David Wright: 0:00

My guest today is Craig Hupper, SVP of trans re and managing director of trans Capital Partners and the head of the ESG task force at trans re. And this series of episodes, we're talking about the environmental, social and corporate governance framework. Greg, welcome to the show.

Craig Hupper: 0:15

Thanks, David, delighted to be with you.

David Wright: 0:17

First question will cover ESD in detail what it means. But I'm just intrigued by what in your mind is the lowest hanging fruit to pick in pursuit of an ESG agenda?

Craig Hupper: 0:28

Well, they have that probably depends a lot on the organization, we're talking about. Some companies or organizations, and it's not just limited to companies. You know, the, the fruit is a little lower to the ground than others. Others are further on or their situations are particularly complicated. So it might differ, I think, for an insurance or reinsurance company, which is probably the subject we're all most interested in today. The first thing that comes to mind when you're talking about ESG, or issues pertaining to climate change, and how to mitigate and manage and assess the impacts of those those effects on insurers, arrangers, operations,

David Wright: 1:07

what would be an example for a trans read gridpoint. Let's narrow it to that, at least, like what would be the simplest, most straightforward thing, that would be a win?

Craig Hupper: 1:17

Well, I'd hate to say it's simple and straightforward, because the deeper you get into this, the more complicated

David Wright: 1:22

Yeah, that's kind of the point, right? It's like, you can go forever. Yeah. Is there anything that's simple and straightforward, is sort of the subtext of the question, I guess. Right?

Craig Hupper: 1:29

Well, well, without getting into too many existential debates about the meaning of life. I think I'm ready. I think the podcast is titled not unreasonable. So we'll try and stick within that. But I think for for a company like like transfere, or another global reinsure, which REITs property catastrophe reinsurance, for example. And some of the things that come to mind, which call out for immediate attention, are the impacts of climate change on on perils like wildfire risk, and flood risk. And, of course, Hurricane hurricane risk as well the hurricane is, candidly, more complicated system. I mean, for example, we've done some work at trans re evaluating our wildfire exposure, in the impacts of drought and moisture, as well as the movement of people and populations, in what's known as a wildland urban interface and come up with a better understanding of the wildfire risk exposure, we face an organization. And that's particularly particularly the case in the United States in the western United States, states like California, but also applies in countries like Australia, which of course, suffered terrible wildfires in the last several years as well.

David Wright: 2:49

So we guess, then, that the mechanism we're talking about here for implementing an ESG policy is as an overseer, right. So very famously, Larry Fink of BlackRock put out a letter to all the CEOs, you're in a little bit ago, 2020, early 2020, advocating for ESG, pro ESG strategies at the businesses that BlackRock invest in? And so I would guess it just kind of let me tell me, if I'm right here, is that what you see the role of trans re as, as a as a, as a kind of force for good for ESG that will then propagate down to organizations? Do you supply capital to the insurance company, so you're promoting an ESG agenda, agenda, as opposed to yourself specifically implementing, you know, trans Reis difference? So the footprint of the operations of transmite, I guess, or something else, won't necessarily change very much. But, you know, as a leverage point on the economy, you're going to try and improve environmental sustainability of all businesses. My right on the right track there, does it thinking about it?

Craig Hupper: 3:52

Well, it's a great question, David, this this, this goes to the heart of a number of the issues surrounding ESG. And candidly, some of the controversy about it. I mean, are we doing this because it's a good thing to do for society? Or it's a nice and socially responsible, or is this beneficial to our organization and raise rates? Right, well, yeah, right. And that and that can be a backlash that may not it may be appropriate, and maybe certain supported by data, but it may not be popular with certain constituents. So I mean, we have a number of motivations for incorporating ESG in our approach, and I suspect this is not terribly different from other organizations. I mean, we certainly, like we're our core function is is underwriters, underwriting is you know, the central scale that a reinsurance company brings to the table. And an underwriter needs to be aware of as many factors that affect the risk, the underlying exposure as possible. And to the extent things like climate change and other ESG considerations affect that an underwriter is not Not incorporating those factors in his or her decisions is not really doing as comprehensive a job as they need to do. But at the same time, as you allude to, there are social implications for this, and societal implications. And whether it's whether if one does an evaluation of wildfire risk, decides the rates need to go up, that may be prudent for for our underwriting, and may be prudent for defending our shareholders interests, it may not be terribly popular with people who have who've got to buy insurance. In fact, that increased rate in the same time, we'd argue that there's an important social component here, that insurers and reinsurers have in terms of putting a market price on risk. And not. And making sure that economic actors incorporate the true cost of risk and their decision making. And that through a long chain has implications for where we, you know, build, build houses and factories and other forms of economic development. If before charging the appropriate price for risk for those, those operations, perhaps they'll be built in areas which are less subject to these risks, built with certain construction standards build under zoning codes that are protective of those assets. And we think there's a societal benefit to that as well. We think it's virtuous. when when when it goes to the cycle properly.

David Wright: 6:27

Yeah, I think one thing that I would be I mean, I feel about I feel anyway about this is that I think that the people who are promoting these frameworks are true believers. Like I think that I'm not I don't I think that the the most cynical take on this is Oh, it's just like a way to raise rates. Are you just trying to convince people that they should pay more for insurance, but I don't think that like just doing a lot of people in the reinsurance business. I don't think that's what's going through the minds of folks, I think that there's a legitimate I mean, you could argue that reinsurers sort of spend all of their career in terms of advocacy, advocating for virtues of restraint and discipline, and, you know, conservation, because I think that there's an a tremendous moral component to to actually, to properly insuring yourself. You know, you're kind of sacrificing today for Juno for preserving the future. So I think it's like ESG is like to me is like tremendously consistent with the ethos as I just observed it generally in the reinsurance business. So I don't think there's like a cynical component to it just on its own, maybe it's convenient. But I think of it as part of the overall discipline of rate management and capacity management, like to me like ESG is kind of like, really culturally consistent with with reinsurance. But think about that.

Craig Hupper: 7:43

It's an interesting observation. I mean, reinsurers by their insurers, largely, talking about property casualty primarily, are fundamentally conservative organizations. And I think that's consistent with, you know, the, the way they operate and the product they sell, we are selling promises for the future. And we've got to be in place to back those Promises, promises and deliver on them, at some point down the road. And that point, maybe tomorrow or maybe decades from now. And I think reinsures have, you know, sort of resist fads, they they are cautious. Now they don't jump into new initiatives with both feet. Typically, they tend to be sort of gradualist on it. And so I think that that extent, it's consistent with with your observation, you know, is this you know, how do reinsurers look at this as ESG really consistent with the way they operate? I think to the extent that these are their advocates for ESG and important constituents, and I include regulators and rating agencies among those important constituents as well as investors. Nobody likes to be told what to do or how to run their business. But I think companies including insurers, and reinsurers recognize that there are a number of constituents interested in the way they operate. Now, the social context of business is changing. And whether they look at this as an organic, homegrown process or not. ESG is a framework a process or requirement that is becoming increasingly important. And they ignore it at their peril. And it can be a source of competitive advantage. That's candidly, that's one of the ways we're looking at this we look at, we look at ESG as an opportunity for us to differentiate ourselves and ultimately to become more relevant and to develop new business opportunities as well as the broader society and broader industry around us evolves.

David Wright: 9:56

Can you tell me that it's really interesting as a source of competitive advantage? Let's take into that, because maybe draw to me the most black and white version of that argument. So in the perfect world, what would be your let's conjure up a Boogeyman, like the most anti ESG competitor? What would How would you advocate for this competitive advantage over that competitor? Well,

Craig Hupper: 10:19

I guess the sort of the anticipate antithesis of an ESG, strong organization would, you know, ignore the factors that affect their underwriting operations, if you think climate change is, is affecting your underwriting, you know, you choose to bury your head in the sand. You know, that's sort of the E element of ESG. An organization that ignores this would also ignore the S component, the social aspects of this, they would ignore the their company's organization impact on broader society, ignore their, the, their differentiation in the labor market, and their ability to hire and retain the best people, for example, they would have terrible governance practices, where they would not be responsive to shareholders, where they're at, and all kinds of conflicts and intra conflicts of interest, and the way they operate. And ultimately, this is not supportive of the organization's future. And so a lot of what ESG is, frankly, is just doing good business, right? I mean, it's there, there are some new aspects of it dressed up within an ESG label. But many of the elements of ESG have been incorporated by successful companies for decades, generations. I mean, you know, companies have been trying to do well, by doing good for a long time, by taking a long term view, you know, some people call it enlightened self interest. Some of the more cynical folks in the financial community have referred to it as, for example, long term greedy, but again, the emphasis is on the long term, and ensuring you're around and successful, to thrive for another day.

