Built to Last: The Connection between ESG Issues and a Company’s Long-Term Success

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Title card, Wednesdays with Woodward (registered trademark) Webinar Series. Built to Last, The connection between ESG Issues and a Company's Long-term success. Logos, American Property Casualty Insurance Association, Insuring America, a.p.c.i. dot org, Travelers Institute, Travelers, Partnership for New York City, Metro Hartford Alliance, Connecticut Business and Industry Association  

Video feed, Joan Woodward. 

(SPEECH) 
Hello, everyone. Welcome to one of our Wednesday with Woodward sessions. We're so excited you're back with us. And we are going to talk ESG today. My name is Joan Woodward. And I have the privilege of running the Travelers Institute, which is the public policy and educational arm of Travelers Insurance. 

Today, we're going to explore these issues that really impact our professional and our personal lives in these really uncertain times. 

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Slide. text, join our mailing list. Connect LinkedIn, Joan Kois Woodward. Watch replays 

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So first, I want to let you know that you're welcome to join our mailing list by emailing institute@travelers.com. You can connect with me directly on LinkedIn, watch a webinar replay at travelersinstitute.org. 

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Slide text, Hashtag Wednesdays with Woodward. 

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And if you look in the chat feature right now, we're going to add a registration link for all of those upcoming programs we're going to have this summer. So before we get started, I'd like to share our disclaimer about today's webinar. 

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Slide, About Travelers Institute Webinars. The Wednesdays with Woodward educational webinar series is presented by the Travelers Institute, the public policy division of Travelers. This program is offered for informational and educational purposes only. You should consult with your financial, legal, insurance or other advisors about any practices suggested by this program. Please note that this session is being recorded and may be used as Travelers deems appropriate. 

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But a very special program for you and always, we'll save time at the end for your questions. So just put those in the Q&A function at the bottom of your screen. Send anonymously if you don't want me to read your name. 

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So we're thrilled to be joined with our partners today for this webinar, including the Partnership for New York City, the American Property Casualty Insurance Association, Metro Hartford Alliance, and the Connecticut Business and Industry Association. A huge thanks to all these partners for the work that they do and for helping us to put on today's program. 

Today, we're excited to explore how environmental, social, and governance issues, otherwise known as the ESG, impact a company's long-term success. Increasingly, ESG has become a very popular buzzword out there, discussed in investor circles, employee recruitment and retention, and a lot more areas. But what does it really mean? And so many different groups seem to care about it, and especially this is getting louder and louder in corporate America and among employees. 

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Slide, Speakers. Three profile pictures. Joan Woodward, Executive Vice President, Public Policy, President Travelers Institute, Travelers. Paul Atkins, Former Commissioner, US Securities and Exchange Commission, CEO Patomak Global Partners, Yafit Cohn, Vice President, Chief Sustainability Officer and Group General Counsel Travelers. 

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So we have two fantastic speakers today who are going to outline what are ESG issues, first of all, and why they impact a company's ability to create that long term value that we all want. They'll also help us understand anticipated regulatory and disclosure requirements and what they can mean for public companies and for all of us going forward. 

So I'm truly honored to be joined today by my neighbor, just down the street, Paul Atkins, Former Commissioner of the US Securities and Exchange Commission and currently Chief Executive, Patomak Global Partners. Commissioner Atkins founded Patomak Global Partners, a financial services consultancy in 2009. He advises financial services companies on a number of regulatory and compliance issues, including Dodd-Frank compliance and US and European regulation and corporate governance issues. 

Prior to founding Patomak Global Partners, he served two terms as SEC Commissioner from 2002 to 2008. And thank you for your public service, Paul. For those not as familiar, the role of the SEC is to serve as the investors advocate, to promote fairness in the securities markets, and to share information about companies and investment professionals to help investors make informed decisions. 

During Commissioner Atkins tenure, he advocated for increased transparency and consistency in the SEC's decision making and enforcement activities for smarter regulation that considers cost and benefits to society. So drawing on that experience, he'll place anticipated ESG disclosure requirements in the context for us and help us make sense of what the current regulatory environment is. 

And next, joining me is my friend and colleague Yafit Cohn, Vice President and our Chief Sustainability Officer here at Travelers, and she's also Group General Counsel. Yafit joined Travelers in 2017 and has led our ESG engagement and communication strategies, including developing a comprehensive sustainability website and integrated sustainability report. She also chairs our firmwide sustainability and ESG committee. In this role, she meets regularly with our stakeholders to convey Travelers' approach to ESG and understand what issues are most important to our investors. 

She serves as Chair of the Society of Corporate Governance newly formed Sustainability Practices Committee. She was named to Risk & Insurance list of 2020 insurance executives to watch and was a finalist for Governance Professional of the Year by Corporate Secretary. Prior to joining Travelers, Yafit was a member of Simpson Thacher's public company advisory practice, advising public companies on issues related to securities laws, corporate governance, including the SEC reporting and disclosure requirements, shareholder proposals and responses to formal and informal SEC inquiries. 

