2 June 2023ArticleAnalysis

How captive NEDs can help navigate the complexities of ESG

Environmental, social and corporate governance (ESG) issues are growing in importance and need to be factored into decision-making on the part of boards of captive insurers, with non-executive directors (NEDs) playing a part in this area.

These were just some of the themes debated in a webinar organised by Zurich and hosted in April by Captive International. A panel of captive experts and serving NEDs agreed that the directors on the board of any captive play a crucial part in running it—and might make the difference between success and failure. But their backgrounds and skillsets can vary hugely, with few requirements for either in most domiciles.

Moderated by Wyn Jenkins, managing editor of Captive International, the panel comprised: Paul Wöhrmann, senior ART manager/customer and distribution management, commercial insurance at Zurich Insurance Group; Andrew Bradley, the former head of group risk services at Nestlé and now an independent director to a captive; Xavier Groffils, captive manager at Solvay; Hans-Peter Wagenhoefer, director of insurance and reinsurance at German multinational BASF; Malcolm Cutts-Watson, chairman of RISCS CWC; and Françoise Carli, the co-founder of ZAKUBO Consulting.

Asked how independent captive board members can incorporate ESG into their thinking and decision-making process, Bradley said that ESG issues have been one of his passions over the last few years, adding that about a decade ago his company started to think about this topic to try to link it all together. He thinks that sometimes people have a problem trying to work out the E, the S and the G parts and how they all link into the insurance market and into the captive.

According to Bradley, there is a role for independent directors who understand this area. They can help the captive insurance company and the parent link these things together for ESG reporting.

He added that the UN’s Sustainability Goals can be seen to link in with insurance products and that the market has been talking about climate change for quite a while.

However, he said, while it’s a hot topic at the moment, some of the things that insurers are selling—such as loss prevention caused by excessive rain, high tides, floods and snow, with drought as a new one due to forest fires or grass fires—are things that people should have been looking at over at least the last five or 10 years to work out how they might be impacted.

He highlighted employee benefit (EB) programmes as something that some companies still struggle to put into their captives, again despite the fact that the industry has been discussing this for the past 10 to 15 years.

“EBs make a very nice fit with ESG,” he said. “How can you improve your employees’ wellbeing, especially in low and middle income countries? Can you give better benefits?

“The COVID-19 pandemic highlighted the benefits of having EBs in your captive programme, where you could pay for things that perhaps the standard policy didn’t cover.”

Taking action

Wagenhoefer explained that his company, BASF, was being “strongly impacted” by ESG issues, as it uses a lot of electricity, which is mainly provided by its own electricity plants,

However, he said, in the future BASF is looking to power its buildings with “green” energy, generated by sources such as wind and solar parks.

“That’s our aim. With regard to our captive, we are focusing on reinsurance and direct insurance partners. We are also looking at investments in green energy—that’s to a certain part done and supported through our captive.”

Groffils said that ESG is a huge concern for his company as well, and that it has put very high standards into this area. According to Groffils, Solvay has set very high environmental goals in order to reduce its carbon dioxide emissions by 2030–2035 and has already achieved a great deal in this area.

Looking at the S part of ESG, he said that Solvay has been defining what sort of care it offers, such as a programme that allows all workers a minimum standard of EBs, such as a minimum number of weeks of parental leave.

Groffils regards ESG as a growing area of concern for society as a whole as well as for companies, and pointed out that the insurance industry, as well as a number of captives, has been setting goals in this area.

“That’s a very interesting development for captives,” he said. “It’s something to which a member of a board could contribute, in order to develop ideas in that area. ESG is a topic that will become mandatory over the next few years, because the EU is thinking about creating a directive on the topic, which could become effective as early as 2025.

“All companies should carefully consider this in the coming months and years.”

Bradley intervened to underline the importance of this, pointing out that some industries are already in distressed circumstances due to the wide range of ESG issues and find it extremely difficult to purchase insurance, or get very low limits, because of what they do in terms of operations.

As a result, their view on ESG could be even more important. He stressed that the role of the captive is to find out some of the risks that a parent company could be hit by, which they probably won’t be able to cover in the reinsurance market. According to Bradley, this aspect is going to become more significant in the future.

However, as Groffils commented, is that really the right thing for captives to do? He thinks that issues like this are where the board of the captive should take hold and probably inform the rest of the group that they should change their practices and look into other solutions that are probably better for the environment.

According to Carli, this is exactly where the independence of some directors can be great for a captive board. She pointed out that if some directors come from working cultures other than that of the parent company, with diversity from seeing other industries or places where ESG is handled differently, they can influence the board to take the right decision or take the right steps for a decision on how to tackle ESG matters for the group via the captive.

“The captive is a tool for the management of the risk of the company, in my view,” she said in conclusion. “It’s not there to do what the others in the market are not doing. It can be a tool that helps you learn, and truly improve the situation.

“The idea is that you find solutions to do things better, to do them more clearly, to become more compliant.”