- Cat bonds are beneficial to society by providing capital for natural catastrophe insurance.
- An important trend is the use of cat bonds in developing economies, often by initiative from the World Bank.
- Entropics invests according to its policy for responsible investment, which primarily entails that we only invest in cat bonds judged to provide benefits for society.
- Entropics is a signatory of the UN Principles for Responsible Investment, UN PRI.
Entropics’ policy for responsible investment aim at securing a high ethical level in all investment decisions. The policy is summarised below. The full policy is available here.
Cat Bonds and Responsible Investment
Cat bonds transfer insurance risks to the capital market. As this is magnitudes larger than the insurance market, the capacity to absorb shocks, such as costs for disaster relief and reconstruction after a natural catastrophe, is significantly larger. Access to insurance coverage thus improves in exposed areas. Though cat bonds today primarily cover risks in developed economies, a number of initiatives in latter years extend the instrument to developing economies, such as the World Bank MultiCat programme, covering risks in Mexico, and CCRIF, offering insurance protection to Caribbean countries. Within the near future, cat bonds covering climate risks in Africa will be issued within the African Union initiative XCF. Improved insurance protection is interesting from a development perspective, as the lack of coverage can add risk to already risky investments. Improved insurance coverage entail an improved investment climate, facilitating economic development. Cat bonds are thus an asset class providing important prerequisites for economic development, while facilitating catastrophe risk management.
Entropics’ Principles for Responsible Investments
1. Entropics invests in cat bonds beneficial to society
Most cat bonds aim at providing capital for disaster protection or other benefit to society (En example may be “longevity bonds”, which are cat bonds assuming the “risk” that insured people live longer than insurers have projected. By transferring this “risk”, insurers can make more generous lifespan assumptions, benefiting policy holders). But cat bonds not directly providing for relevant insurance protection or other improvement to society can be issues. As a general rule, Entropics does not invest in these.
2. Investments should not be made in instruments primarily covering problematic enterprises
Most cat bonds are, in this respect, unproblematic, as they do not offer insurance coverage aimed att specific companies or industries. However, non-listed bonds and similar instruments can do this, and Entropics could thus be offered investment opportunities in bonds offering specific coveragae to enterprises that can be considered problematic. It could relate to companies’ behaviour (e.g. concerning human rights, environmental concern or corruption) or industries that are particularly problematic (tobacco, alcohol, pornography, military equipment and fossil fuels). Depending on the character of the industry, the policy either prescribes a direct barrier to investment or that special considerations apply.
3. Cautionary Principle for Complex Instruments
Cat bonds can cover a broad range of perils and instruments with specific coverage can be complex, containing unproblematic as well problematic parts (such as laborer/environment protection as well as economic insurance for fossil fuel production). Investments in complex instruments are guided by a cautionary principle and decisions are made on a case-by-case basis. Overall, the total value of cat bonds with identified issues should not exceed 10 % of the portfolio value.
4. Entropics will act fairly when a Cat Bond triggers
Cat bonds that trigger due to a natural catastrophe event can sometimes be questioned. Usually, the challenge is legitimate, e.g. to await an official damage assessment or a specific meteorological report. But speculation against these bonds can occur, aiming at delaying or stopping legitimate redemptions. Entropics’ position is not to engage in such speculation aiming at denying justified claims from risk bearers. This position also benefits a better functioning cat bond market by building trust in market participants.
Entropics has signed UN-backed principles for responsible investment (UN PRI) and applied for membership in the PRI Association. We thus commit ourselves to the following principles:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.