ILS is a growing part of the ESG mosaic, say industry experts

As responsible and sustainable investing continues to gain traction, the insurance-linked securities (ILS) asset class is expected to play an increasing role, but it’s important that the sector tells its own environmental, social and governance (ESG) story.

This is according to ILS and reinsurance industry experts speaking recently at the virtually held SIFMA Insurance and Risk Linked Securities conference.

The opening day of the event ended with a panel discussion on the future of ESG in the ILS market, moderated by Andy Palmer, Director, Deputy Head of ILS structuring, Swiss Re Capital Markets Limited.

Early in the discussion, panellist François Divet, Head of Insurance Linked Securities, Structured Finance, AXA Investment Managers, explained that at both AXA IM and the wider AXA Group, ESG subjects are viewed as extremely important for the reinsurance industry as a whole.

“It’s part of our DNA and we are obviously impacted directly by climate change. So, this subject is very important for us but more generally, other subjects like biodiversity is very important. But, it’s not only our conviction which is important, we have more and more requests coming from our clients, investors, willing to have some more ESG product or more information on the ESG subject.

“In addition, especially as a European asset manager, we are subject to a lot of requirements coming from some local regulators or European regulators.”

Other panelists agreed that ILS investors are increasingly interested in discussing ESG products and responsible / sustainable investments more broadly. However, when compared with certain other structures available in the investment universe, ILS is somewhat lagging.

“I would say what we have seen across our business, is that ESG investing or just responsible investing is obviously much more prevalent in equities. It’s very prevalent in fixed income, really on the corporate credit side and sovereign. And, I would say, probably following thereafter would be ILS, but above other securitized, structured credit-type products,” said Joseph Morgart, Vice President and Client Portfolio, Amundi US.

“So, we’re part of the mosaic, and a growing part of the mosaic. But again, I think it’s really the equities and other parts of the fixed income market that really have a much longer amount of time associated with responsible investing and ESG,” he added.

Expanding on this, Maria Rapin, Co-CEO, Nephila Climate, explained that part of the challenge is that many of the ESG measures out there have really been designed with equity and debt investments in mind.

“And so, you have, I think, when you look at the ILS asset class and how we have embedded, as François was saying earlier and Andy as well, in our DNA is this asset class, and thinking about environmental risk, how we quantify and price for it. And, then, also thinking about the social impact of insurance and what that’s providing, and obviously the governance is a core part of any counterparty due diligence.

“So, I think ESG is embedded in the asset class, but the current frameworks in place aren’t really designed for our asset class. So, it feels like we’re in a place of finding our footing and figuring out how to represent ourselves in the mosaic of other asset classes, as Joe says, when it comes to ESG and sustainable investing.”

According to panellist Reto Schnarwiler, Head Group Sustainability at reinsurer Swiss Re, while sustainability as a topic is evolving at a fairly rapid pace, there’s also a number of challenges that the market has to address.

“I think the markets are operating at different speeds. As we just heard, some markets and also some investors are more advanced, and the question is really how do we make sure that we address the different pockets of investors, and how do we best get there,” said Schnarwiler.

Adding, “I think sustainability as a topic is really evolving quite quickly and without also the regulation, the disclosure, etc. And, I think, most importantly we all believe that insurance actually has a positive contribution to sustainability. And that means different things to different people. And the question is really how can we demonstrate that the products that we sell, the products that we then repackage and sell on, that they really have a positive contribution; we can actually demonstrate the positive impact and avoid many of the negative contributions, the harm that we may have in some of our products.

“But, I think we need to come up with a good way to tell the story so that investors and our shareholders really understand what we’re doing in terms of sustainability. And, I think, we need to get there first before somebody else may tell the story for us.”

Environmental, social and governance (ESG) issues are seen as a critical development for the ILS market and for insurance and reinsurance more broadly.