Adam McNestrie
...while admitting that politically I share many of the stated ambitions of the CEOs who have been woken up.
My arguments included concern that the politicization of business risked important questions being resolved by companies that have no direct accountability to citizens. I also warned that there were dangers that leaving the resolution of key political questions to companies risks that they will cherry-pick what they seek to address in order to play to the gallery.
I also set out my natural skepticism around a situation where so many CEOs discovered their consciences as a key driver of decision-making in their businesses at the same time, pointing to the likelihood that the stated reasons for change were not the real reasons.
And last of all, from a shareholder perspective, I noted that CEOs had effectively taken additional control around the fate of their businesses without asking investors. Alongside this, investors now have additional challenges in understanding how companies will deal with the inevitable trade-offs between their different stakeholder groups. Plus, by adding a raft of new responsibilities to the CEO's calendar, there is inevitably going to be a knock-on effect felt elsewhere.
I want to take these arguments a little further today and set out an alternative ESG manifesto, much of which is not incompatible with existing initiatives – some or many of which could be maintained alongside adopting the below if companies feel they have a strong enough conviction around the importance of doing the right thing.
Before people rush to write in to tell me that I am a starry-eyed innocent, these are radical ideas that I offer in the role of a devil’s advocate to stimulate debate in the sector.
To me, seeing the industry start to move in this kind of direction would close off the questions I have around the gaps between rhetoric and reality – but such an outcome carries extremely long odds.
First, all companies in the sector could agree to pay their fair share of tax in the countries where they make their money, and accept an appropriate level of oversight.
One of the first social duties of companies is to make a meaningful contribution to funding government through tax. This is socially useful, but it is also of course essentially a reciprocal trade given that companies rely on the infrastructure – such as schools, hospitals and legal systems – in the countries where they operate.
Some insurance companies do this; many do not. Instead they optimize their corporate structures for tax, utilizing low-tax jurisdictions such as Bermuda, the Cayman Islands, Ireland and the Netherlands.
This could be unwound over time, with the tax planning of organizations focused around the true geography of their profitability.
One of the first social duties of companies is to make a meaningful contribution to funding government through tax
Alongside this, the industry's other political obligation is arguably to ensure that it does not impact the broader economy or individual policyholders through either individual firm collapses or systemic issues.
To fulfil this goal, it could cease fighting and lobbying governments for more favorable regulation, as well as discontinuing efforts to seek regulatory arbitrage by holding capital offshore in more accommodating jurisdictions.
Instead, it could take a more constructive attitude with regulators, and accept there is a positive societal benefit to allowing the industry to be watched and constrained.
Second, (re)insurers could make a major social contribution by agreeing to pay more claims, or offering coverage which they would otherwise consider uneconomic.
Insofar as there is a social purpose or mission undergirding insurance, it is that it makes people whole when something goes wrong. This ensures that people and companies more resilient in the face of all kinds of reverses, and facilitates things which could not be done absent a safety net.
As such, the biggest thing the sector could do to make the world a better place is to commit to pay more claims.
There are a number of ways that this could be done.
(Re)insurers could establish a "social utility" framework which claims teams could utilize when assessing the validity of a claim, encouraging the issuance of more grey-area or ex-gratia pay-outs.
Or (re)insurers could generate a list of clients at the start of the underwriting process that are judged to be socially positive, with these firms then put through a different claims assessment to clients where the relationship is 100% commercially driven.
Alongside this, there could be a hypothecation of profits from "bad clients" to an internal ESG fund, which would then be passed back to "good clients" through ex-gratia payouts.
The biggest thing the sector could do to make the world a better place is to commit to pay more claims
Another avenue to pursue could be treating clients differently through the underwriting process. A (re)insurer committed to making a positive difference through their underwriting could agree to participate in national schemes for nat cat and terrorism at either a discounted price or for free.
An obvious way of taking this approach to underwriting right now would be to agree to provide pandemic BI cover (although not, of course, limitlessly). This could come in the form of an offer to make meaningful capacity available to government backstop schemes.
Or, if these really cannot be got off the ground, then making a small (and carefully controlled) amount of aggregate available to the private sector at whatever the market-clearing price is to small businesses in areas like hospitality.
Third, brokers and carriers with risk management capabilities could make their services available to certain clients either pro bono, or on a discounted basis.
As the core social mission of insurers is to make insureds whole after a reverse, brokers’ mission is to help clients manage risk. They do this by providing advisory services, structuring deals and then securing capacity.
The biggest social contribution they could make would be to recognize that these services could be offered to a deserving clientele without requiring standard commercial arrangements.
If business were being conducted on a fee basis, fees could be fully or partially waived. If it were being remunerated on a brokerage basis, this could be rebated.
A deserving client list could include organizations like not-for-profits, social enterprises, government, public entities like schools or hospitals, or even sustainable private enterprises.
Similar work could be undertaken by large risk-management insurers. Firms such as Zurich, Allianz and FM Global have significant expertise that is currently provided to Fortune 500 clients as part of their insurance arrangements. Others would benefit if this were offered pro bono, or discounted.
Counting the cost
Without unreasonable effort, companies would able to provide significant disclosure around these initiatives.
Underwriters could disclose the amount they had paid out in claims ex gratia, and quantify its financial impact to the combined ratio and their return on equity.
It is difficult to argue that a company is greenwashing, or ESG-investor hunting, when it is haircutting its numbers to deliver on a social purpose
They could also do things like quantify the delta between a tax-optimized structure and their actual tax rate. Deloitte, PwC, EY and KPMG could even offer this service for free to companies they audit to ensure firms are doing what they say they are.
Brokers would also be able quantify easily the amount of revenue that they had surrendered, and be transparent around the margin foregone.
These undeniable steps and the clear disclosure would leave no real space for argument around whether companies are genuinely trading off returns/margins in order to do the right thing.
It is difficult to argue that a company is greenwashing, or ESG-investor hunting, or seeking to placate activists or pander to staff when it is undeniably haircutting its numbers to deliver on a social purpose.
Moreover, this would be insurance companies actively setting about addressing some of the things people hate about insurance companies, or financial services businesses more generally. That they do not pay their claims, that they favor offshore domiciles, that they want to evade regulation so as to run excessive amounts of risk.
So what?
I present the above not as a lecture to management teams who are trying to navigate their way through extremely difficult waters here, but more as a thought experiment around how you would build an ethical sector from the ground up.
Because if CEOs are really serious about what they are saying on the centrality of ESG, it would seem that a strong case could be built from those premises to consider the kind of steps set out in this alternative manifesto.
The very limited (but not zero) take-up for such ideas suggests either that the industry is not thinking radically enough about how to embed ESG, or more likely that it is comfortable with some kind of gap between management rhetoric and reality.
Which may mean that while the industry is now clad in ESG clothes, it remains its old self underneath.
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