ILS industry has good will towards ESG, but there’s more to do: Roundtable

Both the understanding and adoption of environmental, social, and governance (ESG) practices and compliance in the insurance-linked securities (ILS) industry is growing in prominence, but as noted by industry experts at a recent roundtable event, there’s more work to do.

A group of experts from across the ILS, investment and broader risk transfer business met (virtually) recently to discuss ESG practices in the ILS space.

Facilitated by Plenum Investments Ltd. and moderated by Artemis, the roundtable sought to gain an understanding of the consequences of non-ESG compliance in insurance risk transfer; to identify starting points for improved compliance; alongside an exploration of the needs of the market and investors.

After an overview of the status quo around the implementation of the ESG framework in the European Union (EU), the conversation shifted focus to the ILS space and specifically, whether or not ESG is being sufficiently considered in the market at this time.

“I think there’s a strong commitment from ILS managers in looking at ESG strategies,” said Cory Anger, Managing Director at GC Securities, a division of MMC Securities LLC. “But, I would say, for how you implement it into risk transfer and in the reinsurance space, we’re probably in the infancy of how fund managers can address and respond to the principles of responsible investment.”

She continued to note that although they’re still in the early days, there is a lot of room for improvement and that many of the top ILS fund managers are focused on precisely this.

Andy Palmer, Head ILS Structuring EMEA & APAC at Swiss Re Capital Markets, agreed that today, there is very active interest in the topic of ESG.

“You can see that Swiss Re, for example, takes it very seriously. We are having a lot more conversations with our counterparts, competitors, and clients – so clearly the awareness and interest is growing. These discussions are actually very, very important to make sure we understand how ESG will really flow right the way through the entire value chain,” said Palmer.

While interest is clearly there and growing, Palmer explained that one of the tricky elements is that it’s not so black and white as to say something is ESG friendly or compliant, and something isn’t.

“ESG’s not as easy to implement, as we’ve learned from our own approach to sustainability at Swiss Re. It’s more of a gradual process over time. It is about driving oneself, and also the market, to the extent possible, towards a more ESG friendly space,” he added.

Despite growing interest, Nico Rischmann, Partner at Plenum Investments, warned that the reality is that a growing number of new investors, such as pension funds, are increasingly ignoring non-ESG compliant investments.

“Of course, ESG investors support a certain transition period because they know that it’s impossible to claim ESG results without any compromises,” said Rischmann. “This counts especially for the ILS and cat bond market. But, we see a certain, let’s say unrest, among ESG investors because they have not seen any progress during the last three years.

“ESG has received tremendous momentum in the market and has created its own standards. I think it’s very important to understand what is best practice in this world so that they can comply in the future with the standards they are trying to set up. So, ignoring this means losing a large number of institutional clients. This is the pain when discussing our experience during the last few years,” he added.

According to Tommy Piemonte, Head Sustainability Investment Research, Bank für Kirche und Caritas and member of Shareholders for Change, the integration of ESG aspects could prove to be also a challenge for more mainstream investors that are not intrinsically motivated to invest in a sustainable way.

“So, classical investors are now in a really tough competition to integrate ESG factors, to integrate ESG aspects into their investments as an asset owner, but also for their clients.

“It comes of course to one of the biggest problems probably in the cat bond market, that there is a little less transparency. But a fund manager like Plenum, in the cat bond fund management industry, are required to jump over this gap of lacking transparency and give investors the possibility to have something that helps them to become aligned with their own ESG policies,” said Piemonte.

In response, Paul Schultz, Chief Executive Officer (CEO) of Aon Securities, told the audience that one of the founding principles of ILS is that it is a transparent asset class.

“So, I think, transparency has always been embedded into cat bonds, and it’s something all industry participants have been proud of,” said Schultz.

Adding, “Looking to expand that around ESG is just a natural sort of development of where we are. Now, to be able to do so, I think you have to articulate the benefits of it.

“First of all, most of us would say it’s the right thing to do and, so that’s helpful in itself. But as cedents embrace the disclosure that’s associated with this, the transparency around what is in their insurance or reinsurance book, I think they’re going to want to understand what’s the trade-off here, what does disclosure bring.

“And, I think, having a view on the growth potential that can come from a more ESG compliant strategy, is really what the industry needs to articulate.”

Roundtable participant Roland Kölsch, Managing Director, QNG (SRI quality standard FNG-Label), underlined that regarding transparency, you have to know where the money finally goes so that you can justify your best-in-class approach or at least ensure that no money goes to harming activities.

“Without any transparency you cannot do anything. When you’re not able to dig into any detailed insurance contract behind, you will not make it to the EU regulation, it’s my prediction.

“Our experience was that there is a huge lack of the willingness of being open,” said Kölsch.

As noted by Dirk Schmelzer, ILS Fund Manager, Partner, Plenum Investments, while it’s fair for investors to ask these questions, answering them can be a challenge for fund managers.

“It’s very, very difficult for ILS funds to answer these questions, especially when it comes to what type of industries are you exposed. In some cases, you only have to guess, especially when you have questions like, are you exposed to the tobacco industry or so on. It could be in there, but we don’t know for certain.

“So, all these reporting duties become very, very difficult for ILS investors,” he said.

Around the time of the roundtable, Artemis collaborated with Synpulse Management Consulting on the first ESG survey of the ILS and risk transfer market. Roundtable participant Patrick Roder, Associate Partner at Synpulse, divulged some of the key findings.

“If I had to summarise the findings in one sentence, it would be that the market agrees ESG is important today, and even more so in the future, but, the actions taken, they do not yet match the aspirations that have been voiced,” said Roder.