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INDIA: A TWIST IN THE CYBER TALE

Chartered Insurance Institute Blog: August 5, 2021

https://thejournal.cii.co.uk/2021/08/05/india-twist-cyber-tale

In this blog for the Chartered Insurance Institute, I pickup a few threads from an action-packed cyber space as it heats up in India. Despite a small insured book (though growing) – the Indian cyber portfolio is under a spotlight. India moved up to become Asia’s most hacked (EMSOFT, July 2021). Cross border or intrastate; countries, companies or individuals – there is nowhere to hide. The future is about building a robust digital infrastructure. ‘The emergence of cyber mercenaries is one of the most worrying trends’, reminds Daryl Crockett, CEO ValidDatum. ‘What that allows is for funding to follow talent, just as it does in the commercial world, and you have a much faster speed to market’, she points out.

‘Senior executives and Boards will depend more on savvy cybersecurity leaders to inform their organisation’s security in line with its risk appetite’, highlight David Koh, Commissioner of Cybersecurity and Chief Executive of the Cyber Security Agency (CSA) of Singapore and Nancy Luquette, S&P Global. To meet these needs, they say, the effective chief information security officer (CISO) must hone key skill sets to go from subject matter expertise to strategic leadership. Can or should the talent pipeline for cyber underwriter lag behind? There is always a growing case for carving out the cyber underwriting role from financial lines.

Sir Tim Berners-Lee, inventor of the World Wide Web, perhaps never visualised the downside/s to an explosive growth of internet. ‘Wrap a cryptographic blockchain layer around the Internet to make it attributable’, prescribes david piesse, as did #Estonia. Perhaps that’s a vaccine to counter the cyber pandemic! Where and what next in Asia? Please hold your breath.

“Bleaching coral reefs were never going to scare Europeans, but flooded basements will”: Wolfgang Kuhn

Wolfgang Kuhn is a Director of Financial Sector Strategies at ShareAction. With 20 years’ experience in fixed income markets, investing in corporate and government debt, allocating to high yield, emerging markets, convertibles and loans on behalf of institutional investors around the globe.

Wolfgang has a strong interest in risk management, he has been on a quest for the right approach to sustainability in bond management since 2006. Wolfgang is convinced that the orthodox investment framework of risk and return is dangerously incomplete, and needs to be complemented by a third one, real-world impact.

His most recent role was that of Head of Pan-European Fixed Income at Aberdeen Asset Management, managing European credit and macro teams. Previously, he worked for UBS, Deutsche Asset Management and DG Bank.

Wolfgang graduated from Technical University of Berlin, having also studied at University of Wisconsin and University of Freiburg. Wolfgang is a CFA Charterholder, a Certified EFFAS Financial Analyst (CEFA) and a Financial Risk Manager (FRM).

You won’t find an investor these days who doesn’t swear by long-term returns. But, apart from the blessed trusting souls believing in private equity’s long-term myth, you won’t find anyone who isn’t hooked on monthly or quarterly results.

Praveen Gupta: Shareholder resolutions are a critical tool for investors, do you think investors can use voting to help shape ‘real world outcomes’ on the systemic sustainability issues?

Wolfgang Kuhn: No question about it – they can and they should. Until very recently, the vast majority of mainstream investors would have considered voting as something you do because you have to. Very rarely has voting been used to shape the future of companies. Of course asset managers’ stewardship departments would protest. I am always surprised to read the term “shareholder revolts” when the remuneration package for CEOs stands. Not quite the revolt. The only thing it needs is a majority of shareholders to say “no”. Why don’t we see that more often?  

PG: The world keeps emitting over 40 Gt of CO2 per year. We are getting precariously close to exhausting the carbon budget and running out of time for limiting warming to 1.5C. Is banning fossil fuel the only choice we may be left with?

WK: It might well be. But, of course, that is not politically feasible yet. A minimum carbon price seems to gather politicians interest. But vested interests will ensure that it won’t happen. Unless, of course, society takes control. Banning fossil fuels would make sense. At the moment, you won’t see the term “fossil fuel phase-out” in any of the net-zero initiatives of the day. Net zero yes. Carbon phase-out no. Humans are susceptible to logical inconsistencies.

PG: Carbon offsets do not reduce carbon emissions; they only delay them?

WK: Of course I understand the idea behind offsets. Offsets can motivate climate investment in emerging markets where it is seriously needed. But as things stand now, we don’t have time to use inaction in developed markets to fund necessary infrastructure.  So: no offsets. Delay and invest is not a thing any more. REDUCE and invest.

PG: Can technological innovations solve our ecological crisis? Global climate action relies too heavily on energy savings that may not materialise?

WK: Energy savings over time tend to go hand-in-hand with higher energy demand. Hoping that technology will save us from changing the way humanity treats nature is very convenient; unfortunately, it seems too good to be true. If we’d pray more, we might find technological solutions to absorb atmospheric carbon at a scale that can save us. But people don’t pray a lot these days. Mending your ways is never convenient.

PG: Can investor activism deliver the desired outcome in isolation of political will to take unpopular measures and individual behavioural change?

WK: No. Of course not. Investor activism is just a piece in the puzzle. Without the political will to take unpopular measures and individual – as well as institutional! – behavioral change, our children (we ourselves will be ok, just) are doomed. But investor activism can help to get the necessary change of mind going. Companies don’t just emit carbon; they also often lobby against necessary changes considered by government. This needs to be stopped by investors. But that is not all.

Investors need to end themselves the focus on short-term gains. You won’t find an investor these days who doesn’t swear by long-term returns. But, apart from the blessed trusting souls believing in private equity’s long-term myth, you won’t find anyone who isn’t hooked on monthly or quarterly results. We buy 100-year bonds now, because the spread duration could really make money if spreads tighten next week.   

The floods are definitely focussing minds. It is almost embarrassing how politicians are now falling over themselves to demand the most ambitious climate action when, until two weeks ago, they dismissed such demands as unrealistic scaremongering.

PG: Much of what you do is limited to Europe, yes, the US is waking up but what about Asia and Africa? Their biodiversities will come under growing pressure?

WK: The climate crisis and biodiversity destruction are global problems. Europe can (afford to) try to lead for a while. But we are all in the same boat. Everyone can make the boat capsize. This, however, cannot be an excuse for European investors and companies not to act. But arguments pointing to global justice don’t usually work. We can only hope for a sense of shame: that no-one will want to end up as the obvious one “ruining the whole thing”.

PG: Is ESG at a dead-end? Time to reinvent and if so, how?

WK: ESG is not a dead end. ESG is profitable. ESG is rational. Not bothering about ESG is like saying you don’t like vowels in the alphabet. But ESG won’t help humanity get out of the hole that it has – with very uneven contribution – dug for itself. Unless we break the mantra that saving the planet is a win-win. Well, it kinda is: if we stop destroying the planet, we all win. But at the moment, the financial industry makes it look like a walk in the park: “you can save the world while making handsome returns!”. Possible, but not very likely.

In order to NOT destroy the planet, some opportunities might need to be left on the table. Of course, we need to stop focusing on public assets. As long as private assets are considered “smart”, because they offer a neat way to get around the saving-the-planet-nonsense and continue to make handsome returns, we will not get very far. Asset owners need to dare face up to general partners. Owners of all asset classes need to start behaving like owners and accept the responsibility that comes with ownership. That is what we tell children when they get their first pet.

PG: Isn’t there too much bureaucracy riding the Climate Change bandwagon?

WK: I am not sure bureaucracy is what I fear. Rather, it is the net-zero activism that we now find all around. Everyone is joining some initiative. And that would be fine, only that the initiatives never have any real action against them. Action is always going to come later, after methodologies have been discussed, strategies set, targets determined, KPIs agreed, a lot more data gathered. Give it another one, two, three years’ time. Because it takes that long to convince laggards, and we don’t want to leave these laggards behind, do we? This is how you approach issue of moderate interest, not the most important challenge humanity has ever collectively faced.

We were told at the beginning of the decade that we had 10 years to cut emissions in half. But no one wants to address the difficult decisions where short-term money might have to be left on the table. Stakeholder capitalism is very cute until careers, bonuses, returns are at stake. At which point joining a net-zero initiative is buying time: no-one can be expected to change the world overnight, right?

PG: The recent floods – how does that mobilise public opinion and nudge the politics towards a greener Europe?

WK: The floods are definitely focussing minds. It is almost embarrassing how politicians are now falling over themselves to demand the most ambitious climate action when, until two weeks ago, they dismissed such demands as unrealistic scaremongering. Bleaching coral reefs were never going to scare Europeans, but flooded basements will.

PG: May you succeed in bringing about all the transformative changes that you are striving for, Wolfgang!

