1
00:00:00,200 --> 00:00:02,560
Speaker 1: This is Tom ronnins Reese, and you're listening to Switched

2
00:00:02,600 --> 00:00:04,840
Speaker 1: on the podcast brought to you by B and EF.

3
00:00:05,200 --> 00:00:08,039
Speaker 1: With climate change in extreme weather events becoming more prevalent,

4
00:00:08,240 --> 00:00:11,800
Speaker 1: central banks and financial supervisors are facing new risks alongside

5
00:00:11,840 --> 00:00:15,680
Speaker 1: those existing from geopolitics and volatile capital markets. To counter

6
00:00:15,760 --> 00:00:18,360
Speaker 1: this climate threat, some central banks have been creating and

7
00:00:18,400 --> 00:00:21,320
Speaker 1: conducting climate risk stress tests in order to make sure

8
00:00:21,400 --> 00:00:24,759
Speaker 1: financial institutions are capable of riding out potential impacts on

9
00:00:24,840 --> 00:00:28,040
Speaker 1: businesses and investments. But what do these climate risk stress

10
00:00:28,080 --> 00:00:31,000
Speaker 1: tests entail? What are the approaches that different central banks take,

11
00:00:31,120 --> 00:00:34,200
Speaker 1: and which markets are taking this climate threat seriously. Today,

12
00:00:34,200 --> 00:00:36,640
Speaker 1: I'm joined by Tiff and Brandley Bloomberg, NIF's head of

13
00:00:36,680 --> 00:00:39,280
Speaker 1: Transition Risk and Alignment, who draws from findings from his

14
00:00:39,360 --> 00:00:42,240
Speaker 1: note Climate Risk Stress Test Review, which B and EF

15
00:00:42,280 --> 00:00:44,120
Speaker 1: clients can find at B and EF go on the

16
00:00:44,120 --> 00:00:47,519
Speaker 1: Bloomberg Terminal or on BNF dot com. On our website,

17
00:00:47,560 --> 00:00:50,040
Speaker 1: B and EF clients can also find our Transition Risk

18
00:00:50,120 --> 00:00:53,280
Speaker 1: Model TRACKED, which assesses around eighty thousand companies and is

19
00:00:53,320 --> 00:00:57,520
Speaker 1: now integrated into Bloomberg's MARS climate stress testing solution. Also

20
00:00:57,560 --> 00:00:59,600
Speaker 1: on today's show, we are joined by a special guest,

21
00:00:59,600 --> 00:01:02,520
Speaker 1: at Osh, the head of Climate, Nature and Regulatory Financial

22
00:01:02,560 --> 00:01:05,280
Speaker 1: Solutions at Bloomberg, where he and his team provide data

23
00:01:05,360 --> 00:01:08,679
Speaker 1: and analytics that help investors incorporate climate and nature related

24
00:01:08,760 --> 00:01:12,680
Speaker 1: risks in investment decisions and comply with sustainable disclosure requirements.

25
00:01:12,920 --> 00:01:15,240
Speaker 1: Prior to Bloomberg, Edo was a manager of the Climate

26
00:01:15,280 --> 00:01:17,280
Speaker 1: Scenarios team at the Bank of England, where he led

27
00:01:17,280 --> 00:01:20,039
Speaker 1: the development of the NNGFS scenarios, and while working at

28
00:01:20,080 --> 00:01:21,959
Speaker 1: the Dutch National Bank, he was part of the first

29
00:01:22,000 --> 00:01:25,440
Speaker 1: ever climate stress test conducted by a central bank. Examples

30
00:01:25,440 --> 00:01:27,520
Speaker 1: of his team's work be found on the terminal at

31
00:01:27,720 --> 00:01:31,800
Speaker 1: WSL Physical Risk or WSL Water. All right, let's get

32
00:01:31,800 --> 00:01:45,399
Speaker 1: talking about climate risk stress tests with Tiffin and Edo. Tiffin,

33
00:01:45,800 --> 00:01:48,840
Speaker 1: welcome to the podcast today, please to be here. Tom

34
00:01:49,040 --> 00:01:52,480
Speaker 1: and Ado welcome on board as well. Thanks Tom, so.

35
00:01:52,680 --> 00:01:55,920
Speaker 1: I know that you both come into this question of

36
00:01:56,040 --> 00:01:59,960
Speaker 1: climate stress testing from quite different angles and have had

37
00:02:00,040 --> 00:02:03,360
Speaker 1: different experiences in the space. So my first question was,

38
00:02:03,440 --> 00:02:05,240
Speaker 1: you know, to talk about maybe the history of climate

39
00:02:05,280 --> 00:02:08,480
Speaker 1: stress testing. But before we even do that, for those

40
00:02:08,520 --> 00:02:10,840
Speaker 1: of us and I include myself in this that are

41
00:02:10,840 --> 00:02:13,800
Speaker 1: not really familiar with this concept, can you explain what

42
00:02:13,840 --> 00:02:16,680
Speaker 1: a climate risk stress test is or even just what

43
00:02:16,840 --> 00:02:17,919
Speaker 1: is a stress test?

44
00:02:18,240 --> 00:02:22,360
Speaker 2: So stress test is a way for financial supervisor to

45
00:02:22,720 --> 00:02:26,519
Speaker 2: assess the resiliency of the financial system, and this means

46
00:02:26,720 --> 00:02:31,640
Speaker 2: assessing regulated entities, so these can be banks, insurances, even investors,

47
00:02:31,919 --> 00:02:35,840
Speaker 2: and looking at different scenarios to know whether these institutions

48
00:02:35,880 --> 00:02:39,120
Speaker 2: are impacted and whether they are resilient to different type

49
00:02:39,120 --> 00:02:41,919
Speaker 2: of shocks. A new type of shocks that has emerged

50
00:02:42,040 --> 00:02:45,760
Speaker 2: in the last ten years is shocks coming from climate risk.

51
00:02:45,880 --> 00:02:48,560
Speaker 2: So this can be the transition risk, so the risk

52
00:02:48,639 --> 00:02:53,840
Speaker 2: arising from climate policies, shifting consumer preferences, or technology disruption,

53
00:02:54,080 --> 00:02:56,160
Speaker 2: and also physical risks, so this is sort of your

54
00:02:56,200 --> 00:03:02,040
Speaker 2: classic natural disasters or the chronic risk rising temperatures, overall

55
00:03:02,200 --> 00:03:03,360
Speaker 2: sea level rise and so on.

