Just Having a Captive Might Demonstrate Some Level of ESG Focus

Businessman holding the acronym ESG in a bubble with adjoining bubbles reading environmental, social, and governance

June 19, 2023 |

Businessman holding the acronym ESG in a bubble with adjoining bubbles reading environmental, social, and governance

As many organizations look to incorporate environmental, social, and governance (ESG) factors into their approach to business, an argument can be made that having a captive insurance company already demonstrates a certain level of ESG focus.

"Really regardless of industry or size, just having a captive demonstrates good governance," said Brandy Alderson, vice president and corporate account executive at Marsh. "It's a formalized loss-funding vehicle, it's licensed by regulators, and it's a regulated entity which was established to protect the organization against risk."

Ms. Alderson discussed Marsh's ESG Risk Rating scorecard and some of the broker's findings during a session at this year's Western Region Captive Insurance Conference (WRCIC) titled "Embedding ESG Initiatives into the Captive: Who Knew?"

Ms. Alderson said Marsh ranks organizations' ESG efforts across 19 themes, then their scores are weighted by nature of the industry. Thus far, approximately 500 organizations representing all types and sizes of businesses around the world have completed the ESG Risk Rating, she said.

In conducting the ESG rankings, Marsh has found that captive insurance company owners show higher median scores across all areas of ESG, Ms. Alderson said. "Out of the three categories, environmental has the least correlation to captive ownership," she said.

Marsh is starting to see a greater correlation between captive ownerships and higher ESG rankings in the social area, Ms. Alderson said, "likely due to captives having greater correlation between their risk management teams and HR teams," particularly when the captive includes people-related risks.

Discussing the relationship between captive ownership and higher rankings on governance factors, Ms. Alderson noted that captive insurance companies are also influenced by a variety of internal stakeholders including the captive's board, legal, finance, and human resources.

"It's good to remember that ESG factors are constantly being used by stakeholders," Ms. Alderson said.

Ultimately, the "million-dollar question" is, "Do captives lead to good ESG performance or does good ESG performance lead to captive formations?" Ms. Alderson said. Marsh will continue to investigate that question, she said.

Panelist Gregory H. Cobb, director of insurance solutions at Sage Advisory, noted that ESG focuses on the evolution of environmental, social, and governance considerations in the analysis of investments and risk. As such, ESG is already deeply embedded in the insurance process, he said.

Citing a variety of ESG guidelines and principles put forward by different organizations, Mr. Cobb said that there's no single way for an organization to embrace an ESG focus. "As it's evolving, there is no one definition," he said.

On the investment front, over time, with deeper applications, better metrics, and more robust analytics, the impact of applying an ESG focus is beginning to skew increasingly to the positive, Mr. Cobb said. Meanwhile, the skew of negative outcomes is becoming smaller, he said.

"On the investment side, the general conclusion is that if you implement ESG, there's basically no harm done with a slight skew to the positive," Mr. Cobb said.

"The takeaway is that the weight of evidence continues to be skewed more towards the positive," he said.

Mr. Cobb stressed the importance of an organization's reputation, particularly as the share of businesses' asset base represented intangible assets has grown.

"Reputation is everything," he said. "For the insurance industry, there is somewhat of a shareholder imperative.

"The drumbeat from stakeholders is only getting louder," Mr. Cobb said. "They're ignoring the political aspect and they’re focusing on what they want as stakeholders." Stakeholders increasingly scrutinizing insurance industry companies' ESG efforts include shareholders and policyholders, employees, customers, and the community, Mr. Cobb said.

While insurance might not be a popular purchase among insurance buyers, an insurance company's ESG focus can make insurance purchases more palatable to many consumers, Mr. Cobb said. Meanwhile, a changing workforce brings increased pressure to embrace ESG. "The consumer base is changing," he said. "You start to realize that in 5 years, 75 percent of the workforce is going to be millennials. So that's who you're going to be hiring, that's going to be your consumer base."

In addition to being responsive to stakeholders' perspectives, insurance industry businesses also need to be aware of third-party assessments, Mr. Cobb said, such as those of rating agencies.

Regulators, too, are in the early stages of considering insurance industry companies' ESG efforts, Mr. Cobb suggested. "It's not a mandate yet, but so many (regulators) want (companies) to start thinking about it," he said.

Mr. Cobb cited Guernsey's creation of an ESG accreditation program and kitemark for insurers and insurance managers, as an example of some of the movement that's taking place in the insurance industry.

Reinsurers are also beginning to embrace ESG and might eventually start scrutinizing their policyholders' ESG efforts, Mr. Cobb suggested.

Another panelist, Nicholas Cimino, investment director at PNC Institutional Asset Management, said organizations looking to initiate an ESG program have a number of different options for doing so. He suggested, though, that the effort should focus on the organization's goals.

"We think of it as a goals-based approach," Mr. Cimino said. "What is your 'Why'?"

"There's no one mandate. There's no one way to do this," Mr. Cobb said.

Mr. Cobb suggested that there are a number of "Rs" in ESG. They include risk, reward, regulation, rating agencies, risk managers, reinsurers, and reputation.

"If you ignore all of those Rs, eventually you're going to put your reputation at risk," Mr. Cobb said.

June 19, 2023