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ESG gains traction in the ILS market

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ESG gains traction in the ILS market

Client Director, Sherman Taylor looks at how the insurance-linked securities (ILS) industry can incorporate ESG into its operations.*

*Article first published in Artemis' Q4 Catastrophe Bond & ILS Report December 2020

The total market capitalisation of new ILS issuances surpassed USD $15B in 2020, making it another record-breaking year for the asset class.

Investor confidence remained strong despite the uncertainties of the coronavirus pandemic, with a flurry of ILS renewals and new capital inflows. That being said, the ILS industry has potential for additional growth, and innovation is increasingly seen as the key to attracting fresh capital.

One such avenue for growth could be the industry's adoption of ESG (environmental, social and governance) principles. With new investment funds increasingly geared towards younger generations interested in aligning their investment choices with ESG values, the ILS industry could benefit from accessing this fresh source of capital.

There is genuine interest in ESG adoption within the ILS industry too. A topical global issue, ESG investing is being fuelled by evidence suggesting there is a positive correlation between ESG metrics and financial performance and market value. As a result, sustainable investing is becoming a necessity for stakeholders concerned with where and how their invested funds are deployed.

The European Union has taken this one step further. It has already introduced a taxonomy regulation aimed at introducing a benchmark for environmentally sustainable economic activities and to prevent ‘greenwashing’. It is also introducing a sustainable finance disclosure regulation (SFDR) in March. This will require fund managers to disclose how they have integrated in their processes an assessment of all relevant sustainability risks that might have a material negative impact on the financial return of a fund investment. If successful, these regulations could provide a future framework for other regions.

On the environmental side, it makes sense that the ILS industry - which provides capital to support natural catastrophes risk - would embrace neoteric ESG ideals. ILS is inextricably tied to events such as wildfires and other severe weather patterns that scientists generally believe to be correlated to climate change.

The social element of ESG refers to standards organisations set for their relationships with employees, suppliers, customers and communities. Notably, many large players in the ILS industry already embrace such social considerations in their operations. For example, when the coronavirus first threatened in Bermuda, the industry prioritised employee welfare by quickly rolling out 'work from home' plans and acting to ensure the safety of staff.

The governance perspective considers how organisations are managed and how investor value is guarded. It also looks at general best practices, including: board and senior management conduct; accuracy in financial reporting including appropriate disclosures; and transparency with stakeholders and regulators. This level of governance has always been present in the ILS industry due to the complexity of ILS transactions which demands high standards from all participants.

Bermuda is embracing change

The Bermuda Stock Exchange (BSX) is a vital part of the global ILS industry. One of the world’s largest electronic stock exchanges, the BSX continues to attract the majority of public ILS listings. The BSX has also been at the forefront of embracing an ESG ecosystem. In May 2019, it launched its ESG initiative in line with similar World Federation of Exchanges initiatives.

Many of the ESG ideals are already well represented in the Bermuda business community. And as ESG gains traction around the world, Bermuda will continue to be a natural home for the ILS industry as it evolves.

Untangling complexity

Ocorian provide a full suite of administration and fiduciary services to the ILS and captive market from its Bermuda, Cayman and British Virgin Islands' offices. For more information about our ILS and captive services, contact Sherman below or read more here.

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