ESG investors trying to get a free lunch

Investors in the alternative risk transfer space are failing to see the way in which the reinsurance market can play a meaningful role in the road to sustainability, according to Andrew Ritchie, partner at Insurance Research Autonomous Research LLP.

“Investors struggle with ESG because they struggle to see how climate risk can be priced,” he said. “That seems to outweigh the opportunities for reinsurers to make the world more sustainable.”

Ritchie was speaking as part of a virtual panel discussion at Munich Re’s ILS/ART Round Table as part of this year’s Monte Carlo Rendez Vous.

“I don’t understand how this washes out,” he added. “There seems to be some credit given for cat bonds as a means of making the world more sustainable, but not reinsurers, which feels to me as if investors are trying to get a free lunch… reinsurers have a significant role to play, but investors are not really seeing that.”

While there are still very few insurance-linked securities (ILS) or catastrophe bonds that are considered to be fully ESG-aligned, the general sentiment is that this is expected to increase over time.

According to Invesco, there are a variety of key factors in cat bonds/ILS to consider from an investment standpoint that speak to an ESG mindset, including:

  • Climate change trends now filter into the modelling and pricing of cat bond and insurance-linked securities. This evolution gives investors opportunities to positively influence the behaviour of insured parties, who must be increasingly cognizant of their climate footprint.
  • The ILS market’s function of valuing of re/insurer underwriting policies fosters further alignment of re/insurer business models to ESG policies and practices.
  • The role that ILS investors can play in helping re/insurers addresses the “protection gap”, the difference between insured losses and actual economic losses. The ability to close the protection gap could allow re/insurers to better allocate more insured capital in ESG-sensitive ways relative to economic loss, such as from potential weather-related damages that could increase in frequency or severity.

Last year, BlackRock also unveiled new ESG strategies and marketed them to potential investors, including the BlackRock ESG Capital Allocation Trust, a closed-end fund strategy focused on equity and debt securities, at least 80% of which was expected to meet specific ESG criteria.

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