More Australian Pension Funds Ramp Up Climate Investments

(Bloomberg) -- Two of Australia’s biggest pension funds are the latest to ramp up investments related to the consequences of climate change.

Rest Super, a fund with A$80 billion ($54 billion) under management, has put about A$200 million over the last two years into securities linked to insuring against natural disasters. Rival Hostplus invested in a similar strategy earlier this year.  

The two funds are joining larger peers Colonial First State and Insignia Financial which are investing in catastrophe reinsurance. Australia’s pension funds are hunting for fresh investments for the more than A$2 billion of inflows they rake in each week. 

Natural catastrophe reinsurance covers a range of financial products, including bonds that reward buyers for taking on insurance market risk linked to natural disasters such as hurricanes, wildfires and earthquakes. If catastrophe strikes, bondholders pay out. If it doesn’t, they stand to reap outsized returns.

Catastrophe bonds, which are issued by insurers, reinsurers and governments seeking an extra layer of disaster coverage, have been handing investors double-digit returns. Still, the strategy is facing scrutiny amid concerns about the high bar for payouts. 

The trigger for paying out a catastrophe bond, known as an attachment point, is crucial for determining whether to invest, according to Marina Pasika, Rest’s head of growth alternatives. 

“A couple of years ago, insurance companies could easily issue catastrophe bonds or other ILS instruments with fairly low attachment point,” said Pasika. “Those attachment points to deliver on those bonds have really gone up in the last year or two.”

Hostplus is investing in quota shares, a type of reinsurance product where premiums and losses are shared according to a fixed percentage, according to Deputy Chief Investment Officer Con Michalakis. 

“They’ve done very well,” he said of the investment made earlier this year, as a shortage of capital had made the market very attractive for institutional investors. 

Natural catastrophes caused about $62 billion of insured losses in the first half of 2024 — roughly 70% above the 10-year average — as extreme wildfires, droughts and floods upend historical norms.

--With assistance from Ishika Mookerjee.

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