ESG qualities of ILS driving greater investor interest: Wojciechowski, BSX

As institutional investors look to asset classes that promote sustainable and responsible investing, increasingly, they are drawn to the environmental, social and governance (ESG) qualities of insurance-linked securities (ILS), according to Greg Wojciechowski, President and Chief Executive Officer (CEO) of the Bermuda Stock Exchange (BSX).

Speaking during a panel discussion held in Bermuda last year and hosted by Kroll Bond Rating Agency (KBRA), Wojciechowski, alongside PwC’s Arthur Wightman, Ariane West of Nephila Climate and moderator Brad Adderley of Appleby, discussed the connection between ILS and ESG considerations.

ILS and catastrophe bonds have been identified as sustainable development investments. Specifically, it’s been identified by some experienced ILS investors that the asset class meets the United Nation’s Sustainable Development Goal #13, which relates to taking action on climate change.

ILS and cat bonds provide a valuable source of risk capital that responds to the occurrence of catastrophe events and natural disasters around the world, providing those in need with vital financing and liquidity post-event.

“Much has been said and written about the global protection gap – those who are uninsured or underinsured – which is estimated at $180 billion. The greatest source of funds to address this gap is the capital markets.

“Increasingly, investors are directing their money towards ESG investments – something that is making a return and doing good for communities around the world. And ILS is a part, potentially a big part, of this future trend. ILS is helping communities prepare for and recover from storms, fires, droughts, epidemics and other disasters,” said Wojciechowski.

Globally, the noise and subsequent action around climate change is on the rise and the very urgent need to address the issue is being felt in both the public and private sector, which in turn is pushing more and more investors to look for asset classes that hold ESG qualities.

Wojciechowski highlighted the increased focus on climate change and sustainable/responsible investing, explaining that assets managed with ESG mandates by the 500 largest asset managers on the planet increased by more than 23% in 2018.

Furthermore, a report by the US Forum for Sustainable and Responsible Investing found that last year, sustainable, responsible and impact investing (SRI) assets now account for $12 trillion, or one-in-four-dollars, of the $46.6 trillion in total assets under professional management in the U.S.

“Pension funds, in Europe for example, have identified ILS as ESG compliant and are increasing their investment in this sector. Many ILS vehicles are related to climate driven events, hurricanes, wildfires and so on. By helping build resilience against these disasters, ILS fulfils the UN’s Sustainable Development Goal #13 – taking action on climate change.

“Bermuda is undoubtedly the epicentre for the creation, support and listing of ILS vehicles. We have the expertise and long history of being the World’s Risk Capital. The BSX is proud to be leading the ESG initiative in Bermuda and, with 80% market share, is the exchange of choice for ILS listings from around the world,” said Wojciechowski.

Recently, the BSX pushed the ILS asset class as an investment with ESG qualities, launching its own ESG initiative in an effort to encourage sustainable and responsible growth for its members, listings and the wider investment community.

Speaking on the panel, Ariane West, Director of Structured Finance at Nephila Climate, which is part of the largest ILS manager in the world, Nephila Capital, said: “Accelerating awareness of sustainability issues and emphasis on ESG priorities among the investor community has the potential to catalyze a fundamental shift in how the private and public sector engage with the challenges presented by increasing weather volatility.

“The (re)insurance industry, with its core expertise in the analysis and quantification of risk exposure, is uniquely suited to the imperative task of accurately assessing the potential costs of climate trends. For the last 15 years, Nephila Climate has been dedicated to understanding and evaluating these risks and offering solutions to help mitigate them, increasing resilience and encouraging more sustainable approaches.”

Jim Nadler, KBRA President and CEO, said that the company was “very excited” to host its first ESG event in Bermuda, noting that the impressive attendance of the event shows the importance of ESG as it relates to ILS and re/insurance in general.

“As investor interest in ESG continues to grow, KBRA is actively analysing the changing dynamics of ESG factors and their relevance to credit to make our rating analysis more transparent and thorough. Attendees enjoyed an in-depth discussion on how ESG factors influence our insurance methodology and an informative panel discussion around ESG and ILS.”