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November 23, 2020

ESG: Doing Well by Doing Good

Summary:

Insurance is at the forefront of the environmental, social and governance movement, which may usher in a Second Age of Enlightenment.

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As many of you know, my primary professional interest and focus has long been on the impact of information technology on insurance ecosystem transformation. But today I’m addressing a very different subject. 

While the pandemic has had a number of enormous consequences, many of them horrendous, I would argue that it has also enabled several much more positive, longer-term changes in societal values and perspectives as we, the survivors, re-evaluate our higher-level purpose, priorities and concerns for our fellow man and our home, planet Earth. The insurance industry is at the forefront of this movement, which one day may well be thought of as the beginning of the Second Age of Enlightenment.

One manifestation of this shift is the emergence of ESG. Some of you may not recognize this acronym, but you soon will. 

About ESG (and D&I and more)

The term ESG (environmental, social and governance) was coined in 2005 in a landmark study titled “Who Cares Wins,” published during a conference of the same name held in Zurich. It was the first such initiative to bring together institutional investors, asset managers, buy-side and sell-side research analysts, global consultants, government bodies and regulators to examine the role of ESG value drivers in asset management and financial research. There was an immediate and remarkable degree of agreement among participants that ESG factors play an important role in the context of longer-term investment.

ESG originally referred just to the integration of environmental, social and governance factors into the investment selection process, but ESG has since expanded into corporate strategic philosophy and decision-making and has also been extended into other socially conscious and ethical considerations to embrace renewable energy, green initiatives, D&I (diversity and inclusion, which encompasses LGBTQ+, gender and racial equality and diversity and the Me Too and Black Lives Matter movements). That’s a lot of new thinking in a relatively short time.

Redefining the corporate mission

Even before 2020 began – a year that has permanently altered societal perspectives, values and beliefs – meaningful debate had begun about the mission of corporations and their obligations to society beyond simply maximizing shareholder value.

The 2019 Business Roundtable, which represents the chief executives of 192 large corporations, issued a joint statement that was signed by 181 of its members concerning the purpose of the corporation, essentially declaring that business leaders should commit to balancing the needs of shareholders with customers, employees, suppliers and local communities. 

2020 saw the strongest level ever of corporate commitment to sustainability – up 19% from 2019, according to S&P Global Market Intelligence. This accelerated participation comes at a time when investor interest in ESG funds continues to increase. According to S&P, many large investment funds with ESG criteria have outperformed the broader market during the pandemic.

And according to McKinsey in a recent article on the case for stakeholder capitalism, “The business ecosystem is evolving; those who resist will find themselves not only on the wrong side of history but also at a competitive disadvantage.”

This enlightened thinking is very closely aligned with and derivative of the principles of ESG and diversity and inclusion. Over the past 15 years, corporate focus on ESG has evolved to encompass a lot more than just investment criteria. In fact, ESG has become a proxy for how entire markets and societies are maturing and is becoming more of a benchmark for how the financial community, shareholders, stakeholders, observers and the general public perceive and value a company.

See also: ESG Means ‘Extremely Strong Gains’

The D&I dividend

Diverse viewpoints and backgrounds make for a more vibrant and innovative team. “Companies in the top quartile for ethnic diversity are 33% more likely to have industry-leading profitability.” This statistic is part of the catalyst behind “Launch With GS,” Goldman Sachs’ $500 million investment strategy grounded in diversity. Diverse teams drive strong returns and increase access to capital and facilitate connections for women, Black, Latinx and other diverse entrepreneurs and investors.

The insurance industry is embracing ESG and D&I as aggressively as any industry.   

Insurance Industry Initiatives in ESG and D&I

  • The Dow Jones Sustainability Index (DJSI), lists the top-performing companies in each of the 61 industries represented in the index. Zurich Insurance Group earned the honor in the insurance segment this week relative by outperforming in principles for sustainable insurance, financial inclusion and risk and crisis management. 
  • In a July 2020 Milliman report titled “ESG considerations in the insurance industry,” Milliman reported that some insurers are setting standards for their investment managers with respect to how they take ESG factors into account, including Standard Life and AXA.   
  • Commenting during the 2019 Business Roundtable, Tricia Griffith, CEO of Progressive, stated, “CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it’s the most promising way to build long-term value.” Michael Tipscord, CEO of State Farm, added that the company agreed with the Roundtable joint statement even though it did not sign the statement because they do not have shareholders (though some would argue that policyholders of such a large mutual company are the same as shareholders). 
  • To help create a strong and inclusive workplace culture, Sun Life is launching a peer learning program designed to guide the insurer’s employees toward diversity. Sun Life has also invested in Hive Learning’s Inclusion Works – an interactive digital inclusion program. The program embeds tiny, but powerful, acts of inclusion into daily behaviors and routines. The program was piloted over the past 18 months, with 1,500 employees in North America and Asia participating. 94% felt confident demonstrating inclusive behaviors at work.
  • Northwestern Mutual, through its foundation, in partnership with its diversity and inclusion team, announced a 2020 commitment of $1.6 million to All-In Milwaukee to fund its new Talent of the Future program for area high school students over the next four years. This effort is emblematic of the company’s focus on advancing change in Milwaukee and continued commitment to diversity and inclusion.

Insurance Industry Impact

These fundamental changes in corporate values and actions will have real impact on all industries, notably insurance, in many ways. Insurance companies invest enormous amounts of capital and have real influence on the policies and behavior of the recipient companies. Insurance companies provide a very large percentage of all consumers with protection products and services and are highly responsive to the changing values of these customers, many of whom embrace some or all elements of ESG and D&I.  Environmental threats, specifically climate change, hurt insurance companies, as vividly demonstrated by the catastrophic human, economic and property loss costs of this year’s record-setting wildfires and record-setting hurricane damage. 

