Catastrophe bonds: investing in climate disaster

Catastrophe bonds are a growing form of investment that can be used to fund recovery from damage in climate-related disasters. The design of the bonds can be attractive to both issuers and investors, but they may not be effective at covering the damage they promise to help cover.

What are catastrophe bonds?

Catastrophe bonds, also called CAT bonds, are financial instruments that “raise money for insurers, helping them pay claims if there’s a natural disaster or catastrophe,” said Investopedia. They are essentially “reverse insurance,” where “instead of paying premiums to receive protection, investors receive premiums for providing protection.” However, “investors risk losing their investment if a specified catastrophic event occurs before the bond matures.” If the disaster does not occur, “these instruments are known to offer highly attractive equity-like returns, low volatility and low correlation to broader financial markets,” said CNBC.