56
00:03:03,680 --> 00:03:06,919
Speaker 3: Yeah, from my kind of perspective, stress testing became quite

57
00:03:06,960 --> 00:03:10,040
Speaker 3: popular as a regulatory tool after the two thousand eight

58
00:03:10,040 --> 00:03:13,440
Speaker 3: financial crisis. The Basal Committee for Banking Supervision set up

59
00:03:13,480 --> 00:03:16,639
Speaker 3: principles for stress testing which had nothing to do with climate,

60
00:03:16,680 --> 00:03:19,040
Speaker 3: mind you, but but more generally, and one of the

61
00:03:19,080 --> 00:03:22,680
Speaker 3: principles that they highlighted was that stress tests look to

62
00:03:23,160 --> 00:03:26,880
Speaker 3: analyze scenarios that are severe but plausible. So it's explicitly

63
00:03:26,919 --> 00:03:29,960
Speaker 3: not about you know, business as usual risk management, but

64
00:03:30,040 --> 00:03:33,880
Speaker 3: really thinking to more extreme cases that could occur, such

65
00:03:33,919 --> 00:03:36,000
Speaker 3: as the two thousand and eight financial crisis, and make

66
00:03:36,040 --> 00:03:38,320
Speaker 3: sure we're better prepared for such events in the future.

67
00:03:38,520 --> 00:03:41,480
Speaker 1: Got it. So I mean when we say financial supervisors,

68
00:03:41,800 --> 00:03:44,440
Speaker 1: do we mean people like the regulators, the government and

69
00:03:44,560 --> 00:03:45,320
Speaker 1: central banks.

70
00:03:45,560 --> 00:03:48,600
Speaker 2: And also you can have let's say the SEC in

71
00:03:48,680 --> 00:03:53,400
Speaker 2: the US, so Securities Exchange Commission, which is basically supervising

72
00:03:53,680 --> 00:03:57,160
Speaker 2: and looking at equity markets. So it is a range

73
00:03:57,320 --> 00:04:01,600
Speaker 2: of institution agencies that all looking at financial risk.

74
00:04:01,720 --> 00:04:05,560
Speaker 1: Essentially, Let's say a central bank is running a stress test,

75
00:04:05,840 --> 00:04:09,640
Speaker 1: it's not just looking at its own sort of commitments

76
00:04:09,680 --> 00:04:13,720
Speaker 1: in relation to the risks that you highlighted. So I

77
00:04:13,720 --> 00:04:18,440
Speaker 1: think you said transition risk, then weather events and then

78
00:04:18,560 --> 00:04:21,680
Speaker 1: chronic climate risk were the three main categories. It's not

79
00:04:21,760 --> 00:04:24,760
Speaker 1: just looking at those in relation to the Bank of England,

80
00:04:24,880 --> 00:04:28,080
Speaker 1: for example, be looking at the whole UK financial system

81
00:04:28,160 --> 00:04:30,720
Speaker 1: when it's doing that stress test. Is that do I

82
00:04:30,800 --> 00:04:32,160
Speaker 1: understand it correctly? Yeah?

83
00:04:32,160 --> 00:04:34,640
Speaker 3: That's exactly right. So within the Bank of England, actually

84
00:04:34,720 --> 00:04:40,960
Speaker 3: it's the prad Prudential Regulation Authority which is responsible for

85
00:04:41,120 --> 00:04:45,040
Speaker 3: just that prudential regulation and in essence is at the

86
00:04:45,080 --> 00:04:48,360
Speaker 3: perfect wordsworld. Actually it seeks to ensure the financial stability

87
00:04:48,440 --> 00:04:49,800
Speaker 3: of the UK financial system.

88
00:04:50,120 --> 00:04:54,599
Speaker 1: So Ado, you have got some experience actually in being

89
00:04:54,680 --> 00:04:57,640
Speaker 1: involved in the financial institutions that have been running some

90
00:04:57,680 --> 00:05:00,240
Speaker 1: of these stress tests, how do you go about? I mean,

91
00:05:00,240 --> 00:05:02,800
Speaker 1: what does that look like? And is it difficult or easy?

92
00:05:03,200 --> 00:05:05,480
Speaker 1: Did you have to kind of invent your own version

93
00:05:05,480 --> 00:05:06,560
Speaker 1: of it with each institution?

94
00:05:07,240 --> 00:05:11,200
Speaker 3: I suppose it's come along way over the years, And

95
00:05:11,279 --> 00:05:13,159
Speaker 3: I'll just flag up front that you know, I don't

96
00:05:13,240 --> 00:05:16,640
Speaker 3: work at these institutions anymore, so I can't represent the institutions.

97
00:05:16,680 --> 00:05:20,560
Speaker 3: But from my experience working on climate stress testing, when

98
00:05:20,600 --> 00:05:23,560
Speaker 3: we started out the first stress test that I was

99
00:05:23,600 --> 00:05:26,720
Speaker 3: a part of, we didn't really have a president of

100
00:05:26,960 --> 00:05:29,400
Speaker 3: climate stress testing and we didn't know what it looked like,

101
00:05:29,480 --> 00:05:31,240
Speaker 3: so we had to more or less invent the wheel.

102
00:05:31,400 --> 00:05:35,440
Speaker 3: What we did have, though, is a decent conceptual understanding

103
00:05:35,720 --> 00:05:38,440
Speaker 3: of what we were trying to do. There was already

104
00:05:38,480 --> 00:05:42,880
Speaker 3: in academic literature kind of separating out climate transition risks

105
00:05:42,920 --> 00:05:46,320
Speaker 3: from climate physical risks as different risk channels to look

106
00:05:46,360 --> 00:05:50,120
Speaker 3: at and some insight onto what those risk transmission channels

107
00:05:50,200 --> 00:05:53,080
Speaker 3: could look like. So what we really needed to then

108
00:05:53,240 --> 00:05:56,400
Speaker 3: do is think about how could we model these risk

109
00:05:56,440 --> 00:05:59,479
Speaker 3: transmission channels in a scenario setup that's going to be

110
00:05:59,480 --> 00:06:02,880
Speaker 3: relevant for financial institutions. But yeah, as you can imagine

111
00:06:02,920 --> 00:06:05,120
Speaker 3: with anything new, we did run into a number of

112
00:06:05,240 --> 00:06:07,000
Speaker 3: challenges along the way trying to do that.

113
00:06:07,440 --> 00:06:09,479
Speaker 1: And what sort of challenges were those?

