BSX Takes the Lead in ILS and Promotes ESG Initiative
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Leading the Charge: The Bermuda Stock Exchange Takes the Lead in ILS and Promotes ESG Initiative
Institutional investors are increasingly reflecting the relevance of environmental, social, and governance (ESG) factors in responsible investment practices and the longer-term health of the financial markets. It has been recognised that investors have a duty to act in the best interest of their beneficiaries and investment portfolio and that aligning with broader objectives of society will eventually result in greater financial as well as socio-economic returns. ESG metrics include:
- Environment: identifies how a company’s operations impact the natural environment and climate;
- Social: examines how a company approaches relationships with employees, suppliers, customers, and the communities where it operates; and
- Governance: concerns a company’s leadership, executive salaries, audits, internal controls, and shareholder rights.
With that in mind, the inherent ESG qualities of certain insurance-linked securities (ILS) present a clear and mutually beneficial opportunity for growth of ILS and specifically catastrophe bonds (cat bonds) as an asset class which demonstrates low correlation to the broader returns of the financial markets. This is evidenced by pension fund investors from several jurisdictions highlighting the social and environmental aspects of ILS and catastrophe bonds as they provide financing, liquidity and recovery when natural disasters strike.
Bermuda sits at the nexus of the ILS market, and the Bermuda Stock Exchange (BSX) is the world’s premier exchange for ILS listings. At the end of 2020, its market share of global outstanding ILS issuance stood at almost 95 % with the number of BSX listed ILS standing at 590 for a combined nominal value of $43.01 billion.
Since the introduction of the special purpose insurer (SPI) class in 2009, Bermuda has become a significant player in the alternative capital market. Alternative capital comes from the financial markets: hedge funds, mutual funds, sovereign wealth funds, pensions and institutional investors. Over the last decade alternative markets have established themselves as an important supplement to the traditional (re)insurance industry.
Initially, the SPI market was dominated by ILS products for natural catastrophe risks, such as storms (meteorological events) and earthquakes (geophysical events). However, supplementing the significant cat bond market, Bermuda has continued to see steady growth in its ILS sector including new perils, geographies, triggers and risk types like flood and terrorism risk and more being developed.
As the market landscape evolves, corporations and governments will become increasingly comfortable utilising ILS structures, thus increasing the market’s role in protecting against climate–related risk, natural disasters and fostering physical, economic and social recovery.
One such example of Governments utilising the cat bond market for climate risk finance is the U.S. Federal Emergency Management Agency (FEMA) who has issued four cat bonds over the years in order to tap reinsurance coverage from the capital markets for its National Flood Insurance Program (NFIP). The protection will cover some of NFIP’s losses from major flood events caused by named storms across the US, Puerto Rico, U.S. Virgin Islands and D.C. FEMA /NFIP cat bonds have been listed on the BSX each year.
Bermuda and the BSX are prepared for this focus on ESG and sustainable investing. The World Federation of Exchanges (WFE) has listed ESG as one of its priorities, and BSX CEO Greg Wojciechowski sits on the WFE board of directors and supports this mandate.
Launched in 2019, the Bermuda Stock Exchange’s own ESG Initiative will set guidelines for a company’s operations that investors use to examine prospective investments. The overall goal is to empower sustainable and responsible growth for its member companies and the greater community.
Establishing this initiative was of paramount importance, since Bermuda sees an emerging trend where entrepreneurs, investors, and business people incorporate ESG initiatives into their investments and business practices. Large financial institutions, asset managers, insurers and governments have announced ESG mandates in line with the U.N.’s Sustainable Development Goals (SDGs) which provides a shared blueprint for prosperity for people and the planet, now and into the future.
The commitment to provide resilience and disaster risk recovery to communities around the world requires the involvement of the capital markets. Bermuda, as a centre of excellence in climate risk transfer, and the BSX, will continue educating Bermudians and stakeholders on the significance of ESG factors. Together with its partners, Bermuda will support the environmental, social and governance initiatives of businesses and work to provide solutions to increase resilience for communities globally.