So she knows her way around the SEC. I look forward to hearing what the thoughtful discussion will produce. And with that, I'm going to turn it right over to my friend, Yafit. 

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Three video feeds on screen. Text, Joan Woodward, Yafit Cohn, Paul Atkins. 

(SPEECH) 
Thanks, Joan. It's a pleasure to be here. You know, Joan, you're absolutely right. There's so much talk about ESG these days. But it's really difficult to have an informed discussion about ESG without first reaching a mutual understanding as to what that term means. 

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And I don't think there's a universal definition of ESG that's used by all corporations, investors, and other market participants around the globe. 

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Yafit's video feed is full screen. 

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But my view and Travelers' view, which is based on dozens of conversations we've had with investors over the years, is that ESG at its core refers to the risks and opportunities that could impact a company's ability to create value over the long term, and how the company manages those risks, and takes advantage of those opportunities to ensure its long term economic sustainability. 

So ESG is a term that recognizes that a company's value creation does not depend only on its financial or business strategy but that the way it handles various environmental, social, and governance matters could also impact its value, either positively or negatively. So that's all in the abstract. And so I'll give you a few examples that really make it come to life. 

Think about, for example, ethical violations that have come to light at a well-known bank or at a large foreign auto manufacturer. Think about the data breaches that we read about seemingly weekly in the press. Think about environmental concerns like a large oil spill. 

Those are all examples of things that have had significant negative impacts on companies reputations, and their value, potentially, and in some instances, have generated litigation. So all of that is to say that as we have heard repeatedly from our investors, while at times there could be overlap, ESG is fundamentally about value not values. So with that understanding of ESG in mind, it's really not hard to see why ESG matters. 

First and foremost, addressing the company's relevant ESG issues is important for staying competitive in the market. It's absolutely critical for companies to take a holistic view of risk and remain forward thinking in terms of opportunities and innovation. And another way to look at it is that financial success and creating shareholder value are inextricably linked with taking care of all of the company's stakeholders. 

Now for those companies that like Travelers are publicly traded, there's another good reason to pay attention to ESG. Investors, as Joan has mentioned, are increasingly expressing interest in ESG information, recognizing that how companies handle relevant ESG risks and opportunities can be important to understanding the long-term value potential of a company. Investors are also facing asset management industry pressures to fold ESG factors into their analyses. 

So for example, the United Nations Principles for Responsible Investment, or PRI, encourages investor signatories to commit to, quote, "incorporate ESG into investment analysis and decision-making processes." And the PRI now boasts well over 3,000 signatories with over $103 trillion in assets under management. In addition to that, with Europe being more progressive on ESG, global clients expect institutional investors to include ESG factors into their investment thesis. 

And finally, with the growth of passive investing, which now accounts for approximately half of US assets under management, and the simultaneous outflows of capital experienced by active US equity funds, what we're seeing is that active investors have begun using ESG as a selling point. And at the same time, passive investors have begun actively engaging with companies on environmental and social issues as a way to affect change. The bottom line of all of this is that to compete for global institutional assets. 

Asset managers, regardless of their size, regardless of their investment strategy, are increasingly committing to incorporate ESG in some fashion into their investment processes. Now increased investor interest in ESG means increased investor interest in ESG information from public companies. Issuers that don't give sufficient attention to business-relevant environmental and social issues, or frankly those that don't provide sufficient public disclosure on how they're addressing those issues, put themselves at a disadvantage. And they run the risk that their investors will make incorrect assumptions about the company. 

Along similar lines of third party data providers and ESG rating firms that investors often consider to some degree in their investment analyses may hold it against public companies if they're perceived to give insufficient attention to ESG issues. And those companies may also be more vulnerable to environmental, and social, and political proposals, shareholder proposals, which have become more prevalent in recent years. Now it also bears mention that having and articulating a thoughtful approach to business-relevant environmental and social issues creates great opportunity for all companies, whether or not they are publicly traded, to enhance their brand, engage their employees, and attract potential employees. 

Recent studies are suggesting that consumers today are more likely to trust and be loyal to companies that support environmental or social issues and that employees want to work for companies that have a greater purpose. And these trends seem to be even more pronounced among the younger generations. So at Travelers, when we embarked upon our sustainability reporting journey, our primary objective was to articulate for our investors how we create sustained value in the broadest sense. 

But we also understood that being more public about how we're taking care of our customers, our communities, and our employees would engender more positive feelings about our brand, would cause employees to be even more proud of Travelers, and would give recruits even more reasons to want to join our company. Now while I strongly believe that ESG, as I've defined it, is of critical importance, I'd like to share a word of caution with you. Beyond mainstream institutional investors that view specific ESG issues as risks that could impact their investments and beyond customers and employees who appreciate companies who are doing well by doing good, there are countless groups putting significant pressure on companies regarding a broad array of environmental, social, and political Issues. 

Those groups are increasingly calling upon corporations to solve complex societal issues that have historically been within the purview of a democratically elected government. Those frustrated with the government's inability to affect societal change are attempting to achieve their desired goals by shaming companies to take action unrelated and even detrimental to their ability to create shareholder value. And many of these groups have latched onto the popular term ESG in an effort to influence corporations to achieve their own agendas. 

