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Properly accounting for ESG concerns is just good risk management practice, said several Midwest-based US insurers.
At the inaugural Insurance Investor Live | Midwest 2023, held last month in Chicago, the insightful panel of Chief Investment Officers (CIOs) said they felt the recent pandemonium around the viability of ESG as a sound investing framework was hackneyed and misguided.
The panel – which included Robert "Bob" Cataldo, CIO, United Fire Group, Aaron Diefenthaler, CIO, RLI Corporation, and Michael Lohmeier, CIO, IMPACT Community Capital, alongside moderator Stephanie Thomes, Senior Investment Consultant, Insurance Practice, Mercer – added that they felt politicised discussions simply missed the point.
On the heels of highly-publicised departures from the Net Zero Insurance Alliance (NZIA), including the US-based Vanguard, some US politicians – notably those on the Republican side of the aisle – have misidentified the moves, praising them as attempts to undermine so-called “climate activist agendas”.
In March, President Joe Biden vetoed his first bill, which the House of Representatives failed to then overturn: a Republican-spearheaded initiative to stop pension investment teams from considering ESG factors in their selection process. Biden said the bill would have put retirement savings across the country in jeopardy. Republican politicians said ESG investing was part of a government agenda to promote “woke” policies at the expense of US citizens.
The topic surfaced during the panel discussion when Thomes asked how the CIOs managed to square a “bifurcation in ESG appetite across the country” with their national practices. “What stage are you at?” she said. “Are you reporting, reducing carbon, focusing on impact?”
Despite an initial, and palpable, hesitation to address the topic directly, all three panellists soon pointed out that the term ‘ESG’ was a new name for an old problem – one that they had been addressing for a while.
“Most risk-focused investors think about ESG all the time. They may not call it
‘ESG’, but they implement these strategies.”
“We focus on positive impact but see the [whole] spectrum,” said Lohmeier. “Most risk-focused investors think about ESG all the time. They may not call it ‘ESG’, but they implement these strategies all the time.” He did not answer Thomes’s question directly, but instead pointed out he felt the biggest factor influencing outward-facing ESG opinions was domicile.
“Everyone is doing it,” he added. “It’s just [about] how open you are to utilising ESG language.”
When it comes specifically to terminology, the wider business world may have already moved on. For example, the British economist and London Business School professor Alex Edmans has advocated for an “end” to the term ESG, which he said has “major problems”.
He has said that there are three key reasons he believes the term is more detrimental than helpful. These can be boiled down to the following: 1) it’s too niche, 2) it’s too politically charged, and 3) it puts the concept, which is in itself quite limited, on a pedestal.
The term “implies that only people with ESG in their job titles should care about it,” Edmans has said. “And it implies that those on the left should support it and those on the right should oppose it.”
Whilst some may argue that mere semantics don’t change underlying processes and ideologies, Edmans feels differently. He has said that ESG terminology is limited – and ultimately harmful to business success and long-term sustainability. “These are serious problems because ESG [should be] about growing the pie and benefitting both shareholders and wider society. It doesn’t matter what your job title or political affiliation is,” he said. “ESG issues are important to you.”
Echoing similar rhetoric to Lohmeier and Edmans, Cataldo said his team has always implemented environmental, social, and governance-based considerations as part of their risk management framework. He added, however, that he felt the market “weaned out” the winners from the losers, and those who did not consider ESG would ultimately lose out.
“We’re proactive when it comes to supporting clean energy capital, but we don’t
pick solely based on that. Typically, the market ferrets out losers.”
“Our committee considers active strategies to reduce carbon footprints,” he said in response to Thomes’s question. “We’re proactive when it comes to supporting clean energy capital, but we don’t pick solely based on that. Typically, the market ferrets out losers.” This strategy might seem passive to some, but for Cataldo it was the best – and potentially only – way to rise above the polarisation in the US.
“There should be different approaches,” added Lohmeier. “That’s the best part of capitalism: there are winning models.”
Diefenthaler noted that because insurance investment teams hold to maturity, ESG has always been a focus. “It’s just packaged differently today,” he said, gesturing to the importance of marketing – and the ways that developments in that arena change the conversation, especially around the introduction of new products.
There are those that have argued that ESG labels are mere marketing tools. A recent panel discussion during a Clear Path Analysis webinar on ‘Maximising visibility in ESG regulatory reporting through the investment chain’ saw Glen Yelton, Head of ESG Client Strategies, North America and EMEA, at Invesco, and Hannah Herold, Director of Sustainable Research at American Century Investments, noting that there was definitely a marketing element to “every label”.
“That’s what a label is,” said Yelton. “It determines how you differentiate a particular product from a suite of products on the shelf.”
He added that he felt issues arose when people leaned “too heavily” into certain labels – ultimately misrepresenting what they were then delivering. “We need to avoid [the] mispackaging of deliverables,” he said. “The firms who take it seriously are the ones who actually have the dialogue with regulators.”
Herold noted that additional patience and conscientiousness during the transition period was necessary. “[It] takes resources, time, and understanding to adhere to these regulations and understand these labelling requirements,” she said.
An April 2023 Harvard Business Review analysis reiterated that it understood the polarisation as mainly a terminology issue. “[It’s how] a variety of issues have been lumped together by the right,” it said.
The analysis added that ESG, or environmental, social, and governance, is “primarily the language the financial world uses to represent attempts to measure risk (and opportunity) to a company or investment stemming from environmental or social issues. The ‘G’ refers to how well a company manages the governance of these issues.”
“The ESG term puts [the underlying concept] on a pedestal compared to
all the factors that create long term value.”
In other words, environmental, social, and governance-based risks are real, tangible phenomena – which any successful organisation is already accounting for. It is the regulatory frameworks and disclosure regimes that are relatively new, and still developing.
In Edmans’s view, the quarantining of an entire practice – around considering environmental, societal, and operational risks – to a single, specialised arena is at best limiting, and at worse misleading. “The ESG term puts [the underlying concept] on a pedestal compared to all the factors that create long term value,” he has said. “Companies get more brownie points for improving their ESG than [they do] for other long-term factors like innovation and productivity.”
Instead, Edmans said companies should strive to create long term value regardless of whether the way they do so “falls under an ESG bucket” or not. In theory, this means that environment, social, and governance considerations – amongst others – are inherently net positives for investors because they likely boost longevity and improve long term sustainability, increasing long term value.
But there are many ways to accomplish this kind of risk management, Edmans might say.
For staunch ESG advocates, however, ESG investing frameworks are seen as critical because they have allowed for standardisation and regulatory alignment – always a work in progress. There is also the point that having an ‘ESG bucket’, and specific categorisations that investments can fall into, enables individuals and institutions to compare and contrast more easily, especially given time and budgetary constraints. It streamlines risk management and value creation processes.
“We’re seeing pressure from Californian constituents to explain
how we account for ESG.”
Whilst enabling long term value likely cannot be distilled to one framework – and the term does often flatten nuances, which can spawn misunderstanding – many in the industry cannot imagine a way forward without it. Client demands are also playing a role. “We’re seeing pressure from Californian constituents to explain how we account for ESG,” Cataldo said.
As the US ventures forward, toward a more streamlined framework around ESG regulations and disclosures, ESG – by any other name – seems here to stay.