And “green” ESG initiatives will ultimately have tremendous impact on the very fundamentals of designing, underwriting and managing the risks of auto and property insurance.

Climate change, carbon limits and the Paris agreement 

To meet the terms of the Paris Agreement on climate change, which aims to limit global warming to 1.5 degrees Celsius above pre-industrial norms by 2050, developed economies need to phase out most thermal coal by 2030, with a global phaseout by 2040. Some of the world’s largest insurers and pension plans are warning companies they invest in not to finance, insure, build, develop or plan new thermal coal plants, or face sanctions, including possible divestment. The Net-Zero Asset Owner Alliance, whose members include German insurer Allianz and manage a combined $5 trillion in assets, is making the call after a recent commitment to set tougher carbon limits on their portfolios.

Such a change could help drive more examples like the fascinating, recently announced joint venture between Volkswagen and Greece, in which Astypalea will host a grand mobility system experiment. Astypalea, a small island in the southern Aegean Sea, covers just 39 square miles, has a permanent population of approximately 1,300 and is visited by some 72,000 tourists annually. 

Currently, energy demand is almost entirely met by fossil fuel sources. The island aspires to become a pioneer for sustainable tourism over the coming years and is therefore backing sustainable mobility. The transport system on the island will switch to all electric vehicles and renewable power generation. New mobility services such as vehicle-sharing or ridesharing will help reduce and optimize traffic. Energy will be primarily generated from local power sources such as solar and wind. The project initially will run for six years. The goal is to have Astypalea become a model island for climate-neutral mobility.

At the center of the project is an entirely new, cutting-edge transport system with digital mobility services, including an all-electric year-round ridesharing service designed to take the currently very limited local bus service to a new level. Part of the traditional vehicle rental business will be transformed into a vehicle-sharing service offering e-scooters from the Volkswagen Group’s SEAT brand and e-bikes in addition to electric cars. This alone will help to significantly reduce the vehicle fleet on the island. In total, some 1,000 electric vehicles will replace about 1,500 vehicles with combustion engines. Volkswagen has just started to roll out its electric models to the market, with the introduction of several new models planned over the next few years. Commercial vehicles from local businesses as well as utility vehicles on the island – such as police vehicles, emergency services transport and public sector fleets – will also be electrified. Volkswagen will install its Elli chargers across the island to ensure a comprehensive charging infrastructure offering about 230 private and several public charging points.

Volkswagen CEO Dr. Herbert Diess stated, “E-mobility and connected mobility services will significantly improve the quality of life, while contributing to a carbon-neutral future.”

Diversity and women in insurance

The Women in Insurance Initiative (WII) is a consortium of organizations throughout the insurance industry dedicated to taking substantive and measurable action by recruiting, mentoring, and sponsoring women to drive equality in career advancement and leadership throughout the insurance industry. The mission of the WII is to increase diversity and inclusion by developing insurance as an opportunity-rich industry for women.

Between June and September 2019, the Women in Insurance Initiative surveyed a diverse group of companies in the insurance industry to investigate how salaries and roles relate to gender. The survey represents more than 30,000 insurance professionals and found that women in insurance are:

  • Underrepresented among executives; only 29% of senior leaders are women.
  • Increasingly in the minority at higher salary levels – $100,000 to  $119,999 is the salary range where men begin to outnumber women.
  • Highly loyal to their companies; 62% of those who stay 20 years or longer at a company are women.

Insurance companies are also lagging in efforts to promote gender diversity; 

  • 78% of insurance companies lack internal targets for gender diversity
  • 61% of insurance companies with internal targets don’t publish their progress.

The results are clear: Women are working longer at the same company than men. That loyalty, though, is not aligned with promotions and increases in pay. Women tend to occupy the lower corporate levels and progress to the first managerial level, but fewer climb the ladder to the next level. 

See also: Property Claims: It’s Time for Innovation

Racial diversity

Just this week, S&P Global Market Intelligence launched a series on diversity in the U.S. insurance industry with an article titled, “Black representation in insurance grows slowly as industry seeks to diversify.” The article is loaded with interesting facts and figures and definitely worth your reading. What struck me, however, beyond the simple fact that this highly regarded global market intelligence and research firm was writing this series, was its clear-eyed introductions to the topic: “With growing calls for diversity and a dearth of new talent, the U.S. insurance industry has made some progress in adding more people of color to its ranks over the last decade.”

Here are few highlights from the piece to pique your interest:

  • insurance regulators have also taken up the cause. After George Floyd’s death while in police custody earlier this year brought racism into the national spotlight, the National Association of Insurance Commissioners launched a Special Committee on Race and Insurance to examine levels of diversity in the industry.
  • systemic racism became part of the conversation for corporate America. Some insurance industry leaders say that improving racial diversity on their executive teams and boards will lead to better diversity throughout the organization.
  • the insurance industry is outpacing the country in general at bringing in minorities as employees. The nonwhite insurance workforce was 21% in 2019, up from 15% in 2010. The Black/African American insurance workforce was 12% in 2019, up from 9% in 2010.   

At a recent APCIA conference about corporate responsibility, Jack Salzwedel, the outgoing CEO of American Family Insurance Group, said: “If this is going to be a movement as opposed to a moment, then these tactics, these ideas around talent and markets, have to fit into your business strategy.” 

I believe that, although it took a pandemic to give ESG serious momentum, this long overdue re-evaluation of our industry and values is the most important, exciting and promising development of my career. Let’s welcome and actively support this second Age of Enlightenment.

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About the Author

Stephen Applebaum, managing partner, Insurance Solutions Group, is a subject matter expert and thought leader providing consulting, advisory, research and strategic M&A services to participants across the entire North American property/casualty insurance ecosystem.

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