The conflation of ESG with agenda-driven priorities divorced from shareholder value blurs the line between value and values. And this dynamic has given rise to a monumental challenge for companies, which if not handled properly could result in several dangerous consequences. First, when corporations are pressured to spend management time and resources on items unrelated to shareholder value, shareholder value and, by extension, the economy will suffer over the long term. 

Relatedly, the shaming and the ranking of public companies on the basis of issues, again, unrelated to shareholder value has the potential to threaten capitalism over the long term. And in addition, when the corporate venue is used as a substitute for legislative action, democracy could be threatened over the long term as well as a very small group of like-minded individuals would be impacting social change on a mass level without the benefit of debate or checks and balances. I know this sounds extreme, but it's critical to consider the impact on our democratic structure if the corporation is successfully utilized as a means to engineer societal change on a mass level. 

For these reasons, not to mention corporations fiduciary duties to shareholders, I think it's incumbent upon corporations to ensure that they do not wade into the cultural wars raging in our society today or weigh in on polarizing issues that could alienate some of the company's customers and employees. At Travelers, we're laser focused on the fact that we are stewards of shareholder capital. The money is not ours to spend based on our own individual morality or values. 

Following from that bedrock principle is that corporate decision making should be grounded in whether the decision will increase shareholder value over time, recognizing, as I mentioned earlier, that creating long-term shareholder value requires us to take care of our customers, communities, and employees. So at Travelers, when considering actions or initiatives, some might label us ESG. We carefully assess what is in the best interests of the company and its shareholders over the long term. 

We prioritize the company's key ESG risks and opportunities. And we focus on what we call shared value. Those are efforts that are good for the company and its long-term shareholders and also good for other stakeholders, like employees, communities, the environment. Coming back full circle to where I started, it is important to have a clear view of what ESG means for your company. 

For Travelers, ESG, for sustainability, requires that we do three things successfully, continue to execute on our long-term financial strategy, continue to innovate to make sure our competitive advantages remain relevant and differentiating into the future, and continue to make good on our commitment to take care of our customers, our communities, and each other, or as we call it fulfill the Travelers' promise. In an increasingly polarized environment, we think that's a winning approach. And now I'll hand it over to Paul for his thoughts. 

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Paul Atkin's video appears and takes full screen. 

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Well, thank you very much, Yafit. And thanks to Joan for inviting me to participate today. And thank you also for everyone online for attending. 

As both Joan and Yafit noted, ESG, environmental, social, and governance, issues have really become the buzzwords of the moment, particularly down here in Washington, DC where I am. So I wanted to spend a few minutes, especially after Yafit did such a great job of surveying the landscape and how various investor groups and other political groups are approaching this, I'd like to spend a few minutes surveying how the government is responding to ESG issues and then some of the problems that entails. 

So in the Biden administration, just about every cabinet level department and agency and those who are not in the cabinet are looking for ways to insert public policy mandates on climate change, and issues around diversity and human resources, among others. There are even discussions around mandates for disclosure for any company, public or private, that provides goods or services under federal contracts. 

So the Securities and Exchange Commission, where I used to be for many years, about 10 years in total of my career, has been active as well. So there's a new Chairman, Gary Gensler. And he's announced his intent to have the SEC staff develop new disclosure requirements for climate change and human capital. 

A commissioner--there are five commissioners at the SEC. Another Commissioner, Allison Lee, has said that the SEC should regard ESG disclosures as material and therefore required if investors want the information, even if the disclosures may not be relevant to the issuers financial performance. On the other side, two other Commissioners, Hester Peirce and Elad Roisman, have been highly skeptical of these sorts of mandates. Their concerns include the risk that many ESG factors are intended to help special interests instead of investors. 

They also cite risks and mandating disclosure when there is no consensus on which ESG factors impact financial performance. So compounding this is the confusion and political gamesmanship around the concept of materiality. The European Union and some so-called independent standard setters have embraced concepts such as dual materiality they call it or so-called nested materiality, both of which require companies to disclose their effect on society, whatever that may be, and to look into their crystal balls and predict what issues may become material in the future. 

In the US, supporters of ESG standards claim that ESG issues are material to investors and their decision making, arguing that materiality is determined by what investors want. It's important, however, to remember that the Supreme Court's materiality test does not ask what an investor wants but rather what information a reasonable investor needs. More than 45 years ago, Justice Thurgood Marshall, writing in his 1976 opinion called TSC Industries versus Northway, defined materiality under the US Securities Laws. 

So writing for a unanimous court, he said, quote, "Some information is of such dubious significance that insistence on its disclosure may accomplish more harm than good. If the standard of materiality is unnecessarily low, management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information, a result that is hardly conducive to inform decision making," end quote. 

In this case, as well as a follow-on case about a decade later, Basic versus Levinson, the Supreme Court ruled that a fact is material if the omission or misstatement of that fact would alter the total mix of information a reasonable investor considers when making investment decisions, that means to buy, sell, or hold a stock. So what makes for a reasonable investor? Investors are not monolithic. 

