WEBVTT - Debating Whether Climate Risk Is Already Priced In 0:00:00.640 --> 0:00:04.080 ESG is constantly evolving. Over the years. It is shifted 0:00:04.120 --> 0:00:09.160 from socially responsible investing to impact to sustainable finance. While 0:00:09.160 --> 0:00:12.680 the terminology continues to change, what hasn't changed are the 0:00:12.800 --> 0:00:17.759 underlying science market pressures, tangible physical and financial impacts of 0:00:17.800 --> 0:00:22.040 the climate prices, as well as increasing regulatory scrutiny and 0:00:22.200 --> 0:00:26.160 rising consumer expectations. We aim to filter out the noise 0:00:26.239 --> 0:00:29.920 by speaking with industry experts to identify what is really 0:00:30.000 --> 0:00:34.120 driving value. Welcome to ESG Currents, brought to you by 0:00:34.240 --> 0:00:35.480 Bloomberg Intelligence. 0:00:36.400 --> 0:00:36.760 Today. 0:00:36.880 --> 0:00:40.120 On ESG Currents, we're changing up the format and Oxford 0:00:40.120 --> 0:00:43.120 style debate around the motion to the extent that matters 0:00:43.120 --> 0:00:46.680 for investors. Climate risk is already priced in. If markets 0:00:46.680 --> 0:00:49.479 are efficient, climate risk should already be reflected in asset 0:00:49.520 --> 0:00:53.000 prices and investors can rely on price signals. If it isn't, 0:00:53.120 --> 0:00:57.080 investors may be misallocating capital at scale and facing standard 0:00:57.120 --> 0:01:00.840 assets and potentially abrupt disorderly repricing. This is not a 0:01:00.880 --> 0:01:04.480 debate around climate science or about climate politics. It is 0:01:04.600 --> 0:01:08.720 a debate about financial markets, risk valuation and where the 0:01:08.720 --> 0:01:12.440 climate exposure is already reflected in prices. Today, I am 0:01:12.440 --> 0:01:15.800 grace Osborne, the mere ESG integration analyst and your host 0:01:15.920 --> 0:01:19.919 for this episode. Speaking for the motion is doctor Jacob Tommy, 0:01:20.280 --> 0:01:23.480 co founder and CEO of THEA Finance Labs, where he 0:01:23.520 --> 0:01:27.520 has helped develop sustainability tools including Pactor and Asset Impact. 0:01:27.840 --> 0:01:31.200 He is also Research director of the Inevitable Policy Response 0:01:31.520 --> 0:01:34.680 and Professor in Practice at Sous University of London, author 0:01:34.720 --> 0:01:37.840 of two books on sustainability, and writes a monthly column 0:01:37.840 --> 0:01:42.320 for Responsible Investor. Speaking against the motion is doctor Ben Cardecott, 0:01:42.600 --> 0:01:45.560 the founding director of the Oxford Sustainable Finance Group and 0:01:45.600 --> 0:01:50.560 coordinating lead author on finance for the IPCC's seventh Assessment Report. 0:01:51.280 --> 0:01:54.760 Ben chairs the Advisory Group of the International Transition Plan Network, 0:01:55.000 --> 0:01:59.680 advising institutions managing trillions in assets across every major asset 0:01:59.680 --> 0:02:02.960 class and brings a global perspective on how capital markets 0:02:03.000 --> 0:02:06.640 are responding to climate risk. Each side will deliver opening statements, 0:02:06.680 --> 0:02:10.639 followed by robuttals, cross examination and closing remarks. I will 0:02:10.639 --> 0:02:14.400 intervene to keep us focused and within time, Let's begin, Jacob. 0:02:14.440 --> 0:02:15.320 The flora is yours. 0:02:15.680 --> 0:02:18.760 Thanks and thanks for the opportunity to speak here and 0:02:18.919 --> 0:02:23.040 the Oxford style debate pattern and tradition, it's my job 0:02:23.120 --> 0:02:24.800 not just to make the case for the motion, but 0:02:24.840 --> 0:02:27.040 also to define it, and I think today in particular, 0:02:27.120 --> 0:02:30.680 that's going to be very, very key. So just to 0:02:30.680 --> 0:02:34.639 sort of set the terms of the conversation. First of all, 0:02:34.720 --> 0:02:36.960 obviously this is on Bloomberg, and so what we're really 0:02:37.000 --> 0:02:40.160 caring about is whether it's priced to the extent that 0:02:40.200 --> 0:02:42.760 it matters for investors. We're not saying that everyone out 0:02:42.760 --> 0:02:44.600 there in the world is thinking about climate change the 0:02:44.680 --> 0:02:47.760 right way. We're not saying that all the economic assets 0:02:47.800 --> 0:02:50.720 or all economic activity is taking this into account. We 0:02:50.760 --> 0:02:53.799 know there's still people buying water front properties. They might 0:02:53.840 --> 0:02:56.240 not be on top of the topic yet, but we're 0:02:56.280 --> 0:02:59.040 looking at financial markets investors in where they're pricing right, 0:02:59.120 --> 0:03:01.480 So let's just make sure we're clear on that first matter. 