It isn’t just pension and investment advisers that need to get to grips with the complex regulatory requirements around climate change and corporate social responsibility.
Those working in the group risk and healthcare sectors are increasingly likely to have to take such factors into account when recommending providers and benefit solutions to clients.
Until now this has largely been an issue for the investment industry, with a raft of regulations in recent years to encourage funds and pension schemes to incorporate environmental, social and governance (ESG) factors into their wider investment strategies. But this looks set to change with the new Task Force on Climate-related Financial Disclosures (TCFD) reporting requirements, which are due to take effect from April 2022.
These rules effectively require all listed companies with more than 500 employees and all non-listed companies with a turnover of £500m or more, to disclose climate-related financial information on governance, strategy, risk management and metrics and targets. In other words, these firms will have to publish information on their current carbon footprint, their environmental strategy and the steps they are taking to improve this. Crucially, this doesn’t just include the activities of that company, but the ESG credentials of the main suppliers they use, which could include key benefit partners.
For PLCs with a UK premium isting, the timeline is even tighter. They have been in scope for accounting periods beginning on or after 1st January 2021.
Impact on group risk
For the group risk market this ssue has been thrown into the spotlight by the news earlier his month that Legal & General nvestment Managers (LGIM) was divesting from AIG, after concerns about the US insurance giant’s climate policies.
The asset manager, which has been one of the institutional investors leading the way on climate change and stewardship activity, said this decision reflected
AIG’s absence of policy on thermal coal and concerns over a lack of disclosure of its Scope 3 – or ‘value chain’ emissions.
LGIM has previously divested from MetLife because it is not disclosing Scope 3 emissions associated with its investments, although LGIM notes it has made some restrictions on thermal coal. MetLife says it has been taking steps to make itself a more e n v i r onme n t ally su st ai n able company.
S hortly a ft er LGIM’ s announcement, AIG published its first ESG report.
AIG says: “The Report aligns with recognised guidelines such as the TCFD framework, Sustainability Accounting Standards Board Standards (SASB), Global Reporting Initiative (GRI) standard and UN Sustainable Development Goals.”
The Report also provides AIG’s first detailed public summary of existing Diversity, Equity and Inclusion (DEI) efforts.
Partner considerations
The question for many companies, and their employee benefit consultants, is whether these considerations will influence who they work with in future.
Hymans Robertson senior DC consultant Callum Stewart says that larger clients are increasingly looking at the ESG credentials of all benefit suppliers. He says: “Many firms are going through their investment portfolio and their operation and supply chains to understand their ESG credentials. It has been largely assumed historically, that benefit suppliers are addressing these factors but with improved reporting and transparency, clients are well equipped to assess this.”
He adds: “In particular our clients are increasingly looking for benefit suppliers to have credible long-term plans to improve sustainability, for example to address climate change. Benefit suppliers lacking this are becoming more likely to be excluded from short-lists.”
In recent years corporate social responsibility (CSR) and ESG have become industry buzzwords. But he says many clients are increasingly keen to see evidence of action on this, not just glossy commitments in brochures. “Existing suppliers are increasingly being held to account to walk the walk as well as talk the talk,” Stewart says.
Mercer Marsh Benefits partner Chris Bailey agrees that this is becoming a central element of discussions with clients regarding a whole range of employee benefits. “Clients of all types and sizes are increasingly aware of their wider societal impact and have a growing desire to work with sustainable providers. Larger clients issuing formal tenders have long included sections on CSR and have asked providers to evidence their credentials in this area. But there is an increasing trend to disclose the whole supply chain’s credentials too, to look at overall impact.”
When it comes to group risk and health and protection benefits Bailey says that UK providers generally have good CSR and ESG track records. It is noticeable that both AIG and MetLife are large American companies. The US, particularly under the Trump administration, has imposed far less climate-related regulation for the corporate sector when compared to the UK or Europe. This of course may change with the new Biden administration.
Bailey says: “Health and protection benefits sit within the relatively ‘clean’ UK financial services environment. Providers are already subject to minimum pay requirements for staff, reporting on gender pay, complying with health & safety requirements and most run modern efficient offices without the direct environmental concerns that may affect manufacturing processes or logistics.”
