Insurance and Climate Change column

Green Cat Bonds Aren’t a Thing – Yet

By | September 14, 2017

Green cat bonds.

That slinky phrase is one that Greg Lowe, global head of resilience and sustainability for Aon, would enjoy hearing uttered frequently in the near future.

Lowe has been talking with an increasing number of people in the insurance industry who are expressing interest in having some catastrophe bonds be classified as green.

In some respects, many cat bonds already have a green or sustainable aspect to them, and putting green bonds out there is a move he believes would have a positive impact on multiple fronts.

Green cat bonds would be more attractive to a greater number of investors, as well as help people be financially prepared for more frequent severe weather events, which most scientists believe will be the result of a changing climate.

“People often think green of as being clean energy, but if this capital is being used to help protect communities, cities, etc., from being damaged … then of course I think that would something that would be considered a green feature so to speak,” Lowe said.

Creating green cat bonds in Lowe’s view would be a “reputational move” first and foremost, catering to the changing demographics of investors – in other words, something to pique the interest of socially conscious Millennials who are starting to consider building a pension, as well as investment managers after their dollars.

To become a “green bond,” a bond must be certified by certain organizations or issued by reputable organizations that label them as such.

Some of these decision makers and influencers will be on a panel at an Aon conference later this year in Australia, which is aimed at stirring up a conversation around this very topic. The panel is set to include Swenja Surminski from the London School of Economics, Haran Siva from Climate Bonds Initiative, and Matthew Bell from Ernst & Yong.

Lowe, who is also on the panel, said the speakers will discuss the topic of financing resilience and tackle questions like “What are insurers thinking about in this space?” “How have (Financial Stability Board) recommendations changed investors’ view on climate adaptation and resilience?” and “What green bond opportunities are in this space?”

Lowe sees this as an opportunity to further efforts to get some cat bonds classified as green. With enough interest in the subject, he sees an eventual possibility of introducing the cat bond market to the mainstream investment community via green cat bonds.

“I think it could potentially open up interest into a space that’s been rather niche,” Lowe said.

Global green bond volume in the first quarter increased strongly compared to the same period a year ago, according to Moody’s, which issued a report in April that stated if the current trend continues, green bond issuance will total nearly $120 billion for the year and eclipse the record of $93.4 billion in 2016.

Michael S. Bennett, head of derivatives and structured finance in the treasury department of the World Bank, an international financial institution that provides loans to countries for capital programs, and an issuer of more than $10 billion in green bonds, sees advantages and hurdles for green cat bonds.

“We hope that cat bonds can be kind of like a green bond, we’d hope that would catch on with investors,” Bennett said.

An argument can be made that if the funds from a cat bond are triggered and used to help build sustainably after a disaster, then the usage was “green.”

If, on the other hand, a catastrophe doesn’t occur, and the funds just sit in a collateral account, such as U.S. government securities, it becomes a difficult argument to make that the bond was green for asset managers who have committed to running a fund that’s partially or all green, Bennett said.

Another issue Bennett sees is that there isn’t a large pool of existing cat bond investors to choose from, so such a green cat bond is not guaranteed to find a market.

“Cat bond investors tend to be a fairly limited group to date,” Bennett said. “When we’ve done cat bonds, we’ve seen 30, 40 names as being a lot for a cat bond.”

Cat bond investors also have tastes that are more influenced by returns or other financial factors than by usage, he added.

“I don’t know off hand if there are a large number of green bonds investors looking for cat bonds,” Bennett said.

Sean Kidney, CEO of Climate Bonds Initiative, an organization that among other things certifies green bonds, confirmed that the idea of classifying some cat bonds as green is being floated around.

He also said that while there hasn’t been much progress yet, he expects that someday soon investors will have the option to get into a green cat bond.

“We’re hoping to have an expert group to tackle the issue early next year,” Kidney said. “Our expectation is that climate change-related cat bonds will be brought into the green bonds market.”

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Topics Catastrophe

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