114
00:06:10,040 --> 00:06:13,440
Speaker 3: Well, for for example, you know, if suppose a risk

115
00:06:13,480 --> 00:06:17,640
Speaker 3: transmission channel is a carbon price increasing. This is one

116
00:06:17,720 --> 00:06:19,680
Speaker 3: channel that that was quite often used in a lot

117
00:06:19,680 --> 00:06:21,600
Speaker 3: of climate stress test where we say, okay, suppose the

118
00:06:21,640 --> 00:06:25,560
Speaker 3: carbon price goes up. How would that impact the exposures

119
00:06:25,560 --> 00:06:28,320
Speaker 3: of financial institutions. Well, then you need to start thinking

120
00:06:28,360 --> 00:06:32,440
Speaker 3: about what are the GHD emissions of those financial institutions,

121
00:06:32,440 --> 00:06:36,560
Speaker 3: How could thoseg emissions be the gg emissions of the

122
00:06:36,600 --> 00:06:40,000
Speaker 3: companies that financial institutions are invested in, And how could

123
00:06:40,120 --> 00:06:43,200
Speaker 3: a carbon price impact the cost structure of these companies,

124
00:06:43,200 --> 00:06:45,839
Speaker 3: and how could that ultimately affect things like the credit

125
00:06:45,839 --> 00:06:48,520
Speaker 3: worthiness of the companies. That's going to have a bearing

126
00:06:48,520 --> 00:06:52,520
Speaker 3: on the financial institutions stability and safety and soundness. So

127
00:06:52,880 --> 00:06:55,800
Speaker 3: you have to think backwards, and then you realize that

128
00:06:55,839 --> 00:06:58,480
Speaker 3: at that time especially, there wasn't very good data on

129
00:06:58,600 --> 00:07:02,239
Speaker 3: things like GHD emissions, and there wasn't really a president

130
00:07:02,279 --> 00:07:04,240
Speaker 3: of how do you model the impact of a common price?

131
00:07:04,279 --> 00:07:06,400
Speaker 3: How does that play too on the cost structure of

132
00:07:06,440 --> 00:07:09,560
Speaker 3: that company? Could they pass it to to upstream suppliers

133
00:07:09,600 --> 00:07:12,360
Speaker 3: downstream consumers. So there were a lot of new questions

134
00:07:12,400 --> 00:07:14,800
Speaker 3: we uncovered in the process, and a lot of the

135
00:07:14,840 --> 00:07:17,400
Speaker 3: stress tests that have happened over the year, have you know,

136
00:07:17,440 --> 00:07:20,920
Speaker 3: as part of their objectives, have had capacity building to

137
00:07:21,040 --> 00:07:24,080
Speaker 3: just try and understand these questions better and kind of

138
00:07:24,400 --> 00:07:26,440
Speaker 3: learn ways of answering them.

139
00:07:26,840 --> 00:07:31,760
Speaker 1: And how often are stress tests you know necessary? I mean, Tiffan,

140
00:07:31,920 --> 00:07:35,760
Speaker 1: I had a quick peek at your climate stress test

141
00:07:35,800 --> 00:07:37,880
Speaker 1: review No, and I was quite struck by the chart

142
00:07:38,040 --> 00:07:40,640
Speaker 1: on the front of that piece of research which showed,

143
00:07:40,760 --> 00:07:42,640
Speaker 1: you know, what's looked to me like a wave of

144
00:07:42,680 --> 00:07:47,440
Speaker 1: stress tests happening in late twenty tens, early twenty twenties

145
00:07:47,800 --> 00:07:51,040
Speaker 1: that then sort of tails off. Is that just because

146
00:07:51,400 --> 00:07:55,000
Speaker 1: a phase of stress tests amongst certain central banks has

147
00:07:55,040 --> 00:07:57,960
Speaker 1: been complete or is you know, I'm presuming this isn't

148
00:07:57,960 --> 00:07:59,960
Speaker 1: because they were in fashion now they've gone out of fashion.

149
00:08:00,040 --> 00:08:02,880
Speaker 1: It's just they've been done for now. Am I reading

150
00:08:02,920 --> 00:08:03,280
Speaker 1: it right?

151
00:08:03,480 --> 00:08:06,800
Speaker 2: Yes? So my Curley Sunny Park and I looked at

152
00:08:06,880 --> 00:08:09,720
Speaker 2: forty three different climat risk stress tests that have been

153
00:08:09,720 --> 00:08:12,400
Speaker 2: published since twenty seventeen. So if you look at the

154
00:08:12,520 --> 00:08:15,440
Speaker 2: history of stress tests, you know, going back to twenty

155
00:08:15,480 --> 00:08:18,200
Speaker 2: fifteen twenty seventeen, this is when we see the first

156
00:08:18,240 --> 00:08:21,760
Speaker 2: academic studies. The first one was from Stefano Battiston and

157
00:08:21,800 --> 00:08:26,240
Speaker 2: he really set the conceptual framework for stress testing. The

158
00:08:26,320 --> 00:08:29,440
Speaker 2: Dutch Central Bank DNB was the first one to publish

159
00:08:29,600 --> 00:08:32,520
Speaker 2: twenty seventeen twenty eighteen a transition risk and then a

160
00:08:32,559 --> 00:08:36,720
Speaker 2: physical risk stress test. And it's no surprise that DNB

161
00:08:36,880 --> 00:08:39,680
Speaker 2: actually published the first physical risk stress test because the

162
00:08:39,679 --> 00:08:43,920
Speaker 2: Netherlands has a lot of exposure to physical risk from

163
00:08:44,160 --> 00:08:47,720
Speaker 2: sea level rise. Twenty nineteen is also a very important

164
00:08:47,760 --> 00:08:50,559
Speaker 2: date for stress testing because this is when the NNGFS

165
00:08:50,640 --> 00:08:53,400
Speaker 2: so the Network for Greening the Financial System, which is

166
00:08:53,440 --> 00:08:56,320
Speaker 2: an alliance of central banks and financial regulators. This is

167
00:08:56,320 --> 00:09:00,720
Speaker 2: when the MNGFS launched its open source scenarios that really

168
00:09:00,920 --> 00:09:04,200
Speaker 2: created the blueprint for a lot of central banks around

169
00:09:04,240 --> 00:09:07,880
Speaker 2: the world to build their own stress test upon and

170
00:09:07,920 --> 00:09:10,160
Speaker 2: so you know, in twenty twenty one, twenty twenty two,

171
00:09:10,360 --> 00:09:13,320
Speaker 2: our stress test review shows that, you know, there's almost

172
00:09:13,559 --> 00:09:17,560
Speaker 2: thirty exercises that have been published. Some of them are

173
00:09:17,679 --> 00:09:20,040
Speaker 2: sort of first of a kind or one off, and

174
00:09:20,080 --> 00:09:22,960
Speaker 2: some others have a frequency of you know, a year

175
00:09:23,160 --> 00:09:26,200
Speaker 2: two year. What we see is a lot of central

176
00:09:26,280 --> 00:09:31,640
Speaker 2: banks integrating climate stress testing into their own standard risk review.