“We have to reimagine multiple ways of being men and women. There are other ways of framing masculinity and femininity”: Parmesh Shahani

Parmesh Shahani is an author, LGBTQ inclusion advocate and Vice President at Godrej Industries Limited where he heads Diversity & Inclusion and the Godrej India Culture Lab. He is the author of Queeristan: LGBTQ Inclusion in the Indian Workplace  (released in August 2020) and also Gay Bombay: Globalization, Love and (Be)Longing in Contemporary India

He serves as part of FICCI’s inaugural D&I task force and as a board member of Khoj International Artists’ Association. In the past, he has been a TED Senior Fellow (2018), Yale World Fellow (2014), a World Economic Forum Young Global Leader (2014), a Utrecht University-Impakt Fellow (2012), and an academy member of the Global Teacher Prize.

Parmesh is an author, LGBTQ inclusion advocate and Vice President at Godrej Industries Limited. He holds an MS in Comparative Media Studies from the Massachusetts Institute of Technology. 

Praveen Gupta: You highlight the link between inclusivity and profitability in Queeristan. You also mention that to be inclusive is about being ethical and not about making money? Is that a contradiction?

Parmesh Shahani: It is not a contradiction, it is complementary. In any case it is about ethics to start with. We need to treat everyone, in this case LGBTQ people who are 6-10% of the population, fairly. Even if we were say just 1%, the truth is everyone needs to be treated equally. It is very unfair that some people have been marginalised for so long. It is not an ethical versus financial argument but it is ethical and financial argument.

Even if you are not so ethical it makes business sense whichever way you look at it – makes you money, leads to more innovation and the talent it brings you. So even if you are homophobic, even if you are not ethical, even if you believe everyone should not be treated equally – I would assume you are in business to make more money, be more innovative, you want your company to be relevant. That’s how I have structured the argument – saying that it is really dumb – not only are you indecent, but you are also losing your industry and company so much money. I fail to understand why people would still want to argue about this thing.

PG: A five-step guide for making your workplace LGBTQ inclusive is a great prescription. Is it something that can be left with the HR?

PS: HR does not have the freedom and real mandates for innovation. Inclusion is way beyond HR… HR is just one component of it. It is deeply linked to product, innovation, CSR and communications. I think D&I should be a function that reports directly to the MD. People from HR should be a key part of the inclusion agenda but it shouldn’t be sitting in HR. That is what I recommend.

PG: The struggle for inclusivity of women begins with the arrival of the girl child. How does a predominantly patriarchal society resonate with the LGBTQ community?

PS: The way this inequality plays out within the gay movement – gay men tend to speak up more. Women are marginalised even within the queer movement – even in organisations. It will be a gay man who will be out. There are so few lesbians who are out. Very few lesbians in positions of power. I think women continue to be marginalised, even the LGBTQ movement exists within the larger framework of say patriarchy and misogyny. Unfortunately, our queer movement continues to replicate some of those problems.

There is no simple answer – gender and inequality have continued for so many years across the world. In other parts of the world there are successful experiments happening to narrow the gap. In India given how our society is structured, given the burden on women’s bodies, given the burden on women in society in general to be both homemaker, repository of the family whatever name, tradition. Even within the queer movement itself women internalise this misogyny themselves. I think it’s a long-term project.

We have to reimagine multiple ways of being men as well as women. And in any case gender is now being understood more and more as a spectrum. So I think it’s very important to work on projects with women. Men also need to understand how the current structure hurts them so much more. There are other ways of framing masculinity, there are other ways of framing femininity. They can move towards a kindred society.

But this is not going to be an overnight thing. It’s going to face a lot of resistance because people benefit when women are squashed in so many ways – socially, economically and otherwise. One thing we know about men is they do not like giving up anything – even 1% of their space. So it’s going to be a long struggle. But I think we have to start early – in our families and in our workplaces – which is why I wrote this book.

PG: As a culture, we did not originally have a binary mindset. How do we go back to being more accepting?

PS: It really makes sense to be inclusive and it is very much a part of our culture. Historically and culturally we have been good people. We have been respecting the environment for centuries. So for someone to say if you care for the environment, you are anti-development is not true. We have forever co-existed with nature. If you start abusing nature that you become non-Indian. People need to be reminded about that.

The British project was particularly evil in the sense that they not just imposed their values, they helped educate a certain kind of Indian elite in their system. Post-independence those homophobic values remained with the elite that governed us. That is why it took so many decades to get rid of them. I remind in my book that inclusiveness and LGBTQ is very much part of our ancient culture.

Yet a lot of debates in the public space are very binary. Either you like development or you don’t. Either you are this or this. The truth is we have always been plural and multiple for centuries. It’s good that we remind people of this.

Parmesh’s memoir-cum-manifesto, Queeristan is an expansive reference book of history, literature, cinema, movements, institutions and icons of the LGBTQ community. It drives home the singular point that in diversity and inclusion lies the promise of an equitable and profitable future, for companies, their employees, and society at large.

PG: How do you see supportive action boosting the inclusivity quotient?

PS: There is a direct co-relation and I write about this in my book. Urban thinker Richard Florida has mapped correlation between cities that are more inclusive and how they become more receptive to ideas and hence they attract a wide range of people. Hence, they become more innovative over the years. You see this geographically, state-wise and country-wise. Take for instance the East coast and West coast of the US. Because they are more culturally plural and tolerant, they attract better racial diversity, LGBTQ diversity. Because of that talent goes there. Because of that companies like Google open their offices there, thereby the economy improves.

There is a clear link between how you are as a city in terms of your values and the talent you attract. You see that in India all across. You see micro-hubs like Calcutta. It is no wonder that Calcutta had the first pride march in the country. Or like Jamshedpur, which is near Calcutta, where India’s first transgender person was respected at Tata Steel.

We are not seeing India as a whole. There are progressive states and non-progressive states. Chhattisgarh, Maharashtra to its credit, Kerala, Tamil Nadu are in another orbit – in terms of reaching out to LGBTQ people. Bihar, UP and so on are not on the radar. UP is trans progressive but not LGB progressive. That’s because trans people have more resonance in Indian culture. You will see this play out over the years. If TN becomes so much more inclusive – a lot of queer talent may move from Bangalore to Chennai. Like it has played out in other parts of the world.

PG: We are still struggling with women quotas on corporate boards. What about wider forms of diversity?

PS: I am a strong advocate for quotas. That’s the way to go. All around the world positive discrimination reaps a lot of benefits. People who are in power don’t want to give it up. They keep on coming with creative ways of excluding people. One system they use in India is the whole idea of merit. You present a gay candidate to them and a straight person. They will say the straight person had more merit. What is merit? Who is deciding?

You are a straight upper-class person who has gone through a certain experience in life and you are deciding that is the template of merit then that is your problem. If you as a man are saying that if I am seeing candidates and this man has 8 years of experience and this woman has 6 years of experience because she took 2 years off for childbirth – so the man has more merit than the woman. That is your problem. Because you are a straight man you cannot understand that having a child and multi-tasking with those experiences is more meritorious from an innovation perspective. Your male candidate with only 8 years of experience would not have that. When you are framing merit in such flawed terms – you will never hire queer people. So the only way to do this is through positive affirmative action. People do not change unless they are forced to, unfortunately.

PG: What policies must companies implement to draw Millennials and Gen Z?

PS: Generational diversity is important. People who are in positions of power need to realise that it is in their interest to build the bridge with younger people. But bridges don’t come free. An organisation has to invest in it. There are professionals out there to help with workshops, emerging research. Likewise, you will have to invest in reaching out to LGBTQ people. By just saying “Oh, I am not homophobic and people should now come and join my company” – it will never happen. Most companies wanting to run a good D&I programme must allocate at least 2-5 crores annually. That is what it costs for hiring a small team of professionals and doing the policy change. If you are willing to spend 50-100 crores on a TV campaign – why can’t you spend a fraction of that in making your company more inclusive?

PG: What next after Queeristan?

PS: I want to spend a large part of my life in writing on other kinds of advocacy. There will be other projects all around LGBTQ India. I am very interested in looking at the broad question of what does it mean to be LGBTQ in India?

PG: Many thanks for sharing your insightful perspectives. Here’s wishing you the very best in all your future endeavours.

Climate crisis urgently necessitates ESG compliant accounting standards: Transitioning and mitigating the carbon footprint!

My presentation at the CICIRM 2021, Harbin, China.

Right from my early days with the insurance profession, the message was shrill and clear: ‘insurance is a handmaiden of the industry’. I believe I have a more appropriate phrase now – corporate capture. #CorporateCapture goes way beyond insurance. However, as a common denominator for the global economy – it ensures we remain for as much and as long as possible within a firm grip of the fossil fuel industry. Well before it started belching carbon dioxide, nitrous oxides and methane at levels which have precipitated the Climate Crisis – it ensured an insurer DNA at its lethargic worst.

