With extreme weather events proliferating, insurance companies are already on the front lines of climate change. In this episode, Chad Reed speaks with Sarah Chapman, Chief Sustainability Officer for Manulife – one of the world’s largest insurance providers and investment managers. Sarah discusses how Manulife incorporates ESG risks and opportunities, including emissions accounting and biodiversity issues, into its operations and investment decisions, the three pillars of Manulife’s ambitious impact agenda, and the role of industry associations and policy in supporting financial material ESG initiatives.
With extreme weather events proliferating, insurance companies are already on the front lines of climate change. In this episode, Chad Reed speaks with Sarah Chapman, Chief Sustainability Officer for Manulife – one of the world’s largest insurance providers and investment managers. Sarah discusses how Manulife incorporates ESG risks and opportunities, including emissions accounting and biodiversity issues, into its operations and investment decisions, the three pillars of Manulife’s ambitious impact agenda, and the role of industry associations and policy in supporting financial material ESG initiatives.
Links:
Manulife’s Environmental, Social and Governance Report (2021)
Taskforce on Nature-related Financial Disclosures
Episode recorded: April 12, 2023
Email your feedback to Chad, Gil, and Hilary at climatepositive@hasi.com or tweet them to @ClimatePosiPod.
Chad Reed: I'm Chad Reed.
Hillary Langer: I'm Hillary Langer.
Gil Jenkins: I'm Gil Jenkins.
Chad: This is Climate Positive.
Sarah Chapman: I think that the world has come to acknowledge biodiversity as a critical component of our healthy natural capital moving forward. Manulife has been doing a lot both internally and with the industry around things like natural capital accounting and really understanding how do we even measure biodiversity. We have to get that right. Again, I think the foundations are there that will be able to embed the consideration of biodiversity, both risks and opportunities in the same way that climate is being done right now across the board.
Chad: With extreme weather events proliferating, insurance companies are already on the front lines of climate change. In this episode, I speak with Sarah Chapman, Chief Sustainability Officer for Manulife – one of the world’s largest insurance providers and investment managers. Sarah discusses how Manulife incorporates ESG risks and opportunities, including emissions accounting and biodiversity issues, into its operations and investment decisions, the three pillars of Manulife’s ambitious impact agenda, and the role of industry associations and policy in supporting financial material ESG initiatives.
Chad: I haven't met many with a PhD in sustainability and corporate responsibility. What drove you to pursue this degree?
Sarah: When I did my PhD, and this was back before ESG was an acronym anyone knew, and it was when CSR even was just beginning, when I told people I was doing a PhD in CSR, they said, "Oh, customer service representation, that's interesting." Of course, CSR at that time, for me, meant corporate social responsibility. What really drove me to this space, and the context being I did an MBA first and then moved into a PhD in this space, was really about the business opportunity behind driving social and environmental impact.
Really understanding not just that, yes, this is a nice thing to do back at the time where this was really focused on philanthropic efforts and largely compliance-driven efforts with respect to things like environmental risk and environmental health and safety aspects, but truly the business growth and economic value opportunities that come with some of the most significant economic environmental and social challenges that we have across the industry and across the world.
Chad: Definitely resonates with us. I think you then spent some time in academia after your PhD, but then made the jump to the corporate world. Can you talk a little bit about that process and why you made that jump?
Sarah: Yes, so my PhD was actually focused entirely on the business context for this space. I spent an enormous amount of time working with different businesses, really trying to prove out the business case for both social and environmental different use cases, and one of those organizations within the PhD I ended up coming full-time on to lead at the time what we called social innovation.
This was really about how do you take an existing product or service and innovate it in a way that is going to drive growth for the organization, introduce perhaps a new customer segment, but do it in a way that it is addressing a really hairy environmental or social issue at the same time. That jump, I think, because the world was still processing what really things like shared value meant in the business. It was a very natural jump to be able to bring it to life what we had been working through in theory, bring it to life in some really innovative ways from a business context.
