Principal Financial Group, Inc. (PFG) Earnings Call Transcript & Summary

Good day, everyone, and thanks for joining today's webinar, Insurance & ESG, A New Landscape. Before we start, I hope everyone is doing well in these difficult times. And of course, I want to thank everyone for taking a moment out of their day to join this webinar. Today's webinar is going to be recorded, and the recording will be made available alongside the slides for this webinar on our website in the coming days. At S&P Global, we're pleased to announce that as part of our ESG month in October and November, we will be planting a tree through EcoMatcher for each participant that attends the webinar and completes an event survey or that completes the See What Matter quiz. So my name is Matthieu Bardout. I'm an account Director for ESG in North America. I cover banking and insurance markets here in North America at S&P Global Market Intelligence, and it's my pleasure to moderate today's webinar. I'm joined by 3 fantastic panelists who will share lots of fascinating insights today. First, we have Mandi McReynolds, who is Director for ESG at Principal. We then have Nick Dunlop, who is a Managing Director for client relationships at Willis Towers Watson; and lastly, Michael Peterson, who is Deputy Commissioner of Climate Change and Sustainability at the California Department of Insurance. So we have just under an hour now left for this webinar in a busy agenda, so let's jump right in. We're going to start with a few introductory remarks by each of the panelists. We will then have a short polling question to gather some thoughts on the audience. And that will be followed by a Q&A. We'll have about 25 or 30 minutes for Q&A. Throughout that time, for anyone attending the webinar, you should have access to a Q&A widget, through which you are able to submit questions, and we would love to hear from you on the questions that you have for the panelists, which we will direct to them accordingly. Finally, after we're done with this Q&A, we'll have a second polling question, followed by some closing remarks by our panelists. So again, a reminder to please submit questions as we go along, and we will take those throughout the Q&A session. And with that said, and without further ado, I'd like to turn to you, Nick. You are in a client-facing role for a large European insurance, multinational. We've seen Europe play a pioneering role with ESG integration. And increasingly, we have regulation kicking in, in Europe. So what does it look like in practice to work on ESG integration at Willis Towers Watson with your clients?

Well, Matthieu, thank you very much indeed, everybody. And I'll just give a few words on what I think about that. I am going to focus on the E, although it's inextricably linked to the S and the G, it's a multiplier, for sure. I'm going to talk a bit about insurers, but most of what I talk about also applies in one way or another to clients of the insurance business. We've been sort of blessed, I guess, with the regulatory position in the U.K. that has sort of started a snowball rolling downhill around the world. Bank of England, the PRA have sort of consistently led a narrative and calls for action that recognize that climate is a systemic risk to the financial system, and the -- and interestingly, the role of the sector in sort of stewarding transition to a zero-carbon future. And they also encourages dialogue, which is sort of sensing that a low -- a resilient asset should have a better valuation. And I think these things are now sort of becoming very apparent to us as a holistic approach to regulation that is thematically moving across Europe, certainly. You're going to have to be expected declare your exposure, explain how you'll manage it and be prepared to be audited on it. And that's where sort of the move towards a sort of very universal adoption of TCFD, I think as a framework is heading. And we had some notable moments, which sort of pile on the pressure here. There's Mark Carney made that great speech a couple of years ago, the tragedy of the horizon speech. Something that's going to be of a real problem in the future doesn't seem to be concerning people that are here enough and why is that? And then they put out a great letter, the Dear CEO letter last year, which from the PRA, the regulator here, sort of saying that they expect that there will be an embedded approach to managing climate risk in all of their regulated entities by the end of 2021. So the heat's being turned up on this subject. The investment community is deeply embedding ESG. On a day-to-day basis, we're going to hear more about that. A lot of high-profile leaders, and then I think, I guess, notably, have been explaining what the expectations are of people that they kind of lend money to, to make declarations around climate, have a good ESG policy to make these declarations against the framework. And again, TCFD is there. And interestingly, insurers, of course, are now being asked by their investors, "What are you doing about your ESG approach or approach to managing climate risk?" So again, pressure is on and significant stakeholder pressure, external pressure. There's a lot of noise out there, which, of course, is very easily amplified in the modern world, which is showing significant reputational risk to people that call this wrong. And we've seen in our industry, people deciding to take very significant steps away from writing certain assets because of that. But I guess my challenge is the industry [indiscernible] by other financial institutions. The -- there's a new report that just came out by the International Association of Insurance Supervisors, [indiscernible] guidance note by the IAIS, which packages climate risk into sort of some buckets sort of investment risk, operational risk, reputational risk, regulatory risk, liquidity risk and underwriting risk. And I think it would be a very brave organization that said that they were actually on top of managing all of that. And it's certainly throwing up new liabilities for people to consider, both for their own selves as directors and officers of organizations and perhaps new liabilities derive. These are new risks [indiscernible]. I think major insurers, reinsurers are certainly all over this. And not only are they managing it well for their own account and have a clear strategy, but they're actually selling their models and services outside of the insurance industry because they're quite good at what they do in understanding the challenge. But there is no standard rule book for everybody to decide what to do. And actually, generally, knowledge is -- could be better. I have a very senior individual phone only a couple of weeks ago to talk about this and said, the issue around some of these challenges is that we're all going on to these very significant calls and being asked lots of questions, and we don't really know enough about the basics. And I think -- so knowledge is -- more knowledge is required. And climate, certainly, the E part, impacts everything that we do. And if people operate in a very siloed manner, they tend to miss the way that this problem impacts them on a very joined up basis. And so we've got to get out of our silos and consider this problem in a much more joined up -- in a joined-up way. But I think this is an immense opportunity. And it's a fantastic opportunity for my business, the insurance industry, I think, to do something, but it's always been very good at, which is sort of underpinning societal resilience. I think that's our job. We've got a very historic success rate in doing that. And perhaps now is the time that we should consider that and look at how we can support transition. The society has been moving to that low-carbon future, what is it that we can bring to the table? We are the deepest pool of knowledge and data and expertise in the quantification of natural catastrophic risk, and we've got very good solid, resilient financial models for -- and metrics for pricing and that pricing capital and allocating capital. What can we do more with that? And I think there is a real role for us to be more innovative in making new markets to look at these new risks and liabilities as they come down the trend. So I think more knowledge is required, I would say, but a huge opportunity from where I'm sitting. Thank you very much indeed.

