ESG Mandates March into Anti-Bribery and Corruption Policies; What That Means for the Long-Term

Kroll's 2021 Anti-Bribery and Corruption Report shows 70% of respondents want environmental, social and governance included in ABC programs.

By: Jonathan McGoran | July 7, 2021

Topics: Employment Practices | Insurance Industry

Kroll recently released its 2021 Anti-Bribery and Corruption Report, surveying hundreds of senior compliance and risk professionals globally on the anti-bribery and corruption (ABC) landscape, and among the most striking findings were that 70% of respondents indicated that environmental, social and governance (ESG) should be included in ABC programs.

“Environmental, social, governance is becoming more prominent from a corporate culture and a corporate citizenship point of view,” said Steven Bock, global head of the compliance risk and diligence practice of Kroll, a premier provider of services and digital products related to governance, risk, and transparency.

“There are not yet clear and defined regulations, but it’s more reputational.”

Contributing to those reputational concerns are an increasing emphasis on diversity and inclusion and climate concerns among the public.

“I think it is a growing public awareness and a growing public view that corporations now should no longer only be held accountable to producing a quality product or from a shareholder and a stockholder point of view, producing a profit,” said Bock.

“They need to have some corporate citizenship responsibilities, and that’s becoming more prominent.”

While the relationship between ESG and ABC may not be readily apparent, there are structural and logical connections.

Looking at ESG More Thoroughly

As the report states, “An increase in investor and shareholder focus on environmental, social and governance (ESG) has further emphasized the link between a robust ABC program and a company’s ESG compliance, because all aspects of an ESG investment can be undermined by instances of bribery and corruption.”

Steven Bock, global head of the compliance risk and diligence practice, Kroll

Internal structural reasons support this relationship as well: “Organizationally, the compliance leaders, the risk managers that are responsible for the firm’s overall anti-bribery and corruption programs, have been tasked to incorporate ESG regulations, ESG concerns, ESG challenges.”

Another connection between ABC and ESG stems from an increased reliance on third parties.

“There’s an increasing dependence on third parties, whether those third parties are suppliers, vendors, technology providers, service providers or product providers,” said Bock. And that means a greater reliance on due diligence.

“A large component of those programs have to do with due diligence and knowing who it is that you’re doing business with, whether it’s your customers, your suppliers or whomever.”

Where Is ESG Important?

While the increasing focus on ESG was seen in all regions, the extent of these trends and the factors driving them do vary by geography.

“The driver of ESG integration in compliance programs appears to be region-specific,” states the report. “ESG integration is also driven by regional economic and industrial factors. For example, the push for ESG in Latin America is primarily driven by environmental and social concerns stemming from the extractive industry’s negative impacts, while in the Asia-Pacific region the focus lies on business resilience and employee rights.”

While respondents from the U.S., Canada and Europe show somewhat less of an emphasis on ESG, the report anticipates growth in those areas, citing political trends in the U.S. and the recently enacted EU Sustainable Finance Disclosure Regulation (SFDR), which “requires some financial sector firms to disclose their ESG investment impact.”

The report details a similar disparity regarding ABC programs, with a greater emphasis in Asia/Pacific and Latin America. According to the report, “the percentage of people who believe that ABC programs create opportunities to capitalize on good governance and transparency may be linked to the perceived levels of corruption in the region.”

The report goes on to say that “for the U.S., Canada and the European regions, the lower reported importance of ABC programs to good corporate governance and transparency is likely tied to the several countries’ pre-existing strong bribery regulations, including the UK Bribery Act 2010, Canada’s Corruption of Foreign Public Officials Act, and the U.S. Foreign Corrupt Practices Act.”

Living in a Technological World

Technology plays an important role in these trends, both as a source of concern and a tool to deal with concerns.

“At the top of the list, 46% of the respondents indicated that cyber security and data breaches are the top reasons of increased risk,” the report notes.

This relates back to third party risk, as well as to the growth of work-from-home and remote work arrangements spurred on by the pandemic. As cyber security standards and best practices become codified into law, failure to meet those standards becomes not just a cyber security issue but also a compliance issue, as well.

“Data protection regulations such as the European Union’s GDPR [General Data Protection Regulation] are becoming more and more prevalent, prominent and challenging,” said Bock.

“From a data security, privacy and protection point of view, these ABC and senior compliance officers are responsible for a broader remit of responsibilities and concerns.”

Of course, technology can also be a key in helping confront those risks, especially automation, like AI and Machine learning.

“When employed correctly, automation can not only reduce overhead costs, but also support the scaling of operations, increase the speed and quality of a compliance team’s work, improve morale and help keep up with the exponential growth of information available,” the report says.

“In the due diligence world, automation tools have been successfully streamlining workflows and processes for some time now. What has been interesting to see is the rise of automation linked to specific technologies like AI and machine learning (ML) over the last few years.”

Surprisingly, while most respondents to the survey acknowledge the importance of technology in dealing with these challenges, notably few are fully utilizing AI and machine learning, which can be highly effective in helping to deal with these threats.

“Respondents came back to us in this survey and were comfortable with the use of technology, but yet, were not comfortable that they were applying as much artificial intelligence or machine learning,” said Bock. “So, there is opportunity for those areas of technology, artificial intelligence and machine learning, to play a much more prominent, a much more core role in the ABC programs and the ABC protections going forward.”

Bock expects many companies to take advantage of those opportunities in the coming years. He said, “If we were to blink our eyes, in five years, I think we would be amazed about the amount of technology that would be applied across these ABC programs to help them be more scalable and just be more safe and more robust.” &

Jon McGoran is a magazine editor based outside of Philadelphia. He can be reached at [email protected].

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.