By Warren S. Hersch | May 17, 2023 | Original Article
Life insurers trying to do the right thing are being sucked into America’s cultural and political wars, where they risk volleys of criticism no matter what they do.
On hot-button issues ranging from hybrid work and salary transparency requirements to diversity and equity initiatives, insurers are being pushed and pulled in different, often contradictory directions. If they’re not careful, the result could be damage to their brand reputations, or a reduced ability to operate across state lines.
“It’s one hot topic after another,” Reyhan Ayas, a senior economist at Revelio Labs, developer of a human resources database, said in an interview.
David Katz, a partner at the law firm Wachtell, Lipton, Rosen & Katz
David Katz, a partner at the law firm Wachtell, Lipton, Rosen & Katz, said public companies are all struggling with the changing cultural and political dynamics they face from various state governments and the pushback against so-called “woke capitalism.” He added that boards of directors are getting involved in issues that used to be the exclusive purview of management as activists and state governments target the companies.
“No company is truly immune from such pressures, and the age of social media has greatly shortened response times,” he said in an email. “Companies are working with crisis management firms to try to manage many of these difficult issues without fanning the flames of any particular constituency.”
Bradley Honan, CEO of Honan Strategy Group
The current political climate in America is forcing life insurers to “take incoming fire from those on the political left who see corporations as growing too large and greedy, and from the political right as too woke and politically correct — and insurance companies are caught in the middle,” according to Bradley Honan, CEO of Honan Strategy Group.
Taking a Stance Against ESG
A particularly sensitive issue for many insurers now is pushback by states, notably in the South and West, over incorporating environmental, social and governance criteria into their investment decisions for state pension funds and other state assets they manage. Over the past year, Arkansas, Florida, Idaho, Kansas, Kentucky, Montana, and Utah have passed laws circumscribing the use of ESG factors, according to Stephen Parsley, an attorney at the law firm Bradley Arant Boult Cummings.
Stephen Parsley, an attorney at Bradley Arant Boult Cummings
Some of the state laws prevent anything other than financial considerations in these investment decisions. Others provide an exception for environmental, social and governance criteria if they won’t adversely affect investment returns. Still other states have pursued anti-ESG executive or enforcement actions.
Parsley flagged as notable Florida’s law, which Governor Ron DeSantis signed this month. Representing one of the most far-reaching efforts to restrict sustainable investing, it “bars the consideration of the furtherance of any social, political, or ideological interests,” and prohibits ESG bond sales.
Parsley said it’s possible that parallel sets of laws might be developed, one for states supporting environmental, social and governance standard, and another for jurisdictions opposing them. He also foresees future clashes between the federal government and states, including over litigation spearheaded in Republican-led states against Department of Labor rules, finalized in November, that let Erisa fiduciaries for retirement plans consider ESG considerations in investment decisions.
“It’s a mess,” he said of the current situation.
States are even invoking antitrust law to keep insurers from advancing a climate-focused agenda, according to Fox News. Some 25 Republican attorneys general warned in a Tuesday letter to more than two-dozen insurers, including member companies of the United Nations’ Net-Zero Insurance Alliance, that agreements supporting ESG priorities could represent illegal boycotts of sectors that don’t meet carbon-emission standards, thus violating antitrust statutes.
“These seismic shifts in U.S. state policies and pensions are rippling through capital markets globally, including Europe,” said Paul Herman, CEO of HIP Investor, whose acronym stands for Human Impact + Profit. Investment funds characterized as ESG are less likely to gain allocations from these anti-ESG state pensions, according to Herman.
States Undermining Their Interests
He sees an irony there in the case of Florida. It’s one of the Southern states that needs significant funding for climate action because the state has a long, vulnerable coastline. It is also relatively flat and prone to flooding.
HIP Investor CEO R. Paul Herman
Multinational life insurers based in the United States will soon be affected by the European Union’s Sustainable Finance Disclosure Regulation, introduced in part to improve transparency in the market for sustainable investing, he said. Businesses or units with more than $40 million in revenue in the European Union will have to meet its requirements.
“Thus, reporting on greenhouse gas emissions, as well as gender pay gaps and biodiversity impacts, will have to be disclosed,” Herman said.
He added that, as the 2024 U.S. presidential election approaches, some state-managed portfolios are starting to withdraw from ESG funds. Vanguard, he added, has been spooked and departed the Net Zero Asset Managers alliance.
Reyhan Ayas, a senior economist at Revelio Labs
Ayas of Revelio Labs sees another potential minefield for the industry: insurers that try both to accommodate anti-ESG state interests and the pro-ESG positions of their own employees, including on diversity, equity, and inclusion initiatives.
“It will be a very narrow line to walk for a lot of companies,” she said.
Insurers that are unable to manage this balancing act, she added, could see employees depart for other states.
Bastiaan van der Linden of the EDHEC Business School
Bastiaan van der Linden, an associate professor of corporate social responsibility at EDHEC Business School in France, finds it interesting that Republicans in the U.S. — people who might otherwise be expected to take a laissez-faire attitude towards the use of environmental, social and governance metrics in investing because of their conservative political orientation — are opposed to letting the markets guide adoption of ESG-driven standards.
Thus, to impose laws barring their use on private parties, as anti-ESG advocates are trying to do, “sounds like a liberal approach to me,” he said in an interview.