Captives ideally placed to support sustainability

A panel of insurance experts at the Federation of European Risk Management Associations’ (Ferma) forum held in Madrid last week urged captive owners to sign up to the UN Principles for Sustainable Insurance (PSIs).

Out of a possible 6,000 captives globally, only four captive owners – Enel, Eni, International SOS and Sonepar – are among the 345 PSI signatories to date.

“It’s clearly disappointing that the captive market has not jumped into this initiative,” Ferma board member and group head of insurance at ArcelorMittal, Laurent Nihoul, said. “There’s concrete action we can implement, so what are we waiting for?” he added.

Nihoul, who is also president of the International Federation of Risk and Insurance Management Associations, was joined on the panel by Sonepar’s senior vice-president of risks and insurance, François Beaume; International SOS’ group deputy director, Franck Baron; and the United Nations Environment Programme’s (UNEP) head of insurance, Butch Bacani.

Bacani launched UNEP’s PSI Initiative at the UN Conference on Sustainable Development in 2012, to provide a global framework for the insurance industry to address environmental, social and governance (ESG) risks and opportunities.

The Paris Agreement of 2015 and the Kunming-Montreal Global Biodiversity Framework of 2022 underpin global political consensus that sustainability ought to be a core part of corporate strategy.

“Sustainability in the UN context is about intergenerational equity,” Bacani said. “The definition of sustainability is meeting the needs of the present without compromising the needs of the future,” he added.

The PSI Initiative was launched to harness the three roles of insurers, he said, as financial shock absorbers, risk managers and investors. On the latter, he said the deployment of their combined $35trn in assets under management will have a vital impact.

Encouraging captive owners to sign up to the PSIs, Bacani said: “You are closer to the theory of change [and] true sustainable development requires transforming the real economy.” The PSIs can help turn insurance and finance levers towards an economy that is more resilient and sustainable, he added.

"Sustainability in the UN context is about intergenerational equity. The definition of sustainability is meeting the needs of the present without compromising the needs of the future"

^{Butch Bacani
United Nations Environment Programme}

Baron said environmental, social and governance (ESG) strategies are an opportunity for risk managers to use captives to help meet that objective.

“Through a captive, you can concretely be part of implementing the ESG strategy of your organisation,” Baron said. International SOS uses its captive, for example, to invest in software for its ESG projects and to measure its carbon footprint. “Thanks to ESG, we’ve been better able to equip the risk management team,” he added.

To become a “critical enabler” in ESG, Beaume said, captive insurers and risk managers needed to be more vocal in the insurance industry through the PSI Initiative. “Their strategy will impact us,” he stressed.

Sonepar’s captive has co-financed analytics tools to run climate risk assessments for its “significant portfolio” of 4,000 locations, Beaume said. In the next two years, the captive will move to premium allocation linked to the group’s climate adaptation plan, before focusing on claims and enabling more sustainable repairs and reconstruction, he said.

By joining the PSI Initiative, captives could enable the insurance community to speak with a “collective voice” on sustainability issues. Some risk managers may, ironically, have a “fear of change”, he continued. “A risk manager is supposed to interact with other parts of their company, but ESG is super complex and the regulatory side is evolving,” he said.

Nihoul said steel manufacturer ArcelorMittal has a captive but is yet to sign up to the PSIs. “We don’t think we could be part of it because out impact would be limited,” he said, and suggested a marketing effort was needed to convince companies like his to join the iniative.

Baron warned insurers against seeing a captive merely as a risk management tool. “A good risk manager is one who enters a room when they’re not invited. We must all be convinced that we are relevant to all risks,” he said. “The message is not that the captive will resolve everything, but that we can trigger something,” he added.

“Those who haven’t understood the sustainability agenda, haven’t seen the light that sustainability is fundamental to corporate strategy,” Bacani stressed. Climate and nature are “financial material risks”, he said, and how insurers behave in that regard will have a direct impact on sustainability goals.

Speaking to Insurance Day after the panel discussion, Bacani said insurers should view the governance part of ESG “from two angles”.

“If you’re insuring a corporate client, you need to look at governance as an issue – such as, the practice of bribery and corruption, accountability and transparency – because if they fall on the corporate governance mark, then that’s already not a good indicator,” he said. “The other angle is their governance of sustainability within their [insurance] company,” he added.

External pressure to perform well on ESG criteria will only increase.

Bacani explained: “You have sustainability service providers and rating agencies who are starting to look into sustainability issues, and regulators and policy makers are doing the same. Ultimately, it will all be hardwired into regulation and policy, but the journey is still from voluntary to mandatory.”