The agenda:

•What gets measured gets done  •Oxymoron  •Regulatory vacuum  •ESG activism  •Net zero  •Greenwashing  •IFRS wake-up call  •IAIS missing in action  •Reimagining the DNA.

This, broadly, was the framework of my presentation. The idea as I told my audience was to make them uncomfortable. This quote from Raj Thamotheram was my first salvo: ‘The greatest promise of ESG-focused activism is precisely in filling in the gaps that law and culture otherwise fail to address’. What an awesome vision to borrow for (and lend to) a broken regulatory system.

“[I]nvestors must shift the narrative away from a company-first model and focus first on the ecological and social boundaries that all companies must respect. They should continue to make sure portfolio companies are *optimizing* financial return, but only within those boundaries.” What could be a better source than The Shareholder Commons – which is tackling capital system failures that are endangering our future?! Yes, by binning Milton Friedman.

Shareaction’s defiance of status quo and ability to spot the cracks is admirable. Here is what Felix Nagrawala highlights in their recent survey: “Sustainability scores were lower for underwriting than investment across the board… It shows that the insurance industry is yet to realise the systemic risks that climate change, biodiversity and rights violations pose to the economy.” A unique dichotomy that manifests insurers.

Again, from Shareaction: Majority of large insurers do not live up to their role as ‘risk experts’ as they fail to adequately address systemic risks such as climate change and biodiversity loss. 1. Insurers’ boards remain ill-equipped to appropriately manage the environmental and social impacts of their organisations.   2. Despite the insurance sector’s focus on risk, the world’s largest insurance companies are largely failing to assess the impact of climate change on their investment portfolios. 3. Vast majority of insurers have not yet started to develop their approach to biodiversity loss.  4. Most of the world’s largest insurers (top 70 were surveyed) show severe negligence of their impact on human and labour rights across their investment and underwriting activities.  

A letter sent out to CEOs of eight major US insurance companies – signed by four Democratic party senators (I have been repeating this ad nauseum): “In order to better understand your fossil fuel underwriting and investment policies:  1. Have you studied how your company’s annual claims and premiums will evolve as climate-related losses burgeon over the coming decades? Which climate scenarios have you studied?  2. Have you conducted a stress test of your company’s exposure to fossil fuel assets? Which scenarios have you used? What did any stress tests reveal about your company’s exposure to fossil fuel assets?  3. How are your company’s fossil fuel underwriting and investment policies consistent with your broader commitments to sustainability? 

Net Zero Conundrum (Source S&P):

In Net Zero theory, companies are expected to first physically reduce their actual CO2 emissions, then take other actions, such as purchasing carbon offsets, to at least equal remaining unabated emissions.  ​

Mathematically, the “net” CO2 emissions attributable to the company then become zero. Yet not every entity is taking reasonable steps to curb their emissions before turning to offsets.  ​

In order to achieve the Paris Agreement 1.5 degree scenario, global spending trends must change. Today, companies expend more effort on offsets and other financial “solutions” than on actual emissions reductions, including pollution control technologies, clean energy production and energy efficiency.  ​

Financial expenditures on actual reductions must almost quadruple from its 2019 level according to the International Energy Agency (IEA) to achieve alignment with the Paris Agreement. ​

Claims that Net Zero is merely greenwashing are, not surprisingly, growing. The Washington Post criticized the financial sector for its focus on solutions that some argue do not contribute to actual emissions reductions, instead emphasising offsets.  ​

Even UN climate finance envoy and former Bank of England governor Mark Carney recently tripped up over offsets. He claimed that the investment company he vice-chairs was “net zero” despite investing in fossil fuels because the company also invested in renewable energy. Some called that an “accounting trick”. ‘I call it a pile of rubbish’, says Damian Carrington. ​

​An innovation in the ESG insurance space is the arrival of Net-Zero Insurance Alliance in the ESG insurance space – includes seven insurers that are already leaders of the Net-Zero Asset Owner Alliance. ​Insurers are recognising the importance of exiting fossil fuels for good, although whether they’re moving fast enough, and in line with the latest International Energy Agency recommendations, is less certain (Source: Capital Monitor).

A culture of superficial ESG regulatory compliance could set us back years!​

Since the regulators stepped in with a clear focus on managing impact, the industry has gone into overdrive. At times, it feels like it is trying to run before it has learnt to walk. Take climate change for instance. Major commitments are being made about ‘aligning’ portfolios with Net Zero goals without a deep understanding of how to meaningfully measure the carbon intensity of portfolios (e.g. scope 3) or to effectively reduce them (beyond quick cosmetic gains). The obvious case is offsetting, which should be used as a last resort in situations where reducing emissions becomes too challenging.  ​

A special report by ratings agency AM Best in mid-November 2020 emphasised that insurers and reinsurers that ignore ESG in their underwriting and investment decisions confront serious reputational risks. In turn, this risk can cause buyers and investors to flee to competitors, affecting the companies’ creditworthiness and ratings. ​(Source: www.russbanham.com​).To achieve global net-zero emissions by 2050, we will need financing on a far larger scale than what is currently being dedicated. ​

The cost of transition:

The United Nations Intergovernmental Panel on Climate Change in 2018 estimated the world needs to invest about $3 trillion annually under a 1.5-degree scenario.  ​

Of that amount, about $2.4 trillion – or about 2.5% of global GDP – will be needed annually over the next 15 years for clean energy-related investments, the IPCC said. In comparison, global total investments in clean energy and energy efficiency in 2019 reached only US $635.8 billion, according to the International Energy Agency. ​

The world would need to invest about 3.8 times that amount annually to achieve the IPCC’s 1.5-degree scenario. ​

Transition-focused financing, including debt issuance products like green bonds, could help put a dent in overall investment needs. Transition finance could provide up to $1 trillion annually over the next 30 years, S&P Global Ratings estimates. ​

​IFRS in the ring:

The International Financial Reporting Standards Foundation (IFRS) announces the strategic direction to be taken in the formation of a new sustainability reporting standards board, including its focus, scope, and approach. ​

The International Organization of Securities Commissions (IOSCO), the leading international policy forum for securities regulators, announced that it will work with IFRS Foundation Trustees towards the establishment of a Sustainability Standards Board (SSB), citing an “urgent need for globally consistent, comparable, and reliable sustainability disclosure standards.” ​

Citing the urgent need for better information about climate-related matters, the IFRS said that new board would initially focus its efforts on climate-related reporting, while also working towards meeting the information needs of investors on other ESG matters. The board would build on established, existing frameworks, such as TCFD, as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value. (Source: Mark Segal).

In conclusion:

The presentation is neither a comprehensive account of all the gaps nor the remedies – coming from observers and experts. However, there are pointers in plenty towards possible ambiguities that could do more harm than good. What must be measured to ensure sustainability in unambiguous terms? How to ensure we do not get swept by a tsunami of greenwash? ESG per se is getting pulled into many directions, how to ensure the integrity of the core values around environment, societal and governance? While the IFRS attempts to put together a meaningful protocol, the IAIS must get into the driving seat. It must not only ensure insurers defend their balance sheets from climate risks but also that insurers do not aid or abet climate risks both as investors and underwriters. Insurers in the process have to come of age and shake-off the corporate capture that has, for long, held them back from their logical progression.

Flying blind in an adverse climate!

Poor pricing and reserving do not bode well for insurers as the #ClimateCrisis worsens.

Just as the Indian insurance market was beginning to open up to private players, two companies – one in Australia (‘HIH’) and the other in the UK (‘Independent’) coincidentally went into run-off. For similar reasons. Pricing and reserving! Underlying these two was poor corporate governance. Why is it important to revisit? One, most newcomers to the Industry perhaps missed out on them. Two, in a world besieged by Climate Crisis – these reasons will play out yet again. However, the ground has moved significantly since then. The canvas has widened into ESG (environment, societal and governance).

HIH saga

In The Inside Story Of Australia’s Biggest Corporate Collapse Mark Westfield documents how: ‘The plot of the HIH soap opera is familiar – the insurance company collapsed in 2001 with debts of about $5.3billion, which Ray Williams and his cohorts achieved through gross mismanagement, largely charging too little for premiums and failing to put away enough to pay out claims.’

The HIH royal commission probing the collapse of HIH turned out to be a very costly case study into how not to run a company, a poor corporate governance culture and risk management gone wrong. So what can corporate leaders learn from Australia’s largest ever corporate collapse?