0:03:02.160 --> 0:03:04.720 The second is we're not asking about whether in a 0:03:04.760 --> 0:03:09.080 doomsday scenario we might see some repricing. So we're not 0:03:09.160 --> 0:03:12.520 asking if an alien invasion tomorrow happens, all financial markets 0:03:12.520 --> 0:03:15.840 were repriced. Doesn't mean it was mispriced today the probability 0:03:15.880 --> 0:03:18.360 of an alien invasion, right, We're just looking at, given 0:03:18.400 --> 0:03:21.200 what we know about the climate science, is it correctly 0:03:21.240 --> 0:03:23.359 priced or not, And then that gets me to the 0:03:23.400 --> 0:03:25.680 third point, what do we mean with climate risk? And 0:03:25.720 --> 0:03:28.679 of course we're here really straddling two parts of the conversation. 0:03:29.280 --> 0:03:32.080 One of them is the risk from climate change impacts 0:03:32.160 --> 0:03:35.040 on the economy, what we'd normally call physical risk, and 0:03:35.080 --> 0:03:37.160 then on the flip side, we're also trying to figure 0:03:37.160 --> 0:03:39.040 out what the risk is if we're trying to prevent 0:03:39.040 --> 0:03:41.360 those risks from happening in the first place, which we 0:03:41.440 --> 0:03:44.839 normally call transition risk. And obviously that makes my job 0:03:44.880 --> 0:03:46.320 a bit harder because I have to make the case 0:03:46.320 --> 0:03:48.000 that both of these risks are priced. But as I 0:03:48.080 --> 0:03:51.120 hope listeners will appreciate, once I'm through with my side 0:03:51.120 --> 0:03:53.840 of the conversation, we'll all agree that indeed that is 0:03:53.880 --> 0:03:57.480 the case, risk are priced. So let me start with 0:03:57.640 --> 0:04:01.120 the case of why the motion is correct. First of all, 0:04:01.240 --> 0:04:04.840 we obviously know that from any sustainability professionals, modern portfolio 0:04:04.880 --> 0:04:08.200 theory is an impossible word. But this is really the 0:04:08.280 --> 0:04:11.000 foundation for the case here, as that markets are correctly 0:04:11.040 --> 0:04:14.000 pricing these risks. And of course the core condition for 0:04:14.040 --> 0:04:16.600 that to be the case is that markets need information, 0:04:17.200 --> 0:04:22.040 and anybody who's sort of subscribed to Bloomberg or any 0:04:22.080 --> 0:04:25.679 other publication will not have missed the fact that climate 0:04:25.760 --> 0:04:30.120 change is real, that the transition is happening, whatever your 0:04:30.200 --> 0:04:31.840 view on the climate science. As you said in your 0:04:31.839 --> 0:04:35.600 introductory remarks, we can see evidence of the climate changing. 0:04:35.960 --> 0:04:39.400 Investors are exposed to that information. Whether they believe it 0:04:39.480 --> 0:04:41.520 or not, we'll get into in a minute, but there's 0:04:41.520 --> 0:04:44.480 no informational gap here anymore. We see the state of 0:04:44.480 --> 0:04:47.720 play and it is very clear from the evidence that 0:04:47.800 --> 0:04:50.880 investors are reflecting that state of play. What was the 0:04:50.880 --> 0:04:54.200 best performing sector in twenty twenty five, better than tech, 0:04:54.440 --> 0:04:57.760 better than anything else. It was the green sector, Green 0:04:57.800 --> 0:05:01.200 technologies best performing sector according to Freezing twenty twenty five. 0:05:01.920 --> 0:05:06.360 What about the insurance companies spiking insurance premium climate risk regions? 