As investors grapple with the challenges of market concentration, rate uncertainty, and sustainability underperformance, insurance-linked securities (ILS) are emerging as a compelling solution for ESG-focused portfolios, according to Tiziana Maida, Head of Research at investment management, wealth planning and consulting specialist IPS Capital LLP.In a recent commentary, Maida outlined how IPS Capital incorporated ILS into its ESG portfolios in the fourth quarter of 2024, highlighting the asset class’s diversification benefits and alignment with environmental and social goals.“With this scenario in mind, we have focused on alternative investments that are not exposed to the risk of higher rates for longer, such as insurance-linked securities which we have added to ESG portfolio in Q4 last year,” she said.“By their nature, ILS align well with our commitment to environmental, social, and governance principles as they play a crucial role in addressing climate change-related events,” Maida explained.

Maida also pointed out that beyond financial returns, ILS contribute to real-world resilience.“ILS help insurers and reinsurers manage these growing risks.By investing in these products, we can then support the insurance industry’s ability to provide coverage for climate-related events, enhancing social resilience and providing financial support for rebuilding efforts after natural disasters,” she added.

The short duration of ILS, which is typically up to one year, makes them particularly adaptable to climate risk, as they can reprice annually to reflect changing environmental conditions.As Maida goes on to note, this provides investors with updated compensation for emerging climate exposures.In addition, Maida also highlighted the asset class’s growing recognition within the sustainable finance framework.

“A significant portion of ILS assets are now classified as Article 8 under the European Union Sustainable Finance Disclosure Regulation (SFDR), highlighting their sustainability focus,” she explained.Adding: “Moreover, ILS are increasingly being used with a development angle, such as bonds issued to protect against earthquake risk in developing countries.This approach allows investors to support disaster risk financing in developing nations, aligning with sustainable development goals.” She continued: “The financial benefits of these products also offer a compelling narrative.

They often offer favorable terms compared to corporate bonds of similar credit quality.ILS are trading on an average spread of 8.8% over the risk free and they display a current average expected credit loss of just over 2% which compares favorably to the 3.2% credit loss for global high yield bonds as reported by the credit rating agency Moody’s.” Amid growing market volatility, climate risks, and pressure on ESG strategies to deliver, Maida views ILS as a unique asset class that combines strong return potential with risk resilience and measurable impact.“By incorporating ILS into our investment strategy, we are not only potentially enhancing returns and diversification but also contributing to a more resilient and sustainable global economy,” Maida concludes.

Furthermore, IPS Capital’s Chief Investment Officer Chris Brown recently noted that, “Our insurance linked securities are unaffected by tariff noise (which is of course one of their core attractions) and are also up for the month and year so far.”.All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.