Industry the October 2021 issue

Insurers Edge Into ESG

Business performance on environmental, social and governance matters is coming under greater scrutiny, and some are leaning in.
By David Tobenkin Posted on October 1, 2021

While institutional reputation is a broader concept, ESG encompasses many of the reputational challenges now facing businesses. On the environmental side, issues include a company’s carbon emissions profile, overall energy use, overuse of scarce resources, and waste. On the social side are issues such as diversity, human rights, consumer protection and animal welfare. And the governance side includes management structure, transparency, executive compensation, employee compensation and, significantly, risk management and organizational resilience.

When organizations fall short of ESG goals, reputational damage is all but certain.

As the risk of reputation gaps emerge, brokers and agents have an important role to play.

Some insurers see ESG investing as key to reducing their own risk profiles over time.

Related Content: The Evolving Risk of Reputation

“The pace of change in society has never been this fast as the past year,” says Marguerite Soeteman-Reijnen, chair of the executive board of Aon Holdings and chief marketing officer of Aon Inpoint, the company’s management consulting arm. “The impact of climate change, the way companies and governments handle questions around privacy and data management, the pandemic as well as social movements relating to diversity and inclusion and racial injustice have all radically changed the landscape and playing grounds of organizations…. Discussing inequality is no longer enough. One needs to put tangible actions in place and dismantle it. Also, our global insurance consumer base is constantly pushing for a healthier environment, equity, equality, improved human rights and corporate transparency.”

ESG Reporting Amplified

Regulators have increased the focus on ESG. In Europe and the United Kingdom, regulators are imposing ESG mandates, particularly in the environmental sphere. When organizations fall short, reputational damage is virtually assured. For example, Britain’s joint Government-Regulator Task Force on Climate-related Financial Disclosures (TCFD) announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, alongside the publication of its Interim Report and Roadmap. The road map sets out that re/insurers will likely be subject to mandatory disclosures by the end of 2021. Some think the United States could follow suit, given the Biden administration’s emphasis on environmental and social justice issues.

Organizations are under pressure to add greater rigor to their ESG reporting, including specific metrics that demonstrate their progress toward ESG objectives. These include actual regulatory reporting requirements in the United Kingdom and Europe (impending in the UK, existing in the European Union). In the United States, says Jason Day, chair of the corporate practice at international law firm Perkins Coie, there is stepped-up enforcement of the accuracy of disclosures. Day says commentary from the SEC suggests that ESG reporting requirements for both issuers and asset managers may be imminent. Issuers also face indirect but very real pressure to report on ESG matters from institutional investors and other stakeholders, such as customers, employees, community members and others in the insurance ecosystem. “The current ESG reporting environment in the U.S. requires issuers to disclose ESG information that is material to investors or voluntarily disclose ESG matters, which leads to inconsistent and often varying disclosure practices, making it difficult to evaluate and compare disclosures and opening the door for criticism of a particular company’s approach,” Day says.

If you’re good at ESG, you also tend to be good at the hardcore financial skills of doing business, which reduces the sacrifices required.
John Godfrey, director of corporate affairs, Legal & General

ESG Reporting Liability

Any business that moves toward making ESG a core part of its mission expands its exposure to reputational risk. Day says that’s precisely because such an approach makes a company’s ESG efforts material to its success.

“I think a public company that may be consumer facing, and their brand may be built on environmental or social issues, or that may be part of their brand, they likely have said a lot on ESG to customers, and they likely have sustainability reports, or otherwise, with a lot of detail,” Day says. “That’s the reality of their business.”

Day says he is unaware of any ESG-based legal challenges that have resulted in actual decisions for plaintiffs. “A food company that offers organic products, that’s often a part of their DNA, so they’re going to have more to say on it generally and in the SEC filings, too, than a fast-food provider,” Day says. “Because it’s part of their business, it’s important for investors and other stakeholders to understand their environmental and social positions and behaviors.”

