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ESG Captive Solutions Guide

What you need to know

12/15/2024 · 5 minute read

Organizations around the world are realizing the need to prepare for and insure against their climate and sustainability risks.

One way that companies can engage with their overall sustainability approach is to use a structured framework that evaluates specific performance criteria for environmental, social, and governance (ESG) related risks, measuring the impact of both the operations and output of an organization on people, prosperity, and the planet.

Captive insurance can help organizations on their quest to improve their non-financial metrics.

Companies with a Captive outperform in ESG scores

Marsh’s proprietary research — based on data from our ESG Risk Rating tool — found that organizations that use a captive insurance vehicle consistently outperform peers without a captive.

Early signs of a positive correlation between companies with captives and their ESG risk rating

This research, from 2023 and 2024, used four common hypothesis tests and revealed that companies with a captive were, statistically, performing significantly better in all categories of ESG. We explored six themes in each category, uncovering the following insights:

  • Captive owners show higher median scores across environmental, social, and governance dimensions than non-captive owners.
  • For the E theme, we find captive owners are interested in exploring how they can help their organizations manage climate change.
  • Captive owners place greater emphasis on identifying and managing their people risks; and are more likely to have stronger credentials than non-captive owners when it comes to the Social dimension of ESG.
  • At the G level, particularly within Governing Body, we see that captive owners are more likely to score higher on questions pertaining to their Highest Governance Body construct, and incorporation of ESG issues into it.
  • Additionally, Captive owners tend to have wider risk awareness in their downstream value chain.

Themes explored in captive vs. non captive performance

(Bold items represent significant differences)

Environmental

  • Climate change
  • Risk and opportunity oversight
  • Biodiversity and nature loss
  • Solid waste
  • Resource availability
  • Air and water pollution

Social

  • Employment and wealth generation
  • Health and well-being
  • Innovation of products and services
  • Community and social vitality
  • Skills for the future
  • Dignity and equality

Governance

  • Clients and customers
  • Ethical behavior
  • Governing body
  • Stakeholder engagement
  • Governance strategy
  • Supply chain

Impacts and opportunities for Captives

Captives are ideally positioned to assist organizations in all three ESG aspects.
selected option

Environmental captures climate change, energy efficiencies, carbon footprints, biodiversity, and other environmentally sensitive issues.

Many of the world's largest insurers have committed to a net-zero position on investments and underwriting by 2050, with significant reductions by 2030. These commitments will inevitably have an impact on commercial insurers’ appetite and ability to underwrite carbon-intensive risk. We are already seeing captives owned by parents in affected industries being used to address coverage gaps, exclusions, climate-related perils, third-party coverages, and renewables. We fully expect this trend to grow over time as carbon-intensive businesses transition to a low-carbon future.

In addition, alternative structures such as protected cell captives may be used for certain risks, and other transformative vehicles, such as insurance-linked securities (ILS), may be used to access alternative capital to protect against extreme weather events.

Social covers labor standards, wages and benefits, diversity, human rights, privacy and data protection, health and safety, and other social justice issues.

Captives offer organizations flexibility and control to address the people risks that impact their business, including employee benefits and employee engagement programs. Captives writing employee benefit risk can support the execution and delivery of a company’s diversity, equity, and inclusion (DEI) strategy and serve as a mechanism to:

  • Harmonize benefit coverages across geographies.
  • Provide coverage not available in some locations, such as maternity benefits.
  • Remove exclusions, such as for suicide or neonatal care.

The captive board itself can be a mechanism to enhance DEI strategy for the group, providing opportunities for individuals from a variety of business areas to participate in key decision making for an important group subsidiary. 

Governance captures a company’s control over the “E” and the “S” categories plus corporate governance considerations.

Regardless of industry or size, the mere existence of a captive demonstrates good governance because a captive is a formalized loss-funding vehicle. It is licensed by regulators and is a regulated legal entity, which has been established to protect the organization against risk.

In addition, a captive demonstrates impactful governance in the following ways:

  • Structured risk management review and oversight with:
    • External stakeholders, such as insurance regulators, outside audit, actuarial pricing and loss reserve opinions, domicile legal counsel, captive manager, and investment manager.
    • Internal stakeholders, such as captive board, risk manager, legal, finance/accounting, HR, and internal audit.
  • Active risk management as a result of prefunding and oversight.
  • Addresses risk management’s contributions to a parent company’s ESG efforts for required annual regulatory reporting in the US and EU.
  • Facilitates tax and regulatory compliance.
  • Enhances an organization’s risk profile in the eyes of commercial insurers.

Additional captive benefits

  • Captive surplus can be used to support a sustainable investment strategy — for example, investments in green bonds.
  • Captives enable organizations to reduce the total cost of risk and enhance sustainability as a long-term strategy, allowing them to preserve assets and improve resilience.
  • Captives are a good way to prevent erosion of profitability and preserve the opportunity to support ESG programs and sustain future growth.

Our recommendations for you

  1. Connect with your Marsh Captive Solutions’ executive to better understand:
    1. The role of a captive in governing, managing, and financing risk.
    2. How a captive enhances risk governance.
    3. Which ESG guidelines and regulatory requirements are applicable locally to your captive.
    4. Ways a captive can support ESG programs.
  2. If you don’t have a captive, or other risk-bearing entity, and want to explore the possibility of one, please reach out to our captive consulting teams by sending an email to: marshcaptivesolutions@marsh.com.

Guide

ESG: Captive Solutions Guide

Everything you need to know about ESG and Captive Insurance in a downloadable PDF

Download

For more information on Marsh’s ESG capabilities, please refer to:

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Climate Change
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Environmental, Social and Governance