Impact Shares targets ESG cat bond & ILS exchange traded fund

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Impact Shares, an ESG focused investment operation, is planning the launch and raising capital for a new catastrophe bond and ILS focused exchange traded fund (ETF), named the Climate Risk Reinsurance Corporation.

impact-shares-logoImpact Shares is a collaboration of financial service and non-profit organisations that provide single social issue environmental, social and governance (ESG) aligned investment solutions.

The company has already issued three ESG aligned exchange traded funds (ETF’s): the The NAACP Minority Empowerment ETF (Ticker: NACP); the YWCA Women’s Empowerment (Ticker: WOMN); and the United Nations Sustainable Development Goals (Ticker: SDGA).

As a result, Impact Shares has the necessary expertise to design and create an ESG appropriate investment opportunity and now sees catastrophe bonds, insurance-linked securities (ILS) and related reinsurance investments as an area of interest, given the increasing focus on climate change and ESG in investor markets.

Brookmont Capital Management, an SEC registered investment adviser, will be the sub-adviser for the Climate Risk Reinsurance Corporation ETF strategy and its founder Ethan Powell one of the portfolio managers, with the other still to be named.

Impact Shares fund, the Climate Risk Reinsurance Corporation, has been registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, so a mutual fund.

The plan is to issue shares to investors that will then be allocated to catastrophe bonds, other ILS and reinsurance investments, with a goal of approximating the cat bond market’s risk and return and the shares ultimately to be listed and therefore tradable on the New York Stock Exchange (NYSE).

The prospectus explains, “Our investment objective is to achieve long-term capital appreciation by approximating a basket of insurance-linked securities (ILS) representing the risk and return of the Catastrophic Bond market which are those ILS with exposure to natural perils impacted by increased climate volatility (Climate Change), including hurricanes, earthquakes, windstorms, fires and floods.

“The Fund pursues its investment objective primarily by investing in reinsurance-related securities, including event-linked bonds, shares or notes issued in connection with quota shares (also known as reinsurance sidecars), shares or notes issued in connection with excess-of-loss, stop-loss or other non-proportional reinsurance , and shares or notes issued in connection with industry loss warranties and, to a lesser extent, in event-linked swaps, equity securities (publicly or privately offered) and the derivatives of equity securities of companies in the reinsurance and insurance industry.”

Catastrophe bonds are the main focus, with climate change exposed perils the target for investment.

The strategy means that under normal circumstances at least 80% of the assets of the Climate Risk Reinsurance Corporation will be invested into “reinsurance-related securities with specified trigger event(s) involving natural perils that may be impacted by Climate Change such as hurricanes, earthquakes, floods and weather-related phenomena.”

The managers explain that, “investing in reinsurance-related securities should involve a long-term view and a systematic focus on replicating on a best efforts basis the performance of the Cat Bond market, not on security selection or market timing.”

By investing in a broad cross-section of the targeted cat bonds and other ILS or reinsurance assets, the Climate Risk Reinsurance Corporation aims to “replicate the risk return profile of the Cat Bond universe.”

This should be appealing to some investors, for who ESG investing and climate risk is a focus, but find it harder to access private ILS funds.

It’s an interesting approach, in trying to track the risk-return profile of the catastrophe bond market, but by allocating to climate change exposed perils only and a subset of the market.

The climate and ESG focus should be appealing and the timing of this launch may also be good, given the growing focus on disaster risk financing around the COP 26 climate conference, the recognised need for more capital to be deployed to protecting against climate risks, as well as the increasing appetite of ESG focused investors and their growing interst in the insurance-linked securities (ILS) asset class.

As a reminder, other asset managers have also noticed an opportunity in cat bonds and ILS related to ESG, not least giant asset manager BlackRock which hopes to raise around $2.3 billion for a new environmental, social and governance (ESG) investment fund strategy that includes catastrophe bonds as one of its target asset types.

It’s a trend we anticipate accelerating, as other asset managers also recognise the ESG credentials of the ILS market, in particular many catastrophe bonds.

ESG investing is a growing focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.

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