Thank you, Nick. Those were certainly some very interesting insights and a lot for us to think about. And hopefully, there will be some questions coming through in our Q&A that you can address later during this webinar. Now Mandi, if that's okay, I'd like to turn to you. You also work for a large financial organization and your company is involved with insurance, with pensions as well as investment management. Now in your role as ESG Director for Principal, you try to coherently bring these different facets together to inform, for example, reporting and strategic endeavors. Could you tell us a little bit about some of the things that you are working on and perhaps compare and contrast that with some of the perspectives that Nick outlined?

Yes. Well, thank you so much, Matthieu and S&P Global for this opportunity. And Nick, for your comments, and Mike, soon to come. I want to start first and have those on the webinar pause and think about what is the essence or purpose of insurance. And I think that's a really important question for any company to pause and ask themselves in their industry is what is our purpose? And when you start with your purpose, then the rest of ESG, your stakeholder engagement, your material issues, the frameworks you decide really then start to ladder up to the essence of your company and allow you to be authentic for who you are. At Principal, this is where we began our journey. We looked at -- we strive to make financial security accessible for all. So as you've [ previously ] noted, all of our different products and services, whether that's in our insurance company or asset under management or retirement or pension come to this point. And so that's really where I encourage people to begin and where we began almost 2, 3 years ago, where our CEO appointed a task force focused on ESG that reported into our Nominating Governance Committee. As we continued in that journey from the enterprise level, the next slide will show you, we've started to pull together this human-centric idea around ESG, really leaning into the S side. And so it breaks down into our wide categories of ESG and focus areas. We did use some other aligning frameworks like the GRI, TCFD, UN PRI, the acronym soup of ESG, as many of you know. But we made a distinction this year as a task force to lean more into the sustainable development goals and highlight a top 3 that really ladder up to what we believe we stand up for, which is humanity and our customers thriving in this planet. And so when we think about E and when we think about G, they influence greatly what it takes place in the S factor. So Nick leaned in a little bit to the E side, and you'll see in my comments I'm leaning really in for the insurance industry and financial service industry into the S. As we think about the future of S, that's the question that I have. COVID created this incredible case study where all insurance companies were in the same arena, right? And we haven't had that happen in society before. But as we lean into our purpose and the pandemic or unrest happens in our society, we're able then to lean into the size of the S factor of ESG that resonates authentically with who we are. So we looked at our employees, our customers and our communities, and how might we add value in this time of uncertainty to build security for them. A good example is our Giving Chain effort that launched to help local businesses receive cash flow for meals that would support those who needed food on their tables in 30 locations around the world, or thinking about how do we seamlessly operate for our customers because humanity is at the center of what we do. So as an insurance company or those who work with insurance companies, I guess that's my question that I have for you is what's going to be the next S factor that we face? Is it cybersecurity or privacy? Is it human rights? Where is the future of our work going? And the only way we're going to know that is if we stay true to our stakeholders. And that's something that I think is at the heart of ESG is that stakeholder engagement that validates your materiality. It's really important that we think about all of our stakeholders, not just one segment or sector. And what I found is we might beginning to add, as Mike comments, regulators and government as the key part of our partnerships for the future of insurance and how we successfully build sustainability in the future. That's why we at Principal chose 17 as one of the UN SDGs we aligned to because we cannot do this work alone to build financial security for all, it takes all of our stakeholders to help us do that together. So I encourage you to think about what is the future of us. I encourage you to think about what is your purpose. And I encourage you to think about what are the short-term and long-term returns on investment as you go down your ESG journey? Those 3 strategic questions will help you shape the future for your own companies and the ones that you work with. I'm going to pause there and turn it back over to my wonderful colleague to share some more of their thoughts.

