The end of the road for greenwashing

With the German police raiding asset manager DWS, the US Securities and Exchange Commission (SEC) investigating Goldman Sachs, and BNY Mellon forced to pay a $1.5 million fine, opportunities for “greenwashing”—in asset management at least—seem to be coming to an end. Could insurance be next?

To discuss this topic and the other vital issues for insurers around sustainability, Intelligent Insurer and DLA Piper’s recent webinar brought together a panel of experts: Tricia Hobson, partner and head of insurance sustainability and environmental, social, and corporate governance (SESG) at DLA Piper; John Scott, group head of sustainability risk at Zurich; Rachel Dugan, chief legal officer and leader of the ESG council at SiriusPoint; and Nir Kossovsky, chief executive officer at Steel City Re, which provides parametric ESG and reputation insurances

As panellists noted, while ESG issues are not new, consideration of them has rapidly become prominent in the last few years. Analysis by asset manager Pimco has shown that from 2005 to mid-2018, the term was mentioned in fewer than 1 percent of earnings calls. By May 2021, however, it was included in almost 20 percent.

In one sense, this may reflect just a change in initials, when companies previously focused on corporate social responsibility (CSR), but in another, it—and the recent actions against ESG funds—represents a new phase in the evolution of ESG.

As Kossovsky sees it, the first phase from 2014 to 2019 was largely aspirational. The second, from 2019, when the Washington lobby group Business Roundtable updated its  Statement on the Purpose of a Corporation to move away from shareholder primacy, took it to the next step.

We are now, said Kossovsky, in the third phase: “Where companies face the risk of ESG as a result of overpromising and underdelivering.

“While many are doing good work, we are discovering that much of the climate promise movement has been little more than a public relations effort,” he added.

A desperate need for standardisation

In part, the risk will come from regulation and legislation. While the EU and UK have the mandatory Task Force on Climate-Related Financial Disclosures (TCFD), as Dugan pointed out, the US SEC is also mandating that New York Stock Exchange-listed companies make climate-risk disclosures from next year.

“It all requires a tremendous undertaking in making sure that climate risk considerations are truly embedded in all parts of the business,” she said.

Even this would be complicated enough given the different regulatory requirements of regulation and the myriad of standards, frameworks and ratings. DLA Piper’s analysis found close to 600 in operation. There is, said Hobson, a “desperate need” for globally recognised rules similar to those for auditing and accounting.

“We hope there is some coalescence from a global perspective because it’s going to be most helpful for rating agencies and investors to be able to compare apples to apples,” she added.

The pressure for companies to embrace ESG is coming not simply from regulation.

“One of the challenging things for companies to navigate is that the regulation is in its infancy and the societal and other drivers are in many ways much more advanced,” said Hobson.

“Regulation will always be the minimum in this space for companies, but very much a minimum in the sense that the external drivers, be they capital, investors, employees or other voices, will be ahead of the curve in many ways.”

No escape from complexity

In some ways progress is being made, particularly when it comes to climate risks. The UN-convened Net-Zero Asset Owner Alliance, for instance, has created a protocol to enable insurers such as Zurich to set targets towards moving to net zero in its investments, Scott pointed out.

Similar metrics and with them a methodology to move to net zero within the underwriting portfolio have yet to be created, but the Net-Zero Insurance Alliance (NZIA) is working with Partnership for Carbon Accounting Financials to remedy this and develop the  first global standard to measure and disclose insured greenhouse gas (GHG) emissions.

“That will be the de facto standard to set the emission structures within the underwriting portfolios,” he said.

There is, however, no escaping the complexity, not least because managing climate and broader ESG-related risks requires more than just reporting them. In many cases, for instance, climate is a “risk driver” rather than a risk itself, giving rise to many indirect consequences.

For example, the transition away from thermal coal as countries eliminate the fuel, could increase employee liability risks as financial constraints on the industry squeeze spending on health and safety training—as has happened in recessions in the past.

Working through what ESG means for each business and the risks it raises will be a challenging process due to the breadth of the issues. As Dugan said, there is an increasing array of tools to help, but no “magic bullet”.

What may help are efforts to increase boards’ understanding of the issues and a slight re-emphasis on the final letter in the initials of ESG. Much of the spotlight in recent years has been on environmental aspects. Ultimately, however, it’s corporate governance that may prove most important, and governance models that need to adapt to give boards and senior managers the oversight they need to protect their organisations.

“Having acted for directors, I get to see what goes wrong. When it goes horribly wrong, it always stems back to governance,” said Hobson. “It’s an area that’s ripe for companies to take a fresh look at.”

To watch this webinar in full, please click  here.