  • Using qualified & experienced directors does not guarantee success.
  • Directors must probe senior management and ask questions.
  • Directors cannot abdicate responsibility.
  • Long term strategies need to be developed and questioned.
  • Do not do business with a company related to directors/management.
  • Be very diligent during mergers and acquisitions.
  • Accountability and propriety is essential at all levels of the organisation.
  • Risk Management should go beyond statements, guidelines and policies.
  • External regulators need to be more proactive.
  • Culture affects behaviour and behaviour will ultimately affect performance.

How Independent?

‘The demise of Independent left 500,000 individuals and organisations from the London Fire Brigade to the Oval cricket ground to Somerfield supermarkets and the McLaren Formula One racing team seeking new cover, cost more than 1,000 people their jobs and will almost certainly lead to a further 1,000 losing theirs eventually, and punched a hole in the investment portfolios of thousands of shareholders.’ Chris Blackhurst traces the life and times of the CEO Michael Bright in his piece The fall of the house that Bright built. The meltdown at Independent Insurance took the City and thousands of policy-holders by surprise, he observes. Yet the signs of impending disaster had been there for years, with only the charisma of its chief executive, Michael Bright, to hide the danger.

Bright, as Blackhurst points out, realised that by not building up reserves and putting cash aside for an event that may never happen he could grow profits. How did this translate into the company’s last four annual reports arithmetic? Gross premiums rose from £438m to £830m, almost double. But the outstanding claim reserve barely moved, from £354m in 1997 to £372m in 2000!

Climate Crisis is staring us in the face

‘Finance & insurance is increasingly hard to procure for high emissions fossil fuel industries. Nothing surprising about that! Global insurers will inevitably price in carbon risk, to protect shareholders & deliver on their treaty obligations – believes Tim Buckley of IEEFA. The issues involved are beyond insuring and investing in fossil fuels.

Shareaction recently analysed how the top 70 insurers in the world are performing?  Here are their findings:

  • Majority of large insurers do not live up to their role as ‘risk experts’ as they fail to adequately address systemic risks such as climate change and biodiversity loss.
  • Insurers’ boards remain ill-equipped to appropriately manage the environmental and social impacts of their organisations.  
  • Despite the insurance sector’s focus on risk, the world’s largest insurance companies are largely failing to assess the impact of climate change on their investment portfolios.
  • Vast majority of insurers have not yet started to develop their approach to biodiversity loss. 
  • Most of the world’s largest insurers show severe negligence of their impact on human and labour rights across their investment and underwriting activities. 

A special report by ratings agency AM Best highlights as to how insurers and reinsurers that ignore ESG in their underwriting and investment decisions confront serious reputational risks. In turn, this risk can cause buyers and investors to flee to competitors, affecting the companies’ creditworthiness and ratings. 

With the likes of the IAIS (International Association of Insurance Supervisors) in a sleep easy mode and IFRS (International Financial Reporting Standards) having missed out on sustainability, responsible lawmakers have taken the lead. This is an extract from a missive shot by four Democratic party senators to the top eight US insurers:

As the leader of a major insurance company, you know the significant financial and economic risks climate change poses to both underwriting and investment. 

Economists, central bankers, financial regulators, asset managers, investors, insurance analysts, credit rating analysts, investment bankers, real estate professionals, and scientists have produced an enormous trove of research suggesting that climate change and the failure to plan for an orderly transition to a low carbon economy can produce staggering economic losses.  

These losses relate to the physical risk of damages caused by climate change or the transition risk of stranded fossil fuel assets as the economy transitions to low-carbon sources of energy. 

Physical risks of climate change pose a serious threat to insurers, both on your assets side and on your claims side. There is ample data that rising sea levels and increased storm intensity and activity will do substantial damage to coastal property values. 

In addition to sea level rise and coastal storms, more frequent and intense wildfires, riverine floods, droughts, and heatwaves will also result in very large losses, much of them insured. Indeed, the management consultancy McKinsey warns of massive physical risks that will increase “nonlinearly” as the earth continues to warm. 

Transition risk is also significant for insurers that hold large stakes in fossil fuel assets. One economic paper reports “economic literature combined with industry practices suggest the presence of persistent market inefficiencies for fossil fuel reserves, so these assets are likely to be stranded and mispriced.

Beyond pricing and risk transferring

Climate Change represents an existential threat and historical models are not predictive of the future. As more and more carbon gets injected into the system – risk grows by the day and is increasingly assuming a systemic form. Transferring the risk is not only insufficient as it does not solve the problem. Moreover, pricing without factoring for externalities will further inflate the carbon bubble for insurers. Therefore, this calls for what McKinsey prescribes – broadening the relevance of the industry and changing outcomes. Needless to mention the big clamour for Net Zero – what ought to be the last resort has become the first love. A license to greenwash.

In conclusion

‘With physical risk becoming increasingly hard to price – translation from hazard to exposure to damage and the manifestation of that in cash flows is just hard to model’. This just about telescopes the pricing challenges into reserving misadventure. Factor in the rising environmental and societal demands – would it mean insurers might be flying blind till such time a dependable navigation protocol appears on the horizon? Regulators, actuaries, analysts, auditors, customers, investors, risk-managers, run-off managers, shareholders et al have a lot to ponder and act upon. Looking back, an HIH or an Independent may appear a minor aberration?!

Translation into simple Chinese: Courtesy Yibo Fang (PG student at NUS).

在恶劣气候的迷雾中航行

随着全球气候日益恶化,不恰当的定价和准备金评估对保险公司来说不是个好兆头。

21世纪初,当印度保险市场开始对私人企业开放时,两家保险公司——澳大利亚HIH公司与英国Independent公司均由于糟糕的的定价和准备金评估能力被监管淘汰,而在这两者背后的深层原因则是公司治理不善。为什么现阶段重新审视这两个因素对于行业至关重要?一方面,当前行业中多数新成立的保险公司常会将其置于优先度较低的地位甚至忽略它们。另一方面,在现今这个被气候危机愈演愈烈的世界里,这些原因将再次成为影响公司治理的关键驱动因子。事实上,险企的经营治理基石板块早已变动,核心逐步扩展到ESG(环境、社会和治理)这个更大的议题。

HIH往事

在《澳大利亚最大企业倒闭的内幕故事》中,马克·韦斯特菲尔德(Mark Westfield)记录了HIH的破产原委:”HIH肥皂剧的情节耳熟能详——这家保险公司在2001年倒闭,负债约53亿美元。正是雷·威廉姆斯和他同伙们的严重管理不善导致了这一结果:由于定价错误使得保费收入被严重高估,但准备金评估不足使得公司没有足够的钱来支付赔案。

澳大利亚为HIH案成立的皇家委员会对HIH的倒闭进行了调查,并总结出了一个代价高昂的反面教材——高管懒政、糟糕的公司治理文化和风险管理手段致使公司破产。那么,企业领导人能从澳大利亚有史以来最大的企业倒闭中学到什么?

  • 使用合格和有经验的董事并不能保证成功。
  • 董事必须调查高级管理层并向他们提出问题。
  • 董事要积极承担自己的责任。
  • 公司需要制定长期战略并不时对其进行修正。
  • 不要与董事/管理层关联的公司做生意。
  • 在并购过程中要非常勤勉尽责。
  • 问责制和合规在组织的所有层级都至关重要。
  • 风险管理应超越报表、准则和政策。
  • 外部监管机构需要更加积极主动。
  • 企业文化影响行为,行为最终会影响绩效。

多么“独立”?

英国Independent公司(下文译为“独立保险”)的破产迫使从伦敦消防队到欧沃板球场,再到萨默菲尔德超市和迈凯轮一级方程式赛车队所涉及到的50万个体和组织重新购买保险,破产还使得超过1000名雇员失去工作,并给数千名股东的投资组合以重创。克里斯·布莱克赫斯特(Chris Blackhurst)在他的作品《布莱特建造的房子的倒塌》中回顾了首席执行官迈克尔·布莱特的生活时代。他指出,独立保险的破产令伦敦金融城和成千上万的投保人感到意外。然而,独立保险的破产灾难早有预兆,只有其首席执行官迈克尔•布莱特(Michael Bright)在竭力掩盖这一危险。

正如布莱克赫斯特指出的,布莱特意识到,通过不积累准备金和为可能永远不会发生的事件预留现金,公司可以增加利润。那么这一想法是如何反应在破产前四年的财报上的呢?据其年报显示,独立保险总保费从4.38亿英镑增至8.3亿英镑,几乎翻了一番。但准备金几乎没有变化,仅从1997年的3.54亿英镑小幅上调至2000年的3.72亿英镑!