Thank you, Mandi. Also some really insightful and complementary perspectives. We can now cover the E, the S. And I think Michael will be well positioned also to speak on the G, the governance and the regulation side of things. Before I turn to Michael, we have a couple of questions coming in. So thank you very much for that. I encourage everyone, if you have any questions, any thoughts, please do submit them through our Q&A tool, and that will allow us to address these during the Q&A in just a few moments. So thank you for submitting questions. And with that, Michael, I'd like to turn to you. You work for the California Department of Insurance. And under the leadership of the previous commissioner, Commissioner Jones, the department launched its climate risk carbon initiative back in 2016. That's an initiative that has continued under the leadership of the current commissioner, Commission Lara. Could you tell us a little bit more about this initiative and share some insights into the role of regulators with climate risk, but more broadly with sustainability?

Absolutely. And thank you very much, appreciate the chance to be here. So as the regulator on the panel here, we offer an interesting perspective, but we really have a lot of aligned goals. What Commissioner Jones began in the climate risk carbon initiative is really asking a question of how as an insurance regulator do you approach an era of climate risk and challenges to sustainability? And that's a question that we continue to ask and the tools that we build as a department and how we engage with insurance consumers and insurance companies. Because ultimately, I'm more of the climate change end of the spectrum here, so I focus on E -- even though, broadly speaking, the sustainability is reliant on ES and G. But these are risks that impact insurance on both sides of their balance sheet. Our role as a regulator is to promote availability and affordability of insurance options for consumers and preserve solvency of insurers so they have the liquidity to pay claims when they occur. And so in thinking of that broad mission, Commissioner Jones did some really foundational work in developing a fossil fuel database, working with partners to undergo a scenario analysis of many of the insurance companies that we regulate. And my role now is to sort of take those foundational pieces and stitch them into sort of a wider framework of what the department is going to do as we continue to ask that question, what does the insurance regulator do to most effectively approach this era of climate risk? And so I wanted to share a couple of observations to answer that question, Matthieu. First is that as a regulator, we have partnerships, and Mandi brought up the potentials for partnerships. And those partnerships span within our own state, within the United States through the National Association Insurance Commissioners, and certainly, internationally, where we have strong partnerships with the UN PSI. And so I wanted to pause and kind of just mention a couple of things that sort of broaden the frame in which I look at ESG. The first is our work at the National Association Insurance Commissioners. For the last 12 to 14 years, there's been a climate risk and resilience working group at the NAIC that now is being elevated to an executive level task force. And so that sort of allow sort of a resurgence of interest in how climate and sustainability work together and what types of policies are best to pursue that link all the states together. But then specifically with the UN PSI, the State of California's insurance department is working on a sustainable insurance road map that takes those initiatives from Commissioner Jones and kind of makes them into sort of a comprehensive strategy under Commissioner Lara that includes sustainable investments, that certainly increases ESG, innovative climate smart products as we're calling them. And then also how to embrace the risk management tools that are being developed to address climate risks as we see them now. And so I think that in terms of our role as a department, we're looking at those 3 categories. We've built an innovative product database that kind of fill in that piece of the puzzle. We're going to build upon the carbon risk -- sorry, climate risk carbon initiatives, this fossil fuel database, so that continues to be a tool for the public to use. And I wanted to sort of end my little intro to this -- my initial answer to this question here by talking about TCFD. That is sort of a way where the insurance regulator and the insurance companies can have a pretty strong partnership in trying to align a disclosure that really benefits the marketplace by being clear and consistent, and also making it so that small companies and large companies and medium-sized companies all feel like they have a common target and common question to ask as we talk about integrating ESG within their business practices. And so to wrap up, I just would say that those -- that initial initiative is now part of sort of a broader suite of things the department is trying to do to look forward and to try to build the partnerships that aim at a sustainable insurance marketplace in the future. And so thank you for the question. I'll pass it back over.

