Marrying ESG vision and captive insurance risk activity

Nicholas Ashburn and Nicholas Cimino of PNC Asset Management share their views on how captives should be forming an investment strategy with ESG considerations in mind


Environmental, social and governance (ESG) considerations have become a mainstream part of investment processes over the past few years. As global efforts to mitigate climate change have accelerated, insurers and international organisations have been working to understand how these and other ESG risks can affect and be affected by insurance activity.

A report from the UN Environment Programme, published in 2021, highlighted the importance of aligning investment portfolios with underwriting activities when it comes to addressing climate change risks.

The report, to which 22 of the biggest global insurers contributed, stated: “To have a truly holistic, enterprise-wide view, there is a need for insurers to assess the potential overall impact of climate-related risks and opportunities — including net-zero emission targets — on both their insurance and investment portfolios.”

Aligning goals

PNC Asset Management’s Nicholas Ashburn, head of responsible investing, and Nicholas Cimino, head of private investments and alternative credit, agree that captive insurers should also carefully consider the relationships between the corporate parent’s activities, the risks underwritten by the captive and the makeup of the investment portfolio. Indeed, many are already doing so.

“Captive insurance portfolio managers may see a parent company with involvement in heavy industry and underweight the industrial sector to reduce correlation between claims and portfolio returns, but mitigating ESG risks can go a level deeper,” says Ashburn.

Captives can consider whether their portfolios and parent companies are exposed to the same risks, such as extreme weather or fossil fuel prices, to ensure that if one party is negatively affected, this is not compounded. Investor approaches to ESG are growing more sophisticated.

While many still exclude specific industries or businesses – tobacco producers or weapons manufacturers, for example – it is more common to see strategies focusing on top performers or improvers on various ESG metrics. Ultimately, however, it is the financial outcome that is most important for most captives.

“We see captive managers wanting to understand if ESG risks elevate the risk profile of an investment, and by how much, but accepting that risk if adequately compensated,” says Cimino.

Getting the data right

Key to understanding ESG – whether at a corporate, underwriting or investment level – is getting the right data. Given that many kinds of ESG data are markedly different from ‘traditional’ financial data, the work involved in gathering, verifying and using this information is often difficult.

A lack of standardisation has long been an issue for investors, but work is ongoing in several areas to improve the situation.

“The outcome is most important, but it is really difficult to get the portfolio results you want without insight into what managers in the portfolio are doing and why,” says Ashburn.

While not every asset manager within a captive’s portfolio needs to approach ESG risk the same way, captives will struggle to manage their own ESG risks without an understanding of these approaches.

Captives need to ensure they have a “deeper understanding of components to anticipate and react to a changing environment”, Ashburn adds.

Related to the data issue is one of coverage. Listed equities are well covered in terms of ESG risk ratings and assessments by a variety of generalist and specialist firms. However, for other asset classes, understanding ESG risk is not quite so straightforward.

For fixed income, which often makes up the bulk of captives’ reserve portfolios, it is harder for asset managers to engage with companies as they do not have the voting rights linked to equities.

However, as Cimino explains, there are still plenty of strategies available that consider ESG risks within credit risk assessment.

He adds: “Equities, and more recently private equity, probably come to mind when considering ESG risks and there are certainly many options in these asset classes that may be more appropriate in a captive’s surplus portfolio, but every asset class has some methods of considering ESG risk factors that can be additive to security and company analysis.”

Wider considerations

While climate change is gathering most of the headlines associated with ESG investing, it is just one element of the wider ESG universe, as Ashburn explains.

There are social risks to consider, some of which are linked to climate change and good governance – which itself can go a long way to helping individual companies address other ESG risks.

“Regardless of what ESG risks are most material to the parent company, a captive’s burgeoning ESG data and research may illustrate best practices in mitigation of those risks at the parent’s competitors, which can inform coverage policy and recommendations made to the parent,” Ashburn adds.

Both Ashburn and Cimino emphasise that “quality data and a robust rubric for materiality of potential ESG risks” are essential to captive insurers’ success in managing ESG risks, whether through underwriting, investment, or both.

As Ashburn explains, this success shouldn’t be defi ned by a specific level of ESG risk as many metrics will vary from one manager or data provider to another. Instead, captives should look to build “a process that accurately captures a degree of ESG risks at the holding, strategy and portfolio level”.

“We’ve seen the most utility with lookthrough analyses that examine the main drivers of risk in underlying holdings across an entire portfolio to ensure a portfolio isn’t overloaded with specific risks,” he says.

12 August 2024
5-6 November 2025

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