Protiviti, Invesco, Centene Corporation and Temple University Leaders Weigh in on ESG Risk, What It Means and How You Can Stay Ahead

Environmental, social and governance reporting is a must for corporations. Are you doing your due diligence in your risk assessments?

By: Kiara Taylor | June 5, 2021

Look back at the past year, what stories, other than COVID and the presidential election, dominated every news outlet? Social and environmental issues: climate change, health care inequalities, labor union rights, voting rights.

And it’s not just the news media focusing on these issues; investors more and more frequently investigate corporate responsibility and sustainability as part of their due diligence before investing.

Focus on corporate sustainability goes hand-in-hand with increased demand for corporate environmental, social and governance (ESG) reporting in addition to standard financial reporting.

Socially-conscious investors want to know that companies care about how their business affects people other than shareholders just as much as they care about profits. Institutional investors want to know that companies have adequately evaluated the risks they face from ESG issues, whether supply chain disruption, labor disruption or even cyber attack.

ESG reporting is now more the norm than the exception. However, companies need to take the next step and fully integrate consideration of ESG issues into their enterprise risk management efforts.

This was top of mind for several RIMS LIVE 2021 speakers this year during April’s “Your New Challenge: Environmental, Social and Governance Reporting and Risks” session. Speakers Jana Utter, vice president, ERM, Centene Corporation; Robert Hirth, Jr., chairman, Protiviti; Suzanne Christensen, CRO, Invesco; and Michael Zuckerman, associate professor in risk and insurance management for the Fox School of Business at Temple University shared insights and tips on ESG risk reporting.

Below is an overview of ESG, touching on the main points the speakers discussed.

What Is in an ESG Report?

ESG reports provide investors with an overview of a business’s impact on the environment and social justice issues and how the company ensures the integrity of its own governance.

But ESG reporting is more than just a tool for encouraging investment by socially conscious investors.

It has also become a way for investors to assess a company’s sustainability and as a result, their risk exposure. Because investors are using ESG information to evaluate risk, companies should also be integrating ESG data and reporting into their enterprise risk management efforts. Thoroughly evaluating ESG issues is not always simple, but the effort is necessary.

Breaking Down Environmental

Environmental reporting will likely find even greater prominence in coming years, particularly as companies address compliance with the Biden administration’s targeted 50+% reduction in greenhouse gas emissions by 2030.

Indeed, under President Biden, the SEC has been instructed to “enhance its focus on climate-related disclosure in public company filings.”

Company carbon footprints will feature prominently in future corporate environmental reporting, even more so than they already do. Calculating carbon footprints is one example of the difficulties with fully evaluating ESG issues. It can be quite complicated, particularly if a company intends to include reporting on what are known as Scope 3 emissions, which include all indirect emissions from the corporate value chain, both upstream and downstream.

Scope 1 emissions are those closest to home: direct emissions from sources your company owns or controls.

Scope 2 goes a little farther afield, including all indirect emissions resulting from your company’s consumption of purchased energy, steam, heating or cooling.

To make matters even more complex, there are several different accepted protocols for calculating carbon footprint.

Environmental reporting includes far more than just carbon footprint. How does a company deal with hazardous waste disposal, ownership of contaminated sites, usage of land shared by endangered species, water and air quality and energy efficiency? These issues, among others, set the foundation for environmental reporting.

A Look at the Social Side

The concept of social responsibility immediately brings to mind support or opposition to voting laws, as numerous corporations recently ceded to public pressure to take public positions on this issue. But underlying events like these is a much larger question: What are a company’s values?

A company’s positions on voting rights, human rights, gender and diversity equality, financial inclusion, and many other social issues are important to investors.

Socially conscious investors look for companies that share their values.

Company values on social issues and company compliance with those values are also indicators of potential corporate risks. For instance, if a company fails to take a stand on an issue of current social importance, will it suffer losses due to boycotts? Does a lack of diversity expose the company to potential lawsuits?

Finally, Corporate Governance

Investor interest in corporate governance is nothing new. Socially conscious investors want to be sure your company acts ethically and considers the interests of employees and shareholders, rather than just management.

They also want companies to be transparent about their governance.

The effectiveness of corporate management, its regard for ethical business behavior, its compliance with accepted accounting procedures, its inclusion of shareholders in decision making, and its engagement with politicians all factor into potential investment decisions.

Some risks and concerns, such as cyber security, span several ESG categories. Cyber security is a top concern for investors — and with good reason. One need not look further than the recent Colonial Pipeline ransomware attack to see why.

Aligning ESG Reporting and Risk Management

While there is no single accepted way to begin ESG data collection and reporting, there are several steps every company should take. The first is to identify and engage the appropriate stakeholders.

Working with stakeholders, businesses must identify the business impact of ESG issues. Businesses must then align specific ESG concerns with the relevant stakeholders and develop strategies for setting policies, goals and performance metrics.

Without concrete plans, ESG reporting is merely lip service that investors will see through. More importantly, it will not help the company to avoid potential ESG risks.

Once a framework for assessing ESG issues exists, the company can begin collecting and analyzing the necessary data to establish baselines and concrete performance goals. Then it can determine how it will report that data.

Effective reporting will show that a company understands the significance of both the issues and its own actions. ESG reporting should tell a story that potential investors want to hear, the true story of how a company applies its values to address issues of global significance.

But it should also tell investors that the company is vigilantly analyzing the risks these issues pose to the business and taking the necessary steps to address them. That makes a company sustainable and a good investment. &

Kiara Taylor has more than 10 years of experience in finance, ranging from fixed income to emerging markets. She enjoys writing on the impact of both micro and macro trends on global finance. She 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.