Catastrophe bonds (CAT bonds) transfer part of the risk of natural disasters assumed by insurance companies to the capital markets. As a result, CAT bonds can have a certain positive effect from a sustainability perspective.
However, for this sustainability contribution, the condition must be fulfilled that the insurance policies underlying the CAT bonds cover sustainable insurance purposes such as for residential property in the event of an incident and do not include insurance purposes that conflict with climate protection or sustainable development. But this is precisely where the value chain of CAT bonds (still) lacks the necessary transparency and commitment to a clear sustainability alignment of the included insurance transactions.
This is why the engagement of Bank für Kirche und Caritas (BKC), conducted on behalf of Shareholders for Change (SfC), starts. In a dialogue lasting several years with four CAT bond fund managers Plenum Investment, Twelve Capital, SCOR Investment Partners and Fermat Capital Management, changes were sought in this regard.
Plenum Investment already implemented all of our engagement demands in 2020, and Twelve Capital is now following suit. Twelve Capital has recently integrated a broad exclusion criteria filter into its processes. It is applied at sponsor (e.g. reinsurance) and CAT bond level. This is intended to prevent, for example, insurance payments in the event of a natural disaster from flowing to unconventional oil and gas production projects. In addition to the introduction of a formalised sustainability assessment process, a dedicated engagement process has also been established. It will encourage increased sustainability focus and transparency along the CAT bond value chain among insurance brokers and reinsurers.
In addition, Plenum Investment and Twelve Capital, together with four other Swiss CAT bond fund managers, have developed a unified sustainability data requirement. It will push for change with greater market power in the CAT bond value chain
“We are pleased that two of the CAT Bonds fund managers we accompanied with engagement dialogues have not only integrated a clearly defined sustainability process in their investments, but are also actively engaged in increasing sustainability transparency in the CAT Bonds value chain”, said Tommy Piemonte, Head of Sustainable Investment Research at BKC.