While most investors are individuals using the capital markets to invest for their long-term retirement, education, potential sickness, rainy day, or other things, some investors are motivated by goals other than positive investment returns. For example, certain social impact investors explicitly denounce the profit motive and instead invest in companies seeking to change business model or alter corporate practices. Needless to say, these latter ones are the exception. They have money to spend that way. 

And of course, there are the institutional investors, such as BlackRock and State Street, that today have an outsized voice in calling for ESG disclosures. Many commentators have noted over the years that meeting the request of all investors would result in information overload, when the volume of facts disclosed prevents an investor from understanding what is and is not important. And I have to say that many of my clients in the asset management industry complain about that constantly. And these are large institutions that are well equipped to handle various disclosures. 

A recent study released by the European Corporate Governance Institute examined retail shareholder participation in the proxy process, but it also provides some insights into what investors may be looking for or thinking about when it comes to material information. For example, researchers found that retail shareholders, when they choose to vote, tend not to support ESG proposals to the same degree as institutional investors. Similarly, the data show that retail shareholders tend to be motivated to cast the proxy vote when the company's performance or return on investment is poor. 

A great example of this played out last month at the Berkshire Hathaway annual meeting, where shareholders rebuffed proposals supported by BlackRock requiring all Berkshire Hathaway companies to disclose climate risk and diverse workforce data. As Warren Buffett bluntly noted, quote, "Overwhelmingly, the people that bought Berkshire with their own money voted against those propositions. Most of the votes for it came from people who've never put a dime of their own money into Berkshire," end quote. 

Buffett has similarly noted that retail investors tend to either support management or sell their shares if they do not. Their prime focus is performance, including being good corporate citizens and return on investment. So seeing this problem, the Supreme Court has understood the hypothetical reasonable investor to be the standard by which materiality is determined. 

Importantly, the reasonable investor does not mean a significantly large group of investors or even the majority of investors. Instead, the reasonable investor is determined case by case and is dependent on the facts and circumstances of the situation in question. This goes to another point that mandated ESG disclosures overlook. 

The people in the best position to assess what is material to a given company or industry are not bureaucrats in Washington or so-called independent standard setting bodies, rather it's a company's board and management who are the only individuals that possess the complete set of facts and circumstances to make materiality assessments. And they bear a fiduciary duty to their shareholders to do so. While the SEC can question those determinations, it's important to remember that examiners, and regulatory, and enforcement bodies have the benefit of 2020 hindsight. 

And additionally, in the United States unlike Europe or other jurisdictions, shareholders can file class action lawsuits if they feel a material fact is omitted or misstated. Now it may be that there are companies where disclosures related to the climate change risk, or water risk, or the threat of terrorism, or pandemics for that matter will be necessary for the reasonable investor to know. Under the current materiality standard set out by the Supreme Court, and ensconced in our Securities laws, and today is enforced by the SEC through its own rules and enforcement cases, companies should disclose that information if it's pertinent and material. 

So looking ahead, it unfortunately appears that the SEC will barrel ahead with ESG disclosure based on politically convenient understandings of materiality. Ignoring the limiting principle of the reasonable investor, the SEC is set to exercise its own judgment about what investors need to know. One is left to ask, is the pending avalanche of ESG information truly fulfilling the SEC's mission to protect investors? 

I'm sure that the ensuing litigation and other controversies over the succeeding years from whatever they may or may not adopt will give us some answers to that. So thank you very much. And I turn it back over to Joan. 

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Three video feeds on screen. Joan Woodward, Paul Atkins, Yafit Cohn 

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All right. Terrific. Well, Paul, Yafit, I mean there's such a lot to unpack with what you said and how you're thinking about this ESG journey for companies, for the governments. There's a lot of people, investors, et cetera very, very interested to see where this is headed. 

And I really appreciate the way you kind of laid it out. A lot of people on our attendance here we're not experts in this subject. And it's very complicated. So Paul, I'm going to start with you. 

And again, don't forget to put your questions and that Q&A feature at the bottom there. Use the Q&A feature, please. And we'll try to get to as many as we can. 

So there's so many different groups, as you know, Paul, out there. The whole industry, right, has sprung up around ESG issues. So we'll get to the rating agencies because there's a lot of them out there. And we have a couple of questions coming in about which one should they watch for an individual investor. But first, let's start at the beginning. 

So for companies just starting out on their ESG journey, where do they begin? What advice would you give them? So if you're running a business as a CEO of a midsize or even a larger company, and you have to consider ESG factors because all of these factors, as you know, are critically important to society, right, and to governments, but as a company starting their journey, what advice would you give them? 

Many companies, most I'd say, that reporting companies with the SEC have already been doing some sort of disclosure. Because as Yafit laid out and I tried to show here through the legal structure and court cases, all that, you have to disclose what's material. And so depending on the company--and SEC has made this clear going back 10 years ago or so, 11 years ago, did a special interpretative release on climate issues and disclosure, and saying, the materiality framework that the SEC has in the reporting framework to kind of help guide people through that. 

