Leadenhall ILS funds ESG classified under Article 8 of EU SFDR

Leadenhall Capital Partners LLP, London headquartered insurance-linked securities (ILS) and reinsurance related investments manger, has achieved a classification of its European open ended ILS funds under Article 8 of the Sustainable Finance Disclosure Regulation (SFDR).

Leadenhall has been working to embrace environmental, social and governance (ESG) within its ILS investment fund management operations in recent years and the work undertaken is paying dividends, as all its EU-based open ended funds are now categorised as investment products promoting environmental and social characteristics.

This is under the criteria that was recently set out by the EU in Article 8 of the Sustainable Finance Disclosure Regulation (SFDR).

Leadenhall committed to embed ESG considerations within its investment management process a few years ago.

The company already has an ESG committee team, which is chaired by Chief Underwriting Officer Jillian Williams.

Leadenhall also signed up to the UN Principles for Responsible Investment (PRI) in 2018 and its ultimate parent company (MS&AD of Japan) is also a signatory of the PRI.

Luca Albertini, CEO, explained “Leadenhall is a firm believer that adopting sustainability and ESG principles will over time lead to better underwriting results and higher investor returns. As one of the largest ILS fund managers in the world we have the responsibility to lead on the engagement with all of our counterparties on the sustainability of our investments and on environmental, social and governance issues.”

Leadenhall notes that there still isn’t a generally accepted world-wide consensus on what exactly should be measured and monitored, when it comes to ESG and responsible investments.

A range of legislative and voluntary initiatives are currently underway to try and achieve some minimum standards, Leadenhall says.

The ILS manager stands well positioned though, with some of its funds already achieving classification under SFDR and further ESG work underway.

Jillian Williams added, “Through engagement we aim to come to a broad consensus on the key sets of criteria, measurements and data requirements from our counterparties and broking relationships so that Leadenhall can add these considerations to its daily underwriting activities and monitor the environmental and social impact of its investment activity. With these indicators becoming mainstream we expect that ultimately the market will exercise pressure on all counterparties to aim for high sustainability standards both via shared conviction that it is the right thing to do but also to avoid the inevitable increased cost of capital that is likely over time for those market players not achieving acceptable standards.”

The management of ESG policies will be a balance between principle based criteria developed by the firm and navigating across various rules and regulations applicable to us and our investors and, whilst today we are implementing an EU regulation, we are monitoring the regulatory developments in other jurisdictions like the UK and the US and those applicable to the fund management as well as to the insurance industry, given the nature of what we do,” Williams added.

The new EU SFDR regime offers a framework under which investment managers can classify their funds as promoting environmental and social characteristics, rather than having a passive approach or disregarding them entirely.

Leadenhall said that the SFDR is just one of the regulatory regimes and principles which it will follow over and above its own ESG policies and approach.

Leadenhall is one of the largest specialist ILS fund managers in the world, with $6.4 billion of assets under management across catastrophe bonds, collateralised property & casualty reinsurance and life insurance linked investments as of January 2021.

The ILS manager has been undertaking its own, as well as sponsored third party research on the measurement and modelling of the impact of climate change.

The SFDR has been developed to cover a wide range of investment products, so is not yet tailored to an ILS strategy, the manager noted, but more detailed regulation is expected in the next year including that affecting Article 8 investment products.

The SFDR does not make any direct reference to the assets and the liabilities of insurers or reinsurers, Leadenhall said, explaining that “this is why Leadenhall sees this as one of the dimensions of the analysis to be discussed.”

Leadenhall is taking steps to push its trading partners for greater clarity of data and ESG related disclosure within their submissions, clearly showing the ILS fund manager is taking a proactive approach to ensuring its investment strategies provide the highest level of ESG quality that it can.

The data required under the SFDR is being made available by a number of the largest counterparties, but Leadenhall said this is not the case for all trading partners, at least not at the level of detail required by this European legislation.

“One of our roles as promoters of environmental and social characteristics under Article 8 of the SFDR will be to actively ask our counterparties and their intermediaries to start to make this data available with the submission or the offering circular, and we are actively reaching out to the broker community to explain these requirements,” Williams stated.

“These regulations are new and to date it is only the EU which has put such a regime in place. It is understandable that the broader market now needs to gear up to be able to report on this new set of metrics. When the data is not available for now it is not necessarily an absolute obstacle to transacting, particularly when the counterparty is positively rated against our key ESG principles, but we can see that in the not too distant future providing and auditing detail data on sustainability issues will become mainstream also within the ILS marketplace,” Williams concluded.

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