As ESG reporting ramps up, brokers can serve a crucial role. Because not only will their clients be held accountable for the statements they make, but so will their insurer partners. That means insurers will be relying on accurate reporting from policyholders on these issues.

“When helping their clients find coverage in the marketplace, and particularly when their clients are a carbon-intensive organization, the intermediary should be assisting with all the ESG reporting when submitting policy information,” says Tom Kelly, a KPMG partner focusing on insurance and reinsurance. “It is important that their clients respond honestly and with a level of due diligence and due care around their own ESG footprint. Intermediaries will have a role in driving the quality and consistency of their clients’ ESG responses.

“As ESG reporting regulations come more into play, we will definitely see policy form changes come out as well, as additional requests for information from insurers and reinsurers as they start reporting more around their underwriting activities’ impact on ESG matters. SEC registrants in the insurance space will also have to adopt the expected SEC changes around ESG reporting. Gathering this additional information to assist in this SEC reporting could potentially be pushed down to the brokers and agents as well.”

Phasing Out Coverage

Some of the largest institutional investors, such as BlackRock, explicitly consider ESG performance in deciding where to invest their dollars, as BlackRock CEO Larry Fink has noted in his famous annual letter to CEOs. Likewise, some sovereign wealth funds, such as the Government Pension Fund Global of Norway, do not invest in companies with ESG shortcomings.

Such actions force many organizations to be more proactive on ESG issues. “I think it used to be getting some ESG disclosure out and getting a ranking from the various ESG raters would be a positive, but you could reason that perhaps if ESG was not material to your financial results you could stay silent,” Day says. “Now, if you don’t disclose, you may get a low ranking. And that ranking, instead of just being a nice positive, means certain investors will not invest in you and certain consumers or customers may raise issues because you’re not disclosing things that others in your industry are.”

Growing ESG risks are relevant to insurers in their roles as both investors and underwriters. For example, in December 2020, Lloyd’s published its first ESG report and announced it would be setting targets for responsible underwriting and investment, in particular by asking managing agents, starting Jan. 1, 2022, to stop accepting new business on certain coal and oil activities and to phase out existing coverage by Jan. 1, 2030.

“An increasing number of reinsurers have started to consider ESG factors within the underwriting process, and there are a number of different approaches that reinsurers are taking given the lack of global guidance,” says Jessica Botelho-Young, associate director of analytics at A.M. Best. “One of the most common approaches is the use of exclusion criteria. More recently, we have seen this applied to the coal industry, whereby reinsurers will cease providing insurance coverage for certain existing and new coal projects. Some reinsurers have taken a more nuanced approach as they work with policyholders to establish a transition plan to reduce their exposure over time.”

ESG-Minded Investing

Other insurers have rolled out increasingly extensive ESG programs, such as U.K. insurer Legal & General. Taking the long view on reputation is a cornerstone of the insurer’s approach, says John Godfrey, the director of corporate affairs. “So, for example, whenever we invest shareholder money, that is put through the reputational lens,” Godfrey says. “Whenever we have things which look like they may be reputationally risky, I get pulled into the debate, as does the CEO. So there isn’t something written on paper which says these are the risks connected to inclusive capitalism. But we know it when we see it, and we’re very conscious of it. We’re a very long-term company that has been around for 180 years. You have to ask, ‘What are people going to think in 30 years’ time?’”

A good example of the long-term approach, Godfrey says, is working with, rather than automatically excluding, investments in organizations based on their ESG shortcomings.

“If you think about a journey to having a sustainable portfolio, the simplest way to do it would, of course, be to disinvest from anything that is carbon intensive,” Godfrey says. “But, you know, that doesn’t really solve the macro problem, because all you’re doing is passing it on to somebody else who may actually be less committed to change than you are.”

Legal & General has been a very active investor that tracks more than 1,000 companies worldwide in 15 climate-critical sectors that are responsible for more than half of greenhouse gas emissions from listed companies. “We engaged in depth with 58 companies, of which 13 now have a net-zero target in place,” Godfrey says. “However, we divested across certain funds from four companies, and nine remain on our existing excluded list. A total of 130, including 13 new ones, are subject to voting sanctions.”

