HOLLY: So, Rowan, good morning.
ROWAN: Morning, Holly, great to be with you.
HOLLY: Great to be with you as well. So, Rowan, we're going to talk about ESG this morning.
ROWAN: Mhm.
HOLLY: Tell me why does ESG matter, and why does it matter to WTW?
ROWAN: Well, ESG matters because it really reflects a growing set of important risks and challenges that we're all facing, both as individuals. Actually, in our own lives and communities, but actually also collectively as companies, but also obviously societies and countries more broadly. And I think most people know what it stands for-- environmental, social, and governance. But it's putting into sharper focus some issues that perhaps have been bubbling under the surface for some time. But particularly amongst the investor community where the ESG nomenclature or phraseology has really had its genesis.
It's highlighting the environment, particularly climate, but not just climate. Wider issues around pollution and biodiversity are beginning to really impinge on our individual lives, but actually, particularly the risks that we face as economies and societies. And of course, beyond that, the important social issues that we're dealing with particularly perhaps around social inclusion and diversity in all of our countries that has also become far more evident of both the risks that faces, both to individuals and their potential and their well-being, but also how we operate as economies in societies. And ultimately, it's about governance. It's about how we organize ourselves as countries, as companies, even ourselves in our own households. And governance is about ultimately deciding what you value, what you want to protect, and organizing oneself and one's operations to fulfill those values. And I think the interesting thing about ESG is it's brought these things into light, but now I think there's a collective challenge of moving from awareness to implementation and prioritization.
And frankly, the difficult choices and trade-offs that creates. So very interesting time, but I think the reason-- and I'm sure we'll come onto it in different themes, particularly perhaps around climate or others is, these are really significant risks that have perhaps been avoided up till now. And we're going to have to confront those risks, and that's why ESG is important. But also there are real challenges of moving from theory into practice. As we see this as a risk issue-- and that isn't a negative thing-- managing risk allows us to have the confidence to build futures. Willis Towers Watson, WTW, is a risk management organization broadly defined across people, capital and risk. So we're excited about our role of helping to properly evaluate-- understand these issues, but then help public, as well as private sector organizations, implement the responses through the channels of people, capital and risk management.
And that is why we see this as important. It's not always called ESG. Sometimes it's called sustainability. Sometimes it's called resilience. Sometimes, you know, there's a whole plethora of words. But what's exciting for us as a company is we've been actually thinking about this area and working in it for about ten years. And so it's exciting because this is now ripening, and we feel quite well prepared. But we're still, like others, much to learn to really help companies and governments and others move forward. So that's why we think it's important.
HOLLY: Well said, Rowan. So tell me-- you didn't mention the Climate Resilience Hub, and I'm curious of the role that the Climate Resilience Hub has within WTW.
ROWAN: Well, we're an answering provocateur. We're there to help stir things up and move things forward. But in essence, we've had the Climate Resilience Hub for about seven or eight years. And its genesis was-- some of us who actually came from the reinsurance part of the business actually. And we've been lucky enough, I suppose that's the right word to use, to be part of the journey of the reinsurance sector from the early 90s, when it was completely dislocated after Hurricane Andrew, as well as some big liability crisis, particularly in the US with asbestos and other challenges. And really it was like the global financial crisis but for reinsurance.
And there was a revolution that happened in the world of reinsurance. I must say the word "sustainability" was never used. The word "ESG's" were never used, or "resilience." But basically investors said, "We need to be smart to risk. We will not make our money available if underwriters only use the past to understand the present and the future." And it coincided with an analytical revolution, a kind of an intellectual revolution called catastrophe risk modeling that basically blended engineering metrics-- and I know you're an engineer, Holly, so you'll like this-- engineering metrics with actuarial science which helps us imagine potentialities which haven't occurred yet. It's called distributions. And then human, as well as physical geography. Being as worried about maps as much as spreadsheets.
And basically, it wasn't perfect, models are never perfect, but they gave us a much more rigorous understanding of, frankly, where the hurricanes could strike, how strong they could be, even if that hadn't happened. And basically these investors said to underwriters in the early 90s, "You've got to use these models." And the underwriter said, "We're not going to use these models. We're special." But they said, "You won't get the capital without that." And slowly but surely, capital and risk management became much more scientific. The demography of our industry changed. And the upshot was that by 2012-- there were very few insurance or reinsurance insolvencies despite growing losses because we've become properly capitalized. But there was one other magic ingredient, and that was the G of ESG-- governance.
And regulators around the world had decided that insurance contracts should have a tolerance or stress level of resilience. They didn't use that word. And they require that insurance companies and insurance contracts should be tolerant to the one in 200 maximum probable a year maximum loss. I.e, the worst loss you could expect once every 200 years. We didn't even know what that meant. It's an engineering term. You'll know what it meant. But suddenly that regulatory rule based on this analytical revolution drove an investor requirement. And basically we'd been lucky enough as a company to be in the middle of that. But we could see we were involved in this broader climate agenda around about 2010, and we could see that magic had a much broader role to make society resilient to this thing called climate, which is basically a future challenge.
