Insurance-linked securities (ILS) and insurance-linked investments (ILI) in general have been identified as an example of a Sustainable Development Investment, according to experienced ILS investors Dutch pension fund manager PGGM and pension PFZW.
As insurance-linked securities (ILS) and instruments such as catastrophe bonds provide risk capital that responds to the occurrence of catastrophes and natural disasters, providing much-needed financing and liquidity when the worst happens, they are increasingly being viewed as an example of a socially and environmentally responsible asset class.
In fact, the ILS market provides products which offer social benefits to society, by taking on peak risks to support provision of insurance and paying out to help in financing recovery, but also environmental benefits, by helping to build resilience to disasters and climate change.
This has been recognised by PGGM and PFZW, with the former saying that ILS has, “Been identified as a Sustainable Development Investment, on the basis of the United Nation’s classification for Sustainable Development Goals.”
The Sustainable Development Goals (SDG’s) were established by the United Nations in order to provide a framework for organisations to think about operating more sustainably and have been adopted by many major institutions as a way to classify and identify investments that provide or enhance sustainability.
Specifically, PGGM says that its identification of ILS as a Sustainable Development Investment is in relation to Sustainable Development Goal 13, which is related to Climate Change, as ILS assists in strengthening of resilience and providing much-needed adaptive capacity to climate-related hazards and natural disasters.
ILS and insurance-linked investing in general, “Fits within PGGM’s and PFZW’s broader ambition to contribute to a sustainable financial system and a valuable future,” the investors say.
It’s encouraging to hear that one of the largest investors in the ILS asset class considers its benefits in this way.
Identifying ILS as socially and environmentally responsible, as well as a sustainable development investment, will help to raise the attraction of the asset class among large pensions and other major investors.
Many pension funds are looking for new asset classes where they can allocate capital into investments that have a sustainable or responsible investment element and ILS ticks many of these boxes, while also offering the type of low correlation alternative risk focused returns that are also extremely attractive at this time.
With equity markets seemingly constantly in flux and global trade risks heightened, ILS could offer a meaningful alternative investment opportunity at this time, made even more attractive by having sustainable and responsible investment traits.
PGGM and PFZW continue, “By providing capital to insurers and reinsurers, PFZW helps to keep insurance for consumers against extreme events affordable and sustainable. In addition, ILI contributes to helping countries, people and businesses deal with the effects of climate change and natural disasters.”
The development of the catastrophe bond and the emergence of ILS as an asset class was as a supporting source of deep capital and liquidity to back global disaster risk transfer. Since then it has also proven effective as efficient source of capital to back risks beyond natural catastrophes.
But as the world adjusts to the reality of a changing climate, increasing exposures to severe weather and disasters, and the escalating costs from them, the need for the participation of this deep and liquid pool of capital in risk transfer markets persists.
Having major investors classify ILS allocations as sustainable or responsible can only help to drive home the fact that bringing the ability of the capital markets to diversify and hold peak risks into financial sectors like insurance and reinsurance is a positive for the health of these market’s and broader society in general.