David Wright: 12:07

Yeah, and I think, you know, so let's just kind of play out the boogeyman for a second, in some sense, like reinsurance or insurance generally, like running insurance company strategy is, I don't want to be too reductionist path is correct, but I'm gonna do it anyway. It's either you're under pricing or you're not. Right. Because ultimately, you know, there's a reinsurance underwriter who once said to me, something that stuck in my mind, he said, we, we kind of only have one decision in a subscription market, which most markets are yes or no. Right? We have, we can influence the price, we can talk about it, maybe we have, maybe we have something but if it's a properly functioning market, we don't really have a lot of influence on what happens. We just say we do this deal, or we don't do this deal, right. So and then you can either make good decisions or bad decisions in those moments. But to me, what's interesting about the story you told a second ago, so is that that company, the bad person, Bad Company, there would simply be underpricing, its risk. Is it as simple as that?

Craig Hupper: 13:00

Well, pricing is obviously a key function of every insurance organization. But I think it's important to look more broadly at how they operate, and whether they have legitimacy in the marketplace, among their employees. Sure, right. And the broader society. I mean, if if an organization is, you know, constantly being barraged with objections and concerns from from regulators and rating agencies, for example, they're not going to stick around and they're not going to succeed. But back back to your point A minute ago, David about pricing. I wouldn't disagree that reinsurance is largely a subscription market, particularly in things like property catastrophe. There's probably more opportunity for diversification, more specialty lines. But I take your point, I think what really differentiates a successful reinsurance company is not just how they price an individual deal, but how they assemble their portfolios, right of multitude of deals. And that may be within within a single line of business or across multiple lines of business. And I think over time, this becomes sort of a virtuous, self reinforcing cycle. You know, a company that's got legitimacy, a company that's recognized for its financial strength, a company that is recognized for its its willingness and ability to deliver on its promises and commitments, will attract customers, and be able to pick and choose more effectively than a company that doesn't behave in a responsible, long term manner.

David Wright: 14:35

That's pretty interesting. So you're, you're kind of evoking this idea of reputation as being incredibly important. And maybe, you know, tell me what you think about the market mechanism for this influencing your business is you might see more better deals, right. So if, if customers like you, they will show you their business.

Craig Hupper: 14:55

But this is this is sort of a little bit of a field of the ESG discussion, but it's not on related. I mean, we pride ourselves in having very deep relationships with with key customers. And because of those, we are able to go beyond, you know, what may be sort of the syndicated treaty relationships and the broker place market and come up with special specialized deals. And we think that's an opportunity to differentiate ourselves, which companies who may not have the the strength of those relationships may not be available be available to them.

David Wright: 15:29

So that so we'll come back to I want to keep riffing on this idea of competitive advantage. So we have two ideas here. And we can if you tell me if I'm off track there, or one of them is you might say more sustainably price, your risk, and to your reputation as being a forward thinking ESG supportive organization could give you access to more business, more on the right track these two true anything else you'd add to that as the sources of competitive advantage due to an ESG strategy?

Craig Hupper: 15:56

Sure, I would make sure that we're incorporating these the pressures and criteria that affect our clients relationships, and the way they look at their business as well. Just so you know, obviously, as a reinsurance company, our core clients are insurance companies. And insurance companies are also not immune from these ESG factors, which were which were incorporating. And they are under pressure by their shareholders, by regulators, investors, rating agencies and others to make sure that they're incorporating these factors in their operations. And they're looking for partners that incorporate them as well. And again, this concept of partnership and long term relationships keeps recurring in our conversation here. And I think that's characteristic of so many reinsurance relationships.

David Wright: 16:50

Yeah, you know, it's it's an interesting, I have observed this over like, years that I spent in the reinsurance business and insurance business now is that there's a kind of like, instinct for self regulation. Right? So you look at look, I just put this podcast couple years ago with this gal, Terry Vaughn, who is the head of the FDIC during the financial crisis actuary professor at I forget what university she is, I didn't look that up. And really interesting. She talked about how are we talked about how there are all these different influences on on enforcing call, I mean, social norms, I don't know what you call it, like we call it cultural norms. Where you have reinsurers you have regulators, you have rating agencies, you have your right, you have like even agents. So it's interesting that the insurance business now I'm talking about agents like care about the reputation of the insurance companies that they that they work for. And there's such a thing as a status hierarchy amongst ensures that customers ultimately care about so like, there's all these with these all these factors, which are secondary to pure economic self interest, that matter? Absolutely. And I just find that really interesting. Right, and I don't I don't know, maybe I'm just crazy, but I find it surprising in an encouraging and, you know, kind of like, you know, a way that I like about society, but one that, you know, if you pull out the old supply and demand curves, doesn't necessarily, you know, watch, or,

Craig Hupper: 18:16

yeah, I mean, dude, what you're talking about, I think is related to an organization's brand. And it's a great point. And this is hardly limited to insurers, and reinsurers I mean, we see this kind of cellphone you choose to have, you know, the car, you drive the neighborhood, you live in millions of other of other economic decisions one makes, you know, you're factoring in what that says about your lifestyle, what that says about your own identity, and a million other factors. But But brand and staying power and reputation are just absolutely critical.

David Wright: 18:52

And staying power and insurances. It means something that, you know, very specific, which is part of the economic arrangement of insurance that you will pay for claims, because you're still gonna be there 2030 years down the road where, you know, again, differentiates insurance. Because if you look at, although there's been some research recently that says this trend is reversing, but for the most part, there's turnover amongst corporations, right. So the, I don't know, gee, what's the big deal? Once upon a time? Tell us one that actually lasted a long time, but there are many other organizations which turnover and no longer on the s&p 500? Because they went out of business and insurance has less of that, or it should it's supposed to have less of that?

Craig Hupper: 19:28

No, David, you you alluded to something a few minutes ago that I think about ESG that I think is really important and touches on a lot of these issues. You talked about BlackRock and their their CEOs letter to to industry. And I think organizations like BlackRock and plenty of other large institutional investors, make the argument that ESG isn't just sort of a nice to have thing. It's not just about reputation. It's not just about doing good in society. They make the point and there is some academic literature to support this argument. companies who rate high on ESG criteria actually outperform in the investment marketplace. And so this is not just sort of window dressing. This is this is core to performance of organizations. And so this is sort of where we're capitalism really enters into this rather than, you know, fuzzy, fuzzy reputational stuff. The, you know, then there has been some evidence of this, particularly during the in the last year, you know, with with COVID. And the the economic strains that's put on society, organizations which have higher ESG scores have outperformed in that investment environment. I guess the question is whether that sort of vote some self selection, typically, natural resource companies, commodity companies, oil companies, generally have lower ESG scores and others, and of course, demand for those products, you know, the oil market just just plummeted during during the depths of the COVID crisis. And so the shares of oil companies fell fell fell down significantly. But this is the argument that ESG proponents make. This is not just about doing nice things. This is about outperforming. And in fact, the argument then is made that managers of companies really need to incorporate ESG as part of their fiduciary obligations to run the company and the interests of shareholders. Now, the interests of shareholders in these cases, supposedly align with that a broader society. Yeah. Which is, which is the more complex, sophisticated and candidly controversial argument.

David Wright: 21:38

Yeah. And, you know, having reviewed the literature myself, hard to, you know, hard to specifically comment, but I can certainly, like, take the general, I get the point. The thing about that, which puzzles me is, if it's just a good idea, so why ESG? Right. And that's just, you know, it seems then superfluous that as a result, what do you say to that? I don't know that there's maybe there's not really something that can be said about that. If it's if it's controversial, then then that's part of the point is you're trying to make that advocate for that point of view?

