By R. Ivy Riggs, CPCU, ASLI, AIS
Paper or plastic? Tofu or steak? Blue or red? In these days of rampant polarization when virtually any choice can come with an unwelcome label attached, producers may often feel they walk a knife’s edge in presenting their products and services in a way most likely to appeal to their clients. Nowhere is this more evident than in the use of the “ESG” designation as a political football. But is it warranted? An impartial review of the facts will demonstrate how a clear-eyed survey of the current landscape can increase one’s value to their client base.
Developed as a shorthand for “Environmental, Social, and Governance”—all key factors in the management of any business—these traditionally non-financial considerations have a history of being difficult to quantify, or even to agree on what they mean. Indeed, the Environmental factor is often reduced to a stated concern about climate change or a need to divest from carbon-intensive industries. Such an oversimplification is inaccurate, while a closer examination reveals far more nuance. Environmental threats to achieving business goals include energy usage, type and volume of waste streams, waste disposal practices, responsibility for contaminated land, and regulatory compliance. Each of these risks can be managed through a well-crafted environmental insurance program.
Even so, a budget-conscious client might ask, “Why should I care about environmental risk if I already have D&O coverage? Isn’t ESG just a liability for Directors and Officers?” The answer is an emphatic NO! While certainly D&O insurance has an increased exposure tied to growing concern for ESG, such policies usually feature not only a pollution exclusion but also exclusions or restrictions on coverage for civil fines and penalties. Addressing these loopholes through companion environmental insurance policies is a solid strategy, but there are other points to bring up when trying to convince a reluctant insured.
First is the involvement of the Securities and Exchange Commission (SEC). Under the Biden Administration, the SEC has established a Climate and ESG Task Force within their enforcement division. This group is charged with proactively identifying ESG-related misconduct, specifically including detecting attempts by corporations to “greenwash” their images to appear more environmentally sustainable than they truly are. When identified, such attempts may result in serious penalties, both directly from fines and indirectly from damage to corporate reputation and loss of goodwill. But what if one’s clients aren’t publicly traded? Why should they care about ESG?
One answer concerns the rating agencies that evaluate the relative strength of insurance companies. The oldest and most well-known of these—the A.M. Best Company—was the first to become a signatory to the United Nations Environment Programme’s Principles for Sustainable Insurance. In doing so, they reiterated their stance that “ESG elements play an important role in the financial strength of an insurance company,” and therefore in their ratings. In fact, since 2020 roughly 10% of A.M. Best’s rating adjustments have been attributable to ESG factors. This fact becomes important to the average client because companies both big and small are parties to contracts that require them to carry coverage with insurers of a certain caliber. Should their carrier’s rating drop due to ESG or other factors, they will have to go back to market for a more highly rated provider to stay in compliance.
Another reason to care about ESG is underwriter selectivity. Those responsible for selecting, evaluating, and pricing desirable environmental risks to cover are working for insurers that are also being judged against their peers in the marketplace. Consequently, as part of their own efforts to support sustainability and profitability, they may actively avoid taking on accounts that fail to align with goals of reducing carbon footprints, mitigating pollution, preventing loss of biodiversity, and transitioning to renewable energy. In short, those on the wrong side of the “E” pillar may find themselves increasingly uninsurable.