FTI Consulting’s Co-Leader of Insurance Services, Wendy Shapss, answers the question making its way through the hallways of insurance companies as more carriers choose to shed clients deemed non-ESG compliant.
n recent years, the corporate world has been increasingly attuned to environmental, social and governance (ESG) principles. Going well beyond traditional corporate social responsibility (CSR) guidelines, companies are actually aligning their business plans with stated ESG goals. Europe has been at the forefront of the movement. As Alan Jope, CEO of the British-Dutch multinational Unilever stated in 2018, “It is not about putting purpose ahead of profits, it is purpose that drives profits.”
While the COVID-19 pandemic has upended nearly every aspect of business for companies across industries, the application of ESG principles is still very much moving forward. “S” tenets in particular are receiving close attention as the public scrutinizes corporate response to employee well-being and human and civil rights injustices.
Prior to COVID-19, the U.S. insurance industry appeared to be inching closer toward greater ESG adoption as evidenced by the kinds of companies and organizations it was choosing to underwrite and invest in. The most prominent example of this development has been the move to end support for the coal industry, citing the deleterious effects of coal mining and coal-fired power plants on the environment.
Leading that charge was Chubb: In July 2019, the Switzerland-based multinational became the first insurance company with a U.S. presence to say goodbye to coal when it announced that it would stop the underwriting of risk in coal-related businesses and drop investment in the industry as well. The Hartford and Liberty Mutual announced similar plans in December of last year. U.S. companies are taking cues from Europe, where every major insurer has restricted its financial involvement with the coal industry.
We expect the trend of divesting to expand into other business sectors associated with negative environmental impact. Already, a few insurance companies have imposed restrictions on investing in and insuring tar sands extraction and pipeline infrastructure projects. Fossil fuel companies are likely to come under the microscope, too.
It will also be worth keeping an eye on how the divesting trend evolves amid the current and post-pandemic economic fallout. In a few short months, we have seen the boundaries between profits and purpose overlap as corporations have scrambled to respond to a new reality. Some consumer insurers, for instance, have already extended credits and other benefits to strapped policyholders.
We can't yet predict the long-term financial impact of the shift toward ESG on the insurance industry. (Chubb did say in its statement announcing the policy that it expected the divestiture to have minimal impact on premium revenue and no impact on investment performance.) But based on our experience, insurance companies will want to review their bylaws and other areas related to corporate governance to take into account concerns of key stakeholders. As ESG principles continue to influence U.S. companies across multiple sectors, the insurance industry can align with the trend and stay a step ahead through foresight and appropriate planning.