177
00:09:31,679 --> 00:09:34,120
Speaker 2: It's not necessarily a part yet of what we call

178
00:09:34,320 --> 00:09:37,480
Speaker 2: the capital requirements. So usually, you know, a stress test,

179
00:09:37,600 --> 00:09:39,719
Speaker 2: one of the main goals would be to derive a

180
00:09:39,920 --> 00:09:42,920
Speaker 2: number that would quantify the amount of money that an

181
00:09:43,000 --> 00:09:46,200
Speaker 2: institution has to set aside to face a certain shock.

182
00:09:46,400 --> 00:09:50,880
Speaker 2: So climatory stress testing is not currently leading to capital

183
00:09:50,960 --> 00:09:54,959
Speaker 2: adequacy requirements, but central banks are mainly trying to push

184
00:09:55,120 --> 00:09:58,679
Speaker 2: to raise awareness around this new source of risk and

185
00:09:58,720 --> 00:10:02,600
Speaker 2: also build cap city within their regulated entities in terms

186
00:10:02,600 --> 00:10:05,920
Speaker 2: of the modeling, making sure that banks hire different teams

187
00:10:05,960 --> 00:10:07,760
Speaker 2: that are able to look at these questions.

188
00:10:08,000 --> 00:10:11,079
Speaker 1: So you've introduced this idea of an MGFS there, what

189
00:10:11,120 --> 00:10:13,719
Speaker 1: does that stand for? And yeah, can you just give

190
00:10:13,800 --> 00:10:16,120
Speaker 1: us a little bit more detail about how it operates

191
00:10:16,160 --> 00:10:17,640
Speaker 1: and what's under the hood.

192
00:10:17,640 --> 00:10:20,640
Speaker 2: There So the NNGFS is the Network for Greening the

193
00:10:20,640 --> 00:10:24,920
Speaker 2: Financial System. This is an alliance of regulators that are

194
00:10:25,040 --> 00:10:29,120
Speaker 2: looking to incorporate climate in the supervisory scope. So the

195
00:10:29,240 --> 00:10:33,000
Speaker 2: NNGFS counts more than one hundred and forty members. You

196
00:10:33,080 --> 00:10:37,240
Speaker 2: have central banks, you have financial regulators. Development banks also

197
00:10:37,360 --> 00:10:39,440
Speaker 2: are part of the NGFs, and so there are different

198
00:10:39,480 --> 00:10:42,360
Speaker 2: working groups that are working across a range of topics.

199
00:10:42,440 --> 00:10:46,120
Speaker 2: The main topic that stood out and the main work

200
00:10:46,160 --> 00:10:49,480
Speaker 2: that stood out out of the NGFs is the NGNGFS scenarios.

201
00:10:49,480 --> 00:10:52,680
Speaker 2: So these are climate scenarios that look across physical risk

202
00:10:52,760 --> 00:10:55,679
Speaker 2: and transition risk. The long term scenarios are looking out

203
00:10:55,720 --> 00:10:58,800
Speaker 2: to twenty one hundred on a five year basis. And

204
00:10:59,280 --> 00:11:02,040
Speaker 2: when you think of you know, the nngfsnios. This is

205
00:11:02,120 --> 00:11:05,760
Speaker 2: quite different actually from the scenarios that BNF can publish

206
00:11:06,040 --> 00:11:09,760
Speaker 2: or the International Energy Agency can publish. The NNGFS scenarios

207
00:11:09,760 --> 00:11:12,000
Speaker 2: are not normative, so they don't tell you what you

208
00:11:12,080 --> 00:11:15,160
Speaker 2: should do in order to achieve a certain climate outcome,

209
00:11:15,240 --> 00:11:18,720
Speaker 2: like a net zero emissions pathway. The nngfsnios are really

210
00:11:18,760 --> 00:11:22,440
Speaker 2: here to explore different plausible futures and they're interested in

211
00:11:22,480 --> 00:11:24,600
Speaker 2: sort of exploring those extremes as well, you sort of

212
00:11:24,760 --> 00:11:27,920
Speaker 2: extreme a physical risk and extreme transition risk, and what

213
00:11:28,080 --> 00:11:30,920
Speaker 2: happens if the transition is delayed for a long time

214
00:11:31,040 --> 00:11:32,760
Speaker 2: and then all of a sudden, you know, in the

215
00:11:32,760 --> 00:11:36,360
Speaker 2: twenty thirties, you have a policy shock that imposes a

216
00:11:36,520 --> 00:11:40,079
Speaker 2: very strangent pathway to the economy to decarbonize very fast.

217
00:11:40,320 --> 00:11:43,640
Speaker 2: There are six to seven scenarios depending on the phase

218
00:11:43,840 --> 00:11:46,360
Speaker 2: of the nngfsnios you're looking at, and these are really

219
00:11:46,400 --> 00:11:49,600
Speaker 2: here to explore this world of risk from a physical

220
00:11:49,600 --> 00:11:50,880
Speaker 2: and transition standpoint.

221
00:11:51,240 --> 00:11:53,920
Speaker 1: So could you just I think you mentioned that there's

222
00:11:54,000 --> 00:11:56,280
Speaker 1: the scenarios that it looks at. There's sort of three

223
00:11:56,400 --> 00:11:59,120
Speaker 1: main ones. You just explain what those are.