0:05:06.400 --> 0:05:09.479 Withdrawing all together, it seems like they're on top of 0:05:09.480 --> 0:05:13.000 the topic as well. And we've got a world of 0:05:13.040 --> 0:05:18.160 academic research suggesting that climate risk are reflected. ECB has 0:05:18.200 --> 0:05:21.080 just published something about the CUPN Central Bank. We've got 0:05:21.120 --> 0:05:24.320 SOAS and Imperial College who've done a study showing that 0:05:24.440 --> 0:05:28.880 country sovereign risk exposure is linked or sovereign pricing is 0:05:28.960 --> 0:05:32.000 linked to the climate risks that they're exposed to. The 0:05:32.040 --> 0:05:33.920 fact of the matter is it's just not twenty ten 0:05:34.000 --> 0:05:36.080 or twenty fifteen anymore. Maybe I would have had a 0:05:36.160 --> 0:05:38.840 harder job making the case ten to fifteen years ago, 0:05:39.200 --> 0:05:42.000 but the information is there now. The carbon bubble is 0:05:42.000 --> 0:05:45.360 not still around the corner. We've seen the growth in renewables, 0:05:45.360 --> 0:05:48.360 We've seen all these explosive trends, and so I would 0:05:48.400 --> 0:05:51.080 say that investors are pricing now. Of course, there's going 0:05:51.120 --> 0:05:52.560 to be some listeners out there who's going to say, 0:05:52.560 --> 0:05:55.320 how could you possibly make that case? You know, armageddon 0:05:55.360 --> 0:05:58.760 is around the corner. We've got the doomsday glacier, We've 0:05:58.800 --> 0:06:01.320 got Amazon die back, We're sitting here in London. We've 0:06:01.360 --> 0:06:04.279 got the ocean current collapsing any day now and putting 0:06:04.360 --> 0:06:07.520 London under a mile of ice. Sure, all these scenarios 0:06:07.600 --> 0:06:10.279 are out there, but for one, they are very long 0:06:10.360 --> 0:06:13.480 term scenarios, and as we all know, financial markets are 0:06:13.520 --> 0:06:17.799 not so much. And two, we're not looking at these probabilities, 0:06:17.839 --> 0:06:21.280 these low probabilities as a central case. And as we 0:06:21.360 --> 0:06:24.080 know from our pricing, if something has a one percent 0:06:24.160 --> 0:06:27.240 or zero point one percent probability, even if it's an 0:06:27.240 --> 0:06:32.000 extreme event, it's just not going to move financial prices massively. 0:06:33.120 --> 0:06:35.400 The other thing I'll say, and then close with this thought, 0:06:35.760 --> 0:06:38.760 is we've actually asked investors what they think. This isn't 0:06:38.800 --> 0:06:42.320 some sort of a mystery voodoo let's sort of read 0:06:42.360 --> 0:06:45.920 a crystal ball or read the tarot cards. We'd ran 0:06:45.960 --> 0:06:49.720 a survey, we work. We'd have this climate forecasting project 0:06:49.800 --> 0:06:53.120 called Inevitable Policy Response. Last year, we surveyed over one 0:06:53.160 --> 0:06:56.760 hundred investors. We surveyed over three hundred experts around the world, 0:06:57.040 --> 0:06:59.920 and we asked them what did they think the turns 0:07:00.200 --> 0:07:02.799 would look like? And they're not believing in a world 0:07:02.800 --> 0:07:06.160 anymore where there is no economic transition. Again, whatever you 0:07:06.279 --> 0:07:08.680 view on the climate science, they don't believe in the 0:07:08.680 --> 0:07:11.080 one point five degree goal, that's for sure. But they 0:07:11.120 --> 0:07:14.840 also don't believe in a world anymore where nothing else happens. 0:07:15.120 --> 0:07:17.240 We know that one half degrees is off the table. 0:07:17.600 --> 0:07:20.480 But when we actually plugged their views into our risk 0:07:20.560 --> 0:07:24.040 models and showed what kind of repricing would happen if 0:07:24.040 --> 0:07:26.600 they were wrong, the risk from the power sector went 0:07:26.640 --> 0:07:29.160 down to one percent. Now if Ben on the other side, 0:07:29.200 --> 0:07:30.920 he is going to make the case that one percent 0:07:31.360 --> 0:07:35.440 is mispricing to the extent that's material for investors, then fine, 0:07:35.480 --> 0:07:37.320 I think I'll lose this debate. But otherwise I think 0:07:37.360 --> 0:07:38.680 I've got the facts on my side. 0:07:38.880 --> 0:07:42.600 Thank you, Jacob. So, to summarize, markets are correctly pricing 0:07:42.680 --> 0:07:45.680 this risk, the transition is happening, and investors are fully 0:07:45.760 --> 0:07:48.920 exposed to the information needed to reflect the state of play. 0:07:49.080 --> 0:07:50.840 And with that I'll hand over to Ben for his 0:07:50.960 --> 0:07:54.800 position against this motion is one percent risk. If indeed 0:07:54.800 --> 0:07:57.360 it is just one percent risk and mispricing to the 0:07:57.400 --> 0:08:00.200 extent that it is material to the investor. 