Craig Hupper: 22:16

Well, we draw some parallels in our company between what's going on with ESG in the last several years, and what, what was going on with enterprise risk management dozen or 15 years ago. I mean, again, back, it's like underwriting risk management is a core function of an insurance or reinsurance company. And that is what we do, we go out and take risks, and assemble what we hope are diversifying portfolios of risk. But we affirmatively do this, we're not trying to eliminate risk, we're trying to manage it. But I think the, at least in the United States, I'd say the discipline of risk management of enterprise risk management really got a kick from rating agencies, about a dozen or 15 years ago, making this an important part of their evaluation criteria. And so I think this helped companies Marshal the resources they needed to put together more complex and comprehensive enterprise risk management programs. I think it's interesting. You look at the global financial crisis in 2008. You look at COVID in the last year, there have been very, very few insurer and reinsurer insolvencies compared to prior financial and insurance crises. And I think a lot of that can be chalked up to enterprise risk management discipline being incorporated in corporations and insurance and reinsurance companies rather. And so this has been something which, you know, companies may not have, you know, initially, you know, wanted to do because it is disruptive. Once they did they see the benefits of it, in terms of staying power, and again, that enhances their reputation, their ability to deliver on their commitments. Yeah,

David Wright: 24:08

I mean, I have to say, I'm sympathetic to that. I. It was the way I put it. And I had this I did this podcast recently with Steven Mildenhall on the macro history of insurance. And in it you, you don't even need to look back to say, the 1920s like he does to get this view, but it you know, just reinforces the point, which is, man, has there been not a lot of action over the last 20 years really since? Since the 911. Hard market, which was it following 911 rather, wasn't only caused by 911. That was a serious disruption in capacity. And, you know, on an industry scale, one hasn't happened since. And even one of the amazing things about that is even spectacular events like Hurricane Katrina and before the Hurricane Andrew Dart rockers kind of like small blips compared to like a liability crisis which is like a whole nother level. Have a problem for the for the business. And in any case, this is a puzzle, right? So it was an amplitude of kind of the cry of the of the cycle was sort of something like this and then just kind of stops for an obscenely long period of time. And the thing that I like to point out, which is not like a, you know, ironclad argument, but I like to say, you know, present this following chain of logic, which is to say, Would you not agree that technological change has a nonzero impact on risk management? I mean, of course, does. And so if that's the case, then what would what would a spectacular improvement and risk management technology, due to the marketplace, it would make it look like as looked in the last one, two years, right, like not a whole lot of change? Right. And that's just not worth management. That's a little capital inflows and outflows perhaps I mean, you can use whatever risk management means. But maybe, as you say, poor portfolio management, maybe risk management, your m, and then ESG, are all just actually just kind of labels, we're putting on stuff that we're just doing cuz they're good ideas. And they're the same thing.

Craig Hupper: 26:07

No, I think that's right. I mean, the luck, there is something new about this nsj that the the arguments being made that this is actually supportive of shareholder interests. But I think your point is well taken that this is not completely cut out of new cloth at us. Now, if I run an underwriter, I'd say something about the old wine in new bottles. But But I'll leave it, I'll leave it to my colleagues over there. These are sort of points of view and organizing principles and frameworks and ways of looking at these problems. The problems and the challenges are not new. But these are different ways of organizing resources around them. Look back back to yesterday. I mean, the, again, I think, the differentiator here, what what is new about ESG in the last couple of years is this argument, this is constructive and supportive shareholder interests. But there has been a move, there have been multiple movements in history. for companies to incorporate principles we now would call ESG. I mean, there's the corporate social responsibility, movement or CSR. There's social socially responsible investment, there is what was known as the triple bottom line. There have been sanctions debates. I mean, I'm old enough to remember, you know, the apartheid regime in South Africa, led to great debate in business circles in the United States and elsewhere, about what multinational should do about their South African operations. And one of the outgrowths of that was the development of what were known as the solvent principles. There's a civil rights leader in the United States, a Baptist minister minister named Leon Sullivan, who promulgated a set of guidelines and rules for multinationals operating in South Africa. They had to treat the employees a certain way, you know, equitable promotion opportunities, education, training, that kind of thing, non discrimination in the workplace. Now, I think you can look at those as predecessors and precursors of some of the ESG factors that are that are tied up in a more formally ESG framework today.

David Wright: 28:29

You know, what fascinates me about this is it, it kind of scrambling of terminology adopted across the political spectrum. And so, you know, a few minutes ago, we use words like conservative conservationist, which are kind of the same word, but men have a radically different political spectrum implications, because I, you could probably make the point that ESG is a much more left friendly or friendly left movement. Right, environmentalism tends to be associated with the left. And you just made the point there that, you know, a pretty clear intellectual call it I don't know forerunner to this was the apartheid sanctions and restrictions and apartheid regime. And you know, this, they have these, you have these strictures promulgated by a Baptist minister, right. And, you know, for a little while ago, and somebody I'm going to do a podcast with this, but the Vatican puts out this document every year, I think it's every year every few years, which talks about principles for economic sustainability, by the Catholic you know, doesn't get any more dogmatically right wing Christian than the Vatican. And Holy cow, would they ever be on board with this? And but based on my reading, and I'll get somebody eventually in the podcast to talk about this. But, you know, this is like, it's all over the place politically. We don't necessarily think that that's the case. But it really is like, you know, this is, this is a pan political kind of movement. I'm not saying they're not detractors, but they don't necessarily map to what we think of as the political debates of our time.

Craig Hupper: 29:53

Yeah, I think the objections tend to be from folks who just don't like being told what to do. Sure, right. Yeah, I mean, we'd like to sort everybody would like to find maybe this is human nature, but everybody would like to find, you know, their own way to doing what they think is responsible and appropriate. But, but the reality is we live in a complicated world. And there are lots of influences that impinge on on businesses operation. And, you know, in the last year, in particular, I think, you know, broadly speaking, 2020 was a watershed year, with multiple impacts, we've got the impact of, of COVID-19, we've got the impact. And I'm thinking I'm speaking primarily the United States here, but I think more, I think it applies largely in the rest of the world, and the United States with a social justice movement arising.

David Wright: 30:42

So maybe we now we can turn a little bit to what really goes on, on an ESG taskforce at a reinsurance company. What So you start with this idea, hey, we should do something. Maybe you can talk about the genesis of that. And what actions from a process standpoint, do you take?

Craig Hupper: 31:01

Sure, happy to share some of some of how some of our journey on this if I can use a new age term a little bit. So just Well, let's let's talk about climate change for a second is probably the, you know, one of the key areas of our ESG process. So trans re is that a, what we call an emerging risk process for about a decade or so. And climate change has been on on the list of emerging risks for that whole period. And I mean, we over that time, we've had some internal presentations, we sponsored some outside speakers. It's been it's been on the radar, a lot within the organization. But starting about two years ago, in early 2019, we have a, we have an annual planning meeting for our risk management team. And it was interesting, it prior meetings for the risk management team, climate change had come up. But that year, three of us in separate presentations, myself from the capital markets and investor side, colleague from the risk side and our international operations, and another colleague from our cap modeling team, all flag climate change is a key issue, we need to devote more resources to kind of the debrief the next day after the meeting was over, we decided it was time to morph to formalize the process a bit. And so we decided to set up this taskforce. And I, I was I was lucky enough to be to be named as a as a person to head that up. So we set up an interdisciplinary group of about a dozen people across different parts of the organization, people from the underwriting side from the modeling side from risk management, from investments, actuarial the legal and regulatory side, which is a key component for marketing and communications, because we really need to communicate what we're doing in this area and be part of the public dialogue, selling from claims, and also zoning from the operational side for things like our own carbon footprint. And, you know, like all these, these task forces, I've been involved with some of the very early ones on risk management. A long time ago, the first couple of meetings, you sort of sit around talking and try and figure out what you're going to what you're going to do. But ultimately, we started looking at some disclosures about what our peers had been doing. We started working up some of those coming up with some heat maps, about different aspects of climate change, and how they affect the different parts, different lines of business and different parts of our underwriting operations. And we started thinking about how to incorporate that in the rest of our operations. And again, particularly on the underwriting side. And then about a year, year and a half ago. We were not unconscious about the other aspects of ESG and decided to broaden the brief of the taskforce beyond just climate change. Right. So we renamed it it became from the ESG. From from the taskforce on climate change. It became the taskforce on ESG. Okay. And around that time, we actually, this this coincided with some some of the terrible social issues, which which manifest themselves in this country about a year ago, we actually set up a separate Diversity, Equity and Inclusion committee at the company, separate from the ESG Task Force been linked to it. And we've got a team member from that that committee who also serves on the task force to make sure we're we're linking those operations. So that's that's sort of the the bumpy path along the way. And we got to the point where we're now a team which we meet quarterly, we've got various responsibilities assigned. We report to our corporate risk management committee and on through the organization that way And it's a meaningful part of how we organize our resources in this area,

