Schroders updates its GAIA Cat Bond strategy to integrate ESG factors

Schroders, the global asset manager specializing in the management of investments in insurance securities (ILS), has updated the strategy and investment policy of its flagship UCITS catastrophe bond fund, the Schroder GAIA Cat Bond, to incorporate specific ESG and sustainability characteristics.

From the end of February 2022, the Schroder GAIA Cat Bond will follow a newly documented investment strategy emphasizing environmental, social and governance (ESG) factors, reinforcing the investment strategy’s sustainability credentials by catastrophe bonds.

The Schroder GAIA Cat Bond fund is one of the largest UCITS catastrophe bond fund strategies in the market with approximately $2.35 billion in assets at the end of 2021 and is one of the most established, having was launched in 2013.

Changes to the Cat Bond fund’s investment objective and policy will incorporate specific and binding ESG-related features, all aligned with Article 8 of the EU Sustainability Reporting Regulation. financial sector (SFDR).

“We believe that integrating sustainability factors into the Fund’s strategy aligns with investors’ growing desire to put their money into investments that can clearly demonstrate their sustainability credentials,” Schroders explained.

The changes mean that Schroders GAIA Cat Bond will clearly define the ESG and sustainable investment objectives it will lead to achieve the investment strategy.

This will include specific sustainability criteria by which the fund will be managed and which will explain how the catastrophe bond fund will achieve its ESG-related characteristics.

The investment objective will now state that the Schroder GAIA Cat Bond fund will invest in a portfolio of insurance and reinsurance risks that “meets the Investment Manager’s sustainability criteria”.

The catastrophe bond fund will be actively managed to ensure that it meets the newly defined objectives for the composition of its portfolio, which is established on a sustainability-focused basis.

This will include at least 80% of the catastrophe bond assets held by the fund invested in risks relating to natural catastrophes and life insurance or reinsurance.

While, more specifically, 50% of the Schroder GAIA Cat Bond fund assets will be invested in weather risks and at least 5% in cat bonds which are designed to help cover the protection gap and address the affordability of insurance coverage. Typically, the proportion of investments focused on the protection gap is likely to be closer to 10% to 20%, Schroders predicts.

The catastrophe bond fund will also be managed with a positive absolute sustainability rating, based on a rating system used by portfolio managers.

Schroders said it aims to invest in catastrophe bonds issued by issuers that have good governance practices in place, in line with its criteria and will engage with sponsors where areas of weakness on sustainability issues are identified.

This is important because for insurance, reinsurance and insurance-linked securities (ILS) to truly improve their sustainability, it will take the engagement of different levels of capital providers and market players to move forward. sustainability and ESG more generally.

Schroders said it will aim to qualitatively assess an investment’s suitability against its sustainability criteria, through information gathering, document submission and direct engagement with sponsors and brokers through survey.

Importantly, Schroders also stresses the important role of venture capital in the form of ILS, stating that he believes: “That the selection of such investments can help reduce the cost of purchasing protection against such events for individuals; reduce the negative consequences of events related to a natural disaster and/or a vital risk; and contribute positively to the reconstruction of economies and societies after the event.

Additionally, weather risk hedging can help “mitigate the potential negative consequences of climate change,” the investment manager states in its recently updated cat bond fund literature.

Overall, Schroders said it expects to assess over 90% of the companies in the cat bond fund portfolio against its sustainability criteria and most importantly believes that because of these criteria, at least 20% of the global cat bond investment universe is now excluded from its investment selection.

This practice of rating cat bonds against sustainability criteria that also focus on the sponsors themselves can have positive effects in the insurance and reinsurance market, as sponsors will also be motivated improve their own ESG relevance.

Thus, the Schroder GAIA Cat Bond Fund will become a strategy with environmental and/or social characteristics within the meaning of Article 8 SFDR, Schroders said.

These positive steps to clearly update the investment objective and policy will help educate investors in the fund and will likely attract new investors as well, as ESG investing is such an important topic, aligning ILS fund strategies on investors. ESG ambitions can only be a positive development for the manager and the sector as a whole.

Read our recent article on the growth of UCITS catastrophe bond funds.

ESG investing and the opportunities it presents are a growing concern for the insurance securities market (ILS). Read more of our insights on this topic here.

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