气候危机正凝视着我们

碳排放极高的化石燃料行业越来越难以采购到合适的金融和保险产品,但这并不奇怪!IEEFA的蒂姆·巴克利(Tim Buckley)认为,全球保险公司将不可避免地为碳风险定价,以保护股东并履行其条约义务,这其中所涉及的问题不仅仅是为化石燃料提供保险和投资。

英国非营利组织Shareaction最近分析了全球前70家保险公司的表现,并有如下发现:

  • 大多数大型保险公司没有履行其作为”风险专家”的角色,因为它们未能充分应对气候变化和生物多样性丧失等系统性风险。
  • 保险公司董事会仍然没有能力适当管理其公司行为对环境和社会的影响。
  • 尽管保险业注重风险,但全球最大的保险公司多数未能评估气候变化对其投资组合的影响。
  • 绝大多数保险公司尚未开始开发应对生物多样性丧失的解决方案。
  • 大多数世界上最大的保险公司在投资和承保活动中严重疏忽其对人权和劳工权利的影响。

评级机构AM Best(贝氏评级)的一份特别报告强调了在承保和投资决策中忽视ESG的保险公司和再保险公司将面临严重的声誉风险。另一方面,这种风险可能导致买家和投资者选择竞争对手,进而影响公司的信誉和评级。

由于国际保险监督员协会(IAIS)处于监管滞后、缺位状态,而国际财务报告准则(IFRS)等机构在可持续发展方面也未能如出一身,负责任的立法者已经率先采取行动。下文是四位美国民主党参议员向美国八大保险公司发函中的摘录:

作为一家大型保险公司的领导者,您应当清楚气候变化对承保和投资构成的重大金融和经济风险。经济学家、央行行长、金融监管机构、资产管理公司、投资者、保险分析师、信用评级分析师、投资银行家、房地产专业人士和科学家都通过大量研究表明,气候变化和未能计划有序地向低碳经济过渡,可能会造成巨额的经济损失。这些损失涉及气候变化造成的物理损害风险,或随着经济向低碳能源过渡而滞留化石燃料资产的过渡风险。

气候变化的物理风险对保险公司构成严重威胁,这一威胁反映在资产和负债两端。有充分的数据表明,海平面上升和风暴强度和活动增加将对沿海财产价值造成重大损害。除了海平面上升和沿海风暴外,更频繁和更强烈的野火、河流洪水、干旱和热浪也将造成非常大的损失,其中大部分都投保了保险。事实上,管理咨询公司麦肯锡警告称,随着地球持续变暖,巨大的物理风险将“非线性地”增加。

对于持有大量化石燃料资产股份的保险公司来说,过渡风险也很重要。一篇论文指出:经济文献结合行业实践表明,化石燃料储备市场效率始终低下,因此这些资产可能会滞留和被错误地定价。

超越定价和风险转移

气候变化代表着生存的威胁,历史模型无法预测未来。随着越来越多的碳被注入系统(风险与日俱增,并越来越多地以系统的形式出现),单纯转移风险是不够的,因为它不能解决问题。此外,不考虑外部因素的定价也将进一步加剧保险公司的碳泡沫。因此,这需要麦肯锡的处方——将行业之间的相关性和不断变化纳入考虑,更不用提社会对于“净零”的强烈呼声——“漂绿”本应是应对气候变化最后的手段,现在却成了最初、最美好的愿望。

结语

“随着物理风险越来越难以定价——很难用模型去反映从危险到风险的转换,以及现金流中这种风险的表现”。这使得大量的定价挑战变成准备金评估的意外事件。随着越来越多由环境和社会需求主导的风险慢慢浮现——保险公司可能会在迷雾中航行,直到届时一个可靠的灯塔出现?监管者、精算师、分析师、审计师、客户、投资者、风险管理者、合规经理、股东等有很多需要思考和行动的因素。回首往事,是否会有另一家公司重蹈HIH和独立保险的覆辙?!

本文首发于The Diversity Blog [2021.07.08],作者Praveen Gupta,英国特许保险学会会员(FCII)。译文中如有错误和词不达意之处敬请谅解,一切观点以英文原文为准。

You Are What You Risk: “A successful community or nation is one where people come together to reduce risk…”

Author and strategist Michele Wucker coined the term “gray rhino” for obvious, probable, impactful risks, which we are surprisingly likely but not condemned to neglect. She is the author of four books including the global bestseller THE GRAY RHINO: How to Recognize and Act on the Obvious Dangers We Ignore, which China’s leadership has used to frame and communicate its crackdown on financial risk. The metaphor has moved markets, shaped financial policies, and made headlines around the world. It helped to frame the ignored warnings ahead of the COVID-19 pandemic and inspired the lyrics of the hit pandemic pop single “Blue & Grey” by the mega-band BTS, about depression as a gray rhino. Michele’s 2019 TED Talk has attracted over two million views.

Michele is founder of the Chicago-based strategy firm Gray Rhino & Company, drawing on three decades of experience first as a financial journalist and then media and think tank executive. She has been honored as a Young Global Leader of the World Economic Forum and a Guggenheim Fellow. She has held leadership positions at The Chicago Council on Global Affairs; the World Policy Institute; and International Financing Review. Her writing has appeared in publications around the world including The Economist, The New York Times, The Washington Post, and The Wall Street Journal. She has been a sought-after media commentator on the Covid-19 pandemic.

Praveen Gupta (PG): I am tempted to call your book the Bible of personal risk?

Michele Wucker (MW): Oh my, what a compliment – but perhaps blasphemous? YOU ARE WHAT YOU RISK is meant to be a wide-ranging set of principles that help to guide people through their lives. And I quote the Bible in the book when re-telling the story of the Parable of the Talents: the master who gives three servants money and reprimands the one who does not invest it. But I also talk about how different religions and value systems shape people’s individual responses to risk in very different ways. The Bible is only one tradition. So perhaps a better description might refer to the great books of many religious and philosophical traditions, since each brings its own perspective to the question of risk.

PG: From business, policy, strategy, financial risk of ‘Gray Rhino’ to the personal approach to risk ecosystem, the new book bridges the two sides of risk?

MW: The deeper I got into researching and writing the book, the clearer it became that we need to look at risk-taking holistically and see the connections that link personal risk attitudes, beliefs, and behaviors to organizational risk culture and the wider risk values that societies embrace and that governments implement. It was a challenge at the beginning, coming from a background in policy, finance, and business strategy, and fearing it was too risky a stretch to take a deep dive into personal approaches to risk. But as I made progress, I came to see that strategic business and policy decisions need to take personal and group risk attitudes into consideration.

In their new book, Daniel Kahneman, Olivier Sibony, and Cass Sunstein disparage such influences as “noise” that interferes with decision making. While we agree that those influences demand attention, I take issue with their premise that some decisions ought to be identical across different scenarios. The risk fingerprints of individuals, organizations, and societies, and the feedback loop among them, are at the heart of who we are, and thus are the most important component of decision-making; decisions are the symptoms.

PG: Gender and colour are ongoing challenges and hence a big obsession for diversity?

MW: Gender and colour can affect our risk decisions, but most likely not in the way you might think. Julie Nelson of the University of Boston has revealed problems with earlier research on gender risk differences; her research suggests that there is a 95 percent overlap between how much risk men and women are willing to take on. This is particularly true when education and experience levels are similar. The biggest difference comes from the experiences that each group shares, which change the risks they face. A woman speaking up in a meeting is more likely to be ignored, or called bossy for being too assertive, or seeing a man take credit for the same idea after she was ignored for raising it. Thus, the risk and reward equation is different for the social risk of speaking up – and women have lots more experience, which makes them better at decision making.

Also, risk stereotyping is a real problem, which often leads to women and people of color being passed over for promotions or investments in their companies. Many women entrepreneurs share war stories of venture capitalists not thinking that women will take enough risks to be worthy of their investments, even though research disproves that stereotype and other research suggests that start-ups founded by women are more likely to succeed than those founded by men.

People may mistakenly think of gender and color as proxies for diversity in risk attitudes. Instead, boards and people making hiring and promotion decisions and assembling team should look explicitly at risk attitudes.

Decision making groups would benefit from ensuring that there is diversity in risk attitudes and tolerance among their members so that they can make better risk decisions. People may mistakenly think of gender and color as proxies for diversity in risk attitudes. Instead, boards and people making hiring and promotion decisions and assembling team should look explicitly at risk attitudes. There are tools for this, like the Risk Type Compass out of the UK. They also can learn a lot from posing scenarios and asking questions like “What’s the biggest risk you’ve ever taken?” and “What’s the biggest risk you’ve ever turned down?”

PG: What numbs humans to recklessly ignore climate risk? What are the chances of us waking up to it, in time?

