Governments must amplify their ESG demands to drive investors to green cat bonds

Meredith Jones

Partner, Global Head of ESG

With stakeholders coalescing around ESG in such a profound way, it is perhaps no surprise that ESG is rapidly evolving within the world of Insurance-Linked Securities (ILS) and, in particular, catastrophe bonds.

As investors increasingly focus on ESG and sustainability in their investment decision-making, the primary sources of capital for ILS offerings, such as pension funds and ILS funds, are pushing the industry to embrace ESG.

In addition, as climate change initiatives accelerate and global stakeholders look for ways to manage the volatility caused by global warming, ILS and cat bonds seem to have a natural role.

The linkage between ILS and cat bonds to environmental and social factors is not difficult to discern. ILS issuers must monitor changes to the climate and evolving weather trends in order to determine the probability of natural catastrophes. Efforts are currently underway to help insurers and reinsurers better understand their exposure to climate change, with the UN Principles for Sustainable Insurance piloting a project to use the Task Force for Climate Related Financial Disclosure (TCFD) as a framework for assessing this evolving risk. The TCFD framework allows firms to focus on the environmental risks due to climate change by focusing on the four pillars of governance, strategy, risk management, and metrics and targets. And of course insurance, including ILS and cat bonds, have a pivotal role to play in disaster recovery and inclusive economic development.

Earlier this year, we saw the implementation of the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which included three classifications for investment funds to help prevent greenwashing.

  • Article 6 funds do not integrate sustainability practices into their investment structure
  • Article 8 funds are classified as “environmental and socially promoting
  • Article 9 funds target sustainable investments

Given the increased interest in ESG and sustainability from investors, these classifications could make it easier for investors to understand the sustainability of the funds in which they invest.

We have already seen a few ILS funds achieve Article 8 fund classification status under the SFDR, showing the continued movement of insurance-linked securities into the world of sustainability. Some examples are AXA IM, Leadenhall Capital Partners, Plenum and Twelve Capital. Over the coming months and years, we expect to see investors, ILS practitioners and other key stakeholders further increase their commitment to ESG.

As firms navigate new forms of volatility such as climate change, Aon is committed to protecting and enriching the lives people across the world. At COP26, our goal is to mobilize private sector capital and drive collaboration with governments, academia, communities and businesses to deliver compelling solutions. Find out more about how we are tackling climate change at COP26.

About the Author

Meredith Jones is a Partner and Global Head of Environmental, Social and Governance (ESG) at Aon. In this role, she works across Aon’s solution lines (Risk, Reinsurance, Health and Wealth) to develop and deliver ESG assessment, consulting and solutions.