David Wright: 35:04

is the output then recommendations for where we're the I guess, like, I can think of the I can imagine like a work product being researched this or that topic, like he's using competitor analysis, what are the people doing? And imagine the output of that are things that the organization should do. Right? And so where would you how what would be the mechanism just like the bureaucratic if I could use that word, mechanism for how you get those recommendations into the hands of the people that are actually going to make the decisions? Or adopt them? or reject them? Or bright? Is it like, Is it good one community to another or like and tell me, I'm just fascinated by this sometimes. So David, this, this

Craig Hupper: 35:43

is probably a subject we should talk about in another podcast about a year. Okay. Because and I'm not trying, I'm not trying to duck the issue. But this is very complicated. One of the things that becomes clear, is one delves into this, it's it's actually again, back to the risk management analogy. It's tough to come up with policies and strategies and decisions. Before you have a baseline. And before you have granular and transparent data on which to base those decisions. Yeah, right. So So among our priorities, candidly, is, you know, we've got actually what we think is best in class management information systems within the industry. But still, it's not as granular as we'd like it to be about our underlying business and in for so we're, we're a reinsurance company, you know, we cover we provide capital to insurers, we don't know the identity of every single insured within our students. portfolios. Yeah. So we can answer sort of, in very broad brush terms, something about the kinds of portfolios we're supporting, but not in great detail about, you know, the number in a bye, bye bye si si code. Yeah, for the kinds of companies that are that are ultimately covered in our portfolios. So we're trying to get better at doing that. But but but that's the kind of data we need to get before we can come up with more specific decisions and strategies and commitments within ESG, because these come with trade offs, you have now a number of a number of companies have made certain pronouncements about the amount of, for example, coal, or oil and gas or other natural extractive industries, which they support their insurance operations. candidly, we are not yet comfortable enough that we are in a position to make any such commitments that we can really stand behind. Yeah, and I think this is characteristic of other other reinsurance companies. We think it's a stretch to be able to say with great certainty. Now, the the the kind of support one is providing to these kinds of operations today. And so we're investing in better data

David Wright: 38:02

on that, that is so interesting, it really aligns with something that I made an observation about, you know, years ago, as, as one time actuary working on portfolio analyses on a customer that was particularly weak on data, although I would say that this is the case universally, that the only really good data you have is on cash flows. Because that's like, audited. Right. And you know, when and where trouble, money went, right? Everything else is pretty dirty. Even like something as simple as limits or exposures or like you say, si si code, holy cow, I mean, correct. Like it. Again, I'm in the insurance business right now. And we try and track si si codes. And it's, it's, it's a mess. You know, it's all human entered. And, you know, the data is like, pretty good, if you want to make generalizations. But if you want to get really specific on things, it's just kind of like melts out of your hands, you know, it just it doesn't have that kind of decision. And so it's really hard to know what's going on inside your portfolio. If it's not a cash flow related analysis, and let's face it, cash flows are important. And they're a primary importance, of course, because that's how we get paid. But if you want to do anything more fundamental right, or precedent to cash flows, like you say, analysis on, we don't have the data. Isn't that amazing?

Craig Hupper: 39:21

Or we have data that's very, very broad, and not as useful as it could be.

David Wright: 39:27

Yeah. And so do you have initiatives afoot then? That are data collection type initiatives? Or what would be what would be the recommendation then? From to do something about that?

Craig Hupper: 39:41

Sure. So we actually have invested in we are internally invested in over the last 10 years, and new internal module farm management information system, which captures underlying data, but only for limited lines of business. For certain lines of business, in certain parts of the world, and one of the things we're investigating is whether to beef that up to to apply more broadly. I mean, for example, it's the the sort of the question that we were trying to answer, you know, 1010 or so years ago was, you know, we're a big writer of, of casualty lines of business, particularly professional liability lines of business. You know, pick a company out of thin air, we'd like to know if Walmart not as big of a large company. If there's a dirt DNO loss on Walmart, what do we have for that? across the variety of seeds we sport? And for example, could we also capture if we happen to have any surety lines that related to Walmart? You know, can we add those up across the board and get a picture of our exposure? And, of course, you know, Walmart may be listed under different names, you know, maybe maybe cited, you know, with or without the hyphen, for example, maybe an ink after it, comma before the ink or so forth. And so we've invested some resources, and data capture, and sorting. So we think we've got a good handle on that. But again, only for a limited, limited lines of business. And how can we get to the point where we can actually get more detailed information across lines of business. I mean, again, I hate keep beating up on the risk management analogy. But there are some parallels with where the cat modeling world was 2025 years ago. You know, before Hurricane Andrew, there really wasn't a cat model, modeling business afterwards became apparent that this was necessary. And reinsurers started demanding that their insurers, you know, started their seasons capture this on a more transparent level, it was a major major data exercise for them to undertake. But it got to the point where, you know, we have some data now that we can actually use to manage our portfolios. And I think a question can be asked is whether we're going to get to, you know, that kind of pressure for ESG considerations down the road, Is there gonna be enough pressure to put push down to our students? And will they have the ability to capture this and then share it with their reinsurance partners?

David Wright: 42:12

I have to think that you can't be the only voice in the organization advocating for better data, right. I mean, what's so interesting is, again, back to this earlier theme of a lot of this is just a good idea anyway, and I mean, I didn't see this one coming. Correct. But it makes complete sense. Now, in hindsight, that, of course, data is the data is the barrier is the barrier data as a as they all say, data is the source of all, you know, value and, and how then are you like, how do you? So you have two hats, right, Greg? So you're going to be just somebody who is a good citizen of trans ri, and you want the best for trans? And you have, you've been asked to adopt this perspective of ESG. And so you're going to kind of lean this way. And so like, with the ESG hat on, you're probably looking for existing processes, or let's call strategic allies that you can align with and say, Hey, you want data? I want you to be kind of the same thing for totally different reasons. But it will, it will enable us, you know, to specifically do better at this task we've been given, who are your allies? And who also want this data at this? Is it just like a universal good and everybody wants it? Or are there specific processes in organization? They're also working on this problem?

Craig Hupper: 43:24

Well, I think this comes back to something we've been talking about. Not everything comes with trade offs. Yeah. And love, nothing is cost free.

David Wright: 43:31

Yes, of course,

Craig Hupper: 43:31

no, measurement isn't free. That's a central question of economics, I suppose. Like, everybody wants everything free immediately. But that there's opportunity costs associated with this. And it takes time, and it's just starting out. I mean, you look, even even today, I made the analogy about cat modeling data a minute ago, you know, even today, the date is not perfect. It differs from client to client. It certainly differs in different parts of the world, for example, and from parallel to parallel. So I think we're gonna we're gonna be working on data for a long time to come.

David Wright: 44:10

Yeah, I mean, always, you can always be better probably right. But I think, you know, when in assessing the trade offs, it's it as a manager, I like this as well. It's always fantastic to have a very specific thing that it's going to benefit, right saying, Ah, if I get this, I can do that.