Chad: You're now the global chief sustainability officer or CSO at Manulife Investment Management. Many corporates and investment managers are hiring in-house CEOs. I think there's been a trend in the last few years especially. Tell us exactly what a CSO actually does especially on a day-to-day basis because I'm sure many folks have no idea.
Sarah: Yes. Just to clarify, so chief sustainability officer for Manulife globally, which includes not only Manulife Investment Management, our global wealth and asset management business, but also the life and health insurance company, again, operating across the US, Canada, and large markets in Asia. What does a CSO do? Ultimately, in my opinion, and the way that we've structured sustainability and the application of ESG in our organization is that it's actually very decentralized.
What I mean by that is that every business and every group function in some way plays a role in delivering against our ESG ambition, whether it's finance, helping us really understand and build financial grade processes and controls with respect to our emissions data, or it's our real estate business and the way that they're taking into consideration things like climate risk in both their investment portfolio and the operational excellence of the way that we're running our buildings. It's truly decentralized in that everybody in some way has responsibility for different aspects of ESG across the organization.
My role as the chief sustainability officer is to set that north star vision for the organization, what are the key things and the key areas where we believe we have both credibility and a right to really move the needle on specific social and environmental issues both through our business and our interaction with our customers, our engagement with our own people, and importantly the role that we play from an external ecosystem perspective in the industry. Setting that North Star vision, understanding how are we measuring success, and really holding the organization accountable for the commitments that we're making, and then, of course, ultimately, the reporting and disclosure on both that strategy and our progress against it.
Chad: Absolutely. You've done a great job of laying that all out in your sustainability report. I saw the most recent one, which was 2021. You detail in there the impact agenda, which I think is probably part of the strategy that you've developed where you discuss how you create long-term value for your business, for communities, for the planet. You've actually chosen three specific issue areas where you think you do have the greatest ability to affect social and environmental change. Could you tell us a bit about these three pillars?
Sarah: Sure. This was in an effort to get very focused around where, again, we feel we have credibility and through our business we can affect the greatest change. There's three key areas. One is around sustained health and well-being. As a global life and health insurance company, this is a very obvious place for us from a shared value perspective. The healthier our customers, the better it is for us as a business, and the opportunity, obviously, to move the needle on society's health more broadly.
This is anchored against our leading position with respect to behavioral insurance, but it also touches on the important role that we play from a financial security perspective. We have a large retirement business across the world that is really helping people on a day-to-day basis plan for and understand financial savings and financial education more broadly. Again, not just through our retirement, but also our wealth and advice businesses as well. The first pillar is all about sustained health and well-being, a place where we feel, again, we have a great role to play in the world.
Second one is around inclusive economic opportunity, so building upon, obviously, our significant focus on diversity, equity, and inclusion, not only in our own talent from an acquisition and retention perspective, but importantly also through other areas of our business. This is about procurement. How are we thinking about supplier diversity? How are we thinking about access to finance and the role that we play as not only a global life and health insurance company, but also on the financial wealth management planning side, the role that we play to really help build up and serve the underserved with respect to access to finance and financial inclusion. Second one is all anchored around diversity, equity, and inclusion.
Then the third one is sustainability. This has two main parts for us right now, a huge focus, obviously, on climate change and equally a focus on biodiversity. This is building upon a real leading stance we have as the largest institutional manager of agriculture and timberland in the world. We have had a long history of really understanding and driving natural climate solutions and owning and managing the most sustainable forests and farms across the world. We believe greatly in both the opportunity that exists from an investment perspective, but also the role we have to play to drive further scaling of natural climate solutions with a lens of both climate change and biodiversity.