224
00:11:59,320 --> 00:12:02,600
Speaker 2: Yeah, So they are three categories. You have the orderly

225
00:12:02,720 --> 00:12:07,360
Speaker 2: transition category, you have disorderly transition category, and then you

226
00:12:07,480 --> 00:12:11,160
Speaker 2: have the hothouse world. So elderly transition this is a

227
00:12:11,200 --> 00:12:16,120
Speaker 2: relatively smooth transition pathway where the economy starts decarbonizing basically

228
00:12:16,120 --> 00:12:19,760
Speaker 2: from next year onwards at a steady pace. And this

229
00:12:20,200 --> 00:12:23,600
Speaker 2: transition sort of limits the amount of physical risk that

230
00:12:23,679 --> 00:12:26,320
Speaker 2: there will be later on in the scenario. So we

231
00:12:26,360 --> 00:12:30,120
Speaker 2: decalbonize fast. We don't accumulate as much greenhouse gases into

232
00:12:30,160 --> 00:12:33,360
Speaker 2: the atmosphere, and so natural disaster are a little less

233
00:12:33,400 --> 00:12:37,760
Speaker 2: frequent than they would have otherwise been. Disorderly transition is

234
00:12:37,800 --> 00:12:40,679
Speaker 2: looking at what I already describe. So this is assuming

235
00:12:40,800 --> 00:12:43,480
Speaker 2: that the transition does not happen in the short and

236
00:12:43,559 --> 00:12:46,079
Speaker 2: mid term, but then by a certain date you start

237
00:12:46,080 --> 00:12:49,960
Speaker 2: seeing more climate policies coming and disrupting part of the economy.

238
00:12:50,040 --> 00:12:54,040
Speaker 2: So you can think of for example, bands internal combustion

239
00:12:54,200 --> 00:12:58,200
Speaker 2: engine cars being implemented pretty heavily across the world and

240
00:12:58,240 --> 00:13:00,679
Speaker 2: so disrupting one part of the economy. And then the

241
00:13:00,720 --> 00:13:04,600
Speaker 2: hot house world is a very high intensity, physical risk

242
00:13:04,679 --> 00:13:07,920
Speaker 2: world where we do not decarbonize fast enough and so

243
00:13:08,040 --> 00:13:10,880
Speaker 2: we continue accumulating a lot of emissions in the atmosphere,

244
00:13:10,920 --> 00:13:14,160
Speaker 2: and this leads to very frequent and high amplitude and

245
00:13:14,240 --> 00:13:17,240
Speaker 2: natural disasters and the physical risk impacts.

246
00:13:17,640 --> 00:13:21,720
Speaker 1: So ado, I mean you've had some experience of applying

247
00:13:21,760 --> 00:13:24,480
Speaker 1: these scenarios in the stress test that you've been involved

248
00:13:24,480 --> 00:13:27,120
Speaker 1: in developing. Is it ay standard? How they are applied

249
00:13:27,120 --> 00:13:30,400
Speaker 1: across different institutions stress tests? Well, they were.

250
00:13:30,320 --> 00:13:32,959
Speaker 3: Actually maybe it's a great point, they were actually developed

251
00:13:33,160 --> 00:13:37,080
Speaker 3: to serve as a baseline for primarily regulators central banks

252
00:13:37,200 --> 00:13:41,200
Speaker 3: to frame stress tests around. So the idea was, let's

253
00:13:41,200 --> 00:13:44,680
Speaker 3: develop a set of common scenarios that can then be

254
00:13:44,760 --> 00:13:47,520
Speaker 3: refined to meet the specific context of the regulator, the

255
00:13:47,559 --> 00:13:50,480
Speaker 3: specific risk they want to prope and maybe any specific

256
00:13:50,679 --> 00:13:54,280
Speaker 3: local jurisdictional features that they would want to incorporate. So

257
00:13:54,320 --> 00:13:56,920
Speaker 3: they're very much as starting point, and in fact the

258
00:13:57,360 --> 00:14:00,560
Speaker 3: Bank of England's climate be annual exploratory scenario or the

259
00:14:00,559 --> 00:14:03,640
Speaker 3: stresses that they ran in the UK. The scenarios that

260
00:14:03,679 --> 00:14:06,959
Speaker 3: were used actually deviated from the ng festerinaris in a

261
00:14:07,000 --> 00:14:10,199
Speaker 3: few places, even though the anti festerinaris were used as

262
00:14:10,240 --> 00:14:13,600
Speaker 3: the baseline, if you will, But then certain tweaks were made,

263
00:14:13,640 --> 00:14:17,000
Speaker 3: for example, around physical risks. There was an understanding that

264
00:14:17,040 --> 00:14:20,720
Speaker 3: the NNGFS scenarios, due to modeling constraints that are that

265
00:14:20,800 --> 00:14:24,280
Speaker 3: are well restrewed across climate modelers, there was a risk

266
00:14:24,680 --> 00:14:28,480
Speaker 3: that the scenarios didn't capture the fullest extent of physical

267
00:14:28,600 --> 00:14:31,320
Speaker 3: risks that may actually occur. So the Bank of england

268
00:14:31,320 --> 00:14:34,320
Speaker 3: took steps to mpop some of the physical risks in

269
00:14:34,360 --> 00:14:37,360
Speaker 3: their exercise, essentially to get to that severe but still

270
00:14:37,400 --> 00:14:41,200
Speaker 3: plausible a level of stress that you want to analyze.

271
00:14:41,480 --> 00:14:43,560
Speaker 1: So where in the world have we been seeing some

272
00:14:43,680 --> 00:14:46,480
Speaker 1: of these stress tests happening across the world?

273
00:14:46,760 --> 00:14:50,640
Speaker 2: Emia apak amor, but we have to say you really

274
00:14:50,720 --> 00:14:54,040
Speaker 2: let the charge in terms of developing the framework. And

275
00:14:54,080 --> 00:14:58,080
Speaker 2: actually the NNGFS as Secretariat was hosted i believe by

276
00:14:58,120 --> 00:15:01,320
Speaker 2: ban de France and Bank of England, and so DNB

277
00:15:01,480 --> 00:15:04,200
Speaker 2: also has played a role. Out of the forty three

278
00:15:04,240 --> 00:15:07,960
Speaker 2: stress test that Sanny and I reviewed, we found that

279
00:15:08,400 --> 00:15:12,360
Speaker 2: more than forty percent of them have been conducted across Europe.

280
00:15:12,440 --> 00:15:15,600
Speaker 2: So Europe really played a role in that first wave

281
00:15:15,720 --> 00:15:18,720
Speaker 2: of stress tests, so between twenty twenty one and twenty

282
00:15:18,800 --> 00:15:22,240
Speaker 2: twenty two, and then we saw this spread across the world.