Craig Hupper: 44:26

That's a great point, David, and a great segue. And I think one of the ways within any any organization No, and not limited us not limited to reinsurance, but to the extent one can point to additional opportunities for business, increased profitability, or just just better performance. That is a great way to get resources allocated to a new initiative. And again, one of the things we're looking at from ESG we think there's opportunity here, not just in differentiating ourselves, you know, as a corporate citizen, But there are opportunities for new business in here. I mean, there, there are new sectors of the economy opening up for renewable energy. There are new sectors of the economy for, you know, electric cars, solar power, geothermal, you know, wind power, and so forth. All these things will need insurance and reinsurance support. To the extent we can capture the data on this, to the extent we can be expert and underwriting these, these new operations, that is an opportunity for us to capture new business and, you know, be more profitable and deliver more value to our shareholder. And that's the kind of thing if, look, if I'm a busy executive, forced to choose among competing alternatives, which have costs, the opportunity that represents an opportunity that represents the potential for profit, is certainly an opportunity that I'm looking consider, perhaps, at the top of the pile, compared to something that's just that does not do that.

David Wright: 46:03

How about how about burdens or costs you might place on people at different parts of the value chain? Because I think, you know, from a data standpoint, folks that are upstream from you, in, you know, in some version of it, maybe maybe you guys have other ideas, but my thought is, if you're looking for better data, you don't produce data, right? you consume data that others produce. And so really, it's going to those producers and saying, Give me more data. How do you make that case? And even, you know, I think the best case scenario, you could say, if you give me more data, then I'm gonna go to everybody else. And and then we can make better decisions about ESG. For example, do you make that case? Is that something that's compelling to folks? Or how do you do that?

Craig Hupper: 46:43

Yeah, we haven't done that much yet with ESG. But we certainly do that on other lines of business. In terms of benchmarking and pure analysis, right. companies want to know how they're doing against their, their own competitors. And obviously, we respect confidentiality. But we do have certain insights, as a leader in different lines of business. And we can give give our clients some idea about how they stack up and help them identify new business opportunities or where they need to to strengthen their operations. And I certainly expect we'll have analogous situations as we go further down this ESG journey.

David Wright: 47:20

how receptive because I hear here's how, by default? Well, I would imagine, it's a great idea. We'll get back. Right? I mean, you're asking us for something, you know what I mean by that?

Craig Hupper: 47:32

Yeah, look, a couple years ago, I would I would certainly have agreed with you. I think, again, back to back to the point before, before you went to the break. I think, particularly in the last year, you know, we think of roughly 2020 is a watershed year, you know, with with with COVID, and all its manifold impacts. economically, socially, environmentally, culturally, we see social unrest, again, particularly in the United States, after the terrible, terrible death of, of George Floyd and Brianna Taylor and others, as resulted in great pressures for social justice. Now, the climate change situation, has certainly, you know, is always his last several years risen closer to the top of the pile. But it's certainly even further up that list now. And, of course, with political issues in United States culminating in the events of the US Capitol on January 6 2021, has forced corporations to take certain stands. I mean, there there was a very well known social media company, which removed the president united states, from their, from their feed, as a result of his efforts, you know, lost about $5 billion in market capitalization instantly from that, since then it's bounced back. My point is they This is a decision they probably never wanted to have have to take, but they felt felt forced to make a decision to remove the president from this. You know, we had airlines stop preventing the checking of firearms and flights to the Washington DC area around the time in the inaugural, we had a large home rental organization, no stopping the rentals of homes in the Washington DC area around the time of the inauguration, because they didn't want to be responsible, in case people were coming with with mischief in mind. My point is not to take a stance on these decisions. But these are organizations that are not singling them out. Most corporations want to be considered fairly agnostic on these controversial decisions, but they felt compelled to make decisions and to take certain stands as a result of the events of the last year or so. And I think I think organizations now realize that they really have no alternative. They can't stand you know, they disengaging from the broader context of what's going on in society really is no longer an option for them. And this back to your, your point in a long winded way, I think this is the kind of exogenous or macro factor that is going to have companies invest the resources and and make the commitment to collect the data, and just broadly now participate in some of these broader dialogues.

David Wright: 50:31

What's interesting about that is, that is certainly an examples you've you, you brought up there, this isn't a sideshow. Right? In and you could make the argument. I think that prior iterations of this, I mean, going inside shows a little bit kind of diminutive, but I don't really mean to do that. But I mean, it don't. This is not this is not like the CEO and executive committee who are running the ESG committee, right? Like, this is like there's another committee of people in there's lots of them, and they're all important, right? But it feels to me like, certainly on this, I would call those more s, right, the ones you brought up there, then he, but those were decisions that were had to be made, I mean, you're gonna raise $5 billion in market cap, the CEO is gonna sign off on that one, and probably take over that decision making process, and now rightly so. Right. And so I have to think that the degree of attention that gets paid to this, it ceases to become, you know, back to maybe the theme of this entire conversation, which is that to what degree is this actually something distinct from just company's strategy? And, you know, is this kind of like strategy committee of some sort, which

Craig Hupper: 51:43

I think it's a great point, David, you can't isolate this from, you know, broader questions of strategy and the purpose of an organization. Look, these are philosophical and cultural and existential questions. And these are not appropriately left to, you know, staff groups. I mean, this is, these are the kinds of decisions that get made at the highest levels of an organization. And I can I can tell about our parent company, just last week, released its first ESG report, I think it's 67 pages. You know, we are, we are responding to the demand for this and are the senior leadership of transatlantic and the senior leadership of our parent company, and its board of directors are all in on this stuff. And this is important to them. And I think similar discussions and similar commitments are taking places across the halls of different organizations around the world. Now,

David Wright: 52:40

you know, if it comes down to the, on the investing, the sort of, I think, important genesis of the current phase of ESG, I don't know what he would have to call it. Interest dues. YaSM is, is, is the BlackRock CEO, Larry Fink's letter. And what fascinates me about that, and this actually ties into reinsurance decisions do so it's not really on this kind of, or current segment of processes. But I really want to bring this out, which is, if in investing, well, let's say, let's do a reinsurance deal, let's say a reinsurance deal, because it applies to both, you say no to a deal, because of I don't know, it's tainted somehow is it with with some kind of some sort of unsustainability about the the seating organization or something when we don't like it, we made an analysis, we have the data. And this does not meet our criteria for ESG. strategy. But then the price goes up, because everybody else says no to write, and the price goes up again. And the price goes up again. And now it's very hard to make the point actually, like ESD doesn't really feel like the profit maximizing strategy on this deal, man, this is an unanswerable question, Greg. So it'd be unfair. But how do you think about that? I mean, Surely it's when you lease you're gonna have to tackle or think about? Absolutely.

Craig Hupper: 53:58

Yeah, it's it's tough to answer that broadly, without a specific situation in mind. The the point you're raising is excellent, though, which is that it's easy to make these decisions when the indicators all point in the same direction. Yeah. It's like, if deal was unprofitable, unsustainable, controversial, and bad for your reputation? I think I think that's pretty easy choice. If it's a more gray area, and if it is compellingly profitable that is, that is a very different than that is it more challenging calculation, which and I would not prejudge how any organization would would come up with it. But I would say that the calculus you know, the the weight on the scale is different today than it was a couple of years ago. For a lot of these operations. Just one thing, I think it's it's its challenge. ESG is challenging for any organ. To get the balance, right, it is probably easier for an insurance or reinsurance company than it is for certain other organizations involved in more controversial operations. I mean, if you were an opioid manufacturer, if you make firearms, if you make tobacco products, you know, I think you got a different set of challenges and constituents to deal with, you know, insurers, and reinsurers again, are, by their nature, they think of themselves as conservative and responsible organizations, you know, providing capital to help people manage the insecurities of life, you know, rebound after bad things happen. That's a more attractive starting point to me from an ESG perspective than some of these other organizations with different set of challenges. Yeah, I