So if it's a new company just really starting out, I think one is to take an assessment of what are the risks that are challenging the company and what do your investors--what do you think they need to know about your company and how it's being managed. And back when I was a commissioner back in 2003 I believe, we set out a new rule regarding this area of the 10-K, the annual report that companies file, called management's discussion analysis. Asking companies to set forth their risk factors is item 1A, if you look at your 10-K, for how they look at their company and what do they think investors should know. 

Now the whole concept was to have management speak directly to investors. And we were hoping that legal jargon wouldn't get in there and whatnot. But of course, over the years, the lawyers get to work. And so item 1A now is pages and pages long, almost 17% of the annual reports according to some study, the average annual report. So there's a lot to unpack in those. 

But in almost all that I've seen, they discuss some kind of climate issues, and other things that might affect their operations, or may sometime in the future affect their operations. Because a lot of the stuff, of course, companies are trying to cover things just in case something happens because there are a lot of lawyers and other people out there who want to sue them for what they could claim [AUDIO OUT] would not be proper disclosure of what might happen. 

So I would say, you know,  that's the first step, is to make a real assessment of what's affecting the company, and how you're managing it, and then what do you think investors should know. Look to SEC interpretative releases and the guidance that's out there. And then also, there are multiple frameworks and all sorts of advisory firms and things like that out there. But that's also very confusing. But I think if you kind of keep things simple, focus on what you think is important to impart to your investors, that's the first place to start. 

OK, terrific. Thanks, Paul. We'll get back to those rating agencies in a few minutes here. But Travelers has been doing ESG. We've been embedding ESG factors into our business for many decades. But in 2019, Yafit, you were named our Chief Sustainability Officer, first for the Company. 

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Screen from Travelers website. Text, Sustainability at Travelers means performing today, transforming for tomorrow and fulfilling our promise to our customers, communities and employees. 

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And we're really excited about that because you actually just marched right down the road, and got us all together, and put together this sustainability website on our website, looking at all the risk factors and the opportunities that the company had. And so you put it all together for us. And in that process, walk us down that road. Did the company change what they were doing in any way or the approach to ESG issues when you were putting that sustainability website together? 

I think you hit the nail on the head, Joan. We have been integrating ESG into our business strategy for decades. ESG is not something that's, you know, mine alone at Travelers. I'm not I'm not running that by myself. That's something that is really integrated within the business across the different business units. 

And so when we embarked upon our sustainability reporting journey, there was this feeling at Travelers that we were doing so much with respect to ESG. We have such a compelling value creation story to tell and the way that it incorporates ESG factors as we said. But we hadn't yet seized the opportunity to tell that story and to discuss those ESG initiatives publicly. 

So the project really did not change our approach to sustainability. And what I saw throughout that process in that first year especially was really how deeply ingrained ESG is in our company. It's just integrated and embedded in the way that we execute day in and day out. And it's just part of how we create value. 

So that end product that you see today, which is a comprehensive sustainability report that creates, that conveys how Travelers creates value, that discusses keeping the Travelers promise, and how that's integrated within our value creation strategy, all of that is an articulation of what we've already been doing as a company. We just packaged it and articulated it so that all of our stakeholders could understand who we are and how we create value in the broadest sense. 

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Joan - Air quotes on new. 

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OK, but Yafit, there's a lot of new organizations, and I say new which have kind of grown up around ESG. So there's the SASB. We have FASB. Everyone knows what FASB is. Now they're SASB--Sustainability Accounting Standards Board. And then there's the TCFD--the Task Force on Climate-Related Financial Disclosures. 

And so are you spending your days kind of writing SASB reports or TCFD disclosures? I mean, what does that look like? And how do you think about kind of checking the boxes and doing what all needs to be done as investors are expecting companies to do these now? 

It is a massive endeavor, I would have to say. It takes us about nine months of the year and over 150 subject matter experts internally to put together our reporting. That includes the comprehensive sustainability report we have on our website as we discussed, plus our SASB report, plus our TCFD report. 

Those are all things that we update on an annual basis. And so it really is a big lift. But again, because we've already been doing all of this as a company, it's just about packaging it properly. 

OK. OK, Paul, we're going to get to you, and we're going to--one second on materiality because the materiality question is really important. But Yafit, one more time back to you. How does a company or how should a company decide which ESG issues, there's so many of them, to prioritize? Because that is, I think, a really important factor when companies think about their ESG or their sustainability story. How do you prioritize those factors in your mind? 

For sure. So I can give you my experience and what we did at Travelers when I first started in late 2017. We spent a few months literally doing nothing but engaging with our investors. And we went out to half of our investor base and shares outstanding at the time, representing about $11.9 trillion in assets under management to really understand their views with respect to sustainability disclosure. 

And one of the things that I sought to understand there was which ESG factors do investors believe to be most relevant to a property casualty insurance company. So I would say that our findings from those engagements, which took several months, were really critical, particularly since our investors were the primary audience for our sustainability reporting. But in addition to speaking with our investors, we did conduct a formal prioritization exercise to help us focus on the specific topics that are relevant to our industry, our business, and our stakeholders. 

