Investment Management: ESG Factors in Investment Decisions

We recognize the importance of responsible investment and, accordingly, incorporate environmental, social and governance (ESG) factors in assessing the sustainability of the entities in which we invest. We have traditionally limited our exposure to public equity securities and other riskier asset classes. Since we invest overwhelmingly in fixed income securities, our analysis of ESG factors focuses primarily on credit risk. Our Investment Policy, approved by our Board of Directors, reflects a long-term approach to sustainable value creation and requires Travelers to consider ESG factors in the investment process, to the extent relevant.

With respect to our fixed income investments, we invest using a variety of qualitative and quantitative criteria that take into account both expected returns and risks including interest rate, credit and prepayment risks. Our fundamental investment process weighs, on an appropriate basis, financial statement data, management information, relevant ESG factors, third-party research and other information. In addition, our asset allocation process considers the expected return advantages offered in the market in compensation for bearing various risks, including credit risk and ESG risks.

We have assigned internally developed ESG scores to all issuers in our fixed income portfolio. In certain circumstances, this process has led to the exclusion of potential investments or the divestment of portfolio holdings (“negative screening”) due to ESG risks where we believed that the expected returns were not consistent with the underlying risks – in other words, where we did not believe we would be appropriately compensated for the risks that we would be assuming.

As it pertains to investments to support our insurance operations, consistent with our credit-based approach to investing, we have a policy to avoid making new debt or equity investments in companies with significant exposure to thermal coal mining, oil sands or coal-based electricity generation, to the extent consistent with applicable law and our fiduciary duties.

In addition, in our municipal bond, mortgage and real estate investments, we consider the impact that changing climate conditions may have on any given city, state or region. Since we assume catastrophe risks such as earthquakes and windstorms in our capacity as an insurer, we also seek to manage our portfolio’s credit risk to such events by assessing our investment exposures in impacted geographic areas. In addition, for municipal bond issuers in the Southwestern United States and other areas of the country susceptible to drought, all investment analyses include an assessment of water supply adequacy.

For further discussion on the incorporation of ESG factors in our investment process and the impact of the regulatory environment in which we operate on the investments we make, please see our TCFD Report.

GHG emissions and our investment portfolio

Currently, greenhouse gas (GHG) emissions data for the substantial majority of segments of our investment portfolio (e.g., municipal bonds, foreign local and regional governments, mortgage bonds, ABS & CMBS and private equity, hedge funds and other investments) is unavailable and, where it is available, the data quality remains inconsistent. Accordingly, at this time, we cannot accurately calculate the total emissions of our overall investment portfolio. Nonetheless, as discussed in detail in our TCFD Report, we believe that we have incorporated the relevant risks into our investment analysis. In addition, we have attempted to quantify GHG emissions of securities within our corporate securities portfolio (corporate bonds and public equity) and our sovereign bond portfolio, the only portfolio segments where reported GHG emissions data is available. These portfolio segments represent approximately 40% of our overall investments. As additional emissions data becomes available over time, we expect that the total GHG emissions that we will be able to report will increase.

For a detailed discussion on our approach to calculating GHG emissions financed by our investment portfolio and the results of our calculations, please see our TCFD Report.

Climate scenario analysis with respect to our investment portfolio

We have engaged a third-party vendor to perform a climate risk analysis of Travelers’ investment portfolio. This analysis combined climate stress tests with stochastic modeling of possible future economic outcomes to help us better understand the possible impacts of various scenarios on our investment portfolio.

For a detailed discussion regarding the analysis and its results, please see our TCFD Report.