Schroders updates GAIA Cat Bond strategy to incorporate ESG factors

Schroders, the global asset manager with a specialist insurance-linked securities (ILS) investment management business, has updated the investment strategy and policy of its flagship UCITS catastrophe bond fund, the Schroder GAIA Cat Bond, to incorporate specific ESG and sustainability features.As of the end of Februrary 2022, the Schroder GAIA Cat Bond will follow a newly documented investment strategy with a focus on environmental, social and governance (ESG) related factors, enhancing the sustainability credentials of the catastrophe bond investment strategy, according to documents seen by Artemis.

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

The changes being made to the investment objective and policy of the cat bond fund will incorporate specific and binding ESG related characteristics, all aligned with Article 8 of the European sustainability related disclosures in the financial sector (SFDR) regulations.

The documents explain that, “Incorporating sustainability factors into the Fund’s strategy aligns with the increasing desire among investors to put their money into investments that can clearly demonstrate their sustainability credentials.”

The changes mean that Schroders GAIA Cat Bond will clearly lay out ESG and sustainable investment targets that it will run the investment strategy to meet.

This will include specific sustainability criteria that the fund will be managed to and that explain how the cat 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 related risks that “meets the Investment Manager’s sustainability criteria.”

The cat bond fund will be actively managed to ensure it meets newly defined targets for its portfolio mix, which is laid out on a sustainability focused basis.

This will include at least 80% of the cat bond assets held by the fund being invested into natural catastrophe and life insurance or reinsurance related risks.

While, more specifically, 50% of the Schroder GAIA Cat Bond fund assets will be invested into meteorological risks and at least 5% into cat bonds that are designed to help cover the protection gap and address affordability of insurance cover. Typically, the protection gap focused investment proportion is likely to be closer to 10% to 20%, Schroders expects.

The cat bond fund will also be managed to a positive absolute sustainability rating, based on a rating system employed by the portfolio managers.

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

This is important, as for insurance, reinsurance and insurance-linked securities (ILS) to really improve its sustainability, it will take engagement from the different tiers of capital providers and actors in the market to move sustainability and ESG more generally, forwards.

Schroders will aim to qualitatively assess an investment’s suitability relative its sustainability criteria, through information gathering, submission material and direct engagement with sponsors and brokers by questionnaire.

Importantly, the document also highlights the important role of risk capital in ILS form, saying, “That selecting such investments can help to reduce the cost of purchasing protection against such events for individuals; reduce negative consequences of events related to natural catastrophe and/or life risk; and positively contribute to the rebuilding of economies and societies post event.”

In addition to which, covering meteorological risks can help to “ease the potential negative consequences of climate change”, the investment manager states in the document.

Overall, Schroders said it expects to rate upwards of 90% of the companies in the cat bond fund portfolio against its sustainability criteria and importantly believes that, due to this criteria, at least 20% of the overall cat bond investment universe is now excluded from its investment selection.

This practice, of scoring cat bonds against a sustainability criteria that also focuses on the sponsors themselves, can have positive effects through the insurance and reinsurance market, as sponsors are going to be motivated to enhance their own ESG appropriateness as well.

So, the Schroder GAIA Cat Bond fund will become a strategy that has 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 to educate investors in the fund and likely attract new investors as well, as with ESG investing such an important topic, bringing ILS fund strategies into line with investors ESG ambitions can only be a positive development for the manager and the sector as a whole.

Read our recent article on UCITS catastrophe bond fund growth.

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