We formed the Climate Resilience Hub in 2014 to essentially take the sort of lessons that we'd learnt in reinsurance, marry them with the wider knowledge we had as a company in investment and human capital, to help companies and organizations confront in a positive way the inevitable changes that we could see were happening partly from the changing climate-- and we could see where that was heading, that's the laws of physics-- but also, the necessary policy response of a low carbon transition, which was very contentious, I must say, in 2014-2015. In the UK, public policy had moved perhaps a little quicker than other parts of the world, and five or six years ago this was very avant-garde. We just feel very pleased now. We were five or six people then. We're now well over 120 people in the core hub. And our role is to support the wider company adapt and update their services to support clients. But also obviously to help clients directly, and help the wider stakeholder community to take advantage of our expertise in the right way.
So it's a fantastic job to have, obviously, but it's a very serious problem to help confront.
HOLLY: Well, first off, fascinating to hear the history. And I can tell you it makes me so proud to work for WTW just to hear about the hub and the great work that you do. So thank you for that, and sharing that. And it's funny you say the one in 200 year event. Speaking of climate and the impact in ESG, in Kentucky we've had now two in the last three months, two in 1,000-- one in 1,000 year events. So all of us I think feeling the impacts. So going back to ESG. We've talked about how critical climate is to ESG. Why is this such an important moment in ESG?
ROWAN: Oh, wow. Gosh, we've only got a few minutes. Why is it an important moment? Well, firstly, it's an important moment because we are on-- I'm going to focus on climate-- obviously there are hugely important matters to do with social inclusion and others which come in the ESG umbrella. And actually some of these things are related. I mean we've been looking recently at the critical challenge of heat risk in the US, as well as other parts of the world, and how that impinges, not just on people in their homes, but people at work.
And surprise, surprise, those who are most exposed work outside, whether it's in agriculture, or, utilities or in parts of the public sector, no surprise. Let's take the US, many of those come from minority communities. So actually climate risk, social inclusion, and social well-being in some times, and certainly in the developing world, these things are very much overlapping. But if I may, Holly, I'll frame my response in the context of climate.
It's a critical moment for ESG because this next ten years is absolutely critical for society and economies to move towards a low carbon transition, as well as build the necessary resilience to the shocks which are already happening. If we lose this ten years, I fear we're in the realms of palliative care rather than helping to cure the problem. And the majority of the world's economy is in the private sector and mediated by financial markets. Until financial markets update themselves-- Adam Smith 2.0-- to take account of this risk, we may not be able to move the dial quickly enough.
So that's why it's important from a physical point of view. It's important because for a variety of reasons ESG has moved up to the top of the awareness list. There was a recent "Economist" article I know that raised some questions about ESG. Whether we call it ESG, or sustainability, or something else, we can't afford to lose this moment of making significant progress in this set of risks. And we've either got to capture this ESG wave and make it relevant and tractable and practical, or we're going to have to wait for the next buzzword to come along in investor markets, which could take another three or four years. So I appreciate all the challenges with ESG as a term, but at the same time, if we don't use this collective word surfboard to make the move now, we can't really afford to wait another four or five years. And that's why it's such a key moment.
The other reason it's a key moment is, actually markets are responding, the winners and losers both as end consumers, but also as the people who are making this new market operate, actually that landscape is forming now. The winners and losers are-- you can identify the likely leaders. I hope we're among that group. And so it's important for those who are in this domain because within five years I think it will be a more mature space, and the landscape will be not set fixed, but will certainly be much more established than it is now. And it's a big opportunity, as well as a big challenge.
HOLLY: So it sounds like, Rowan, that the recent criticism on ESG is really good for ESG, right? It forces the efforts to become more credible and meaningful and effective. And it's really all about creating long term value, setting the right priorities, and not being too scattered in the things that you want to accomplish. Because I think that's one of the criticisms, is that it can be too many things and too many priorities, and where do we focus? So one thing you mentioned, the recent "Economist" article, and what it said essentially was all that matters is emissions. It can be boiled down to that one single thing.
But you mentioned the impact of heat, for example, on populations, and how that can be quite inequitable, and how it impacts societies. So there's this notion of a-- we have to transition, but we have to do it in a sort of just and equitable way. So could you comment on that. The balancing of how do you transition quick enough and yet do it in a meaningful, just and equitable way.
ROWAN: Yeah. So to the point about ESG being all things to all people, I do-- and I hate to try and create this hierarchy of priorities and needs, because I know there are many, many issues that are attached to ESG, but also recognize that companies and others only have so much mind space. And I can see that ESG will probably be dominated by the climate and environmental issue, broadly defined, and the social inclusion and social equity issue, broadly defined. And I can imagine those two becoming, if you like, I wouldn't-- they are both very important. I think we could all agree there.
And I think I know what "The Economist" were trying to do to provide that clarity. But I'm sure they wouldn't disagree with the social inclusion side. When it comes to climate, emissions are very important. And we do need to get to a net-zero economy, which is why they're focusing on emissions. It is slightly more-- and they were trying to argue about simplicity, and I fully support executing the genius of simplicity. We do need to be a little bit careful. We do need to move towards a net-zero economy. But we need to also be mindful that there are some sectors which will need to continue to emit to help us to get there.
