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].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

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