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Brokers and insurers have long focused on helping companies mitigate climate risks, but managing a broad spectrum of environmental, social and governance concerns is becoming a critical part of how the industry does business.
Employees, policyholders, investors and ratings agencies, in addition to climate activists, are increasingly scrutinizing how businesses, including brokers and insurers, address a range of ESG-related issues, including environmental stewardship, climate change, diversity and inclusion, racial justice and workplace conduct, experts say.
In June, an activist investor forced the board of Exxon Mobil Corp. to elect “climate-aware” director candidates, and in May a court in the Netherlands ordered Royal Dutch Shell PLC to reduce carbon dioxide emissions by 45% of 2019 levels by 2030. Also in June, Legal & General Investment Management, Britain’s biggest asset manager, dropped American International Group Inc. and three other companies from several of its funds over what it called “insufficient” response to climate change.
A changing regulatory and legislative landscape is also pushing companies to be more transparent about their ESG practices. As a result, brokers and insurers, like other financial institutions, are under pressure to make more detailed ESG disclosures, and as the U.S. shifts toward mandated disclosure requirements the businesses may be exposed to new risks (see related story).
Meanwhile, litigation arising out of ESG and sustainability issues is on the rise.
ESG covers a broad range of topics and is becoming a key driver of business strategy for insurers and brokers, said David Sherwood, a Stamford, Connecticut-based managing director at Deloitte & Touche LLP.
The primary ESG focus of many companies has been on climate change, but there are other important components to consider, Mr. Sherwood said. These include “S” issues, such as human capital, data privacy and cybersecurity, as well as “G” issues such as business ethics, corporate governance, board responsibilities and executive compensation.
“When you look at climate and some of the drivers behind that and the impact it will have on businesses and society globally, and you look at some of the other risks within the ESG categories, such as cyber, then you can understand why it has the attention of insurers and brokers,” Mr. Sherwood said.
Insurers face broad ESG risks because they affect both their assets and liabilities, said Isabelle Santenac, global insurance leader at Ernst & Young, in Paris.
As investors, insurers initially focused on the asset side, in terms of where they invested their money and how they could have an effect as an investor, she said.
“Now, what we see is there is a clear shift and they are focusing on the liability side, on what the risks are and what the impact of ESG is on the risks they write,” Ms. Santenac said.
Many insurers have set emissions targets for their organizations and a growing number are restricting coverage for companies that build or operate coal mines and plants, for example.
Brokers have an important role to play helping policyholders understand what their ESG risks are, what coverages they may need, and risk management steps, experts say.
As climate change risks evolve, brokers can guide businesses to design a sustainable insurance program, which embeds and raises awareness of ESG issues, and explain how they can adapt to environmental conditions to be better prepared, Ms. Santenac said. Many insurers and several brokers have signed on to the United Nations’ Principles for Sustainable Insurance, a global sustainability framework that aims to encourage greater integration of ESG issues into insurance.
It is in insurers’ interests to encourage their customers to join in the race to net zero emissions, said Nigel Brook, London-based partner at Clyde & Co LLP.
“Ultimately, businesses that don’t care about human rights, environmental degradation, and don’t care about governance, are not sustainable and won’t perform as well. It makes sense that the companies that get things right will perform better,” Mr. Brook said.
Corporate governance, ESG integration, labor relations and human capital management are material issues for insurers and brokers, said Sercan Soylu, Toronto-based associate director, insurance, real estate and asset management, at Sustainalytics, a unit of Morningstar Inc. (see related story)
Recent mergers and acquisitions moves, in the brokerage sector especially, underscore how important it is to manage these issues, Mr. Soylu said.
As intermediaries, brokers have a strong governance responsibility in terms of the products they market and sell to policyholders, he said.
J. Powell Brown, president and CEO of Brown & Brown Inc., said ESG strategies are part of good business practices. “It will make us and all other companies better,” he said.
For a brokerage, the social and governance aspects to ESG are more significant, while the “E” in ESG is less so because while brokerages have an environmental responsibility, they are not like an oil company that has extensive environmental exposure, Mr. Brown said.
In March, Brown & Brown published its first ESG report, a 28-page document that it said is intended to hold the company to a higher level of accountability. The report, which includes information on a range of topics, including ESG governance, diversity and inclusion, and climate change mitigation, will allow Brown & Brown’s “teammates, investors, carrier partners, and customers to have better insight into the way we do business,” Mr. Brown said.
Katherine J. Brennan, general counsel of Marsh LLC in New York, said ESG issues are playing an increasingly important role in attracting and retaining staff because employees and job candidates don’t want to work for an employer that doesn’t address these issues.
From a business perspective, Marsh is seeing an increase in request for proposal plans from clients to work with companies that are committed to ESG, while shareholders are also looking at corporate ESG practices when deciding where they want to invest, she said.
“As a company and collectively as an industry, we have a platform to enact change in many of these areas, and because we have that platform we have a responsibility to drive change in many of those areas,” Ms. Brennan said.
Parent company Marsh & McLennan Cos Inc. released its first ESG report at the end of the first quarter providing more disclosure on a range of ESG-related areas, from how it measures its carbon footprint to how it uses data to manage its workforce.
Several of the major brokerages have publicly outlined climate pledges and commitments in their ESG reports.
In its 2020 Impact Report, for example, Aon PLC outlined its commitment to achieve net-zero greenhouse gas emissions by 2030. “The transition to net-zero is a complex, global challenge. There is tremendous opportunity for Aon, and our industry in general, around creating innovative new solutions and services that support our clients’ efforts in achieving their sustainability goals,” the report said.
Eric Andersen, president of Aon, said the brokerage wants to be “part of the solution.”
“We want to help using the risk mitigation skills we have, the risk transfer capabilities, the access to alternative capital, modeling to be able to help these clients as they transition,” Mr. Andersen said.
Governance of ESG risks for the brokerage sector extends from the boardroom to the projects they choose to take on and the supply chains with which they engage.
Marsh McLennan last year developed a set of client engagement principles aligned around United Nations sustainable development goals, for example. The principles are designed to bolster its commitment to sustainable goals around health care, human dignity, gender equality, energy security, access to reliable and sustainable energy supplies, and job creation.
The principles have been rolled out to MMC’s business leaders, and protocols and operational lines within the businesses have been established so that if matters come up that could potentially conflict with those goals, they can be escalated, Ms. Brennan said.
“In that way we are bringing different voices to the table to review proposed projects and evaluate whether a work can proceed,” she said.
Litigation on a range of environmental, social and governance issues, such as climate change, pollution, diversity and CEO pay, is on the rise, putting pressure on companies to proactively manage ESG risks.