While the insurance-linked securities (ILS) sector has strengthened its governance practices considerably in recent years, when it comes to environmental, social and governance (ESG) considerations, ILS manager selection really matters, as there is variation in how ESG has been adopted and practices are followed, according to Frontier Advisors.
Frontier Advisors is an Australian independent investment consultant with experience advising regional institutional investors that allocate to the insurance-linked securities (ILS) asset class.
In a recent paper, Isabella Milazzo, a Consultant in the Alternatives Research Team at Frontier Advisors, explained that for end-investors, ESG remains an important consideration when allocating to the insurance-linked securities (ILS) asset class.
She explained that ESG is increasingly being incorporated into the ILS market, saying that consideration of ESG issues is deemed to be “critical for the development of the ILS market and for insurance and reinsurance markets more broadly.”
As a result, “ILS managers are increasingly focused on improving ESG practices throughout the entire investment process,” Milazzo said.
But she also noted that, “Manager selection matters when considering ESG factors,” saying that, “Frontier has observed many instances in recent periods where ILS managers will deem contracts uninvestable on the basis that counterparties do not meet ESG criteria.
“However, there is variation with how stringent managers are with this process.”
Milazzo went on to explain that, for the ILS manager community, “environmental and climate change risk is of high importance.”
As a result, a significant amount of time and resource is put into understanding climate risk, the influence it has on specific perils and the effect it can have on ILS investments, Milazzo said.
She also highlighted that, as ILS investments are used to support resilience against natural disasters, this aligns with environmental sustainability goals.
On the social side, Milazzo noted that ILS investments also “inherently provide positive social impact in that they support the efficient functioning of the insurance market.”
ILS is one of the contributing sources of funding when natural disasters occur, helping in the rebuilding and recovery of affected communities.
Finally, Milazzo also highlighted that ILS managers own governance practices “have become increasingly robust over recent years.”
In fact, “It is typical for managers to conduct deep assessments of governance factors associated with all parties involved in ILS investments,” Milazzo explained.
Because of this, the ILS asset class is continuing improving and increasing the incorporation of ESG issues into its processes and ILS manager decision-making.
But, with ESG practices and their adoption not a level playing-field in the industry, it is important that investors do their own diligence on ILS managers, if ESG is one of their core investment tenets.
Recall that, the ILS ESG Transparency Initiative is a global insurance-linked securities (ILS) industry group of investment managers focused on enhancing environmental, social and governance (ESG) transparency in the ILS market.
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