283
00:15:22,240 --> 00:15:24,560
Speaker 2: So APAC really took the lead towards the end of

284
00:15:24,600 --> 00:15:27,160
Speaker 2: twenty twenty two and twenty twenty three with a lot

285
00:15:27,320 --> 00:15:30,000
Speaker 2: of new stress tests that were published on the back

286
00:15:30,040 --> 00:15:34,560
Speaker 2: of the NNGFS scenarios. Overall, we found that between sixty

287
00:15:34,560 --> 00:15:37,600
Speaker 2: and seventy percent of transition risk and physical risk stress

288
00:15:37,640 --> 00:15:41,640
Speaker 2: test were conducted on the back of the NNGFS scenarios.

289
00:15:41,720 --> 00:15:45,880
Speaker 2: Another source of climate scenario data is the IPCC, and

290
00:15:45,920 --> 00:15:48,800
Speaker 2: you have also different ways of capturing the risk. You know,

291
00:15:48,840 --> 00:15:52,160
Speaker 2: different models, but NNGFS has really been the blueprint for

292
00:15:52,240 --> 00:15:54,800
Speaker 2: a lot of countries to develop their own stress test.

293
00:15:55,040 --> 00:15:57,400
Speaker 1: So it's not the only show in town, but it's

294
00:15:57,400 --> 00:16:01,800
Speaker 1: the main one in this domain. Absolutely, so is the EU.

295
00:16:02,160 --> 00:16:04,200
Speaker 1: I mean you mentioned that this kind of started in

296
00:16:04,240 --> 00:16:07,200
Speaker 1: the EU, but you know we're now seeing in other regions.

297
00:16:07,320 --> 00:16:09,880
Speaker 1: Is the EU still playing a leading role in this runt?

298
00:16:10,040 --> 00:16:14,160
Speaker 2: I would say yes. And last year the EU published

299
00:16:14,240 --> 00:16:18,520
Speaker 2: a new type of stress tests which incorporated the FEIT

300
00:16:18,600 --> 00:16:21,360
Speaker 2: for fifty five policy package or the U in a

301
00:16:21,480 --> 00:16:24,240
Speaker 2: very granular way. So this is sort of the decarbonization

302
00:16:24,480 --> 00:16:28,120
Speaker 2: policy package across the U, and this stress test really

303
00:16:28,160 --> 00:16:31,600
Speaker 2: looked at the risk across all the banks, the insurers

304
00:16:31,840 --> 00:16:35,720
Speaker 2: and dig very deep into some of the implications across

305
00:16:35,720 --> 00:16:38,720
Speaker 2: sectors of these policies. So this is sort of the

306
00:16:38,800 --> 00:16:42,120
Speaker 2: you trying to anticipate some of the risks coming from

307
00:16:42,360 --> 00:16:45,680
Speaker 2: sector level climate policies. And I think this is also

308
00:16:45,960 --> 00:16:50,440
Speaker 2: this sets a very interesting precedent for other stress testers

309
00:16:50,600 --> 00:16:53,880
Speaker 2: to look at, not just running the analysis in a

310
00:16:53,960 --> 00:16:57,120
Speaker 2: very generic way, but running those stress tests in a

311
00:16:57,200 --> 00:16:59,840
Speaker 2: specific policy orientated way.

312
00:17:00,240 --> 00:17:03,280
Speaker 1: So that's the role that EU is playing, and obviously

313
00:17:03,320 --> 00:17:06,280
Speaker 1: you're both sitting in Europe, but I'm here in the US,

314
00:17:06,480 --> 00:17:09,520
Speaker 1: and you just turn on ANYTV channel and you can

315
00:17:09,560 --> 00:17:12,760
Speaker 1: see that it is a very different environment politically here

316
00:17:12,920 --> 00:17:15,880
Speaker 1: than it was, say a year ago, and then particularly

317
00:17:15,960 --> 00:17:18,920
Speaker 1: in relation to questions around climate. So has that had

318
00:17:18,920 --> 00:17:22,320
Speaker 1: an impact at all on stress tests in the US

319
00:17:22,400 --> 00:17:23,919
Speaker 1: or plans around stress tests?

320
00:17:24,160 --> 00:17:27,520
Speaker 2: So the US published in twenty twenty four a pilot

321
00:17:27,600 --> 00:17:32,880
Speaker 2: stress test that included six large banks, so that's you know, Goldman, Sachs, JP, Morgan,

322
00:17:33,080 --> 00:17:36,160
Speaker 2: and other banks. And this stress test was actually very interesting.

323
00:17:36,320 --> 00:17:38,439
Speaker 2: So on the physical risk side, it looked at the

324
00:17:38,480 --> 00:17:42,199
Speaker 2: impact of hurricanes in the northeast of the US, looking

325
00:17:42,240 --> 00:17:46,440
Speaker 2: at you know, hundreds of thousands of residential and commercial loans.

326
00:17:46,560 --> 00:17:48,639
Speaker 2: And on the transitionersk side, it looked at, you know,

327
00:17:48,680 --> 00:17:51,560
Speaker 2: the impact of transition risk and potticas on real estate,

328
00:17:51,600 --> 00:17:53,840
Speaker 2: for example. So I thought was this was a very

329
00:17:53,880 --> 00:17:58,160
Speaker 2: promising episode. But actually right before the Trump administration came

330
00:17:58,200 --> 00:18:02,159
Speaker 2: into office, So in Jazz Neurary twenty twenty five, the

331
00:18:02,200 --> 00:18:06,040
Speaker 2: Federal Reserve actually exited the NGFs And so this is

332
00:18:06,080 --> 00:18:09,600
Speaker 2: sort of a reaction potentially to the current politics and

333
00:18:09,680 --> 00:18:13,320
Speaker 2: the current environment in US politics. But nevertheless, physical is

334
00:18:13,359 --> 00:18:15,879
Speaker 2: are very important today in the US. So you're seeing

335
00:18:16,359 --> 00:18:21,560
Speaker 2: heightened natural disasters. There's a wild fire season now in California.

336
00:18:21,640 --> 00:18:24,960
Speaker 2: You have zones across the US that have become unensurable

337
00:18:25,119 --> 00:18:29,199
Speaker 2: from a residential and commercial real estate standpoint. And so

338
00:18:29,600 --> 00:18:32,959
Speaker 2: while the US is sort of backing away from stress

339
00:18:32,960 --> 00:18:36,439
Speaker 2: testing potentially for a while, there are actual effects that

340
00:18:36,520 --> 00:18:38,440
Speaker 2: are being felt across the economy.