Thank you, Michael, for some really interesting perspectives. We have a couple of questions already on the regulatory side of things. So I think we can -- we will turn back to that in just a few moments. For now, we're going to turn to our first polling question, which everyone should have on screen now. We'll take a few moments for everyone to answer. If you could answer that question that would be fantastic. So what do you think will be a driver for ESG integration? Are we talking about voluntary initiatives, some of which were mentioned today, the PSI, the PRI, the TCFD and others? Is regulation really going to be a key driving force behind the integration of ESG? Are markets going to reaccelerate things for us? Or is it something else entirely that will drive ESG integration within insurance market? And if you could take a moment to answer that question, then we'll have the results on screen for just a few moments, and then we will turn to the Q&A. So once again, the question is, what do you think will drive ESG integration, voluntary initiatives, regulation markets or something else entirely? We'll give it just a few more seconds and then return to the answers. Okay. Interesting, interesting answer there. So we have 51% have responded, that believe that regulation is really going to be the primary driving force behind ESG integration, followed by markets with 31% and voluntary initiatives having also some importance with 14.5%. So a really quite significant result here, and I'm sure there will be some follow-up questions on why we might think that.

And with that, I'd like to turn to the Q&A. We have roughly half an hour left on today's webinar, so plenty of time to discuss different things. We have a number of questions that come through. But again, I want to encourage all the participants to send questions that you might have through the questionnaire, and we will do our best to get to those in just a few minutes. To get us started, I want to pick up on something that a few of the panelists mentioned, which is participation in some of these initiatives such as the TCFD, the PRI and the PSI. Interestingly, in the survey results, we have about 14% of participants that suggests that this is going to be a primary driving force. So we're, nonetheless, seeing thousands of market participants joining initiatives like the TCFD, for example. So my question is for Nick and Mandi, why would you join initiatives like that? What is the benefit of joining initiatives like the TCFD or the PRI and collaborating with your peers? And Nick, perhaps if we can start with you.

There we go. Sorry, I was on mute. The perpetual problem of modern communication. Well, look, I think TCFD does a few things. I mean first of all, in what is a fairly -- what is a subject that has not really got a firm set of rules laid down around it. TCFD actually does provide a solid framework for people to take a view at the quantification of their climate risk. And it sort of puts you in a position where you have to consider what your strategy is and make some statements around that. So it's a road map, and it's a solid road map for the people considering this new and rather existential subject. So I think, first of all, it's a great tool. It answers the -- it forces people into -- then also when it's used in the context of your primary investor says, unless you fill in one of these things maybe our relationship is going to change its character -- the character of our relationship may well change. I think it also forces some behaviors, which is perhaps not a bad thing either. But I'd -- perhaps a more positive spin on this, and I think to go back to some of the comments that have been made earlier on, broader stakeholders are expecting organizations to start to be on top of this issue. And it has an impact on the way that they feel about their organization, and it has a reputational benefit to businesses, organizations to be on top of this. And I think TCFD is a demonstration of that. So I think it's inherently helpful tool in terms of understanding a problem -- governance around that problem, but also demonstrating that you are actually doing something about it and helping you do that.

Thank you, Nick. Mandi, I will direct the same question to you, why would you join some of these initiatives? What is the benefit of being part of these networks and initiatives through which you can collaborate with your peers?

Sure. I think it gives you a global lens to how you can maintain best practices and keep up with the different areas of ESG. And I'm looking at some of the questions coming through in the chat, and thank you, everybody, for continuing to submit those. When we think about it from scenario testing to asset managers, in particular, one thing that I always share with people is start where it can make the most sense to have a pilot and learn and then scale from there. So at Principal, we began our TCFD work and our science-based targets in looking at the risk management, particularly within our physical real estate area. It made the most sense for us to start there. And then now we're moving into what does this look like at the enterprise level? And more broadly, within all of our risk management as a company from the different degrees of testing. And so, I think that's really important. And as Michael and Nick could share and articulate well, when you're aligned to TCFD or you're aligned to some of these other best practices like UN PRI, it pushes you to be ahead of some of these risks that you need to consider as a company that they're talking about around the world. And so I think that, that really helps you up your game. And it also gives you resources to be thinking about and feedback to be thinking about. I look forward to the day when there's some more frameworks that are joining together and thinking about maybe one standard framework. That's been a conversation among the big 4 accountants. We see some work out of FASB and GRI. We know that TCFD and the carbon disclosure project, CDP, have come together. So I look forward to a time where we can have a common ground standard. We're just not there today. And so my advice to people is think through your business, think through your purpose and begin to pick the initiatives that align best with your strategy that can add that value of best practice. And for us, that was the UN PRI supported with the CDP and TCFD.