David Wright: 55:55

mean, I'm totally with you on the on the point about the trade offs becoming very difficult. And in doing research into this conversation, I came across this, this press release from the Department of Labor, department labor, where they actually denounced ESG investing. So ironically, because their point is, you should be maximizing returns, we have underfunded pensions everywhere. And my God, if you, if you force us to, like stitch up a retiree, because of some kind of like, mission that you're on, that is bad, don't do it, right,

Craig Hupper: 56:29

is that that's a great point. And again, it goes to the trade offs, and frankly, the evolution of thinking on this. And I referred to Leon solvent a couple minutes ago, showing my age, but I remember, you know, studying economics now a while ago, and you know, at the time, Milton and Rose Friedman from the University of Chicago, were the economists in sort of popular culture, who were talking about how, you know, the sole responsibility of a corporation in addition to complying with laws. I mean, they were they were always very careful about that, but is to make a profit and deliver value to their shareholders. I think the thinking of that has gotten more complicated. In 2019, you know, the Business Roundtable in the United States, sort of a collection of big blue chip companies that made what was a fairly different, different kind of pronouncement, to look not only at their shareholders interest, but theirs stakeholders interests, you know, broader social context of an issue. Now, you refer to the Department of Labor standard. That's fascinating, because that was a ruling, or an approach that was promulgated under the prior administration. Since then, since the new administration has taken hold in Washington, there is attention to rolling back that standard. So that pension fiduciaries are going to be permitted to incorporate broader ESG factors into their decision process. And again, this goes to the argument whether you believe it or not, but the argument is that you can consider ESG factors and still be a responsible fiduciary, because again, that that ESG considerations properly managed are beneficial to shareholders as well as the broader social context.

David Wright: 58:17

Yeah, and you didn't just to kind of reframe it one more time, in reinsurance terms, just because those are the terms I understand best is if you believe that capital is the source of diluted returns, so we're over capitalized goes the logic. And as a result returns drop, because there's too much capital chasing after a few too few deals. And then you wall off a subset of deals, they're ESG non compliant, that don't get any more capital. Suddenly, it's like, well, aren't we now kind of making it worse? for ourselves, if we're all pouring into, you know, if we're kind of like, reducing the universe of potential this? I mean, this presumes that, that there is a constituency of reinsurance deals that are not ESG compliant, which, you know, maybe that's kind of the deeper goal, which is like, if everybody can just agree to adhere to these philosophical tenants, then there aren't any deals outside of the Venn diagram of ESG compliance, and we don't worry about it anymore. What do you think?

Craig Hupper: 59:11

Well, again, this goes to some of the social controversy about ESG. I mean, so should you support coal mining operations, you know, coals dirty extractive industry. But tell that to someone in developing countries or who has any accident, yeah, that's a great point, just your job depends on it. But say you're somebody in a developing country that doesn't have access to electricity. Unless the you know, the electric utility, which is fueled by coal comes online, and brings power to your village changes your life. I mean, this is an area where sort of the E, the environmental considerations in the ass and ESG may not be in alignment. And these are some of the trade offs that need to be made and managed. Well. The This is complicated because these tips were talking primarily we're talking about supporting legal products and legal services. You know, in this country, at least, they may be controversial, but our political leadership is still in their wisdom, you know, sided not to change their if their legal status. And corporations are being forced to tiptoe into areas that were really not within their traditional purview. And those are getting into political decisions, which which were usually left to the formal political process. And so the lines are blurring between these these different approaches. I think we sort of ended this last time about how, you know, the the sort of traditional line between Friedman esque role of business, you know, just existing to make a profit, maybe expanding or encroaching over, across the line onto what was traditionally viewed as government's role in terms of telling companies what they could and couldn't do, and what were social goods?

David Wright: 1:01:09

Yeah, we're talking about like, Cool coordinating actors in society, to generate public goods to use kind of economic terminology, or protecting public goods, voluntarily, which is like, a fundamentally different kind of governance than the government selling here, the laws obey the law. And as long as you obey the laws, then you're okay. And everything else is, is well, it's kind of up to people to do what they want to do. But to me, this is, it feels different. Like, it feels like, you know, the this movement feels to me much more like an NGO, kind of, you know, it does not feel like simple profit maximizing business activity. And that it by the way, is not a judgment against it, or for it actually, in any kind of way. It's just just sort of feels different to me. I don't know. Does it feel different to you, Greg?

Craig Hupper: 1:02:01

Well, well, then here's, here's where the argument gets interesting that it's supposedly in doing these things, you are creating more value than you would if you did not, and that then itself becomes part of your fiduciary responsibility as an agent. Yeah. And it's a little classic sort of principal agent issues in business. And, you know, by I think part of the argument is by recognizing these externalities, just as a term you used last time, that this is, this becomes a legitimate role in business because it creates more value than not doing that. I guess the I'm just, and maybe we can talk about this the role of government here, US Department of Labor, or the Securities and Exchange Commission at this point, or the New York, Verona financial services, has not prescribed specific things you must do to comply with regulations. However, they are certainly providing guidance. They're certainly making no bones about where their preferences lie. You know, the SEC is tying this up in terms of disclosure and materiality, what investors would want to know about I mean, NASDAQ, I think it was in December or earlier, last fall, late fall, NASDAQ announced that they were going to be requiring, or their their, I guess, it's accurate stated floater proposal, the companies listed on the NASDAQ would have to meet certain criteria for their board members, I think it's, I think they wanted every company on the NASDAQ to have one one woman member and another member who identified as a diverse member of a diverse population, or with a with a non traditional sexual orientation, something like that. And, you know, you could, if you're a company, and you decide if the if NASDAQ actually does go ahead and implement this, you could decide the list, you know, you could go get listed somewhere else. And this is, again, the NASDAQ is not the SEC itself, right? They're making sort of a similar argument about disclosure, and providing a data to investors, they investors would would reasonably want. Now, of course, the counter argument that as well, if this were really important to investors, then investors through the corporate governance mechanism can make their views heard. And if that's truly important to them, you know, the company will find a way to respond to that. Now there could there could be a proxy, a proxy proposal for that, for example.

David Wright: 1:04:45

So here, like here, here's an interesting, here's an interesting observation about this. I mean, it's like, this is the sort of thing that libertarians want to happen, which is to say they want to preserve The ability for organizations to exit right to say, I would very much I mean, it is perfectly consistent, I think from like a libertarian philosophical perspective to to actually be fully supportive of all environmental regulation, but also just want the want to be opt in. Right. And so what maybe from like a libertarian standpoint, encouraging about the ESG movement, is that it isn't law, like, you can choose to not list on the NASDAQ, and the NASDAQ has all these requirements, which the NASDAQ, it has made the decision to have those requirements or and then companies that don't want to do that can just go list somewhere else or be totally over the counter.

Craig Hupper: 1:05:37

It is, to the extent alternatives exist for them.

David Wright: 1:05:39

Right? They said doctrine does exist. Yeah. And with the NASDAQ, putting out some kind of pseudo regulation to that extent, there will be alternatives. Right. But if the SEC does, then the alternatives disappear in the United States and elsewhere, maybe you can do Ico I don't know, whatever it is, but that's me is like that. It's like environmental regulation through a market mechanism, or through a voluntary mechanism, which is pretty different. I think. I mean, maybe this has existed all along, but I don't know, like, it just feels more intense right now.

Craig Hupper: 1:06:08

Yeah. And look, when it from a personal perspective, I mean, I have some sympathy for the libertarian perspective. That being said, I mean, the market is not, does not respond to every factor. I mean, there's a there's a deep literature in economics about externalities. Now, pollution is the classic externality, that the except there's no cost associated with this society bears the costs rather than, you know, the owners, principals or agents themselves. And that's, that is a very legitimate form of government intervention to to to capture those externalities and make make make the party that's responsible for them, you know, shoulder the burden from them. And I think that kind of argument or version of that argument is being as being applied in this whole ESG debate as well. To the extent that all these externalities are not being captured, you know, perhaps there's a helping hand that can be made along the way. Now, that being said, I mean, there are, this is more prominent outside the United States. But regulators and other countries, particularly in Europe, are beginning to take a more demanding and specific and particular view, thinking about how they regulate insurance and reinsurance companies. For things like climate change. I mean, they need to demonstrate in different countries, regulators require insurers and reinsurers to demonstrate their exposure, calculate and demonstrate their exposures to certain climate change scenarios. And depending on the outcomes of those those calculations, now, the regular may intervene with some with some, some some requirements they've got to comply with and may impose additional capital Charges and all all sorts of other things. And again, this goes back to the whole sustainability and resilience issue we've spoken about before that the extent a regulator isn't persuaded that these these factors, demonstrate that you've got enough sustainability, resilience to meet your obligations. That's when they step in.

