Q&A: The key role of captives in ESG commitments

Zurich NA on how captives can play a role in executing environmental, social and governance initiatives.

 

As environmental, social and governance (ESG) initiatives have moved up the agenda at many companies, there’s growing interest in whether captives can play a role in successfully executing on those objectives.

We sat down with Adriana Scherzinger, head of captives sales and execution at Zurich North America, during the recent Vermont captives conference to get her perspective. The conversation continued afterward to include her Zurich North America colleagues Dawn Hiestand, head of captives (group), and Mark Way, head of sustainability underwriting, all of whom are based in the US.

Captive Review (CR): What role can captives play in supporting ESG progress?

Adriana Scherzinger (AS): ESG can mean different things to different people. From a (re)insurer’s perspective, when we think of the ‘E’ in environmental, we may think of the impact of climate change and severe weather events.

From the ‘S’ for social, we think of employees, human rights, diversity, equity and inclusion, social inflation and changing demographics. And from the ‘G’ for governance side, we look at how certain regulations change and the impact they might have, among others. In terms of the governance aspect, the mere existence of a captive can reflect good governance because a captive is a formal loss-funding vehicle established to protect the parent company from risk.

As regulated (re)insurance entities, captives offer their parent organisations a structured way to inform risk decision making. In addition, captives can draw on a growing array of risk engineering services with ESG relevance that some fronting carriers and service providers offer.

For example, Zurich Resilience Solutions (ZRS) has developed multiple ESG and sustainability-oriented risk engineering solutions including carbon advisory services to help customers understand and calculate their greenhouse gas emissions, reduce their carbon footprint and build resilience in the face of climate change.

Earlier this year, ZRS introduced a workplace diversity, equity and inclusion service that provides customised solutions to help organisations advance their diversity, equity and inclusion impact and make meaningful progress toward their goals.

Organisations that have strong enterprise risk management programmes and are committed to ESG objectives can require their captive to adopt the parent company’s policies, procedures and approach relating to climate and sustainability, green investments and more.

CR: What are some ESG ‘quick wins’ that captives can implement?

AS: A captive could help assess and mitigate the impact of climate change on natural catastrophe exposures that are financed by the captive. If insurance market capacity is limited or not affordable, or if the terms and conditions aren’t favourable, captives’ flexibility can help parent organisations to formally fund coverage gaps and enhance resilience to environmental risks.

In terms of investment strategy, captives can support and sustain responsible investing, aligned with environmental objectives, such as promoting renewable energy and low-carbon activities. In support of the ‘S’ or social component of ESG, many captives already underwrite employee benefits, including life insurance and disability, and they are also able to fund other voluntary benefits and non-traditional coverages intended to attract and retain diverse talent and enhance employee engagement.

The possibilities are immense, such as using the captive to cover fertility treatments for growing families, to support gender dysphoria coverage or to provide new offerings for mental health.

CR: A big question for many captives: can prioritising ESG in the captive affect the bottom line and, if so, how?

Dawn Hiestand (DH): ESG connects to both the underlying companies in the captive and then the captive as its own entity. Many people and businesses are trying to figure out, if you make a public commitment in the ESG space, if you have a really good sustainability programme, what will the financial benefit be? Is there a connection with their loss ratio?

We don’t have all the answers; correlations are hard to make statistically. It may be those companies with a strong sustainability programme tend to be more focused on risk mitigation in general. That has real bottom line impact. Here’s another way of thinking about bottom line impact of ESG commitments: the talent we need increasingly say they want to work for companies whose corporate objectives are aligned with their values.

Increasingly, a strong commitment to sustainability is one of those values. What a great opportunity to retain talent, which costs less money than hiring new. That impacts the bottom line as well. Ultimately, what’s going to drive bottom line impact the most is your consumer. Consumers are asking companies to be more environmentally and socially responsible, and if they make buying decisions based on what they see in that regard, then it certainly will have an impact on the bottom line.

Mark Way (MW): There have been many studies that suggest a positive correlation between a company’s ESG performance and its financial performance. Certainly there are major business opportunities for companies in the ESG space. Just think about the transition to the net-zero economy and all the structural and technological change that will bring.

Companies that ignore ESG trends may face reputational issues that can have a big impact on their stock price, as we have seen previously. Equally, companies risk inviting ‘greenwashing’ allegations if they exaggerate their ESG performance or the ESG relevance of products and services they offer.

Basically, ESG and sustainability are topics that are not going away and which are, and will become ever more, bottom line relevant.

AS: ESG creates both risks and opportunities for the (re)insurance industry, and these extend to captives as well. There are a lot of questions that need to be answered. ESG risks are not the same across industries, and even within the same industry we might have different views and the ESG factors may differ. ESG considerations are essential for a sustainable future.

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