MW: Humans’ reckless ignorance of climate risk is the consequence of a combination of influences. First is what some social scientists call “solution aversion” which is a tendency to deny the seriousness of problems when we don’t like the solution. This is quite prevalent in part because most humans don’t like change of any kind, so solution aversion comes into play more than we think. Manufactured denial also comes into play: people who don’t like solutions to climate change because they are making money from dirty energy know that they can exploit human nature. The media also comes into play. Here I hesitate to repeat the mistaken impression they disseminate, lest I reinforce it, but I think it’s important to call out as false – that climate change is “slow moving” and something that will happen in the future. It’s here now: extreme weather, rising seas and inland water levels, droughts, wildfires. Finally, a sense of agency is important, but climate change feels so big that many people feel powerless, even though we have more power than we think.

PG: Insurers understand risk. Yet they – the large American ones in particular – continue to invest in and insure the very reasons that are responsible for the Climate Crisis?

MW: It’s very much in insurers’ interest to help solve the climate crisis, and you’re right – it’s a big problem that many insurers continue to invest in and insure the fossil fuel industry. If you insure coastal real estate, businesses and individuals who are prone to flood or fire damage, or any other entities vulnerable to climate change-induced extreme weather, why would you want to contribute to the very influences that put your insured clients – and in turn, yourself – in harm’s way? That question is especially apt when it’s clear that fossil fuels are at a turning point when both investors and policy makers are going to be making big changes.

There has been rising concern by financial regulators and by insurers themselves over whether the industry has enough capitalization to withstand expected losses caused by climate change, and it’s time to stop hand-wringing and take serious action.

There has been rising concern by financial regulators and by insurers themselves over whether the industry has enough capitalization to withstand expected losses caused by climate change, and it’s time to stop hand-wringing and take serious action. The insurance industry also is well positioned to push for meaningful changes by insured entities. Just like many auto insurers reduce your premiums for avoiding accidents, driving fewer miles, and allowing apps to monitor (and hopefully improve) your driving habits, there are so many ways that insurers could nudge clients to reduce their carbon impact.

PG: Would you prescribe risk education at an early age so as to inculcate equity in societal wellbeing?

MW: Kids are getting a risk education already, whether intentionally or not. They see how their parents, teachers, and peers respond to risk misinformation, embracing or rejecting it. Particularly in the West, parents and nanny societies try so hard to protect kids from risks that they teach them to avoid it instead of how to weigh risks thoughtfully. What we need is intentional education in risk literacy: how to understand probabilities and impact, how to acknowledge the respective roles of emotion and reason, and honing those skill sets in practice in different risk scenarios.

PG: Though early days, any signals from the American individualism?

MW: There’s interesting research on the differences between individualist and collectivist cultures on risk responses: how risky people see something as being, what choices they make on their own versus in the group, how gender stereotypes play out, and how much power people feel they have allowing them to make a difference. Paradoxically, sometimes individualist cultures can make people feel that they have less power as individuals, compared to collectivist cultures.

The pathologies of American hyper-individualism have played out in the Covid-19 pandemic, as we’ve seen a stark difference between people who wear masks and are vaccinated to protect others as much as themselves, and others who insist on going mask-less and rejecting vaccines as a show of individualism and political statement.  The latter have made it harder to fight the pandemic. A successful community or nation is one where people come together to reduce risks, and the first sign of decay is when members ignore their responsibilities as citizens.

PG: The Gray Rhino is a well-established metaphor. Any likely ones expected to emerge from your latest work?

MW: The biggest one is the risk fingerprint: the set of influences behind your risk choices, including your innate personality, upbringing, social environment, values and sense of purpose, physical environment, and neurobiology. Like a real fingerprint, some of the aspects cannot be changed, but others can be optimized through awareness, habits, and processes. You cannot control your innate personality nor your upbringing, but you can practice good risk habits, surround yourself with peers with a diverse set of risk fingerprints, and be aware that what you eat, what music is turned on, and the temperature in the room can all sway your decisions.

Your choices leave an imprint much like a real fingerprint does on a flat surface, which forensic investigators can then use to identify the person who left it. This imprint identifies you to the world, much as the fingerprint defines you. That’s why the cover of the book prominently features a maze in the shape of a fingerprint: the maze representing choices and uncertainty, and the fingerprint standing in for identity.

PG: Grateful thanks for these brilliant insights, Michele. May your new book become an international bestseller, too!

The case for resilient EB global programmes: Mitigating Systemic risks!

Managing a global workforce is not just about bridging varying benefits, cultural differences and languages. Nor is it anymore a straightforward strategy to help you engage employees and improve retention, health and performance. If you wish to get anywhere close to addressing this, please remember that you are now dealing with Systemic risks and not just employee benefits (EB) risk/s per se. My first lessons in structuring and running global programmes – out of the London Market – were rather siloed. Each component of a multinational customer’s diverse geographic presence would generally have a different set of brokers, carriers and design. All mutually exclusive and hermetically sealed. Assets, cargo, liability, at best some element of cross class. Benefits would sparingly figure in the list. Yes, an occasional cover for a handful of expats.

The virus that haunts us today – origins zoonotic or manufactured – has forever mutated the physics and chemistry of the EB business. It has brought two things to the foreground – Climate Change and ESG (environment, social and governance). These two intertwine and overlap with the pandemic in ways that EB underwriters do not have the luxury of grand isolation anymore.

So, what’s happened?

The focus of this piece is on Asia. The reality again is diverse – from South Asia to the Far East. Hard core manufacturing ranging from sweat shops to high tech. Services from body shops to the high-end application development centres. Not just the politics and economics but the ESG interplay.

The Pandemic has an expiry date but then it is expected to become an endemic. It’s all set to widen protection as well as the benefits gap. Health resilience to vary depending on the health infrastructure and virus containment policies, as Swiss Re affirms. If affected employees of a top-notch global brand were in an Indian city that turned into a hotspot during the second wave of the pandemic – getting a hospital bed, oxygen and critical medicines et al – notwithstanding the best-in-class benefits programme – could be as challenging as it would for anyone else. The TV channels were full of images including a diplomatic setup in the capital desperately trying to procure an oxygen cylinder for a sick staff. Fancy work places do not preclude them from a Sick building Syndrome. While the affected employees struggled for a treatment or whilst undergoing it, what was the impact of this on the global business that they work for – on rolls or off rolls? Is an outreach a solution? Many Indian corporates, for instance, have been offering benefits no less than the most enlightened multinationals. The challenge is far bigger.

Climate Risks

Economies in south and southeast Asia are most vulnerable to the physical risks associated with climate change. Climate change also poses transition risks, and once again Asia may be most impacted, according to Swiss Re. Climate change has no expiry date nor a vaccine. Remember many S. Asian cities including India have the worst AQIs (air quality index) in the world. Which would mean that employees are not living and working in an ideal environment. The escalating heat and humidity levels in northern India would trigger higher frequency of cardiac and neurological conditions. One, therefore, needs to watch out where you locate the business and thereby the workforce. Needless to mention the return periods of floods and droughts due to overall global warming and poor civic infrastructure and safeguards.

Climate Change impacts lives, health, and supply chains. Unlike the pandemic, assets too. It invokes intergenerational and transregional justice. “A new, highly complex and destabilised ‘domain of risk’ is emerging – which includes the risk of the collapse of key social and economic systems, at local and potentially even global levels,” warns the Institute for Public Policy Research. “This new risk domain affects virtually all areas of policy and politics, and it is doubtful that societies … are adequately prepared to manage this risk.”

ESG

In 2021, investors are under renewed pressure to consider the “S” (social) performance component in their investments. Yet in the world of Environmental, Social and Governance (ESG) investing, the integration of social performance assessment has seen insufficient progress. For all investors, it is important to proactively address these questions because, as the ESG Working Group found, social issues can create key risks. They are salient and will be increasingly relevant in the future according to the Working Group – a pro bono partnership that brings together civil society, experts and private sector.

With ‘Social’ assuming the centre space under ESG, the employee has emerged as a key stakeholder in any business. ‘Zara’ for instance has been under global media scrutiny for its alleged exploitative practices in the Xinjiang province, China. Employees of sensitive components also play a critical role in supply chains and just in time functions. Any weakness in the global chain would only seriously impact the end product. Deficiencies in employee care, therefore, spill well beyond the realm of traditional EB boundaries. In extreme situations triggering issues around human rights, slavery, reputation, employee morale and employee value proposition. Thereby bringing management liability into play.

In conclusion

What may the future manifestations of the overlaps be is anybody’s guess. To be able to address them, risk managers need to anticipate them. This web will only get more intricate by the day. Last week’s action in the courthouses and boardrooms relating to Shell, Exxon Mobil and Chevron moved the ground significantly. This is the beginning of a lot more waiting to happen. Given the dynamic nature of risks, reminds Swiss Re, we are now in an age when forward rather than backward-looking data analysis is paramount. This equally applies to the benefits business and all its systemic entanglements. Silos wouldn’t work!

