The UK’s Environment Agency, a governmental organisation responsible for protecting and improving the environment and promoting sustainable development, has put out to tender the management of a bond portfolio for its pension fund. They’re seeking bond managers for a global bond portfolio with a value of between £10m to £150m, a small part of their total pension fund which is valued around £1.1b.
Part of the tender document (which you can see here) states that they want some of the bond investment to be undertaken taking into account ESG factors. For those who haven’t yet come across ESG it stands for environment, social and governance factors. ESG is a hot topic amongst investment managers and many funds are demanding at least a portion of their investment be in asset types which meet the description. For the Environment Agency this is understandable given that they are the agency set up to look after the environment in the UK, so it’s particularly pertinent to the ILS market when they mention catastrophe bonds as one of the ESG investment types they are willing to consider as an option for investment.
The tender document states ‘In terms of integrating ESG factors, we are open to a broad range of product types and or combinations of bond products including green or sustainable bond products. Although in no way limited to, these could include traditional bond mandate with an ESG overview, allocations to green bonds, climate change bonds, supranational and agency bonds, weather catastrophe bonds, and other environmental or sustainability bond products. Our preference is for positive bond selection using financial and sustainable criteria rather than negative screening.’ Now I can think of quite a few investment firms and vehicles who could fulfill those criteria.
Now, I haven’t really considered that cat bonds could be considered an ethical investment with respect to environmental issues up to now. On reflection it’s clear that they certainly could be considered as having ESG factors, they fulfill a role in insurance which allows for cover against extreme weather events and can be used to protect developing nations (so that’s the environmental and social aspects, governance is naturally a huge part of this market anyway). If investors such as pension funds begin to see investing in catastrophe bonds as more ethical than other assets and offering an equally good return this could help to spur on even greater interest in the market than we are seeing right now.
I’ve yet to see any firms with investment skills and backgrounds promote ILS as an ethical investment, perhaps you should consider that new angle?