So if you're investing in a lithium miner who's emitting carbon to support the net-zero economy, that's very different to investing in someone else who's emitting carbon to support effectively an activity that is moving in the opposite direction. Similarly, we're very passionate about the need for resilience and adaptation of communities exposed right now, and not just in the global south. Some of the most fashionable and lucrative areas in the world in California, Australia, Western Europe have been hit. Sounds like you're having those challenges even where you live, and I'm sure it's a very, very fashionable area, Holly. So we all face these challenges, and we need to address that.
And that's not strictly speaking about emissions in the short term, that's about other forms of resilience. It's more than that. But I do agree that beginning to synthesize ESG down to a number of manageable buckets of activity would be truly helpful, and to try and do it through a coherent system-- which is why we like risk, because risk allows us to do that. To your final point about the just transition, couldn't agree more. We're going to have to move to a net-zero economy, which is going to create lots of winners and losers. Many losers who are entirely, if you like, innocent of the decision. If you've been working in industry X, which has been a perfectly respectable viable essential industry, but now for a set of other reasons it's no longer, your sector, your region of the country will suffer. And we've got to find ways within countries, as well as across countries, of managing that transition so that we share the risks and benefits of this transition.
We've done this before. We did this in the 1930s. We certainly did it after the Second World War, where through public, as well as private mechanisms, we created ways to ensure the mutualization of risk across society so that we could all make this transition together. Of course, there will be relative winners and losers, but there has to be within the parameters of reasonableness. If not, this necessary transition to protect us all will not be politically viable. If it is not politically viable both within countries, as well as between them, it won't happen. If it doesn't happen-- and we may come onto this later in the conversation-- in a few decades, the risks we face physically, economically, socially, will be very significant.
And if we look ahead even further to the end of this century, which isn't that far away. Not as far away as the end of the Second World War. There may be some viewers who were born before 1945. We're not talking about a long time away. By 2100, the world we live in will be very different. And it will not be a place where economies and societies will be able to have a way of life anything like we have right now.
And that's what this is about. This isn't about saving the planet. The planet will do just fine on its own. It's about protecting our individual and collective security and way of life. Of course, we'll need to do things differently, but we want to have a way of life that's, broadly speaking, similar, obviously, better than it is now. If we don't make these adjustments now, it's a bit like not having a medical and not sorting it out yourself. We all put it off, don't we? Because we can. But then you go to the doctor one day and it's not a question of just simple treatment. So there we go.
HOLLY: Yeah. It's so well said, Rowan. I think we have to get away from this short term view. Insurance has always been something you purchase for one year. We're talking about long term risk. And in my experience working with companies, when you start to look long term and really measure and weigh the risks, I've seen a lot of companies that have realized, "Wow, we're prioritizing this risk above something that's existentially threatening our business." And so I think taking that view and really starting to quantify those things helps companies, societies, start to make the right priorities and the right decisions.
So I was going to ask you what happens if we don't get this right, but you just articulated that, so well done. I will ask you, maybe more on a positive note, if we all were to embrace ESG and work together towards a just climate transition, what would the future look like?
ROWAN: Oh, the future will look hopeful. When do individuals, you and me, Holly, families, companies, ultimately countries, when do they begin to have real risk? They have real risk when they lose a sense of hope for the future. When you lose-- it's all happened to us as individuals I'm sure at different times of our life-- when you get to a point where the future looks difficult and for whatever reason you don't have hope for a better future, that's when people, families, countries break down.
To some degree, we've all been in denial, and some of us may still be in denial, about what the future will look like for us all if we don't confront this issue. And we're not all there yet. But those of us who have been lucky enough and privileged enough to work with the scientists and others to see where things will go, we've internalized that. And then you go through a process of "Oh my goodness, me. This is looking so significant and so difficult, what can we do about it?" But then you start going through the process of, "No, there's still time."
If we, as you said, quantify these risks, get them into financial decision making, make the change, there is still time to actually build really successful economies, successful communities, that we can all thrive. The world will be different than it is now, but it can be different and better in many ways. And I think that's what we can achieve if through ESG, or sustainability, or resilience, or whatever other framing suits you. We just take account of these risks, be prepared, frankly, like when you have a medical, go to the gym. We're going to have to do some things that hurt, all right? We are.
We're all going to have to suffer a bit of pain for some gain. And we're going to have to all share that a little bit. But I think then we've got to paint this positive future for us as different economies and different communities and companies. And if we can, and enough of us feel that collective endeavor, this is an exciting agenda. That's certainly what I think we're beginning to see at WTW as we go through this process ourselves and work with different clients. It's exciting, isn't it? Actually, clients are now seeing the positive opportunities of being on the right side of this. But there's a way to go.
HOLLY: Rowan, you've outlined some of the risks and challenges, but also painted a positive outlook of where we could go as a society. And I can share that as a WTW colleague, I'm really excited to work with our colleagues and our clients to help achieve these collective positive ambitions. This has been an absolute pleasure, as always. Thank you so much for the inspiring conversation.
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