BLACK SWANS, GREY RHINOS AND UGLY DUCKLINGS

The Journal, Chartered Insurance Institute: May 12, 2012

Black swans, grey rhinos and ugly ducklings | The Journal Magazine (cii.co.uk)

This article is an outcome of a brilliant event hosted by Ethical Systems and Preventable Surprises. Renowned author Michele Wucker brought forth her strategies to empower individuals and institutions to tame the pandemic.

Metaphors capture defining moments but they are vulnerable to clicheing or mutations. The ongoing pandemic, despite the assertion by Nassim Nicholas Taleb that it was a White Swan – flipped to a Black Swan! Needless to mention, each one of us has our own baggage. Interestingly, that influences individual and collective beliefs. Risk management included. Michele Wucker endeavours to demolish entrenched misplaced narrative and puts us head on with the ‘grey rhino’ (#GrayRhino: the American way).

I expect a later discovery – the Green Swan to stay benign – just as conceived by John Elkington – to deliver exponential progress in the form of economic, social and environmental wealth creation. Notwithstanding the simultaneous existence of a Black Swan version for a catastrophic ‘climate event’.

“Biodiversity loss and poor management of natural resources have been linked to the emergence of infectious diseases”.

Alessandra Lehmen is an outstanding Environmental and Climate lawyer qualified in the US and Brazil. She has an LL.M. degree in Environmental Law and Policy from Stanford, a Ph.D. in International Law from UFRGS and an MBA from FGV. Alessandra is a Postdoctoral Laureate at the Make Our Planet Great Again Program of the Presidency of France. At Stanford, she was a Rising Environmental Leaders Fellow, a member of the Board of the International Law Society, and winner of the Olaus and Adolph Murie Award for best work in Environmental Law. She is also a recipient of the Lincoln Institute/Harvard Forest Conservation Catalysts Award. Alessandra has been consistently recognized as a leading global environmental lawyer by British publications PLC Which Lawyer and Euromoney Expert Guides.

Alessandra is a passionate musician. She is the vocalist and lyricist of alternative rock band Lautmusik and was an alto singer at the Stanford Symphonic Chorus.

International cooperation is important and does not need to happen at the expense of sovereignty, but I think conditioning our environmental and climate efforts to external funding is ill-advised and sends a twisted signal.

PG: What is really happening to your forests?

AL: Unfortunately, the pace of deforestation is picking up. In 2020, according to the Global Forest Watch report, Brazil concentrated about 1.7 million hectares – more than a third of the surface of devastated virgin forests on the planet. According to Brazil’s National Institute for Space Research (INPE), the Amazon rainforest lost 11,088 square kms of land, the largest amount in the past 12 years. A recent survey by NGO Imazon Institute concluded that the Amazon had the highest rate of deforestation (810 square kms) in 10 years for the month of March. Also in 2020, the Brazilian and international press reported the tragic advance of fire in two of the most important biomes in the world, the Pantanal wetlands and the Amazon. Although this has fallen pretty much under the radar, fires also severely affected the Pampa biome, in the country’s Southernmost region.

In 2020, according to the Global Forest Watch report, Brazil concentrated about 1.7 million hectares – more than a third of the surface of devastated virgin forests on the planet.

This trend was catalyzed by a series of environmental setbacks. Those include the passing of more flexible forestry laws in 2012, the recent hampering of the Ministry of the Environment’s deforestation control and enforcement actions, lowering of climate ambition, and legislative action aiming at regularizing illegal grabbing of public forests as well as indigenous land. A recent report by Observatório do Clima, a network of environmental NGOs, finds that the Ministry of the Environment’s budget is the smallest in 21 years.

As a result, Brazil has been facing increased scrutiny and pressure from the international community. President Bolsonaro’s speech at the Leaders Climate Summit convened by President Biden was met with varying degrees of optimism and skepticism. Some have commended what was perceived as a change of tone and increase in commitments, such as the revival of the promise to stop illegal deforestation by 2030 (a goal that was already included in Brazil’s first NDC under the Paris Agreement, in 2016) and the indicative goal of carbon neutrality by 2050. Others, including US climate envoy John Kerry, welcomed the pledge but questioned whether the announced measures will actually be put into practice.

President Bolsonaro’s speech at the Leaders Climate Summit… was met with varying degrees of optimism and skepticism… US climate envoy John Kerry, welcomed the pledge but questioned whether the announced measures will actually be put into practice.

What I find particularly problematic is the apparent return of “demanding diplomacy”. After a decades-long effort to position itself as a self-sufficient mid-sized power, as well as a leader of environmental and climate multilateral efforts, Brazil’s current stance is a throwback of sorts to the old practice of conditioning action to the influx of international resources. The revised Brazilian NDC presented in 2020 mentions that at least US$10 billion per year will be needed to implement the pledges, and the government has been reiterating the call for the international community to pitch in.

International cooperation is important and does not need to happen at the expense of sovereignty, but I think conditioning our environmental and climate efforts to external funding is ill-advised and sends a twisted signal. Brazil has shown in the past that it has what it takes, in terms of institutional capabilities and governance framework, to fight deforestation. Putting a price tag on carbon neutrality is also at odds with the government’s failure (challenged in 2020 by means of two cases that are underway at the Brazilian Supreme Court) to adequately channel idle resources of the Amazon and Climate funds. Brazil is particularly well-positioned to become a leader of bioeconomy and low-carbon economy, but is losing momentum. This realization has been leading civil society, corporations, and subnational entities to organize their own movements and engage in paradiplomacy efforts.

PG: In what ways are the palm oil companies contributing to the damage?

AL: According to recent reporting by Mongabay, the Amazon state of Roraima has witnessed a surge in cultivation of oil palm in the last decade, driven by biofuel demand. The goal was to convert degraded grazing areas into palm oil plantations, providing small farmers with a sustainable source of income while blocking further deforestation and allowing local vegetation to regenerate. However, the report cites a surge in demand for cleared land in this region, incursions near and into indigenous lands (entailing a heightened risk of contamination of native populations with Covid-19), and water contamination by pesticides.This latter aspect was challenged in a lawsuit filed by the Public Prosecution Service in 2014, and awaits a decision on the merits. 

This is an interesting question. The issue is relatively less debated than deforestation associated with cattle and soybean production. It should, however, be on the radar – particularly considering the push for biofuels as a means of achieving climate goals.

PG: The Amazon rainforest is now a net contributor to warming of the planet?

AL: The study you refer to looked at the volume of CO2 absorbed and stored by the Brazilian portion of the Amazon from 2010 to 2019. The main conclusion, published in Nature Climate Change, is that it emitted 16.6bn tons of CO2 as a result of deforestation and degradation, and absorbed only 13.9bn tons as the forest grew. Also significantly, the research team – including France’s National Institute for Agronomic Research (INRA), the University of Oklahoma and the University of Exeter – found that degradation – that is, parts of the forest being damaged but not destroyed – accounted for three times more carbon loss than deforestation. These findings have important implications for public policy. As important as zero deforestation programs are, a bigger focus on degradation seems to be in order.

The main conclusion, published in Nature Climate Change, is that it emitted 16.6bn tons of CO2 as a result of deforestation and degradation, and absorbed only 13.9bn tons.

PG: As farms and pastures expand it is increasing the risk of another pandemic?

AL: Absolutely. Biodiversity loss and poor management of natural resources have been linked to the emergence of infectious diseases, which are often triggered by zoonotic outbreaks, for a few decades now. These factors ultimately place people in contact with a natural reservoir or host for an infection, either by increasing proximity – causing the virus to jump species – or by changing environmental conditions so as to favor an increased population of pathogens or their natural hosts. Climate change is clearly adding to the risks.

The IPCC Special Report on Climate Change and Land Use, released in 2019, states that human use directly affects more than 70 percent of the global, ice-free land surface, and that between a quarter and one-third of all land is utilized for food and energy production, which amounts to a 46 percent deforestation rate. The report also states that the impacts are reciprocal: land use contributes to climate change and climate change affects land. Degraded land becomes less productive, restricting the types of crops that can be grown, thus reducing the soil’s ability to absorb carbon. This exacerbates climate change, which in turn triggers land degradation in several significant ways, leading to increased proximity of humans to natural disease hosts.

PG: Do you see any hope in the form of ESG?

AL: I do. Deforestation of the Amazon is largely driven by the production of agricultural and livestock commodities, mainly cattle and soybeans. According to Imazon, more than 90% of deforestation is illegal, and a majority of the land is used for grazing. Climate change in Brazil is, in turn, extensively linked to land use and deforestation. The recent centrality of ESG has the potential to put additional spotlight on the Amazon, and to help steer businesses towards a more sustainable course. I envision two main paths for this to happen: enhanced control of the supply chain, including indirect suppliers (a central concern with regard to the meat industry), and increased scrutiny of the role of financial institutions.