0:08:00.360 --> 0:08:03.560 Great well, thank you, Grace, and thank you Jacob. And 0:08:03.600 --> 0:08:06.760 I think you will lose this. Jacob, and I have 0:08:06.800 --> 0:08:08.360 a great deal of respect for your work and the 0:08:08.400 --> 0:08:10.920 work of the Finance labs. But I think you have 0:08:11.000 --> 0:08:15.520 set yourself an impossible task today. And let me explain why. 0:08:15.760 --> 0:08:18.720 Now the motion is to the extent that it matters 0:08:18.720 --> 0:08:22.280 for investors, climate risk is already priced in, and so 0:08:22.360 --> 0:08:24.920 to win the debate, Jacob must convince you that all 0:08:25.040 --> 0:08:28.640 climate related risks that matter for investors are already priced 0:08:28.680 --> 0:08:32.720 in across all markets, for all investors all the time. 0:08:33.520 --> 0:08:37.160 My task is much easier. I need only show that 0:08:37.240 --> 0:08:40.120 some material climate risks are not currently priced in by 0:08:40.160 --> 0:08:44.000 some investors some of the time. If markets are anything 0:08:44.080 --> 0:08:48.800 short of perfectly efficient on climate, the motion falls at 0:08:48.800 --> 0:08:52.160 that first hurdle, and that is an asymmetry at the 0:08:52.160 --> 0:08:55.000 heart of this debate. And I believe the proposition has 0:08:55.040 --> 0:08:58.360 already fallen at that first hurdle, But obviously we want 0:08:58.360 --> 0:09:00.839 to keep this a bit more interesting. Will say a 0:09:00.920 --> 0:09:04.240 bit more, and I'm going to draw on findings from 0:09:04.240 --> 0:09:06.000 the European Central Bank, the Bank of England, and the 0:09:06.000 --> 0:09:09.520 Bank for International Settlements to show that the institutions that 0:09:09.559 --> 0:09:12.800 supervise the global financial system have reached the opposite conclusion 0:09:12.840 --> 0:09:16.480 to the motion, the opposite conclusion to Jacob and the proposition. 0:09:17.240 --> 0:09:20.400 And I'm also going to use the proposition's own research 0:09:20.920 --> 0:09:25.200 to make the case against their motion. So there are 0:09:25.200 --> 0:09:28.600 structural reasons why capital markets are poorly equipped to price 0:09:28.640 --> 0:09:32.000 climate risks. These are not temporary inefficiencies that are going 0:09:32.040 --> 0:09:36.920 to self correct. Their features related to how markets work. So, first, 0:09:37.480 --> 0:09:40.440 climate risks does involve deep uncertainty, not the kind of 0:09:40.520 --> 0:09:45.119 uncertainty markets handle well. This is not coin flip uncertainty 0:09:45.120 --> 0:09:48.959 with known distributions, but ambiguous probabilities can tested pay off 0:09:48.960 --> 0:09:54.199 distributions are nonlinear dynamics where uncertainty is this deep markets 0:09:54.240 --> 0:09:56.680 either attached the wrong prices or applied discount rates that 0:09:56.720 --> 0:10:01.079 bury long tailed losses that is not priced in second 0:10:01.480 --> 0:10:06.480 investment mandates benchmarks and career risk shortened investor horizons. A 0:10:06.559 --> 0:10:09.959 pension fund CIO who knows that coastal real estate will 0:10:10.000 --> 0:10:13.640 be impaired over twenty years still faces a benchmark measured 0:10:13.679 --> 0:10:17.600 over twelve months long dated. For seeable risks are systematically 0:10:17.640 --> 0:10:21.800 discounted away, and when the repricing does come, it comes 0:10:21.800 --> 0:10:25.280 all at once. Because physical climate shocks and policy shifts 0:10:25.440 --> 0:10:29.640 hit many portfolios simultaneously, you cannot diver diversify away from 0:10:29.640 --> 0:10:32.640 climate risk. Now let me move to some of the 0:10:32.920 --> 0:10:36.280 evidence I mentioned before. So the ECB the Eripen Central 0:10:36.280 --> 0:10:40.160 Bank in twenty twenty two did a climate risk stress 0:10:40.160 --> 0:10:43.559 test and found that eighty percent of significant Eurozone banks 0:10:43.559 --> 0:10:46.720 had either basic or no climate related risk management practices 0:10:47.200 --> 0:10:50.720 in place. What followed was not reassurance that markets were 0:10:50.760 --> 0:10:53.720 going to self correct. What's happened is that there's been 0:10:53.760 --> 0:10:57.200 a multi year enforcement escalation. In March twenty twenty three, 0:10:57.320 --> 0:11:01.199 the ECB issued a binding superviser decisions to twenty eight 0:11:01.280 --> 0:11:04.120 banks that had failed to manage climate related risks, with 0:11:04.240 --> 0:11:07.880 the threat of penalties to be enforced afterwards in November 0:11:07.920 --> 0:11:10.800 twenty twenty five. The ECB issued its first climate related 0:11:11.720 --> 0:11:14.679 risk fine against a banker in February of this year 0:11:14.720 --> 0:11:17.040 at find Credit Agricol seven point six million for the 0:11:17.080 --> 0:11:22.600 same failure, and the ECB has as of January this 0:11:22.760 --> 0:11:25.800 year formally embedded climate and nature related risks into its 0:11:25.840 --> 0:11:28.800 core supervisray and monetary policy functions, so if climate risk 0:11:28.840 --> 0:11:31.839 were already priced in, the supervisor of the Eurozone banking 0:11:31.880 --> 0:11:34.680 system would not be issuing binding decisions, imposing fines and 0:11:34.720 --> 0:11:39.359 restructuring its own operations to address it, and that progression 0:11:39.520 --> 0:11:44.080 from twenty twenty two highlights widespread and inadequacy across the 0:11:44.080 --> 0:11:47.040 financial system, particularly the banking system. The Bank of England 0:11:47.080 --> 0:11:50.160 found something similar in its climate buyin and exploratory scenario, 0:11:51.760 --> 0:11:57.600 and there it found that firms were assessing climate risk 0:11:57.640 --> 0:12:02.640 for counterparties and finding wildly different results for the amount 0:12:02.679 --> 0:12:05.040 of climate risk that the counterparties faced by a factor 0:12:05.080 --> 0:12:08.640 of ten for the same borrower, and that highlights again 0:12:08.800 --> 0:12:12.440 some of the issues here in relation to supervised firms 0:12:12.559 --> 0:12:17.120 pricing these things. The Bank of International Settlements they published 0:12:17.240 --> 0:12:20.080 a study last year focused on sovereign bonds and physical risk. 0:12:20.920 --> 0:12:25.560 They found that transition risk is associated with high sovereign yields, 0:12:25.679 --> 0:12:29.320 particularly for high missing countries, but they found that physical 0:12:29.400 --> 0:12:32.920 risk was not being priced into sovereign borrowing costs at all. 0:12:32.960 --> 0:12:35.400 And given that sovereign bonds are the bedrock of the 0:12:35.400 --> 0:12:39.720 global financial system, they're the benchmark for interest rates influenced 0:12:39.720 --> 0:12:41.760 the pricing of every other asset class, they're the most 0:12:41.800 --> 0:12:47.880 liquid asset. That is a very significant gap and shows 0:12:47.880 --> 0:12:52.439 why this motion can't hold. I mentioned Jacob's own work 0:12:52.679 --> 0:12:57.439 excellent work which couldn't I agree with strongly, But his 0:12:57.800 --> 0:13:01.079 organization published research from their one and one thousand initiatives 0:13:01.120 --> 0:13:05.080 showing that once you incorporate climate tipping points, ecosystem decline, 0:13:05.080 --> 0:13:08.200 and social risks into financial stress scenarios, the losses in 0:13:08.200 --> 0:13:10.640 equity markets from climate change could be amplified by a 0:13:10.640 --> 0:13:13.320 factor of two point five to three point five times 0:13:13.720 --> 0:13:18.040 compared to standard estimates. So Jacob's own shop says that 0:13:18.080 --> 0:13:21.559 standard models may be underestimating climate related to financial losses 0:13:21.600 --> 0:13:23.600 by a factor of two point five to three point five. 0:13:24.040 --> 0:13:29.319 And if that's right, clearly the motion does not stand. 0:13:30.640 --> 0:13:33.200 So where does that leave us? In just a close 0:13:33.240 --> 0:13:35.680 So the proposition must defend the world where every material 0:13:35.720 --> 0:13:38.520 climate risk is already priced in for every investor, everywhere, 0:13:38.520 --> 0:13:41.640 all the time. That's obviously a hard thing to demonstrate. 