New leaf or empty promise?
Current Chairperson AAE Sustainability and Climate-related Risks Working Group
Past Chairperson AAE Sustainability and Climate-related Risks Working Group
It’s a familiar enough storyline, in fiction and in life: a protagonist who agrees to try again with the disappointing ex when they show up with lavish assurances that they’ve turned over a new leaf, they understand what you need from them, and they are ready to make it work this time. The appeal of an earnest promise is undeniable – but what happens when that promise is not backed up with action? Doesn’t each new letdown make the relationship a little less worthwhile to maintain?
In business too, a quick way to erode customer goodwill is to over-promise and under-deliver. Right now, that’s a scenario that insurance companies and pension funds would do well to consider in connection with their sustainability activities – and the new AAE discussion paper can help with that. And similarly to the example above not to promise anything is not an option, either.
As sustainability concerns move higher up the agenda for everyone, insurance companies and pension funds are more and more likely to rank Environmental, Social and Governance (ESG) issues among their business priorities. What’s more, regulatory frameworks are starting to follow suit and insist on higher standards and transparent reporting on how they are implemented too. The result is that businesses can now make ESG commitments which meaningfully impact their reputational position, so it’s no surprise that some financial institutions are loudly sharing ambitious long-term plans in this respect.
That sounds like good news – and these companies certainly have a clear opportunity to win positive attention. However, it’s important to realise there is also an inherent possibility of reputational risk here. After all, it won’t go unnoticed if your far-reaching pledges are backed up with very little action. Kicking the can down the road in this way may not do any damage at first, but during the transition to a more sustainable economy, people are bound to notice if a company that “talks the talk” doesn’t also “walk the walk”. This potentially triggers secondary risks too: of harsher enforcement and demanding regulations being imposed, perhaps following class action or other litigation.
Though sustainability strategy offers an opportunity for companies to improve their image, insurers and pension funds need to be aware of particular pitfalls. “Sustainability issues and reputational risk for insurance companies and pension funds” explores these and has a specific focus on supporting actuaries in identifying, assessing and evaluating reputational risks in the context of sustainability issues.
This blog is written on a personal title with the assistance of Yestrans.
24 January 2023