Promoting Environmental, Social and Governance (ESG) performance has become a top priority of corporate executives and boards everywhere, including in property and casualty insurance.
Executive SummaryWhile there is the notable absence of emerging risk content in many investor ESG measures, general liability underwriters are constantly scanning the horizon for the next asbestos, and D&O underwriters are watching out for the next Enron, note Praedicat executives David Loughran and Robert Reville. Here, they also describe two additional shortcomings of investor-oriented ESG measures, contrasting the virtues of casualty insurance underwriting in moving the promises of a better world forward.
However, promoting ESG performance requires measuring it, and nearly 18 years since the term ESG was first coined in a 2004 UN-sponsored report, and decades since “socially-responsible” investing came into vogue, there is little agreement in how to measure ESG performance.
A 2019 study by researchers at MIT and the University of Zurich examines the six most prominent ESG measures used by investors today and reports that the correlation among them averages just 0.54. The correlation in credit scores issued by the major credit-rating agencies, by contrast, exceeds 0.95. It should come as no surprise then that while credit scores are highly predictive of future financial performance, ESG scores seem to have little predictive power, financial or otherwise. ESG-branded equity funds, for example, might perform slightly better than the universe of all funds (and maybe only because they tend to be tech-heavy), but analyses suggest they perform no better on objective measures of sustainability and social responsibility.