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The Bermuda Stock Exchange (BSX), which houses the majority of the world’s outstanding catastrophe bond market as listings on its exchange, is pushing the insurance-linked securities (ILS) asset class as an investment with Environmental, Social and Governance (ESG) qualities.
The BSX has launched its own ESG initiative, as it looks to encourage sustainable and responsible growth for member companies, listings and the wider investment community.
The BSX said that it, “acknowledges its role as a leader to promote the development of a sustainable approach to the financial system and to take actions that transition towards a sustainable economy and financial future for current and future generations.”
Greg Wojciechowski, CEO of the BSX, explained why it’s important that financial institutions look to promote ESG quality within the assets they house, “Stock exchanges are at the intersection between capital market players and their increasing responsibility to ensure business practices are geared toward positive environmental, social and governance practices. At the BSX we are moving forward in encouraging and empowering social impact investing and compliance with best market practices and driving sustainable finance as ESG standards become increasingly important and formalised.”
The BSX is currently home to 950 listed securities, among which are insurance-linked securities (ILS) and catastrophe bonds that are increasingly acknowledged to be an asset class with ESG qualities, given they provide insurance and reinsurance capacity largely for use as disaster risk financing and recovery capital.
The 330 listed ILS issuers on the BSX, representing $32.7 billion in market capital outstanding, a significant segment for the exchange.
The BSX notes that ILS and cat bonds have been acknowledged as sustainable development investments. We’ve explained before that some of the largest institutional investors in the ILS asset class have highlighted their ESG qualities, saying that they fit a number of the United Nations Sustainable Development Goals (SDG’s).
“As investors look to grow their holdings in asset classes linked to social and responsible investments, this creates an increased pool of investors in these securities which are helping to narrow the protection gap which are uninsured and underinsured risks,” the BSX explained.
Catastrophe bonds and ILS do provide disaster risk financing capacity that can help to encourage resilience to disasters and climate change, a gap in financing for many parts of the world and ultimately supporting the communities affected by disasters, which may be exacerbated in future by climate as well.
The BSX said, “As the world leader in ILS, Bermuda will play an increasingly important role in assisting communities around the world adapt to and recover from natural disasters, a changing climate and the resulting impact on vulnerable communities. And many of the BSX’s listings, especially in the Insurance Linked Security (ILS) Sector, are well advanced in developing products that move the sustainable finance agenda forward.”
Catastrophe bonds tend to be classified as meeting three of the Sustainable Development Goals: 11.5 – Reducing the impacts to human lives from disasters and creating more sustainable cities and communities; 13.1 – Taking action to increase resilience and capacity to combat and recover from climate change; and 8.1 – Increasing access to financial services to enhance inclusive and sustainable growth potential.
Through the provision of capacity that aids the responce to disasters and climate change related catastrophes, as well as the recovery, ILS are becoming an important source of risk transfer and risk funding. In some cases this has also led to governments leveraging the capacity of the capital markets through cat bonds, so they can free up their own budgets for disaster resilience and reconstruction efforts as well.
Wojciechowski further commented, “The emerging trend for entrepreneurs, investors and business people is to incorporate ESG initiatives when investing and doing business. This trend will only become more important in the future. What is clear is that companies can no longer simply seek to make a profit and return for shareholders. Success will also be measured by the extent to which companies embrace ESG initiatives. As climate change, social awareness and transparent governance become more important, at the BSX, we see this as an opportunity to help our member companies move forward with an ESG agenda that will assist communities around the world adapt to a changing world in terms of environmental change, social issues and more transparent governance.”
Nandini Sukumar, Chief Executive Officer, The World Federation of Exchanges (WFE) of which the BSX is a member, added, “We are delighted to see BSX launch its ESG initiative today, and firmly support the exchange on its sustainability path. We are particularly pleased to see the BSX formally embrace the WFE’s five Sustainably Principles, principles that constitute a formal declaration by the WFE and its membership to take on a leadership role in promoting the sustainable finance agenda. We recognise that exchanges – as a central point of contact for issuers, investors and market intermediaries – act as important vectors in the transition to sustainability. We therefore take our role in tackling ESG issues, and that of our members, extremely seriously. Only by working in partnership with all industry stakeholders towards a common goal can we hope to move forward to an inclusive and sustainable economy.”
Promoting its ethical investment qualities is good for the ILS asset class, as it can help to attract more institutional investors who have mandates to allocate to asset classes that meet ESG requirements which could help to raise the attractiveness of catastrophe bonds and the wider ILS sector.