In this 3-part series, Craig Hupper, TransRe’s ESG Leader, talks about the Environmental, Social and corporate Governance framework.
Can’t listen now? Read the transcript (edited for brevity and clarity)
What does an ‘ESG task force’ do?
Climate change is one of the key areas of our ESG process. We have a long established ‘emerging risk’ process, and climate change has been on that list for over a decade. In early 2019, we decided we needed to devote more resources to the issue, and formed an interdisciplinary group of 12 from underwriting, modeling, risk management, investments, actuarial, legal and regulatory, marketing and communications, claims and operations. We looked at our peers’ disclosures and created heat maps around how different aspects of climate change affected different lines of business.
We have since established a separate DE&I committee, and one of our task force members is on that committee to ensure we link our efforts.
How do task force recommendations get into the hands of decision makers?
It is hard to develop policies, strategies and decisions without granular, transparent baseline data. For example, our underwriting positions are a priority, but our data isn’t as granular as we’d like. We don’t know the name of every insured within our clients’ portfolios, so we can only answer in general terms if asked about the kind of portfolios we support. We need better data to inform specific decisions, strategies and commitments within ESG. Some companies have announced how much coal, oil, gas and other extractive industries they support. We are investing time and effort to generate better data on that.
What data generation initiatives do you have to better inform decisions?
Our Entity Data Analytics (EDA) project captures underlying data, but only for limited lines of business in certain territories. We are looking at how we can apply that more broadly. That system was created to answer, ‘can we get a big across-the-board picture of our exposure to any specific company?’. We need to answer that across all lines of business.
Cat modeling world was in a similar place 25 years ago. There was no cat modeling business before Hurricane Andrew. Then reinsurers began to demand cedents capture this on a more transparent level. Will we get that same pressure from ESG? Will our cedents be forced to have the ability to capture this and then share it with their reinsurance partners?
How many different departments are working on this problem?
Everybody wants everything free, immediately, but it takes time. Cat modeling has made great strides, but the that data is not perfect, it differs from client to client, from territory to territory and from peril to peril. I think we will be working on data for a long time to come.
Who will benefit most from this drive for data?
One way to get additional resources (in any organization) is to point to the additional business opportunities, increased profitability or better performance it will generate. We see new ESG opportunities from new sectors of the economy opening to renewable energy (electric cars, solar power, geothermal, wind power). They all need re/insurance support for physical damage, production guarantees and the like.
What will you give back to your clients in return for all this extra data?
We provide benchmarking and peer analysis for a number of our lines. Companies want to know how they’re doing against their own competitors. We respect confidentiality but offer insights as a leader in a business line. We give our clients an idea on how they measure up, then help them identify new business opportunities, or where they need to strengthen their operations. I certainly expect to do the same with ESG in due course.
How receptive are clients to ESG feedback?
2020 was a watershed year. Covid-19 and its economic, social, environmental and cultural impact, social unrest, climate change pressure all added focus to ESG.
You have seen corporations pressured to take stands. I think organizations realize there is no alternative, that they cannot disengage from what’s going on in society. This is the kind of external, macro factor that will drive companies to invest the resources to collect data and participate in these broader dialogues.
How much input does ESG have to TransRe’s overall strategy?
You cannot isolate ESG from broader questions of strategy and the purpose of an organization. Alleghany recently released its first ESG report. We responded to the demand for it. Similar discussions and commitments are now taking place in different organizations around the world.
If everyone withdraws support from non-ESG compliant companies, isn’t there a lot of money to be made?
It is easy to say no when all the pointers are in the same direction. If a deal is unprofitable, unsustainable, controversial and bad for your reputation, that’s an easy call. The gray area is when it might be highly profitable. However, things are moving quickly. The calculus today is different than it was a couple of years ago for a lot of operations. ESG is challenging for any organization to get the right balance.
It is probably easier for a re/insurer than for companies in controversial industries (opioids, firearms, tobacco). They have a different set of challenges. Re/insurers think of themselves as conservative and responsible. We help people manage the insecurities of life. To me that’s a more attractive starting point from an ESG perspective.
What about those who denounce ESG investing because it doesn’t maximize returns?
Trade-offs are everywhere. In the 1980’s, University of Chicago economists said the sole responsibility of a corporation is to make a profit and deliver value to its shareholders. That rationale has gotten more complicated. In 2019, the US business roundtable declared they would look beyond their shareholders to their stakeholders’ interests. The Department of Labor last year came out against ESG investing, but the new administration is seeking to change it to allow pension fiduciaries to incorporate ESG factors into their decisions. You can apply ESG factors and still be a responsible fiduciary, while properly managed ESG positions are beneficial to shareholders as well as the broader social context.
Will there always be non-ESG compliant reinsurance deals, or will a consensus emerge?
Should re/insurers support coal mining operations? It is a dirty, extractive industry. What if you live in a developing country? The local utility will only bring coal-powered electricity to your village. Do you refuse? Sometimes the ‘E’ (environmental) considerations and the ‘S’ (social) may not perfectly align. A trade-off must be made, and managed.
It’s complicated because we’re talking about supporting legal products and legal services. They may be controversial, but our political leadership has chosen not to outlaw them. That forces corporations to tiptoe into areas where the lines are blurry.
Listen to Episode 3 as the discussion continues….