Fresh ESG capital an opportunity for the ILS industry: Taylor, Ocorian

In a recent interview with Artemis, Ocorian Client Director Sherman Taylor explored how the insurance-linked securities (ILS) industry can incorporate ESG into its operations and what benefits this might bring.

He expressed his optimism as he noted the total market capitalisation of new ILS issuances surpassed $15B in 2020, making it another record-breaking year for the asset class.

Taylor commented, “Investor confidence remained strong despite the uncertainties of the coronavirus pandemic, with a flurry of ILS renewals and new capital inflows. That being said, the ILS industry has potential for additional growth, and innovation is increasingly seen as the key to attracting fresh capital.”

He also believes that one such avenue for growth could be the industry’s adoption of ESG (environmental, social and governance) principles.

“With new investment funds increasingly geared towards younger generations interested in aligning their investment choices with ESG values, the ILS industry could benefit from accessing this fresh source of capital.” he continued.

Taylor also explained that there is genuine interest in ESG adoption within the ILS industry too.

He noted, “A topical global issue, ESG investing is being fuelled by evidence suggesting there is a positive correlation between ESG metrics and financial performance and market value. As a result, sustainable investing is becoming a necessity for stakeholders concerned with where and how their invested funds are deployed.”

The European Union has introduced a taxonomy regulation aimed at introducing a benchmark for environmentally sustainable economic activities and to prevent ‘greenwashing’.

Whilst adding this regulation, it is also planning to release a sustainable finance disclosure regulation (SFDR) in March, which will require fund managers to disclose how they have integrated in their processes an assessment of all relevant sustainability risks that might have a material negative impact on the financial return of a fund investment.

If successful, these regulations could provide a future framework for other regions, explained Taylor.

“On the environmental side, it makes sense that the ILS industry – which provides capital to support natural catastrophes risk – would embrace neoteric ESG ideals,” he continued.

“ILS is inextricably tied to events such as wildfires and other severe weather patterns that scientists generally believe to be correlated to climate change.”

He also noted that the social element of ESG refers to the standards which organisations set for their relationship with employees, suppliers, customers and communities.

Notably, he continued, many large players in the ILS industry already embrace such social considerations in their operations. For example, when Covid-19 first appeared in Bermuda, the industry prioritised employee welfare by allowing people to work from home, ensuring the safety of the staff.

The governance perspective considers how organisations are managed and how investor value is guarded.

It also looks at general best practices, including: board and senior management conduct; accuracy in financial reporting including appropriate disclosures; and transparency with stakeholders and regulators.

He said, “This level of governance has always been present in the ILS industry due to the complexity of ILS transactions which demands high standards from all participants.”

To conclude, Taylor noted the ESG efforts of the Bermuda Stock Exchange (BSX), which is a vital part of the global ILS industry.

“The BSX has also been at the forefront of embracing an ESG ecosystem. In May 2019, it launched its ESG initiative in line with similar World Federation of Exchanges initiatives.

“Many of the ESG ideals are already well represented in the Bermuda business community. And as ESG gains traction around the world, Bermuda will continue to be a natural home for the ILS industry as it evolves,” said Taylor.

Read more of our coverage of ESG in the insurance-linked securities (ILS) market.