0:13:42.320 --> 0:13:45.000 Jacob hasn't demonstrated that. Unfortunately, that is not the world 0:13:45.080 --> 0:13:49.400 we live in. We live in a world where the ECB, 0:13:49.520 --> 0:13:51.400 the Bank of England, the BIS have found that these 0:13:51.440 --> 0:13:53.079 things are not being priced in. There's lots of other 0:13:53.120 --> 0:13:56.240 research and I could cite as well the proposition's own 0:13:56.320 --> 0:14:00.319 organization has said this too, and then it it's also 0:14:00.400 --> 0:14:02.800 worth just remembering too that there are climate risks that 0:14:02.880 --> 0:14:06.000 not even the best research groups in the scientific community 0:14:06.000 --> 0:14:09.960 fully understand or can properly model, tipping points, cascading hazards, 0:14:10.440 --> 0:14:15.200 compounding events. You can't actually accurately price some of these things. 0:14:15.600 --> 0:14:19.320 There are no unknowns and unknown unknowns. So I think 0:14:19.320 --> 0:14:22.760 with that it's very clear. So the motion fails. 0:14:22.800 --> 0:14:30.640 And sorry, Jacob, thank you Ben. Okay, Jacob, So are 0:14:30.640 --> 0:14:33.760 you now convinced that climate risks are in fact not 0:14:34.000 --> 0:14:37.640 fully priced in? Given your own research house bea Finance 0:14:37.720 --> 0:14:42.119 Labs one in one thousand initiative. Essentially, once you incorporate 0:14:42.160 --> 0:14:46.480 climate tipping points, ecosystem decline, and social risks into the 0:14:46.480 --> 0:14:49.920 financial stress scenarios, the losses in acty markets from climate 0:14:50.000 --> 0:14:52.800 change could be amplified by a factor of two point 0:14:52.880 --> 0:14:56.920 five to three point five compared to standard estimates. Is 0:14:56.960 --> 0:14:58.200 this enough to change your mind? 0:14:58.400 --> 0:15:01.720 So Ben's obviously delivered the knockout blow. Is any self 0:15:01.760 --> 0:15:04.720 respecting researchannels will tell you the moment they get cited, 0:15:04.760 --> 0:15:07.640 they go into a state of shock and paralysis and 0:15:07.760 --> 0:15:12.400 immediately feel compelled to agree with the counterpart. No, indeed, 0:15:13.320 --> 0:15:17.200 I am not fully convinced, despite Ben so eloquently citing 0:15:17.200 --> 0:15:20.160 our own research. You know, we're just a small thing tank, 0:15:20.280 --> 0:15:24.640 the little engine that could. But Ben works for Oxford, obviously, 0:15:24.760 --> 0:15:26.960 and you know that's where the real research happens and 0:15:27.000 --> 0:15:29.320 the real work is done. And he cited so many 0:15:29.360 --> 0:15:32.640 wonderful studies, but not the one that his shop put 0:15:32.680 --> 0:15:37.520 forward that did show how much cost of capital had 0:15:37.640 --> 0:15:40.640 now shifted in favor of green technologies and how that 0:15:40.680 --> 0:15:44.480 had really fundamentally transformed as sort of from a risk 0:15:44.520 --> 0:15:47.200 premier perspective in particular over the last couple of years. 0:15:47.440 --> 0:15:49.720 I just want to, I think interrogate maybe two or 0:15:49.720 --> 0:15:52.400 three points that have been highlighted, and also that I 0:15:52.440 --> 0:15:54.680 feel like the audience should really try and reflect upon 0:15:54.720 --> 0:15:57.640 as they think about where they stand on this motion. Right, So, 0:15:57.880 --> 0:16:00.800 I think the first thing is the idea that to 0:16:00.920 --> 0:16:04.080 believe that climate risk are mispriced, you have to believe 0:16:04.080 --> 0:16:06.440 that all investors are pricing climate risks. I just don't 0:16:06.440 --> 0:16:08.640 think that's the right way to think about it. If 0:16:08.680 --> 0:16:10.560 you said to me now that you know if you 0:16:10.600 --> 0:16:12.840 take AI or any other risk, well, there's a handful 0:16:12.880 --> 0:16:15.280 investors who are not really on top of the AI trend, 0:16:15.360 --> 0:16:17.920 and that means the AI dynamic is not properly reflected. 0:16:18.040 --> 0:16:20.040 We wouldn't really think about it like that, right. What 0:16:20.040 --> 0:16:22.000 we're just saying is that, you know, we're in this 0:16:22.040 --> 0:16:23.920 big market. There are a lot of many players in 0:16:23.920 --> 0:16:25.960 the market. They have a lot of many different views, 0:16:26.520 --> 0:16:29.480 and all these players do have the informational access, not 0:16:29.520 --> 0:16:31.640 the least thanks to Bloomberg, I should say, not getting 0:16:31.640 --> 0:16:36.800 paid for this shout out that about the climate issues 0:16:36.840 --> 0:16:38.880 we're talking about, right, and the fact that some of 0:16:38.920 --> 0:16:41.400 them are choosing to ignore them, doesn't mean it's mispriced. 