Chad: No, that's great. I want to get into that in just a minute. First, I want to talk about net-zero. A lot of companies, especially asset managers, have set net-zero targets. For companies like yours and ours, most of our emissions are in our scope 3, category 15, or the emissions associated with the investments that we make. You've, I believe, set a target to be net-zero by 2050. Can you talk to us about, we've gone through the process ourselves, how difficult it can be to measure the emissions from the assets that you finance and your other investments, and how that effort is going for you currently?
Sarah: Let me just provocatively say, for us, net-zero means nothing unless we truly understand and set shorter-term financed emissions targets. Net-zero is so far in the future, although I will say from a scope 1 and 2 perspective, we are already net-zero in our operations. That's in large part, again, due to the operational control we have over a significant amount of agriculture and timberland that allows us to inset against our scope 1 and 2. We feel very good about where we're at from an operational perspective, though we have set a further absolute emissions reduction target of 35% by 2035.
Again, for any financial services organization, financed emissions is the most critical aspect of emissions and it's also arguably the most complex to be able to measure. Fundamentally, for the companies that we invest in, we rely on them to be disclosing their emissions because their emissions become our scope 3 financed emissions. At the same time, I also believe that we can't let perfect be the enemy of good.
For some, the challenge around financed emissions, the challenge in terms of the data and the complexity of how we understand and measure and track and report that often can be used as an excuse and it's not for us. This is an industry-wide problem that we are working very closely with peers and industry groups to move the needle on. There's a lot happening, obviously, on the regulatory side of things in terms of the push for disclosure with respect to emissions, which will help us greatly on this mission but the complexity of emissions accounting has come a long way and I think has matured in a really significant way whereby we are seeing convergence of standards and accounting methodologies so that we are able to compare apples to apples when we look at emissions accounting.
Chad: You already have a $67 billion sustainable investment portfolio that is, I believe, fully net-zero or green or has avoided emissions associated with it. Are there any particular asset classes within this larger portfolio that you see particularly interesting in terms of growth because it will, obviously, help you hit your net-zero interim targets and also from a risk-return perspective? Any asset classes that are particularly interesting to you all at this point in time?
Sarah: We, obviously, feel strongly on the agriculture and timberland side from a private asset perspective. We believe that there is an enormous opportunity in general for private asset classes, specifically, ag-timber real estate as well. That's one that we've been historically very focused on and a leader in. What I will say is that whilst there is an enormous opportunity from that impact investing side of things, whereby particularly institutional clients who have set net-zero targets are now looking at these asset classes to help them achieve that, there is also great financial returns associated with this asset class as well, and we've seen that in the long term. Great opportunity there and an area where we've been focused.
Chad: Excellent. We'll dig into that a little bit more. I did read just a few weeks ago, Zurich Financial and Munich Re decided to exit the Net-Zero Insurance Alliance, which is an industry association that many insurers have joined to demonstrate their commitment to net-zero and moving in that direction. One of those insurers cited antitrust concerns in terms of collusion and-- I'm just curious, what are your thoughts on these sorts of industry associations and their role in pushing the industries that they represent forward in this regard?
Sarah: If we step back two years ago, there was an enormous influx and a standup of many of these different industry associations. That was reflective of the industry trying to grapple together and collaboratively on these really crunchy issues like net-zero that we were trying to get our heads wrapped around, and so you saw a massive influx. Obviously, many things have changed, particularly the regulatory environment. I think that people are taking a very careful look now upon what commitments they've made, what industry associations are continuing to maintain momentum and those that maybe need to be converged with others.
I think you're seeing that across the board. We see increasing noise on GFANZ and some concerns there. I won't comment specifically on that industry alliance as it stands, but ultimately, I think they have an important role to bring industry peers together to figure out these issues. There was a massive influx of them and I think we're just gonna start to see some convergence and some that rise to the top as the most relevant for organizations.
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Chad: You mentioned biodiversity a little bit ago, so let's turn to the intersection of biodiversity in climate because it's an increasingly important topic. It's become increasingly clear that climate and nature are inextricably linked and enabling the energy transition while managing the potential negative impacts on biodiversity is a very complex challenge.