And the way that we did that was that we first identified a universe of ESG topics that could potentially be relevant to our industry by reviewing a whole host of internal documents, industry and peer reporting, analyses of the prominent ESG data providers, and the sustainability reporting frameworks. And then we prioritize those topics, both through that detailed feedback that we got from our investors as well as through a series of internal group discussions, each of which was dedicated to a specific stakeholder group, whether it be our customers, or employees, or agents and brokers, Travelers itself. 

And we did that because we wanted to make sure that we were taking our other stakeholders views into account in addition to those of our investors. And then ultimately, internally, we refined the list of priority topics to those 16 topics that you see on our website today that became the focus of our sustainability reporting. And that if you look at our sustainability site, we call our drivers of sustained value at Travelers. So that's a pretty involved process. 

But I don't think that every company needs to go through that. I think there are less time-consuming ways to identify the handful of ESG issues that are most relevant to the company's business strategy and are most linked to its economic sustainability. And Paul referenced this as well. But companies could look at which ESG oriented issues have been on the board's recent agendas, or which ESG issues are already part of the company's business plan, and which ESG related risks are already embedded within the company's enterprise risk management program. 

And of course, for public companies, many public companies are already conducting offseason engagements with their large institutional investors. So while they're speaking with their investors, it really doesn't take much to also get their thoughts on ESG issues that they think that a company in that industry should be reporting on. And finally, I'll just say companies can start small. 

They don't need to bite off as much as we did in our first year of reporting. I think it's important to start somewhere, again, with those ESG issues that they believe most relevant to their industry and business. And they could always build on that from there. 

I think that's really good advice. I actually do in terms of starting small. So Paul, back to you. This is for laypeople, OK? So we're not ESG experts. 

We're not lawyers, certainly not SEC lawyers on the phone here. What does materiality mean? How does that factor into the conversation of ESG disclosure? So first, just what does materiality mean, and how does that affect the ESG materiality disclosure? 

Well, so I guess just basically like I was saying, materiality is understood in the whole legal framework, and before the courts, and the SEC means what is it that is important to a reasonable investor to make a decision regarding buying, selling, or holding a particular stock. And so that, there's a lot in that to unpack. But suffice it to say that it doesn't matter if you, yourself, focus on one particular issue. 

You don't want to invest in any coal companies, or gun companies, or what have it. So that's fine. That's up to you to do that. But as far as the reasonable investor who is looking to invest for an economic return, what is it that is important that is a critical determinant in whether to you know--if you're trying to decide how to dispose of your stock, or whether to acquire it, or whatever. 

And for that, that means that it's not a monolithic type of decision. It's a case by case basis. So therefore, what's then arguably what should be mandated disclosure is, you know, a relatively small ambit. But like Yafit was talking about, Travelers and other companies have a lot of voluntary stuff that they do. 

And in my work with companies as consultant, we help them, and I've talked to all sorts of investor groups and others who have, you know, particular wants or whatever that they would like to find out about companies and encouraging them to do X, Y, and Z. But you have to really, you know, as Thurgood Marshall said, I mean, you can't disclose the world. 

And you mentioned SASB, which they've now merged into with another group into a different organization. I think they've kept that moniker, Sustainability Accounting Standards Board, but you know they can't define sustainability and what they're talking about is not accounting standards. It's maybe reporting and not quite that yet with the SEC. 

So I think there is a lot of definitional issues that go on. But if you look at what SASB does, for example they have on their website this big matrix of 77 different industries on the horizontal axis, and then on the vertical one are 26 different attributes. You multiply that out, and you get 2000 some odd boxes there of what they have deemed as material for what particular industry or sub-industry and then-- what should be disclosed. 

So one of the things that they talk about disclosure there is the percentage of free range chicken eggs that the company uses. Now maybe that's important for some companies or not. But I'm not sure that one could say a reasonable investor, you know, would use that as a determinant to buy, sell, or hold. If you're a member of some groups, then maybe that would be. But I think that's not necessarily, for most people, a determinant. 

So that's kind of the juxtaposition here between something that really is critical, that's a material factor that a reasonable investor would view it that way versus some voluntary disclosure that the company can do. And there are lots of companies who subscribe to SASB, or TCFD, or PRI, or GRI, or whatever the ones that are out there. And so that's fine. That's great if they have investors who are very interested and knocking on their door constantly saying, you know, we'd really like to know that. 

A lot of companies will say it privately. Some will disclose it as well in their disclosure. So that's all fine. But when we talk about what should be mandated by the SEC, we have to remember that disclosure isn't costless. You know, that's why materiality is important. 

And some people say, oh, it's only disclosure. I really can't argue against that. Why can't--more the better. But we've seen how disclosure, like Thurgood Marshall says, can obfuscate important things because in the avalanche of information. Even the most sophisticated investors can lose the forest for the tree. So I think that's what we have to really remember. 