341
00:18:38,560 --> 00:18:41,280
Speaker 3: I might add to two additional developments that I could

342
00:18:41,280 --> 00:18:44,760
Speaker 3: shed some light here. So while the Central banks were

343
00:18:45,000 --> 00:18:48,240
Speaker 3: developing climate stress tests, there was another group called the

344
00:18:48,320 --> 00:18:52,720
Speaker 3: Task Course for Climate Related Financial Disclosures TCFD, which came

345
00:18:52,720 --> 00:18:55,800
Speaker 3: out with a set of recommendations in twenty seventeen. The

346
00:18:55,840 --> 00:18:58,120
Speaker 3: same year the first under My stress test was published,

347
00:18:58,160 --> 00:19:03,000
Speaker 3: and they set out recommendations for corporations to publish more

348
00:19:03,000 --> 00:19:07,800
Speaker 3: information on various particularly around their climate related risks and

349
00:19:07,840 --> 00:19:11,119
Speaker 3: how they were managing climate related risks. And these recommendations

350
00:19:11,200 --> 00:19:15,919
Speaker 3: actually included a recommendation to apply scenario analysis to identify

351
00:19:16,000 --> 00:19:18,240
Speaker 3: what those risks might be over the short, medium and

352
00:19:18,320 --> 00:19:21,639
Speaker 3: long term. And the TCFD recommendations have evolved the bit

353
00:19:21,720 --> 00:19:26,200
Speaker 3: since then. They have been formalized by the International Sustainability

354
00:19:26,200 --> 00:19:29,040
Speaker 3: Standards Board, the ISSB, who has actually merged with the

355
00:19:29,040 --> 00:19:32,760
Speaker 3: TCFD or vice versa, and has published a more formalized

356
00:19:32,800 --> 00:19:36,639
Speaker 3: set of reporting requirements which have been formally adopted by

357
00:19:36,760 --> 00:19:41,240
Speaker 3: jurisdictions across the world, which require companies, financials and non

358
00:19:41,240 --> 00:19:45,000
Speaker 3: financial companies to disclose on their climate related risks and

359
00:19:45,240 --> 00:19:48,800
Speaker 3: implicitly or explicitly, there's an askut in there, depending on

360
00:19:48,800 --> 00:19:50,640
Speaker 3: the jurisdiction that is, but there's an askut in there

361
00:19:50,680 --> 00:19:54,720
Speaker 3: to apply scenario analysis to identify those risks. So we've seen,

362
00:19:54,960 --> 00:19:57,600
Speaker 3: if you will, a kind of trend of private sector

363
00:19:57,920 --> 00:20:02,240
Speaker 3: scenario analysis in peril level to the more broader central

364
00:20:02,280 --> 00:20:07,560
Speaker 3: bank exercises. So that's been helping further establish climate stress

365
00:20:07,560 --> 00:20:10,399
Speaker 3: testing as a discipline across the world. Now, what we

366
00:20:10,480 --> 00:20:13,520
Speaker 3: did notice with the Trump administration coming in is that

367
00:20:13,600 --> 00:20:16,760
Speaker 3: the SEC which was set to mandate such a climate

368
00:20:16,800 --> 00:20:19,640
Speaker 3: disclosure rule in the US, has currently stopped their efforts

369
00:20:19,640 --> 00:20:22,280
Speaker 3: to get that rule across It was already being contested

370
00:20:22,280 --> 00:20:26,199
Speaker 3: in a number of US courts and in Canada the

371
00:20:27,119 --> 00:20:30,399
Speaker 3: regulator had a similar climate disclosure requirement that they were

372
00:20:30,440 --> 00:20:33,800
Speaker 3: about to bring into force. And they've actually pressed pause

373
00:20:33,880 --> 00:20:36,320
Speaker 3: on that in response to developments in the US. It

374
00:20:36,359 --> 00:20:38,760
Speaker 3: seems so we do see a bit of a setback

375
00:20:38,800 --> 00:20:41,040
Speaker 3: there as well. But a final thing I just quickly

376
00:20:41,080 --> 00:20:43,760
Speaker 3: want to mention is that during all of these years

377
00:20:43,760 --> 00:20:47,080
Speaker 3: of capacity building, my sense of the industry is that

378
00:20:47,080 --> 00:20:51,680
Speaker 3: there's been a growing intrinsic appreciation of the risks brought

379
00:20:51,720 --> 00:20:54,480
Speaker 3: forth by climate change, and as Tiffan pointed out, especially

380
00:20:54,480 --> 00:20:57,119
Speaker 3: the physical risks which are which are very visible in

381
00:20:57,160 --> 00:21:00,520
Speaker 3: some jurisdictions, and you know, with very real con sequences

382
00:21:00,560 --> 00:21:04,320
Speaker 3: that we can see today financial consequences as well as others.

383
00:21:04,359 --> 00:21:07,840
Speaker 3: And so even though the regulatory push in Americas may

384
00:21:07,880 --> 00:21:11,280
Speaker 3: subside somewhat, I think that might be compensated in part

385
00:21:11,359 --> 00:21:16,479
Speaker 3: by an innate push by institutions to manage these risks regardless.

386
00:21:16,080 --> 00:21:18,800
Speaker 1: I mean an innate push by the climate itself. You

387
00:21:18,800 --> 00:21:21,840
Speaker 1: could say, just force financial institutions to think about this.

388
00:21:22,080 --> 00:21:24,440
Speaker 1: I mean, just on that, you know, the governmental level,

389
00:21:24,680 --> 00:21:26,800
Speaker 1: things have changed. At a federal level. One of the

390
00:21:26,840 --> 00:21:29,359
Speaker 1: things there's always been a narrative in the US is

391
00:21:29,680 --> 00:21:31,840
Speaker 1: whatever's happening at a federal level, you need to look

392
00:21:31,840 --> 00:21:33,880
Speaker 1: at what the states are doing, do we see any

393
00:21:33,920 --> 00:21:36,480
Speaker 1: activity at a state level in terms of climate stress

394
00:21:36,480 --> 00:21:37,720
Speaker 1: tests in the US.