David Wright: 1:08:10

I want to do what's what might seem like a bit of a hairpin turn here, but I am just fat so that we're describing there is more of a traditional regulatory intervention, right? So you must describe these things, or you're doing this or we're going to charge you some capital, we're going to penalize you, or shareholders. But there's this other thing called governance, right g in the ESG. And that, I think, has nothing to do with these things. It seems to me to be an interesting and odd. It does. I don't I don't I don't see the automatic link between the E and the S I get, right. The G i don't understand how it fits into the picture. Helped me.

Craig Hupper: 1:08:52

Yeah, that's that's an interesting point. David? No, I think it's fair to say that, you know, governance is not a new concept now and in the corporate hierarchy. And in fact, you know, let's, let's link this to, to insurance and reinsurance underwriting for a second just for fun. I mean, to the extent to which somebody is evaluating directors and officers liability risk in an organization, an underwriter is going to be very interested in now that that company is set up, and how its governance works, how its board is composed, how leadership is compensated, what the incentives are, for operations and so forth. And that's, that's been the case for decades, for organizations, and certainly stock analysts and investors have had a similar set of interests and they were very interested in how organizations are set up and how the governance works. I think adding it to the E and the s this this G component is part of this effort to link all these factors into a broader framework of corporate culture. And culture is central to all of these things. Now, what what a company's ethics are like, how it manages competitive relationships? You know, their whole broader risk management issues and so forth? I think the I think you're right, I think I would agree with you that the GE is probably the longest tenured of the three, three letters of the ESG. framework. But it's an it's an effort to integrate this in a more unified approach, I think brings the EDS and the G together. You know, there's

David Wright: 1:10:40

a, I think, if I may, as you're talking, they're just sort of thinking about it some more. And I think maybe you invoked the idea of a principal agent problem a few times, I think, in our conversation here. And you could argue that the whole of ESG is an attack, by principles on agents sort of saying that, you know, that the agents don't represent the needs of either the principles or of society, maybe we can abstract away a little bit up a little bit. And that is reflected in the E and the s, because society wants the E and the s to be more prominent than the agents are ignoring it. And the governance agents are always trying to, like, you know, wriggle out of under the thumb of the principals and do it, do it, do it what they want.

Craig Hupper: 1:11:21

But but the that's a great point. But one of the distinctions here, though, I think, is an enlargement of just who is classified as the principal here. Sure, it's no longer just considered, you know, who owns a company or the organization. It's the broader society in which it operates. And so the definition of the principle has expanded meaningfully, to include employees, communities, which they operate, broader society. And so again, it's not to belabor this point again, but this this also ties in I mean, I think you can make an analogy between the principal agent problem and this whole concept of externalities again.

David Wright: 1:12:03

Yeah, and I think, you know, I think about this sometimes where, you know, back to another theme of the conversation, which is that insurance is kind of a funny business, because we, there's a coordination happening all the time, even if only implicitly, right, where, you know, companies kind of have, you know, you could charge nothing, right for your product and sell lots of insurance. And remember, a very little bit of money, and eventually you blow up, of course, and so there's this kind of like, collective action problem, that's always been the case in insurance, where, you know, certain periods in history regulators were literally telling the insurance companies what they had to charge, or rather reading bureaus, I should say, and over time, you know, that coordination has become kind of almost more cultural and not as explicit as exemptions for antitrust laws and the like, for insurance churches. Weird business, right. It's a very, very kind of like, socially minded is not really the right word, but almost gonna cause like collectivist sort of business. It's a strange. Sure. And so, you know, if the theme of the conversation here is like, societal factors have always been earliest cultural factors are greater than single company factors have always been a part of, of insurance. This to me is like, a similar, consistent broadening of the definition of who is who is whose interests are at stake stakeholders, let's call it stick redefined.

Craig Hupper: 1:13:19

That that's a red, red, red color, red word for a lot of people. But yeah, that that term gets thrown around a lot.

David Wright: 1:13:25

Tell me why tell me more about the color. Why do people get upset at the work? Is it because there's somebody else imposing their will on you? That doesn't really attempt? Tell me more about stakeholder theory?

Craig Hupper: 1:13:33

Well, I know at what point do this take what's the definition of a stakeholder? And how far down the line is it extend? I guess? Sure. But it's just it can be sort of never ending?

David Wright: 1:13:48

It can? Yeah, right. Right. The long tail. Right? So how far do you go? Right? How far away from shareholders do stakeholders go and there's customers and you know, the insurance industry? Let's take holder in, you know, just to bring it back to this a stakeholder for one insurance company is another insurance company, because, you know, if you work for trans re, and if I don't know, let's pick on somebody, if Everest three cuts all their rates in half, it screws up trans resistance, because of you know, all the things that not that they would do that, of course, not so fine people that ever three. But you know, you get what I'm saying, right? So like, either you have an interest in the good behavior of other organizations around you, because there's a long history of bad behavior for an insurance leading to horrible outcomes, ultimately, for the customer in the end, but for a lot of people in between. And so stakeholder You know, this sort of broad definition of, of collective action, like who can influence who is is not unique to is it's common insurance, long history, but now ESG seems to be kind of taking this sort of concept, broadening it.

Craig Hupper: 1:14:54

Well, this is interesting to you refer to, you know, Cust customers get heard, and certainly that that What happens when something bad bad occurs, but like other financial institutions, I mean, everything's connected to everything else. And we certainly saw in the financial crisis, you know, some very well known leading insurance companies were caught up in a variety of financial instruments that threaten to bring down, you know, large chunks of the world economy. You know, this, this went far beyond just the the policyholders of folks who have made a conscious decision to buy insurance products from from those companies, you know, just extended to all kinds of knockout and knock on effects are, again, the externalities again, come up. And I think that's part of the argument here, that insurance is part of the financial chain, and the broad range of relationships that are connected and tie the world of finance around the world, even among folks who really did not make any conscious decision, you know, to get involved in any particular company's operations. And this is all part of the regulatory role and ensuring solvency of the system, and not just, you know, individual companies matter, potential companies are part of the system. And if one company gets in trouble that can't have knock on effects to others.

David Wright: 1:16:15

Is that what GE is getting at? So maybe bring it back to that? What, what is the, what is the purpose of the GE in ESG? Is it about? Is it about coordinating amongst companies? It can't be I mean, that's, that's, that's insurance?

Craig Hupper: 1:16:34

Yeah. I mean, that's, I think what I was trying to offer was, was an example from the regulatory perspective. But I think the G Now look, like I think we talked about this earlier that, you know, particularly, this has been brewing for some time, you know, socially responsible investment, triple bottom lines, sustainable finance, and particularly the events since the financial crisis. Since COVID. Since social justice issues have come to the fore in the last year, climate change, and so forth. I think the the issues have just become so prominent that there are there many constituents who think that business just needs to stand up and take a stand. And this, these are these these issues are too important to be left completely isolated, or from a libertarian framework, perhaps,

David Wright: 1:17:36

in my mind, I think of like, you know, you're you're bringing up a bunch of like, I think, important decisions that organizations have to have, like you say, have a stand on, or not everyone, but more organizations, or maybe just as many as before, but now we just hear a bit more, I'm not sure. But in any case, these are specific issues. But to me, like the G, the governance comes at a process that should be like a procedural enhancement of some sort of some kind, as opposed to, like having a specific opinion on a few topics. And, you know, the classic kind of like, I know, in the in the finance literature or something, right. I think that there's some studies that show that independent directors, presence on boards enhances long term shareholder returns, right. So to me, that's like the classic governance, like when, right? That was pretty simple. I think, is there more, you know, is there more to it than that, like, how does one structure a business differently as a result of ESG?