Thank you, Mandi. That's some very interesting comments. And there's a couple of things I want to pick up on in just a few minutes. For now, I'd like to turn to you, Mike. Certainly, interesting results from the survey is, we think the regulation is a key driver for ESG integration. We have also a question from [ Britney ] on this webinar, asking us that the California Department of Insurance will require disclosures or if it will continue to be voluntary? I think extending beyond that very specific question, I'd like to ask you what do you think is the key priority for you at the California Department of Insurance and more broadly alongside other members of the NAIC? What are you hoping to move forward with in terms of regulation in the insurance space ESG?

Great. Thanks for the question. I was hoping to come in second place on that poll. But no, that regulation came in nice first. I did -- in answer to that question, our top priority is a sustainable insurance margin. And so one of the components of that is some kind of -- is the consistency in disclosure of climate risk. And for the last 10 years, we've had a client risk disclosure survey with 6 other states that we've implemented. And that's kind of built a knowledge base of the types of ways in which companies approach climate risks. And so it's kind of our way of saying, we want you to have a plan for climate. That plan should include at least these [ 8 ] questions that we ask you each year. And so one of our top priorities is to have that existing tool align directly with the TCFD framework. And I'm not going to say that a regulation is going to necessarily get us there or volunteering in that pathway is going to get us there, but that's the direction that we'd like to go as a high priority. And I think the reason for that is that, like the other panelists have mentioned, this is a pretty fragmented set of risks that people are trying to figure out what to do. And there is a value in having the consistency in how you measure and disclose that risk, what questions you ask yourself as a company and what was sort of transparent to the broader public. And so we think that the TCFD framework, at least right now, is a really strong option, and we'll see how things evolve. But I think then moving from our sort of existing set of questions towards the TCFD is a big priority for us and one that we think will position the insurance sector to better view both ESG inhibition and climate risk more directly in the long run. So I think that that's really where we're hoping to go.

Thank you, Michael, for these insights. Nick, I'd like to turn to you, continuing on the theme of regulation. I think it's something that you introduced a little bit. You gave us some perspective on some of the changes in Europe. Maybe picking up on some of the priorities that Mike laid out. Could you maybe comment on how you have things -- seen the things change, pardon me, with your clients, with the relationships that you have with the market because of the changing regulatory landscape in Europe? What impact does that have in practice?

I think it's made people take it extremely seriously. And you have to -- not that maybe some weren't. But I think it's moved the broader -- it's moved the body of the industry at the back of the financial institution sector, the financial sector, the regulated sector, it has certainly moved it in a major way. It was -- I think people have viewed this as an issue that probably needed dealing with some point in the future. And where that might be, who knows? And I think it suddenly went from that to being, "Oh goodness me, I'm now going to be forced to model this, and I'm going to be forced to own the risk." And I think when a regulator is able to move a lever and make somebody actually have responsibility for owning -- identifying how big something is and then owning it and probably eventually having it on their balance sheet, that changes the entire way of looking at things. And so I -- what has happened, subsequent to the regulator really taking action in the U.K., and what we've seen happening further afield has been remarkable. I mean the -- from a really practical perspective, a letter was sent out and the phone rang off the hook almost like, "How do I deal with this issue? You've got some ideas." And it started to really accelerate the speed at which the problem was being analyzed. And so I had a very -- I think the short answer is, it's had a very material impact and made people start to really look at it in a much more serious way, whereas I think beforehand, it was being looked at seriously by certain people, major reinsurers have been looking at it for years. But I think it moved the body of the financial services business in a way that we have not seen before, hugely impactful. That's what I would say.

Thank you, Nick. We have quite a number of questions coming in. So that's really fantastic. We'll try to come to get to some of those. I think some of these cover similar themes. And one of the themes that I'm seeing in some of the questions is standardization. Mandi, I think this is a question that I'd like to direct to you. That's something that you've touched upon, there's lots of frameworks out there, lots of different approaches. And I think I'd like to direct that to you because you work as a sustainability director. In that role, I think it's very important that you pick up on lots of different frameworks and information and bring it together in a way that it's coherent that you can communicate to your stakeholders, to your shareholders. So my question to you on standardization is, what is your observation out there? Is ESG really a fragmented space? Is it starting to come together? What are you hoping will happen in the coming months and years? And what can you, as a sustainability director, help -- do to consolidate that field?