19-08-2020
Green hybrids expose issuing insurers & banks to risks
Insurance AlertssGreen hybrids expose issuing insurers & banks to risks
Issuing green or sustainability-linked hybrids helps banks and insurers spotlight their environmental, social, and governance (ESG) strategies, but investors are still exposed to the risks of the broader businesses, states S&P Global Ratings.
In a report titled "The Greening Of Financial Services: Challenges For Bank And Insurance Green And Sustainability Hybrids" S&P Global Ratings looks at the challenges related to such hybrids for issuing banks and insurers.
Structural tension
S&P Global Ratings said, “We see an inherent structural tension between using such hybrids to earmark funds for qualifying projects, and the role capital plays on a bank or insurance balance sheet. We believe this is why the green or sustainability promises incorporated in such hybrids have so far been light on specific commitments, and we note that such hybrids may not match the investment mandate of some green and sustainability investment portfolios.
“Given that promises linked to specific hybrids also have to satisfy regulatory capital requirements, we think banks and insurers may be more able to tap, and benefit from, the growing demand for green and sustainability assets based on broader business model commitments and progress.”
Reputational risk
The development of a green and sustainability hybrid asset class could also increase reputational risks around related events. For example, investors in a green-labeled hybrid may not receive hybrid payments because of problems that a bank or insurer faces from losses after a borrower or investment fails due to the crystallisation of ESG risks (from losses due to polluting, for instance).
Source: Asia Insurance Review
