support from the ESG investor community is the key prize, but I think it’s fair to say that that interest and support is conditional,” he continued.

Rivaldi went on to explain that ESG investors are looking for an opportunity that is sizeable, attractive and has the potential to grow further; an investment that is aligned with their ESG interests; and they also want to make sure that the associated risks are demonstrably well-modelled and understood.

“If you can tick each of those boxes and convince on all three, then I think that opens the door for real interest and support from ESG investments,” said Rivaldi.

The discussion then turned to the alignment of ILS with ESG goals, and how important it is that the industry clearly demonstrates that and moves from simple, industry level analysis to being more convincing about investments at an individual asset level.

“First of all, in general terms, I’d say that ESG relevant data quality and transparency remains a major issue for the industry.

“We currently observe no real meaningful consensus, or standardisation in terms of ESG relevant metrics. Most data is self-reported, which obviously raises concerns around reliability, the risk of greenwashing, and even how relevant the reported data is to the actual business itself,” he noted.

Rivaldi also highlighted inconsistency across the balance sheet, with carriers being more eager to disclose information on the asset side of the balance sheet, but not so willing on the liability side. Furthermore, geographical inconsistency is also a hindrance, he added.

Of course, it’s also going to be critical for the market to really demonstrate the understanding and management of environmental-type risks, which raises the climate factor and the capabilities of modelling for certain exposures.

“I think it’s pretty apparent that there are clear debates remaining on perils and hazards, particularly at the moment, I’d say secondary perils. So, severe convective storm, wildfire risk, and the impact on climate change on those perils,” said Rivaldi.

“I wouldn’t say that remaining uncertainty is a deal breaker for ESG investors necessarily. The fact that you can’t talk with 100% accuracy or certainty about climate change, for example, I don’t think that’s a deal breaker.

“But, I think you need to be able to demonstrate that you’re doing a lot of hard thinking about it, and demonstrate how you’re considering that uncertainty within the broad investment process that you’re applying. So, across the entire analytics chain, across the portfolio construction piece, and also from a risk management perspective,” he added.

The session, which was broadcast first to event registrants on Tuesday 9th Feb, can now be viewed below:

Every session from ILS NYC will be made available more broadly via our Artemis Live video channel and audio versions will also be shared via our podcast as well.

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Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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