For example, global mining exploring is accelerating in what are called key biodiversity areas, or KBAs, as companies seek new deposits of lithium and copper for batteries, for transportation, and other energy infrastructure. The global community has started to mobilize around this and recognizing the need to halt what could be a dangerous decline in biodiversity, 190 nations agreed last year to place 30% of the planet's land and sea under protection and to manage the remaining 70% to avoid losing areas of high importance of biodiversity and to ensure businesses disclose biodiversity risks and impacts from their operations. Talk to us about how Manulife looks at this biodiversity challenge, both risks and opportunities.
Sarah: Manulife has, obviously, been heavily engaged in the biodiversity conversation for a while. We are a signatory to the Finance for Biodiversity Pledge. We were very engaged at COP 15 held in Montreal a few months ago. I think that the world has come to acknowledge biodiversity as a critical component of our healthy natural capital moving forward. My observations coming out of COP 15 and beyond are as follows, number one, I think we will be able to leverage a lot of the important groundwork that was set with climate change. If you think about something like TCFD (the Task Force on Climate-related Financial Disclosures) and the rallying of the industry and regulators and everyone around that framework, we should be able to see a fast follow with TNFD, Taskforce on Nature-related Financial Disclosures, given that people are aligned to that type of framework.
I hope that we are able to build upon the foundations and the frameworks that have been set with the context of climate change for the purposes of biodiversity, particularly in the corporate and financial world. I think that there's a huge opportunity to scale and leverage from that work and we're certainly seeing the opportunity. That being said, biodiversity is very complex, particularly the measurement of biodiversity is very challenging, and arguably far more challenging than emissions, which, again, is complex, but we have our head wrapped around that.
Manulife has been doing a lot both internally and with the industry around things like natural capital accounting and really understanding how do we even measure biodiversity. We have to get that right. Again, I think the foundations are there that will be able to embed the consideration of biodiversity, both risks and opportunities in the same way that climate is being done right now across the board.
Chad: Yes, I absolutely agree. You mentioned previously your sustainable timber and agriculture portfolio, at least $11 billion of assets in at least one of those asset classes. How are you leveraging this portfolio to support both the climate, net-zero, other mitigation goals, and biodiversity challenges?
Sarah: This is an important asset class, not the only one, but an important one, and there's a couple of important elements to highlight here. One is in order for these asset classes to be successful, we really need to, we as an industry, need to align on high integrity carbon standards to ensure legitimacy behind that other value that this asset class is bringing. In March of 2022, we actually released our own carbon principles that align with existing ones out there. This is about going above and beyond emerging international best practices, but really setting into stone the way that we think about how we measure carbon, carbon removals, which becomes an important element as you think about the value of these asset classes.
That's certainly incredibly important to us because as we start to see the opportunity from an investment perspective in these asset classes, institutional investors acknowledge that there is, yes, the financial return associated with something like agriculture and timber, but also the other value that comes from the carbon credits, whether they inset those or sell them on the market for offsets for additional financial return. There's an incredible opportunity that Manulife has been at the center of and we believe can be scaled in a big way.
Chad: Very important to get those carbon credits right. The Integrity Council for the Voluntary Carbon Market I know has also recently put out some principles at least that will help drive that market forward as well. You mentioned too earlier, regulators. As you know, insurers are already on the front lines of climate change but now some are being thrust into political battles over ESG broadly at least here in the US.
State lawmakers in some red states like Texas, North Dakota, South Dakota, they're trying to bar insurers from weighing any environmental, social or governance factors in underwriting policies, while some more activist shareholders and some blue states are trying to limit insurers' investments in underwriting in oil and gas projects due to climate considerations. In fact, a bill introduced early this year in Connecticut would establish a surcharge on insurance that underwrite fossil fuels.
How does Manulife think about the role of policy in inhibiting or driving ESG considerations in both your investment and your operational decisions?