He adds: “These providers are also typically backed by asset classes such as gilts meaning they have less exposure t environmentally harmful equities. This is a debate providers will likely relish rather than shy away from.”
Ripple effect
Stewart says that despite this, the actions of institutional investors like LGIM has the potential to create ripples in this health and benefits sector in the UK. He says: “When large corporate players make a public divestment or don’t participate in an issuance it can make waves in the investment world. These are powerful messages being put out there by large investors that ESG matters and if you want us to invest in you or place our business with you, you need to measure and manage your ESG risks.
“For these firms this could lead to a further loss of business elsewhere if corporate clients think they are not doing enough on ESG risks.”
At the moment though, corporate advisers agree that these considerations are mainly a concern for larger clients. Benefiz director Tim Gillingham notes that in the UK both MetLife and AIG Life are largely targeting the smaller end of the market, with a particular focus on SMEs – so there may not be any immediate knock-on effect. Gillingham says: “ESG and climate change considerations will be a factor for bigger schemes, where providers might pitch to the employer or where procurement is involved and sustainability is an issue. But for the SME market it doesn’t really matter.”
Gillingham also adds that AIG Life makes extensive use of technology, particularly compared to some of their main competitors. He says this means that their carbon usage — at least in terms of its UK operations — is typically lower. Although of course he says this needs to be balanced by looking at the track record of the larger parent group.
Advisers point out that while SMEs may not be required at present to look at these issues, all indications are that the current TCFD rules will be extended to smaller firms in future, and those that get on the front foot and start looking at such issues may well have advantage over competitors. Howden Employee Benefits head of benefits strategy Steve Herbert says: “ESG for employee benefits? Absolutely. Every company has corporate social responsibility (CSR) and ESG is a reflection of that. It is definitely something we have to do with pensions and if you do it in pensions, then all your employee benefits will need to reflect it.”
Corporate advisers also point out that when it comes to ESG regulations, much of the focus to date has been on climate risk. But when it comes to procurement clients and their advisers should potentially be looking at a far wider range of potential risks.
Stewart says: “ESG is a broad risk category. Currently the emphasis is rightly focused on tackling climate change because there are both physical and financial consequences. While climate is an important topic and shouldn’t be ignored, some other issues are also important; these include pandemic risk, fairness in society and diversity.”
‘S’ in ESG
Luke Prankard, a wellbeing consultant at employee benefits provider LifeWorks says there is likely to be an increased focus on the societal aspect of ESG in future, a trend accelerated by the Covid-19 pandemic.
He explains: “Much of the focus until now has been on the environment and climate change. But we are seeing more of a shift towards including the societal issues — the ‘S’ part of ESG — alongside this.
He says this can incorporate a range of factors from how businesses look after their workforce, their customers and their community as well as a firm’s human rights and data security track record. As with environmental concerns he says this scrutiny is likely to extend to the key suppliers and business partners.
This though he says may well benefit group risk and employee benefit providers. Prankard says that firms like Lifeworks can help individual companies support their employees better through wellbeing and mental health services.
Prankard says: “Many firms will offer EAP and wellbeing services because they want to support their staff and can see the benefit in terms of staff loyalty and productivity.
“But increasingly we are seeing organisations ask for tools that help them evidence and measure what they are doing on these issues.”
Very often he says this is coming from the top of an organisation, from the boardroom, often from pressure from investors in these companies.
Supporting workers
“These investors want a clear plan that looks at all aspects of ESG. The social element is becoming a bigger focus. They want companies to have a programme in place, that looks at what they do to support employees at present, how well they are managing the wellbeing of staff and whether there is a roadmap to improve and develop this in future.”
Increasingly he says that companies like Lifeworks are not only providing wellbeing services to help employees, they are also developing a range of audit tools for employers, to evidence and measure current and future performance. “These are very much operating on a business and strategic level” he says.
As with climate risk, this isn’t just about ‘doing the right thing’, Prankard says there is some evidence to suggest firms that have a better track record of supporting their staff perform better over the longer term.
Firms that are adapting their business models to transition to a low carbon economy, who understand key metrics regarding their staff and have board-level discussions on issues of recycling, waste and improved governance are more likely to be successful businesses in future. As Prankard points out this is why investors are increasingly focused on ESG metrics. But for businesses looking to build long-term relationships with partner organisations it should also be a key consideration.