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 (An 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 policyholders). However, cat bonds that do not directly provide for relevant insurance protection or another improvement to society can be problematic. As a rule, Entropics does not invest in this type of cat bond.
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 at 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 coverage 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. They can contain unproblematic as well problematic parts (such as labourer/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.