Craig Hupper: 1:18:36

How does one structure I think, one, are you talking about ESG, or just the G now,

David Wright: 1:18:40

g. g. If we can,

Craig Hupper: 1:18:47

again, I would go back to the fact that successful companies have long has extensive and, you know, established governance processes. I mean, just just as an example, our parent company, recently, you know, they've had a long standing at their board level, they'd have long standing, nominating and Corporate Governance Committee. In 2020, they change the name of that committee to the ESG. Committee. Interesting. And I think, I think that's not unique to our parent company. Right. You know, that kind of emphasis that's being placed on on these broader issues, as well.

David Wright: 1:19:23

Interesting. It does kind of bring me back to this idea of, you know, I think of the the idea of independent directors. If I can just sort of latch on to that a little bit as a conceptual model, then that's where I go with or come to the idea of, of having external shareholders stakeholders, if we may raise the red flag again or be have a greater voice, right. So it's like more voices, I guess so more people involved in the governance process or in the oversight process. And maybe that's how you introduce the E and the s as well, because the more people than kind of goes out to everybody.

Craig Hupper: 1:20:07

Yeah, but we're seeing this the response to these pressures just just in the last week or so. I mean, the the major, I'm trying to avoid specific names here. But it'll probably be pretty clear. A major American Sports Network, decided to move its its its mid season, mid summer season game series out of the state of Georgia, to make a statement about our recent changes in Georgia voting law, a leading soft drink manufacturer and a leading airline, based in the state of Georgia, each base in the state of Georgia. I've made public statements about this, this chitinous recent change in voting law in Georgia, they just my guess is nobody can prove this. But a year or two ago, they might have stayed silent on this or what about this pass? Given the confluence of events over the last year or so they apparently decided that they couldn't just let this go. They needed to take a stand on it. Something that affected them and their their home turf.

David Wright: 1:21:13

Yeah, that is it. That kind of thing is a pretty fascinating development. And where my mind goes on this is kind of thinking back to, to what degree This is unusual, because I think companies often have taken stances on she's

Craig Hupper: 1:21:28

not unprecedented for sure.

David Wright: 1:21:31

Right. But But probably the magnitude is kind of it's kind of hitting a new peak, if we can call it that, or, you know, not peak suggests it'll come down after but you know, I mean, like, it's sort of at a new high. We are

Craig Hupper: 1:21:45

there are activists that are there activist communities that are looking to the corporate world to take certain stands. And obviously, there have been activists for for many causes forever. But they seem to be particularly organized. As a result of these these these influences.

David Wright: 1:22:05

You know, one other interesting theme, which I've seen written about more and more, is that this kind of activism reflects the ethos of the employees. And I won't I know, I mean, listen, Georgia passes a law of evidence is kind of like a definition. A lot of people in Georgia won't have that law to best, right. So it can't be universal. And I, you know, you sort of wonder about, like, companies becoming kind of more politically monolithic, one way or the other making kind of stands like, does the culture works, then there? I mean, it's, I don't know, Greg, that's an unfair question. I'm just kind of shaking my head thinking like, if you wish the extrapolation of this, what does society kind of look like, later on? If this goes,

Craig Hupper: 1:22:52

Well, why don't we have another podcast in a couple years? And we can reflect on that we probably should. I pick up on what you just alluded to a minute ago. David, though, that I think this is somewhat of a generational thing. We've got we we previously touched on the taskforce on ESG that we have here, transfere. It's been around for about two years. Our younger members of the task force are very passionate about this stuff. Right. And this is this is a big deal that they want to work for an organization that they think means something is doing the right thing. And I think companies that ignore this are gonna have a tougher time attracting and retaining strong talented younger members of the younger generation.

David Wright: 1:23:42

Yeah, you know, they're to your point A minute ago, like it's not unprecedented, right. I mean, the maybe the most famous instance of this was the cultural, I don't know, Renaissance, or do you want to call it a cultural revolution? I know, he said, That's not what it is every one of those two, around the same time, but I'm thinking in the 60s, right, where the baby boomer generation, right? enacted was coincided with huge amounts of social change in the United States.

Craig Hupper: 1:24:12

Yeah. And we certainly saw during the 60s and 70s, in the United States with the Vietnam War era, right. This was, obviously war was terribly controversial, terribly destructive. Many defense contractors were picketed because of their involvement in the war effort. You're no longer the arsenal of democracy. They were, you know, making napalm, you know, and cluster mines and things like that. And, and no, companies that did that. saw their reputation suffer.

David Wright: 1:24:44

Yeah, yeah. And I don't, I'm not aware of that kind of thing happening right now are companies being picketed all these days.

Craig Hupper: 1:24:54

They're coming under pressure to adopt certain certain things.

David Wright: 1:25:00

Yeah, I mean, it's interesting. You know, a minute ago, I was saying I said, a kind of new all time high, perhaps it is not, you know, there's a ways to go, Well, I

Craig Hupper: 1:25:08

think these things, move in cycles. We're talking about Vietnam a moment ago, then you had the 1980s in this country, you know, particularly under the Reagan era, sort of the pendulum swung back to, you know, businesses champions. Now, business can do now, but you're doing it wrong, you know, tax cuts, and the private sector and government being the source of the problem, you know, rather than as the solution to the problem. And I think, now, in the last several years that depend on is perhaps swing back the other direction.

David Wright: 1:25:46

And it's pretty, it's a very interesting point to make to where I mean, I wonder, like, what the heck, like, pushes these forces around? It just seems to be, it seems something, you know, it's greater than all of us. But what is it? You know, like, what, what does it even, you know, how does it make any sense for society today? Just changes, like, priorities? Yeah.

Craig Hupper: 1:26:08

Well, that's, that's why we've got historians, I suppose. And so. Now, we're living in history. Yeah, we're sort of writing the first draft of it now. And, you know, we'll see how accurate it is. As we, as more time passes. Yeah.

David Wright: 1:26:25

Yeah. Great. So perhaps time, nearly time to close, actually, Craig, but I'm wondering if there any, any, any closing thoughts on on on ESG? I mean, what, you know, let's say to the trans ri. Team, because it'll be the primary audience for this, I'm sure. You know, how can they get involved? How, if they're not really even, they're probably all aware of what's going on. But, you know, what can we say to them to, to help this process along and have the most beneficial possible impact

Craig Hupper: 1:26:56

a trans participate? I mean, there are opportunities here, look at it constructively. Again, part of the argument behind ESG is this is a way to maximize long term value. I think the long term is a really important part of this. I think we mentioned in our earlier chat, David, about sort of, you know, different ways of looking at ESG. And now enlightened self interest, as one of them is doing well, by doing good. On Wall Street, you know, a number of proponents of the view of long term greedy, have succeeded over a period of time. And I think we've got to learn something from that. I mean, there are plenty of historical examples, where companies have prospered for themselves and for their shareholders, while at the same time being a force force for positive developments. I look, I'm, I'll make no bones about it. I am a capitalist. My political views don't really enter into this. But I think, you know, the rise. I think, capitalism, you know, is not perfect by any means, but has been a driver of great good, and some not so good. But lifted, you know, more people out of poverty than any other other movement in history. And I think to the extent we can sort of paratus sand off the rough edges, make more and more people eligible for the book, The benefits of capitalism, you know, make for a more equitable society where everybody has a chance to achieve his or her potential. I mean, that's a very exciting part of the journey to be on. I mean, this is this is a way to live up to the best principles that we that we want to live by, you know, by making making the fruits of one's labor as accessible to as many people as possible. So, I guess that's sort of the message I'd give and this this can be a positive force, properly structured and approached. But what's let's not never lose sight of being very pragmatic, and seeing what really generates value and creates prosperity.

David Wright: 1:29:15

Beautifully put, as always, Craig, my guest for the ESG mega episode. is Craig copper. Greg, thank you so much.

Craig Hupper: 1:29:21

Thank you very much for having me. My pleasure to have it.

David Wright: 1:29:25

And that's a wrap cool.