Much of the commodities produced in the Amazon are exported. Tighter rules to halt imported deforestation and outsourced emissions resulting from the consumption of relevant external markets, such as the European Union, entail a greater likelihood of boycotts to Brazilian products. Currently, per the European Commission’s Communication on Stepping up EU Action to Protect and Restore the World’s Forests, a disproportionate 10% of the global share of deforestation is related to EU consumption. Deforestation has been a contentious theme in the EU-MERCOSUR Trade Agreement negotiations. Against this backdrop, monitoring, quantification and disclosure of supply chain emissions is likely to become front and center.

Tighter rules to halt imported deforestation and outsourced emissions resulting from the consumption of relevant external markets, such as the European Union, entail a greater likelihood of boycotts to Brazilian products.

Also significantly, as carbon prices in EUETS soar, there has been a surge in calls for a carbon border tax. The idea is also gaining ground in the US. Regardless of if, or when, we will move more decisively towards carbon pricing and carbon taxes (including border adjustment taxes), we need to prepare for the upcoming “carbon trade wars”, especially if the WTO is able to overcome the deadlock in the organization’s appellate body.

As for the financial sector, The Economist recently published a piece highlighting a study by the CDP, pointing out that only a minority of financial firms are acting. A quarter measure their financed emissions, and almost half conduct no climate-related analysis on their portfolios. However, the oversight of financing of high-impact projects is on the rise – the Brazilian Central Bank has recently launched three public consultations, on the sustainability criteria applicable to rural credit, on regulation of risk management and social, environmental and climate responsibility, and on the annual disclosure, by financial institutions, of a standardized Social, Environmental and Climate Risks and Opportunities Report (the GRSAC Report), respectively. I believe redirecting the money pipeline is key to reversing the course of deforestation.

PG: What role does litigation play here?

AL: I believe litigation plays a key role in this scenario. Companies are increasingly subject to binding ESG obligations. It is possible to anticipate new types of strategic litigation that challenge compliance with said obligations, or, when a corporation appears as the plaintiff, the obligations themselves. Against this backdrop, I also anticipate that strategic litigation will undergo a shift from catch-all rights-based concepts to more granular ESG arguments, such as exposure to stranded assets, climate resilience stress tests in different global warming scenarios, impact investment, and the financing of projects with ESG and climate-related implications.

Another relevant trend concerns transnational ESG litigation. Examples include claims challenging pollution and emissions outsourcing, supply chain disputes spanning multiple jurisdictions, and disputes under trade agreements.

Another relevant trend concerns transnational ESG litigation. Examples include claims challenging pollution and emissions outsourcing, supply chain disputes spanning multiple jurisdictions, and disputes under trade agreements. Outsourcing and supply chain claims target entities that are relatively cleaner in their countries of origin, but are major polluters, or source supplies that are produced unsustainably, in other jurisdictions (e.g. the Total, EDF and Casino cases, based on the French Duty of Vigilance Act of 2017, challenging activities in Uganda, Mexico, and Brazil and Colombia, respectively). Multilateral and bilateral trade agreements increasingly involve sensitive and potentially contentious environmental issues, such as carbon trade barriers and deforestation associated with production of export goods.

PG: Do you see any respite coming in the form of Ecocide laws?

AL: The 2016 policy paper by the ICC Office of the Prosecutor, stating that it would consider the prosecution of environmental cases, has been rightly hailed as a landmark move. It could mean that crimes associated with mass land grabbing can amount to crimes against humanity under the Rome Statute. Could this expand ICC jurisdiction to encompass ecocide? No, as this would depend on the amendment of the Rome Statute, but the policy paper has served the purpose to fuel the debate on the prosecution of international environmental crimes and on the possible conceptualization of a crime of ecocide.

The Environmental Crimes Law, if passed, it will introduce the crime of ecocide in Brazilian law... Ecocide has also made its way into France’s new climate law, which passed the first vote in parliament on May 4.

In the wake of the Mariana and Brumadinho tragedies, in Brazil, Bill nr. 2,787/19 was proposed in order to amend Law nr. 9,605/98 (the Environmental Crimes Law). If passed, it will introduce the crime of ecocide in Brazilian law. The proposed wording defines ecocide as “an ecological disaster by atmospheric, water, or soil contamination, significant destruction of flora or slaughter of animals, which generates a state of public calamity”. Ecocide has also made its way into France’s new climate law, which passed the first vote in parliament on May 4.

PG: Many thanks Alessandra for demystifying all the complex issues facing Brazil and the interconnections with the rest of the world. Wishing you the very best in your endeavours.

Bidding adieu to a doyen: Mr. A.C. Mukherji…

Just as I was to sit down for a Sunday lunch, the phone rang. Next 40 minutes or so followed an impromptu session on unknown facets from the contemporary history of Indian insurance industry. The caller was legendary Mr. AC Mukherji (ACM), former CMD of The New India Assurance. Co. Ltd. A company where I began my career. Interestingly, I got to know him personally well past his retirement from the company.

Two weeks or so, before that call, I had shared with him India’s Coal Story authored by Subhomoy Bhattacharjee. Having thoroughly enjoyed reading it, he said, I have to tell you something which no one after me would know. At such moments you’ve got to leave everything aside. Thanks to Mr. BK Shah, the then Managing Director of The New India Assurance Co. Ltd., we avoided the mistake of creating another LIC or repeating what went wrong with coal, he explained. Created by an Act of the Parliament, every change at the LIC had to be referred there.

For many months after announcing the nationalisation of the general insurance industry, the government was clueless as to what needed to be done next. Interestingly, Mr. Mukherji and his boss Mr. Shah were summoned by the new masters to the Ministry of Finance (MOF). They were asked to prepare an action plan. Months of hard work and 12 box files later, M/s. Shah and Mukherji were back at the MOF. One of their key recommendations was to create a separate holding company – the General Insurance Corporation of India (GIC). Almost 90% of our suggested approach was accepted, he told me. That spoke of New India’s pedigree and credibility in those times of uncertainty. ACM was always respected, in the corridors of power, for his exceptional professionalism.

Whether over a cup of tea at his home in Salt Lake, Kolkata or the Calcutta Club, at airport lounges and locations in or outside India – I had the prerogative of seeking answers wherever and whenever I was face to face with him. ACM always obliged very generously. He was a master story teller, with an encyclopedic memory, who could provide the context and rationale for all that happened in the industry since 1948. The year he joined New India as a management trainee. It was then both a life and non-life insurer (hence the ‘Assurance’) with a GWP of Rs. 2 crores. Not to miss out his joining interview with JRD Tata.

Back in 1995 I had the pleasure of hosting him at an India event in HK. During the coffee break two gentlemen approached him very respectfully and started a conversation in German. I was pleasantly surprised. After they left, he pointed at one of them and said that was Diekmann, recently announced head of Allianz Asia. He should go a long way. But I thought you were conversing in German? Yes, I picked it from my time in Germany. I was posted by New India with Allianz, our settling agent there. He got to know I am around hence the courtesy stopover, explained ACM.

We were in the process of setting up Bajaj Allianz General Insurance Co. Ltd. In late 2000. My boss, Sam Ghosh, asked me to request Mr. Mukherjee to meet him. The reason – Michael Diekmann (later became the group CEO and presently the Chairman of Allianz SE) wishes to have him as the Allianz representative on the Bajaj Allianz board. ACM readily agreed to meet Sam. However, at the meeting he politely excused himself citing a conflict of interest. Given his ongoing commitment to Tokio Marine.

ACM understood people at all levels, had an extraordinary sense of humility, grace and reach. His focus on customer service, policyholder protection and contract certainty were way ahead of time. Likewise, the belief in insurance as a knowledge industry and developing specialty were always on his radar. For much of my early days in the company there was never a mention of ‘PSU’. It was known for its processes and respected in the markets it participated or operated in. He championed management education to ensure balanced development of the rank and file. I remember vividly attending an internal management development programme (MDP) and being told by the eminent faculty – people like Mukherji can run the country. Such is the calibre of your top leadership.

As a seer he could see the coming boom in personal lines. People who dealt with him on complex claims – for instance – be it Space, MLOP or FLOP recall his legendary grip, preparedness, finesse and decisiveness at the meetings. The logic behind the four head offices of nationalised companies; the mergers of various companies into them, to the Malhotra Committee deliberations, and recommendations on the solvency margin regulations – all have his indelible stamp. If the insurance industry ever had a GOAT (greatest of all times), it is him. I have not come across anyone as well rounded and visionary.

There is so much more I can say and I am sure there are many who would have even more fascinating stories to recount. Apart from bidding adieu to one of the finest leaders of our times, ACM is an outstanding role model for the coming generations to emulate and shine. #RIP Mr. AC Mukherji.