ILS tells a compelling ESG story: Carey Olsen

Amid the ongoing expansion of the market for sustainable investment, there’s an opportunity for the insurance-linked securities (ILS) sector to show its alignment with environmental, social and governance (ESG) factors, according to law firm Carey Olsen.

Intensified by the wide-ranging effects of the ongoing Covid-19 pandemic, heightened awareness of the complex ESG challenges currently faced by society has accelerated the need for global businesses to demonstrate a commitment to sustainability, in terms of both individual business practices and external investment policies.

Against this backdrop, Artemis recently spoke with Gavin Woods, Partner, and Sheba Raza, Counsel, at offshore business focused law firm, Carey Olsen, about the increased focus on sustainability in what’s been a challenging and transformative year.

“The insurance industry, as one of a group of key stakeholders, is uniquely placed to respond to the current economic and environmental uncertainties by creating and promoting financial solutions that contribute to more resilient and sustainable businesses, communities and economies,” said Woods.

Adding, “Insurance is, at its core, a risk mitigation tool employed to protect and support businesses, communities and economies from loss, and the impact of the COVID-19 pandemic will no doubt be one of the largest insurance events in history.”

As noted by Raza, the global insurance sector has long been an advocate of collective responsibility through its support of initiatives like the Principles for Sustainable Insurance launched in 2012, and the Insurance Development Forum launched in collaboration with the UN and the World Bank in 2015.

And, with both institutions and investors showing an increased desire for ESG components, in more recent times, the inherent ESG qualities of ILS has become a burning industry topic.

“ILS tells a compelling ESG story, particularly with respect to its ability to provide ready access to capital to insure against environmental risk factors,” explained Raza. “It is important to also note that protecting against such risks has tangible social and governance benefits.

“The intersectionality between the insurance and capital markets to (1) encourage better management of climate risk (through the use of sophisticated environmental data modelling to price insurance risk), (2) promote social and economic welfare (through the provision of speedy access to direct capital for disaster relief, economic recovery and rebuilding projects) and (3) offer increased transparency (through the use of clearly defined and efficient payment mechanisms on a trigger event) demonstrates the inherent value of including ILS assets in mainstream investment allocation strategies.”

“Although ILS is recognised as a sustainable development investment class under the UN Sustainable Development Goals and as an ESG compliant investment by certain market participants across Europe, the opportunities that ILS affords in this space to global investors and fund managers seeking to deploy capital within an ESG compliant framework cannot be underestimated,” added Woods.

The pair noted the continued growth of the market for sustainable investment, underpinned by the substantial inflow of capital into ESG driven investments during the pandemic.

In light of this growth, “the ILS market has an opportunity to clearly demonstrate its specific alignment with ESG factors to ensure the growth and development of the asset class in what will become a much more competitive marketplace for sustainable financial products,” explained Raza.

The arrival of a global pandemic, an extremely active Atlantic hurricane season combined with devastating wildfires and floods in certain parts of the world, not to mention ‘medicanes’ in Europe, is expected to intensify the conversation around sustainable investments.

Additionally, while Covid-19 may have taken centre stage in terms of global exposures and challenges, the very real and significant threat of climate change remains and will only serve to further accelerate the push for ESG criteria.

This heightened drive for sustainability, as noted by Woods and Raza, represents an opportunity for the ILS sector to highlight its inherent ESG qualities to a broad class of investors seeking both sustainability and positive capital returns.