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Captives can play key role in ESG initiatives

Posted On: Mar. 9, 2022 1:15 PM CST


TUCSON, Arizona – Captives can be used to help formulate an organization’s environmental, social and governance strategy and provide funding for ESG efforts, a panel of experts said.

Attention to ESG issues can also help captives secure reinsurance capacity, particularly with European reinsurers, they said during a session at the Captive Insurance Companies Association international conference in Tucson on Tuesday.

“The biggest risk about ESG is ignoring it,” said Michael Douglas, Newtown Grant, Pennsylvania-based director of business development for Aon PLC’s captive management operations.

Under pressure from regulators, investors, activists and others, corporations, particularly in Europe but also in the United States, must be seen to be working to identify and report what they are doing on ESG initiatives, he said.

Captives, which are designed to solve problems for their parent companies, are well-positioned to act as a focal point to identify ESG issues and implement and document a company’s strategy for addressing them, he said.

The Guernsey International Insurance Association last year published a framework for captives and insurers to address ESG risks, said James Stewart, Guernsey-based client services director at Artex Risk Solutions, a unit of Arthur J. Gallagher & Co.

The framework “acts as a handrail for licensed insurers to consider their operations, their own activities against the U.N. sustainable development goals,” he said.

It addresses four aspects of captive operations: governance, making ESG considerations part of routine strategic planning for a captive; risks underwritten, including understanding the impact of ESG risks, such as climate change risks; investments, including the ESG footprint of the investments; and reporting, to ensure that the captive board is comfortable that it has fulfilled its ESG reporting requirements.

Captive boards and risk managers can use the framework to engage on ESG matters with the senior leadership of their organization and discuss whether a captive should cover any of the risks, Mr. Stewart said.

Reinsurers, who must meet their own ESG requirements, will likely look favorably on captives that are addressing ESG issues, Mr. Douglas said.

In addition, captives can be used to fund environmental remediation efforts, he said.

Sandvik AB used its captive to finance a climate change risk assessment, said Fredrik Finnman, head of group risk management for the Stockholm-based engineering company.

In addition, Sandvik has changed its asset management policy for its captive to allow investments in green bonds, which are financial instruments that support projects that have a positive effect on the environment, he said.

In addition, commercial directors and officers liability and general liability insurers in Europe are seeking significantly more information from policyholders about ESG risks, Mr. Finnman said.

“The insurers want to make sure that we play fair as a company and that we do the right things, and that we monitor who we do business with,” he said. “Also, do we follow trade sanctions.”

While U.S. insurers are less concerned about ESG issues than European insurers and reinsurers, captive surpluses can also be used for various environmental infrastructure projects, such as installing solar panels on buildings, said Karen Hsi, program manager-captive insurance programs for the University of California, office of the president, in Oakland, California.