0:16:41.400 --> 0:16:43.920 It just means that they've concluded that that information is 0:16:43.960 --> 0:16:48.520 not material for pricing, right, And we don't accept expect 0:16:48.640 --> 0:16:52.040 or accept that, you know, for things to be properly priced, 0:16:52.080 --> 0:16:54.760 every investor has to agree that's material risk, and every 0:16:54.760 --> 0:16:57.160 investor has to integrate it, or in fact integrate it 0:16:57.160 --> 0:16:59.440 in the same exact way. There's I think one area 0:16:59.560 --> 0:17:03.200 to enter right. The second one is about this radical uncertainty, 0:17:03.200 --> 0:17:07.520 and I have some sympathy for that for sure, especially 0:17:07.560 --> 0:17:10.399 as we're thinking about the world more broadly. You know, 0:17:10.480 --> 0:17:13.239 it feels like when have things been more uncertain than 0:17:13.240 --> 0:17:17.280 they have been today? Name your topic of choice over 0:17:17.280 --> 0:17:20.480 the last couple of months. But actually, I think on 0:17:20.520 --> 0:17:22.640 this topic a lot of that uncertainty has gone away. 0:17:23.240 --> 0:17:26.639 On the one hand, on the transition side, obviously in particular, 0:17:26.720 --> 0:17:29.200 we really you know, know where these green technologies are 0:17:29.200 --> 0:17:31.600 going and know the trajectory of them, and so you know, 0:17:31.680 --> 0:17:34.720 there's uncertain there's obviously some risk profiles and different assumptions, 0:17:34.760 --> 0:17:37.000 but I don't think people would talk about uncertainty when 0:17:37.040 --> 0:17:39.640 it comes to that topic anymore. And on the physical 0:17:39.720 --> 0:17:44.280 risk profile, I mean, sure, twenty years thirty years forty years, 0:17:44.280 --> 0:17:47.560 but you know, insurance companies are writing one year insurance contracts. 0:17:47.960 --> 0:17:51.680 We've got short term you know, return pro risk return 0:17:51.760 --> 0:17:55.080 profiles that we're working towards. And I don't think it's 0:17:55.280 --> 0:17:58.439 true that over the next three to five years we 0:17:58.560 --> 0:18:02.000 have radical uncertainty when it comes to physical risk, for example. 0:18:02.400 --> 0:18:05.040 It doesn't mean that there may not be tail events. 0:18:05.280 --> 0:18:07.160 You know that we could see in the next couple 0:18:07.200 --> 0:18:09.600 of years a dramatic shift in some of the tipping 0:18:09.640 --> 0:18:12.560 points Ben highlighted, some of the social dynamics been highlighted, 0:18:12.800 --> 0:18:16.400 but again from the distribution of a pricing perspective that 0:18:16.680 --> 0:18:19.479 is sort of in the normal order of things. And 0:18:19.560 --> 0:18:21.840 just because a tail event materialized, it doesn't mean we 0:18:21.840 --> 0:18:24.880 were wrong about thinking of it as a tail event Exanta. 0:18:24.960 --> 0:18:28.159 So I think those two areas in particular are you know, 0:18:28.359 --> 0:18:31.560 really when investors try and think about whether they think 0:18:31.600 --> 0:18:33.880 it's priced now or not, after this conversation we're having, 0:18:34.359 --> 0:18:35.800 I think they need to kind of wrap the head 0:18:35.840 --> 0:18:36.600 around Yeah. 0:18:36.640 --> 0:18:38.639 I mean, good, good points, Jacob. I might just come 0:18:38.680 --> 0:18:40.439 back on some of them. I mean, I think obviously 0:18:40.480 --> 0:18:46.119 it was a difficult motion meanly set by Bloomberg and 0:18:46.240 --> 0:18:47.640 obviously we can agree. 0:18:47.400 --> 0:18:49.640 You're just buttering me up. Then either I'm not going for. 0:18:49.640 --> 0:18:56.400 It that you know, investors are you know, increasingly pricing 0:18:56.800 --> 0:19:01.120 these risks and have the means to do so. But 0:19:01.119 --> 0:19:03.119 but I think that the way you are characterizing it, 0:19:03.160 --> 0:19:05.960 you know that investors are kind of going through a 0:19:06.000 --> 0:19:09.040 process and then deciding to not price these risks, I 0:19:09.080 --> 0:19:12.560 don't think is right. I think, you know, there might 0:19:12.560 --> 0:19:15.040 be some investors that are doing that. I think there 0:19:15.080 --> 0:19:19.040 are all