Sarah: I'll answer the first part just to set the scene with respect to the anti-ESG rhetoric in the industry right now. Obviously, it's become highly politicized, but if you bring it back to the basics and go beyond the headlines, fundamentally, we believe that ESG factors can have, in these cases, that they can materially impact financial value. You can take lots of examples if you think about the assessment of a real estate portfolio in a flood plain, right, and the impact of climate change with respect to flooding in certain flood plains. That's a very real financial risk that you would take into consideration. We believe that ESG factors can materially impact financial value, and therefore we take those into consideration when they are material into our investing process. If you just anchor against that, it removes the noise of the ideological integration of ESG factors that aren’t necessarily arguably financially material.
In terms of the role that policy can play, it's incredibly important. I think we also have to understand the benefits and risks of the carrots and the sticks with respect to policy. Where is it that incentives are going to work really well and where is it that something like a carbon tax is important? The IRA, the Inflation Reduction Act in the US, I think, is a great example of some carrots that have been put out there that is actually driving investment and flows into the US because people see the opportunity that there is a carrot and there is incentives out there. I think that that's an important one for all jurisdictions to see and watch as that plays out because I think the carrot can be more powerful, particularly in some markets, to incentivize strong behavior. Obviously, things like carbon tax still have a role but fundamentally, policy is incredibly important for us to move but it's not the only tenet to pull. Corporates and broader capital markets have an important role to play as well.
Chad: Absolutely, great answer. We're almost done, Sarah, but first, we have, what we call, the hot seat. We ask for your immediate reactions to the following statements. The hardest decision I've ever made is--
Sarah: Where to live and when to move.
Chad: Those are hard.
[laughter]
Chad: The one thing I changed my mind on is--
Sarah: Switching between an iPad and a laptop. [chuckles]
Chad: For this very interview.
[laughter]
Chad: Very real-time. The person I've learned the most from is--
Sarah: Mentors in my professional career that I have had for sure.
Chad: When I need to recharge, I--
Sarah: Get a babysitter. I have two little ones, two under two.
Chad: Two under two? Oh, wow.
Sarah: Yes.
[laughter]
Chad: The key ingredient to my productivity is-- It could be the same answer too. [laughs]
Sarah: The babysitter. I actually love email. I find email to be an incredibly useful and productive tool.
Chad: Excellent. I don't think everyone agrees with that but-- [chuckles]
Sarah: [chuckles] Yes, I agree.
Chad: I want my kids to know--
Sarah: That we are working every day to leave a better world for them.
Chad: I believe that you're an avid skier, so the most underrated ski resort is--
Sarah: Ooh, great question. Well, as a Canadian, I have to say Whistler, though I don't think that that's necessarily underrated but I spent an enormous amount of time as a child at Smugglers' Notch in Vermont.
Chad: Excellent. I've not been there. I definitely need to check it out. The most insightful book or article I've read recently is--
Sarah: I try and read things that are outside of the industry that we work in because I think that there's an enormous amount to learn from innovations in different industries. I think we have a lot to learn even from an environmental perspective, if you can believe it, in our natural resource sector and where they've done. I love some of the industry trade clubs outside of the financial service industry to learn from great work that's being done there.
Chad: Finally, to me, climate positive means--
Sarah: Seeing the opportunity that climate change can bring to the world, the opportunity from an investment perspective, the opportunity from a technology perspective. Beyond the technical definition of climate positive, I think we need to see climate for the opportunities that it will present to us.
Chad: Great answer. This may be the favorite one that I've received on that one.
Sarah: [chuckles]
Chad: Well, thank you very much, Sarah. It's been really great having you. I look forward to talking again sometime.
Sarah: Fantastic. Thank you.
Chad: If you enjoyed this week’s episode, please leave us a leave a rating and review on Apple and Spotify. This really helps us reach more listeners.
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I'm Chad Reed.
And this is Climate Positive.