Today, environmental, social and corporate governance factors (ESG) are a risk. The pronouncements, promises and pledges that many companies have made have become a risk because of the allegations of “greenwashing” and the fear that many of these aspirational targets are not only out of reach but were knowingly set out of reach, according to Nir Kossovsky, chief executive officer of Steel City Re.

Speaking with the 1.1 Club, Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, Kossovsky said that “insurance is in many ways a very easy way to get out of the responsibility of managing risk”.

With the reputational risk of greenwashing comes the need to actively manage risk, with the role of risk management being that much more vital for a firm than perhaps some of the traditional property and casualty exposures, he said.

Unlike typical losses in the insurance industry, a reputation for ESG excellence or the reputation of a firm overall is like china, in that it is “easily broken and can be repaired, but everyone is always looking at the cracks”.

“For many firms over the last decade or two, insurance became the replacement for risk management. In our currently very hard market, the importance of risk management has risen significantly and the role of insurance has changed from being merely an absorber of all failures to manage risk into a mechanism of a safety net for risk management,” he continued.

More protection

Driven partly by a desire to reinforce the value of risk management, Steel City Re launched a new ESG insurance product in mid-September, designed to provide boards of directors with much-needed protection.

“The purpose of the product is about recognising that many firms today that have dutiful governance because they have thoughtfully made their pledges for ESG are being caught up in the sweep of the fears of greenwashing,” Kossovsky said.

“Well-governed firms are suffering in the backwash of the generalised concerns about greenwashing.”

He positions the firm’s ESG product somewhere between an errors and omissions policy for boards and an indemnity bond for boards to assure firms and investors that the board is being run with respect to ESG in a way that they expect.

“The pronouncements, aspirations and commitments to various ESG targets are being made knowingly, thoughtfully and responsibly by the dutiful board. A firm that is insured by us is a firm which the stakeholders can believe is committed to delivering on its promises,” he added.

The Steel City Re’s ESG offering provides parametric reputation insurances and risk management advisory services built on a framework of behavioural economics. The policy is available only to firms whose reputation risk governance, leadership and controls have been vetted through outside underwriting.

Kossovsky is confident that the best governed companies will seek ESG insurance to help elevate and differentiate themselves from others in their sector who may not be as dedicated to the principles of ESG.

Companies will use the ESG insurance as a “means of signalling to their stakeholders that they should not be discounted” and to demonstrate that they have the evidence to execute on what they promised, he said.

“These companies have recognised that the consequence of not delivering or of overpromising disingenuously can result not only in class actions from disgruntled investors but can now trigger action from the US Securities and Exchange Commission, as well as derivative litigation, all alleging that the firm has been damaged through what is called in the literature, a ‘liar’s discount’,” he explained.

A curious divergence

ESG litigation has surged in the past two years, driven by a gap between what is promised and what is actually being delivered. But to understand the full story, we need to take a step back.

“Corporate social responsibility (CSR) was something that bubbled up in the early part of century. It was a renaming of what the accountants used to call extra financial information. Marketing saw value in that and called it CSR. It had an interesting uptake among customers in particular,” said Kossovsky.

“Then, five years ago, the financial community returned, having learned its lessons with the use of the term extra financial information, and repackaged it as ESG. That caught on in the financial side.”

In the past two or three years there’s been a “curious divergence”, with ESG being an important issue from the investor’s perspective, but at the same time, marketers continuing to use it as a tool for elevating a firm, he said.

“This is creating an odd gap between what a firm was promising through its marketing arm and what a firm could deliver through its operational arm, instantly creating risk,” he continued.

“While some firms are meeting expectations, many others are not. The promises were made in the context of marketing, which historically was protected through the legal notion of ‘corporate puffery’.”

Corporate puffery is a defence that a number of firms have recently attempted to use, Kossovsky said, adding that “as it turns out, because the investors believe in those promises, the regulators deemed those promises were material”.

Essentially, he concluded: “ESG is an aspiration, a goal of environmental sensitivity or awareness, social justice and excellence in governance. That aspirational notion creates in the minds of various stakeholders an expectation of certain levels of performance.

“For those that do not meet expectations, the charge of greenwashing poses a tremendous risk to companies and specifically the members of the board of directors.”

To view the full 1.1 Club interview click here

Main image: Shutterstock / nikkytok