And I think that's a good point. Because Yafit had mentioned, her first job was really, as looking into whole ESG picture, was to go out and talk to our investors who will hold our stock and what do they want us to do and see in this new sustainability website. So I think being an informed company about what your investors are driving for is a critical point. 

But Paul, giving I can't let you go without, I mean, talking about your SEC experience. So how quickly could the Biden administration or the new SEC Chair move some of these new potentials? I know they have this new regulatory flex agenda. 

But how quickly--if they wanted to, and I know there's lots of internal discussions about this at the Commission. But could they move this agenda quickly and have mandatory disclosure of all these different factors that they deem material? Or will this take 10, 15 years to come about? 

Yeah, it won't take 10, 15 years. And it won't take two months. I mean they could, I guess, push something through lickety-split, relatively lickety-split. But that would then make their rulemaking susceptible to, I think, a successful challenge in court by people who will inevitably disagree with what they do. 

So from everything that the new Chairman is saying--Gary Gensler, he's gave a speech last week, for example. I think they will take a deliberative sort of approach to this, come out with a proposal, which then they'll take--still probably crafting it, however long that'll take them, another couple of months, or three months, or something like that, then propose it, and then there'll be a comment period. The way our Administrative Procedure Act, it's the due process. 

An agency like this has to go out and tell people what it's thinking of promulgating, and then get their response, and then it has to respond to those responses, and then in its final rulemaking. And then of course, the rulemaking is subject to challenge. So if the SEC wants to do something really that's very broad and very aggressive, I think if they want to have it stick, they better dot all their Is and cross their Ts. 

If it's a sloppily put together thing with little study and economic analysis as to the costs and benefits, then it will get shot down. [AUDIO OUT] 

OK, I think you've faded out there, Paul. So Yafit, let me go to you on this question. How are you thinking about the anticipated mandatory disclosure requirements versus voluntary, which companies like us do all the time? 

Sure. So from a traveler specific perspective, I'd start by saying I think we're very well situated to handle SEC mandated disclosures given our already comprehensive sustainability reporting. And we're not expecting any disclosure requirements to result in significant changes in how we address ESG topics given the fact that they're already integrated into our business strategy. But then zooming out on a more macro level, first of all, I agree with Paul wholeheartedly with respect to materiality. 

I'd also say that having spearheaded the sustainability reporting process that Travelers for several years now and having that job of trying to make sense of all the noise out there on ESG, the concept of having a single blueprint to work from can seem enticing. But throughout these years, it's also become clear to me that there's really no one right way to produce sustainability reporting. And coming back to the materiality point as well, we appreciated having that flexibility to go out to our investors, to figure it out ourselves, to determine how our companies value creation story should be told in a way that's most appropriate and effective for both our company and for our shareholders. 

And one of the things that concerns me is that given the unique characteristics of each company even within the same industry, it's just not possible or advisable to come up with a single uniform approach that would be right for all companies as it relates to ESG issues. So unless the SEC promulgates principles-based disclosure requirements rooted in materiality, which as Paul said, I don't think that's where the SEC is going with this. I think we'll end up, as Paul mentioned, with less meaningful disclosure for investors. I think SEC filings will be muddied with information that's not material. 

And I think public companies, again to Paul's point, will have to spend significant resources collecting and disclosing that information. And anecdotally, given my role on the Society for Corporate Governance, I chair the Sustainability Practices Committee. I've been told by many companies that disclosures relating to climate alone take dozens of employees and can cost millions of dollars. So I think ultimately, we could end up with a situation that's not good for either investors or public companies and could ultimately harm the competitiveness of the US capital markets over time. 

So Paul, let's go to some audience questions. We have a number coming in. So here's a one for you, Paul. So these disclosure requirements for public companies, which we talk about, could that change a decision by a private company to do an IPO or to go public, because they're so worried about the money they have to spend or being pushed in one direction or another by some groups who have an agenda? Do you think some companies are staying private longer because of these potential new disclosure requirements? 

There's no question that companies are deferring or not going public. And I think it's mainly because of the costs of that are entailed by their going public. So today, we have half the number of companies than we did back 20 years ago or so, 25 years ago. And just like other sorts of groups out there, half the number of broker-dealers and others. 

So, and it's mainly because of their regulatory environment, and the costs that are entailed, and the liabilities. So it's not just disclosure costs but also liability around, you know, the potential liability being sued and having class action lawsuits. And so I think that is creating this--there's a lot of private money out there that-- so people don't really need to go to an IPO route. So here, lately, SPACs have been in the news as a less costly way of getting out into the public markets. So all those things have come together. 

So that these days--unfortunately, like if you look back in like in the 1980s and early '90s, companies went to the public markets to get capital, to build factories, to try to develop their products and get them out there. Today, if you look at what's going on, it's really a way for early investors, insiders to get liquidity and then to sell the company shares to the public. So that has been, I think, just goes all the way back to regulation and how things have developed in the last number of years. 

OK, another question coming in. This is from Myles Gibbons. So he asked, an activist's hedge fund with 0.02% holding an Exxon now has two board seats. 

