Guernsey wants green ESG kitemark option for its ILS structures

The domicile island of Guernsey wants to make available a green kitemark for insurance-linked securities (ILS) structures transacted there, enabling ILS issuers to apply for the ability to verify the environmental, social and governance (ESG) credentials of an arrangement.

The question of the ILS markets ESG credentials is a hot topic right now, with the majority of participants in the market agreeing that ILS such as catastrophe bonds have ESG traits embedded into them, given they provide disaster risk financing capacity from the capital markets, but questions also raised over how to look-through the included contracts to ensure they are truly ESG credible.

Guernsey’s insurance and reinsurance markets wants to formalise the process, by having a specific green, or ESG kitemark available that any ILS structures located in the domicile could apply for.

The idea is that this would be an independently adjudicated decision, providing a way for ILS issuers to display the kitemark and claim their green or ESG credentials for an ILS transaction domiciled in Guernsey.

Speaking during a recent webinar, Adele Gale, Head of ILS at Robus Group in Guernsey, discussed the issuer of ILS’ ESG qualities and what can be done to ensure compliance.

She described the kitemark proposal as, “Something our ILS platforms could apply for that would create an independently-verifiable badge, which can really demonstrate that ESG credentials are at the heart of what is being done.

“Guernsey’s insurance industry recognises its place in the ILS value chain. As the poll shows, ILS has the potential and is predisposed as an asset class to be chosen by investors looking to meet their own ESG agendas. Guernsey is aiming to be as proactive as possible in facilitating this. It is about independent verification and ensuring there is validity and that we are living and breathing ESG.”

Guernsey’s insurance and reinsurance market association, the Guernsey International Insurance Association, has itself signed up as a supporting institute of the United Nations’ Principles for Sustainable Insurance Initiative.

The idea is to enable ILS transactions domiciled in Guernsey to apply for the kitemark, so that they can provide a third-party adjudicated seal of their ESG quality.

Of course, the process to identify just how ESG applicable an ILS investment is, involved much more than just looking at whether it protects against catastrophe or weather risk.

It’s important to assess the underlying contracts right down to the covered portfolios, as well as the sponsors and risk transfer counterparties involved.

But it is a hit topic right now and something that the ILS market is certainly focusing on, so it’s no surprise to see Guernsey keen to take a lead on this.

Bedell Cristin Partner Richard Sharp commented during the webinar, “One feature of the challenges the pandemic threw up was everyone assessing their footprint, their work practices, how their industry operates. It was a timely focus on those issues at the time of the introduction of Guernsey’s green initiative. It has focused people’s minds on these issues and brought them to the fore.”

Gale added, “It only reinforces the legitimate and credible reason for moving towards a more ESG-friendly way of making decisions and living and breathing it. For me, they are complimentary.”

Also participating in the webinar, the outgoing Schroder Secquaero Head of Transaction Management Jutta Kath explained that the ILS market was already supportive of certain activities in the field of ESG.

“For me, ESG has two components,” Kath said. “There is the external view in terms of what we offer to our investors seeking these kinds of products, but there is also an internal view to make sure that the products we offer are not greenwashed for the sake of being in the field. That’s very important to our investors – you need a credible approach.”

Global Parametrics CEO Hector Ibarra also said, “There’s a working group, between the international development agencies and insurance industry, to look more carefully about how to monitor these indirect investments, mentioning the complexity and a lot of this is for example when you’re creating an impact that goes beyond the insurance industry.

“We can have the discussions of what insurance and the product is and focus on what we can achieve for the more vulnerable groups in the world. As an industry, there is a home for a traditional ESG framework is an important challenge and hopefully we can step up to it.”

Catastrophe bonds are already recognised as meeting certain of the UN’s Sustainable Development Goals (SDG) by some of the sectors largest pension investors.

They’re an easier asset to confirm the ESG status of, given they cover a single sponsor usually. For collateralised reinsurance platforms this will be harder, as you really need to look-through every contract and cedent, as we explained.

But the ESG status of ILS is undisputed and finding ways to benchmark, validate and acknowledge this is another opportunity for ILS as an asset class to extend its reach and raise its importance in the eyes of investors.