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Insider in Full: Opinion: The ESG Awakening – A critique

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    • Environment & Climate
    • Topical Trends

The last two years have brought a seismic shift in the way society feels about the ethical responsibilities of businesses...

Adam McNestrie

And – both as cause and effect – the same period has seen the rise of the politically engaged CEO.

Many of the causes championed by executives (climate change, social justice, voting rights, etc) are creditable and progressive. As a citizen the first instinct – my first instinct – is to applaud these moves.

But on reflection, there are good reasons to be sceptical of this movement, and I do not think that caution is inconsistent with sharing many of the stated ambitions of these CEOs.

First, I want to acknowledge the debt that my thinking owes to a very penetrating leader from the Economist in April (See: The political CEO).

That article forensically dissects some of the dangers emerging from the trend towards the politicisation of business leaders – and I share most of its concerns.

Many of the issues arise from the close commingling of politics and business. If businesses exercise too much sway in the political realm, it starts to impinge on questions that are best resolved by governments or regulators.

This is challenging because it creates a situation where political questions are resolved by companies that have no direct accountability to citizens.

In addition, these dynamics can encourage companies to cherry-pick issues to take a stand based on what seems easy or crowd-pleasing.

Much difficult political work reflects extremely challenging trade-offs, with decisions that privilege some groups and hurt others. This is work for governments.

In addition, if businesses get too close to politics and build excessive political sway, there is a danger that they will ultimately use that influence to lobby for changes in their own favour.



Governments are ultimately needed to keep companies in check and regulate marketplaces, which tend towards inefficiencies and market failure when left to themselves.

Companies will always face the temptation to misbehave and look for a free ride. Indeed, we are seeing this play out right now with the historic agreement on a global minimum corporation tax rate.

This is an initiative partly geared towards obliging big tech companies – firms that take every opportunity to advertise their virtue and ideological purity – to pay their fair share of taxes to benefit broader society.

Making an appropriate contribution through tax to broader societal needs tends to be a place that companies draw the line when it comes to their ethical obligations.

Why now?

If my first set of reservations is political, my next is probably more a matter of taste. Journalists tend to develop quite sophisticated bullsh*t sensors.

My issue is that so many CEOs are discovering their consciences all at the same time. The question of what it is to be virtuous goes back to the ancient Greeks.

The idea of doing the right thing is not new.

So the dramatic nature of the behaviour shift should at least prompt the question: Why now?

And as much as there have been some shocking and polarising political events over the last year or two, we should ask the question from a position of scepticism around these Damascene conversions.

Normally when you end up with collective behaviour of this kind, there is an element of coercion at play – someone placing the members of the group under pressure.

Some of this certainly seems to be operating via the asset management industry (which is itself making money from the ESG label), and some reflects more assertive regulators. Staff influence on leaders is, I suspect, overdone as a factor, but the role of political activism is probably underplayed.

I understand that board members and CEOs are now under almost constant attack from activists, including shaming threats and mass email campaigns. This has definitely played a role in focusing minds.



The shareholder perspective

The position of scepticism I have around CEO motives is where I start when assuming the shareholder perspective as well.

The move from the companies in the US Business Roundtable to announce in 2019 that they would deviate from solely pursuing shareholder value to adopt a perspective balancing the interests of all stakeholders is on the surface a massive shift. (If the announcement is taken as sincere in all cases.)



It was also a unilateral shift that wasn't approved by shareholders, as much as there has been some guerrilla activity from investors pushing for it. And as blogger-cum-InsurTech entrepreneur Ian Gutterman has persuasively argued, this basically means CEOs assuming more power over how their businesses are run.

In addition, shareholders are likely to have challenges in understanding how companies will deal with the inevitable trade-offs.

How do you assess the relative importance of profitability and doing the right thing? What do you do when doing the right thing for your customers is doing the wrong thing for your staff? Or doing the right thing for your community is costly to your shareholders?

Interests will inevitably diverge. The hierarchy of stakeholders matters, or else the framework that will be used to determine action.

It is also difficult to escape the idea that this ESG crusading at its worst can prove a distraction from the core role of the CEO.

Amidst the confusing socio-political phenomenon of the ESG Awakening, I also have some sympathy for CEOs (some of them at least) looking to chart a path through hazardous waters. Let's assume for the sake of argument that they are primarily focused on maximising shareholder value, and that they operate with the typical time horizons of a public company CEO.

I have three points to make here thinking about this group.

First, pretending this shift is not happening won't work.

Radical changes in public discourse and early moves from some companies have created expectations around behaviour.

Ignoring that exposes companies to a range of adverse outcomes.

These could manifest themselves in the form of restive staff, angry activists, a shareholder revolt or regulators looking for companies to make an example of.

Berkshire Hathaway has already garnered negative publicity – and a rebuke from one of the shareholder proxy services – by declining to provide group-wide disclosure on climate, even as it stressed its constituent parts are making steps on this front.

Being labelled a do-nothing business or a laggard is a recipe for all kinds of trouble.

Second, it seems unlikely that commercial lines insurers and brokers are receiving full recompense for the financial and opportunity costs associated with leaning hard into ESG.

Walking away from lines of business with rapidly rising rates, and declining potential clients that would otherwise fit within underwriting criteria, will impact underwriting returns at the margin.

While commitments to invest to reach carbon neutrality early, establish new senior D&I roles, and build company foundations all layer on costs.

Embracing new areas of underwriting like renewable energy sit well in investor presentations, but tend to be consistently loss-making.

And for those looking to set up ESG underwriting units, or even to launch new businesses: ESG is not a business model in itself; it is a set of chosen constraints on trading.

Of course, these initiatives have a relatively high likelihood of working from a pure capital-raising perspective given the scope right now to leverage ESG-specific flows of money. But successfully raising money and building a successful business are very different.

Some of this calculus may be different in other consumer-driven sectors, but in B2B financial services, the dividend in terms of new business for those perceived to be the most advanced on ESG seems likely to be small.

Third, the risks run in trailing competitors, and the modest rewards for leading, point towards the wisdom of heading for the middle-of-the-pack on ESG.

In periods of uncertainty, companies often look to the approach of their peers. In this case, where the benefits or drawbacks are likely to reflect relative rather than absolute performance, it makes even more sense to utilise benchmarking when formulating an ESG approach.

This will allow a careful calibration of initiatives to avoid falling prey either to over-reaching or under-performing.

Alongside this, all company management teams should recognise that when it comes to ESG, communication is king. In the current environment, communication of a company's targets and initiatives is crucial. And the exercise is more complicated than in some other areas of communications because the number of audiences has increased.

Alongside typical stakeholders like investors, staff and regulators, companies are also trying to tailor their message to activists and general media.

These groups, of course, don't speak insurance, and the industry starts speaking with a reputational deficit, intensifying the challenge of the communications exercise.

The imperative to respond to the ESG Awakening has slotted itself in alongside the more standard challenges CEOs face around securing profitable growth, nurturing talent and fostering a winning culture.


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