So by all appearances, Exxon's ESG efforts were very comprehensive. Is the Exxon example too extreme for us to be concerned about? Or Paul, do you think this is a wave of the future that companies have to be very concerned about? 

Obviously, I'm eagerly waiting to see actually what the vote on that looked like because what I bet will be is that the individual investors who voted in that matter, you know, probably voted overwhelmingly for management. Exxon is an interesting company with a very high percentage relatively of individual investors versus institutions. And I think it was the institutions that swayed things. 

And there are a lot of reasons for that. Maybe we'll have to go into some other time. But I think it gets back to what Yafit and I were talking about earlier as to how these different groups are viewing things. I think there that was one hedge fund that was new, that was kind of purpose built for this particular thing. 

And they bought the minimum number of shares to be able to put this thing forward and to run a short slate. You know, those short, it doesn't take--they didn't have to solicit every shareholder by running a short slate under the rules. And so it is pretty low cost for them. I think they were claiming they paid $30 million. I'm not sure what they paid it for. 

But anyway, they may be lawyers and other things. But anyway, it's I think that was probably anomalous. But we'll see how things go over the course of the next few years. 

All right. Thank you for that. Another one coming in. Yafit, we're going to hit you with this one. So how do you see social inflation in our business changing ESG considerations for the future? First of all, maybe explain what social inflation is just so everyone understands that. And then how do you relate it back to ESG? 

Yes, of course. So social inflation, again, not sure there's a universal definition, but it's essentially what we're seeing in terms of nuclear verdict awards, the desire of juries to essentially stick it to companies that are in litigation. And this and what we're seeing is the uptick in higher verdicts against companies in general. 

I think in the end of the day, sustainability or ESG really is about the long-term economic sustainability, sustainability of the company. And I think you could look at social inflation as one of those issues that needs to be managed. I think it's another one of those risks that needs to be mitigated appropriately. And so I just sort of see it as part of one cohesive whole and one issue that we really have our eye on here at Travelers. 

And Joan, if you don't mind, I did see a question coming in that I think is really critical to answer with respect to the Business Roundtable. 

Yes, that was my next question. So you go ahead. 

Was it? OK. I just wanted to make sure we hit on that one as we're coming up on time. And so the question relates to the Business Roundtable Statement on the purpose of a corporation and how that has impacted or change the way that we look at value creation. And so just to level set everyone the Business Roundtable Statement really articulates this shared commitment to delivering value to customers, investing in employees, dealing fairly and equitably with suppliers, and supporting communities. 

And it's interesting because it actually resulted in a media firestorm. It drew strong reactions from people on both sides of the aisle. And, but the reason, ultimately, that our CEO sign that statement was really to acknowledge publicly what successful companies have been doing all along, which is to act in a way that ensures long-term success for our shareholders. And to us, and this comes back to what I started the discussion with, this is the statement is really consistent with how we've managed our business for decades as responsible stewards of shareholder capital. 

And as I mentioned, we've long recognized that we can't execute on our long-term financial strategy without taking care of those stakeholders. So essentially at least for Travelers, I would say that the BRT statement really does not signify a change in how we manage our business. And it's really aligned with the way that successful companies have been operating for decades. 

OK, we're going to get another one in here for you, Paul. Thank you, Yafit. I'm glad you addressed that. I was going to ask you that. This is from Aaron Tehan. So I have read about the concept of double materiality. 

I think this means looking at both impacts on the company of climate change. So certainly in our business, we see that impact acts of climate change every day and the impacts by the company on climate change. So can you see the SEC going there in terms of double materiality? 

Well, I think I mean that concept is mainly a European one. And so again they don't really have the litigation environment that we have here. They--you know the lawsuits are very rare over there. Maybe they're on the uptick a bit. But their rules are pretty much kind of stifle, all of that. 

So but here, obviously, materiality really means something. So I really kind of doubt that the SEC would adopt that concept because of just the whole weight of court rulings and, you know, other--the SEC, its own rules will be kind of a major shift to do that. It's more of an informal type of concept. 

So again, I think it ultimately comes down to if the SEC is going to pass a rule. They have to enforce it somehow. And if the things are not material that they're demanding people to disclose, then how do you bring a case against somebody? I mean you could. Maybe it's strict liability. 

It should be a particular number, and you're off by more than a certain amount, even if it's not traditionally conceived as a material type of disclosure. So maybe they could go that way. Maybe the courts would buy it. But I think there are a lot of problems with that. So I don't really see the SEC doing it. 

Could it be done informally like whatever framework the SEC adopts, if it adopts TCFD is--it seems like the Chairman is talking about doing. Maybe that kind of incorporates that concept somehow in it. So maybe that kind of finds its way in the back door to our jurisprudence here. But it would be kind of a difficult thing, I think, under the current environment or foreseeable environment to have it go forward. 

All right. Well, listen. With that, we are out of time. And I just want to thank you, Paul. It was just terrific to host you today. 

And Yafit, of course, keep doing what you're doing. For the employees, we're so grateful you're here. And for our customers and agents, you represent us very, very well on this topic. So we really appreciate your thoughts.