Is there any point of an ‘ethical’ insurance syndicate?

Lloyd’s of London insurer, Beazley, is offering extra cover to companies that score highly in terms of their social and environmental credentials. James Moore looks at whether it’s a worthwhile project

A legitimate attempt to make social change or a cynical PR attempt? (PA)

Now more than ever, businesses are paying attention to how they are perceived in terms of their ESG (environmental, social, governance) record.

Gone are the days when it was enough to put a picture of a smiley wheelchair user in the annual report (as happened to a friend of mine) and count the job as done. Investors are increasingly raising the issue and large parts of the public feel that it matters too.

Now a Lloyd’s of London insurer has launched a syndicate especially for client companies which score highly in ESG terms. A sign that it has come of age?

Maybe. The trouble with ESG is that there is currently an awful lot more effort being put into the PR-ing of it than there is in actually addressing the issues it raises. This is where terms such as “greenwashing” come from. And greenwashing is all too common.

Where does Beazley’s initiative fit into this? As an institution, the famous insurance market is probably cheering it along given the ugly sexism scandal that shook it to its core a couple of years back. It needs all the good PR it can get. Beazley says there’s more to it than that, however.

Syndicate 4321 has been set up to offer additional capacity exclusively for clients with an “excellent ESG rating”. In other words, they’ll be able to get more cover.

This clearly has value if you’re in the sort of business that finds insurance cover hard to get, or when the market is in one of its shortage phases, when premiums surge to levels that can have a nasty impact on corporate balance sheets. Lloyd’s clients are forever trapped in a cycle of famine or feast.

Gone are the days when it was enough to put a picture of a smiley wheelchair user in the annual report (as happened to a friend of mine) and count the job as done

There may be a payoff value to investors in the syndicate too: you might consider that firms with “excellent ESG ratings” could prove less risky to cover.

Take directors & officers insurance, which is usually bought for company bosses, and the non-executive directors who supervise their activities, as a means of protecting them against getting sued.

You would imagine that a well governed, responsibly run company would be less likely to get into that sort of trouble. So, a win win and a means of encouraging good behaviour? What’s not to like?

One problem with all this is how you define what an “excellent ESG rating” looks like and how you test for it. An awful lot depends on the testers and on the criteria used. Standard & Poors, Reprisk and Sustainalytics, will be responsible for this.

The question posed to investors in the syndicate is how far are they willing to trust these companies to gauge other companies’ ESG records, and to manage any conflicts of interest that may arise.

There is also an issue with the categories of cover being offered. One of those is aviation. Realistically, is any airline really sound on environmental grounds given the impact pollution from aircraft has when it comes to global warming?

The latter is proving a real problem for the insurance industry, as underwriters working in the field of catastrophe cover would likely tell you. On the other hand, there are Lloyd’s syndicates that make money from insuring coal mines. You can see how this can easily get complicated

But does this invalidate the whole exercise? Or at least put it squarely into the “nothing more than PR” category?

Beazley could answer the airline issue this way: it isn’t feasible to simply ground every aircraft. That being the case, isn’t it better to reward the more forward-looking among them? Say, those looking to limit their emissions to the greatest possible degree?

Isn’t it better to encourage better behaviour across the board? And I suppose that it is. If that testing passes muster.