Godfrey says that a failure to achieve ESG objectives should not be feared if a company is moving in the right direction. “We’re not in the business of just signing pledges and saying, ‘Well, yeah, in 30 years’ time Legal & General will somehow be net zero.’ We try to be quite granular about the steps on the way.

The pace of change in society has never been this fast as the past year. The impact of climate change, the way companies and governments handle questions around privacy and data management, the pandemic as well as social movements relating to diversity and inclusion and racial injustice have all radically changed the landscape and playing grounds of organizations.
Marguerite Soeteman-Reijnen, executive board chair, Aon Holdings

For example, Godfrey says, about a decade ago the company set a goal to have women fill half the management positions by 2020. The company missed the goal but not by much. “But, you know, nobody really gave us a hard time, because we had genuinely made massive progress,” Godfrey says. “It’s also, frankly, important to be candid and honest about things. If you just say you didn’t quite hit the target, nobody will criticize you. But they certainly would criticize you for lying.”

Legal & General this year also began tying to ESG goals the discretionary compensation packages for the CEO and other executives. Godfrey says an ESG agenda can help drive larger corporate-risk solutions and ultimately help the bottom line. “If you’re good at ESG,” he says, “you also tend to be good at the hardcore financial skills of doing business, which reduces the sacrifices required. Secondly, ESG tends to act both as a risk-management framework and an asset-allocation framework to direct efforts effectively. Just in the energy space, there was a lot of movement toward renewable energy on a sustainability basis. And now, lo and behold, suddenly renewable energy makes economic sense. It’s not a thing for hippies. Doing well and doing good can run hand in hand basically.”

Indeed, the drive to ESG has been facilitated by evidence that the performance of ESG investment vehicles is outperforming general leading financial indexes.

Some insurers see ESG investing as key to reducing their own risk profiles over time. Kevin O’Donnell, the president and CEO of RenaissanceRe, announced in April the company would participate as an investor in two new BlackRock active sustainable ETFs for the transition to a low-carbon economy.

“As a global reinsurer,” O’Donnell said, “we are uniquely aware of the long-term risks of climate change due to our central role in protecting communities from its impact. Investing in transition-ready companies furthers our leadership in risk management, while advancing the sustainability of our own investment portfolio.”

Others praise a new carrier outspokenness on previously taboo social equity issues. “We are now seeing insurance company CEOs and board members comment on social injustice, and I think that’s admirable,” says Steve Gransbury, the head of specialty insurance for insurer QBE North America. “It’s important for organizations to reinforce their values—what they stand for—and communicate them. Policyholders want to see risk-management partners demonstrating their obligations and the role they play in the communities they serve. Moreover, our new employees, the emerging talent that is just starting their careers and the insurance industry leaders of the future, want to know we are doing our part and what we stand for.”

QBE announced a goal of $2 billion of impact investments—investments that deliver an environmental or social impact—by 2025. To date, the insurer has invested roughly $1.1 billion, Gransbury says, through the Premiums4Good initiative, which directs a portion of insurance premiums to impact investments.

Insurers, brokers and agents can work together to elevate ESG in the advising and decision-making process between them and their clients. “As a marketplace, we should articulate our individual sustainability planning, which poses a challenge, considering we all operate and guide amid inherent uncertainty,” Gransbury says. “Confronted by a pandemic and macroeconomic recovery, advisors should embrace responsibility beyond the transaction. Buyers expect a higher level of accountability for advice in making decisions beyond policy wordings and cost-effective premium indications. We need to continue the focus on new and renewal coverage choices that factor in the carrier’s commitments to sustainability and that bring a positive reflection of a customer’s analysis of reputation and like-mindedness in their colleagues.”

As all organizations face the increased scrutiny of their practices beyond financial returns, brokers face a complex role as risk-management consultants to their clients and as partners to industry stakeholders faced with their own changing landscape.

Related Content: The Evolving Risk of Reputation

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