Environmental, social and governance (ESG) considerations are rising up the corporate agenda of captive owners amid increased scrutiny from consumers and regulatory authorities, according to an A.M. Best report on European captives. The report explained that a captive’s approach to ESG is often closely linked with that of its parent. In Europe, the implementation of the EU Directive 2014/95/EU sets out the disclosure requirements of non-financial and diversity information for large companies. The directive does not apply directly to captives, but A.M. Best revealed an increasing number are considering incorporating ESG factors into their operations. The report suggested there has been a rise in the number of captives owners that have integrated ESG factors in their operations, influencing areas such as corporate governance and investments. A.M. Best said: “This has an indirect effect on captives, with many of them holding a large part of their investments in inter-company loans,with the underlying assets invested by their parents.” A change in a captive parent’s operations, in an effort to manage transition risk in industries such as oil and gas,can have a knock-on effect on their insurance needs. “Ultimately, this would require a captive to adapt accordingly,” the rating firm added. Captives might also consider including ESG into their operations because of the growing number of commercial (re)insurers formally integrating ESG factors in their strategy. The report explained that a consequence of this might be capacity shortages in some lines of business or sectors, which could create business opportunities for captives in so-called “toxic” industries. It was noted that captives should assess ESG exposures as part of their risk management activities and be able to recognise, measure and address the impact on their business. A.M. Best suggested that failure to do so can “present significant risks”, be they financial or reputational. Cyber risk and environmental liability are just some of the new areas of coverage for captives, and as such will require a fresh consideration of ESG factors for operators. “Captives will need to be conversant with the potential impact of aspects like these on underwriting and investment exposures,” A.M. Best added.