sorts of reasons why institutions have found it 0:19:19.080 --> 0:19:22.840 hard to think about this systematically and kind of exclude 0:19:22.840 --> 0:19:28.159 it from there their risk pricing processes. I mean, I 0:19:28.200 --> 0:19:32.280 think that's that's harder to say for you know, large 0:19:32.480 --> 0:19:36.159 regulated firms for example in Europe. But I think you 0:19:36.200 --> 0:19:39.240 could point to all sorts of financial institutions around the 0:19:39.240 --> 0:19:41.840 world where you know they haven't gone through some sort 0:19:41.840 --> 0:19:44.720 of systematic process to go no one, we're discounting the 0:19:44.800 --> 0:19:47.640 risks like investment Committee. 0:19:47.640 --> 0:19:50.719 Ignore this please, although perhaps in the States in some 0:19:50.800 --> 0:19:52.600 cases you might I'm with you here. 0:19:52.560 --> 0:19:55.840 Yeah, yeah, exactly. And then I think your point around, 0:19:56.040 --> 0:20:01.159 you know, you know, institutions and have and investors are 0:20:01.200 --> 0:20:03.879 going to have very different views, right, and they can disagree, 0:20:04.280 --> 0:20:07.680 and of course that's what happens in markets. Clearly. I 0:20:07.720 --> 0:20:10.920 think there's a sort of a view sometimes promoted by 0:20:11.200 --> 0:20:14.200 you know, NGOs and others, that sort of thing, that 0:20:14.280 --> 0:20:16.200 there is some single version of the truth when it 0:20:16.200 --> 0:20:18.679 comes out to climate risk and everyone must adopt that. Yeah, 0:20:18.720 --> 0:20:19.280 that's not true. 0:20:20.560 --> 0:20:22.840 Maybe just one more thought, and you know, I'm going 0:20:22.920 --> 0:20:26.159 to dare break up the format just a tiny little bit. 0:20:26.200 --> 0:20:28.040 But one of the key points obviously in the motion 0:20:28.200 --> 0:20:31.480 is that the word climate risks specifically, right, And I 0:20:31.560 --> 0:20:33.560 sort of somewhat loosely in the beginning said, you know, 0:20:33.560 --> 0:20:36.160 it's the impact of climate change directly, but I think 0:20:36.160 --> 0:20:39.679 a lot of the areas where probably investors are the 0:20:39.840 --> 0:20:42.360 least equipped to think about it are those second order 0:20:42.480 --> 0:20:44.680 facts that you talked about in my research as well. Right, 0:20:44.720 --> 0:20:46.840 And you sort of pulled that into climate risk because 0:20:46.840 --> 0:20:48.680 they're driven by climate change. Right. If we're thinking about 0:20:48.760 --> 0:20:53.400 resource conflicts, if we're thinking about climate related migration patterns, 0:20:53.440 --> 0:20:56.760 even if we're just thinking about political conflicts around the transition, 0:20:56.840 --> 0:21:00.080 you know, and the extent to which that dominates the 0:21:00.160 --> 0:21:03.160 political dynamic, you know, the anti net zero pro net 0:21:03.240 --> 0:21:07.400 zero forces at each other's throats and many Western democracies 0:21:07.440 --> 0:21:11.400 now and that obviously leads to reduction social cohesion, all 0:21:11.400 --> 0:21:14.400 these second order effects, and I think that's the area 0:21:14.480 --> 0:21:17.480 where investors, you know, are clearly not on top of 0:21:17.520 --> 0:21:20.040 the topic. I would say there is no evidence whatsoever 0:21:20.160 --> 0:21:22.440 that these second order effects are really well captured. 0:21:23.080 --> 0:21:23.280 You know. 0:21:23.400 --> 0:21:25.840 My I can defend the motion by saying, well, those 0:21:25.840 --> 0:21:28.200 aren't climate risk in the narrow sense of the term. 0:21:28.320 --> 0:21:31.880 Those are the social risks, Those are other types of risk. 0:21:32.280 --> 0:21:34.400 But that's obviously the area where you know, if you're 0:21:34.400 --> 0:21:37.720 thinking about climate risk just as a matter of a storm, 0:21:38.280 --> 0:21:40.720 a flood. You know, we have these flood and storm maps, 0:21:40.840 --> 0:21:45.320 we have insurances responding to them, we see some pricing. 0:21:45.440 --> 0:21:47.639 Is it enough or not? Who's to say, but you know, 0:21:48.720 --> 0:21:52.520 there is clearly some investor response to these realities and 0:21:52.560 --> 0:21:55.679 evaluation of these realities from a financial perspective, not a 0:21:55.680 --> 0:21:59.720