395
00:21:37,680 --> 00:21:40,399
Speaker 2: So on our side, we haven't captured any state level

396
00:21:40,640 --> 00:21:44,639
Speaker 2: stress tests. But it's important to note that across the

397
00:21:44,760 --> 00:21:49,560
Speaker 2: US some states now stepping up to put together structures

398
00:21:49,640 --> 00:21:53,119
Speaker 2: to support the insurance market. And so this is something

399
00:21:53,160 --> 00:21:56,119
Speaker 2: we see across a number of states where public money

400
00:21:56,400 --> 00:22:00,840
Speaker 2: is going to come to support locally some future homeowners

401
00:22:00,920 --> 00:22:03,320
Speaker 2: that are looking to insure their house and so, you know,

402
00:22:03,359 --> 00:22:06,800
Speaker 2: the collapse of the private insurance market is actually a

403
00:22:06,960 --> 00:22:11,199
Speaker 2: very good proxy for you know, how critical physical risks

404
00:22:11,280 --> 00:22:13,879
Speaker 2: are to homeowners today. So you know, physical risks are

405
00:22:13,920 --> 00:22:17,919
Speaker 2: becoming a real risk for households and companies, and so

406
00:22:18,000 --> 00:22:20,600
Speaker 2: this is critical to still have, you know, an insurance

407
00:22:20,640 --> 00:22:24,199
Speaker 2: market locally that can support those businesses. A collapse of

408
00:22:24,520 --> 00:22:27,040
Speaker 2: the insurance market is also a collapse of the financial

409
00:22:27,080 --> 00:22:31,600
Speaker 2: market locally. Climate risk is a manageable risk from a

410
00:22:31,840 --> 00:22:34,720
Speaker 2: financial standpoint. You know, if you think about the full economy,

411
00:22:34,840 --> 00:22:38,200
Speaker 2: banks have a diversified portfolio. It is true that locally

412
00:22:38,320 --> 00:22:42,040
Speaker 2: the market for insurance and the market for mortgages has

413
00:22:42,080 --> 00:22:45,320
Speaker 2: already collapsed and public money has to step in already.

414
00:22:45,640 --> 00:22:47,200
Speaker 1: So we kind of got a picture of what's happened

415
00:22:47,240 --> 00:22:49,240
Speaker 1: in the EU and in the US. Is is there

416
00:22:49,240 --> 00:22:51,840
Speaker 1: a thing noteworthy going on elsewhere in the world.

417
00:22:52,000 --> 00:22:55,240
Speaker 2: So absolutely, we're seeing a lot of activity also across

418
00:22:55,400 --> 00:22:58,160
Speaker 2: emerging markets, and sometimes we see you know, the World

419
00:22:58,240 --> 00:23:02,520
Speaker 2: Bank or the IMF really partnering with local supervisors to

420
00:23:02,560 --> 00:23:06,840
Speaker 2: publish this stress test. So notable examples of this include,

421
00:23:06,880 --> 00:23:09,760
Speaker 2: you know, in the Philippines twenty twenty two, we've seen

422
00:23:10,119 --> 00:23:14,000
Speaker 2: in analysis the impact of typhoons on the financial system,

423
00:23:14,400 --> 00:23:18,119
Speaker 2: specifically you know, gelt towards credit exposure. We've seen also,

424
00:23:18,200 --> 00:23:21,840
Speaker 2: you know, floods in Mexico being one of the main

425
00:23:22,080 --> 00:23:25,439
Speaker 2: targets of one analysis across Brazil this is mainly a

426
00:23:25,520 --> 00:23:29,200
Speaker 2: drought have pushed the financial supervisors to publish their own

427
00:23:29,240 --> 00:23:33,360
Speaker 2: stress test. In China, we've seen also the regulator publishing

428
00:23:33,440 --> 00:23:36,600
Speaker 2: transitionary stress test that was also in twenty twenty two.

429
00:23:36,680 --> 00:23:39,080
Speaker 2: So there's a lot of activities around the world and

430
00:23:39,119 --> 00:23:42,960
Speaker 2: this really speaks to the sort of broadhouse strategy the

431
00:23:43,160 --> 00:23:47,600
Speaker 2: NGFs has implemented, and going forward, we definitely expect a

432
00:23:47,680 --> 00:23:51,879
Speaker 2: lot of regulators across Africa also to publish their first

433
00:23:52,320 --> 00:23:56,000
Speaker 2: stress test using an MGFS blueprint mainly.

434
00:23:56,119 --> 00:23:59,320
Speaker 1: So it seems like climate stress tests are becoming more

435
00:23:59,359 --> 00:24:02,320
Speaker 1: and more main stare dream and although the road to

436
00:24:02,520 --> 00:24:05,879
Speaker 1: get there on climate stress test has some bumps along it,

437
00:24:06,080 --> 00:24:08,399
Speaker 1: you know, and particularly what we're discussing in relation to

438
00:24:08,480 --> 00:24:11,440
Speaker 1: the US, they are getting along that road bit by bit,

439
00:24:11,680 --> 00:24:13,919
Speaker 1: and we have no reason to think that they're not

440
00:24:14,040 --> 00:24:16,199
Speaker 1: going to continue to become more and more mainstream as

441
00:24:16,200 --> 00:24:18,960
Speaker 1: a model. One question I have is what are their limits?

442
00:24:19,160 --> 00:24:21,720
Speaker 1: What can they do and more importantly, what can't they

443
00:24:21,760 --> 00:24:22,720
Speaker 1: do and what's the gap.

444
00:24:22,920 --> 00:24:25,560
Speaker 2: So if you think about it, sixty to seventy percent

445
00:24:25,760 --> 00:24:29,000
Speaker 2: of stress tests have used the NNGFS scenarios, and so

446
00:24:29,359 --> 00:24:32,840
Speaker 2: this is definitely an incredible success of these scenarios. But

447
00:24:33,040 --> 00:24:36,560
Speaker 2: at the same time, this is a curse mainly because

448
00:24:36,720 --> 00:24:40,359
Speaker 2: now you don't necessarily have the diversity in modeling approaches

449
00:24:40,560 --> 00:24:43,439
Speaker 2: and climate scenio data across this, you know, the body

450
00:24:43,480 --> 00:24:46,639
Speaker 2: of stress test that we reviewed, and so the limitations

451
00:24:46,840 --> 00:24:51,040
Speaker 2: of the current literature are mainly the limitation of the nngfscenario.

452
00:24:51,160 --> 00:24:54,720
Speaker 2: And so one thing that I'll mentioned on the transition

453
00:24:54,800 --> 00:24:58,840
Speaker 2: mix side is really the use of shadow carbon prices.

454
00:24:59,000 --> 00:25:03,560
Speaker 2: So shadow CAB is a modeling artifact that the NNGFS

455
00:25:03,560 --> 00:25:07,640
Speaker 2: models are using essentially to capture the intensity of climate

456
00:25:07,640 --> 00:25:11,280
Speaker 2: policies overall. This is an approximation and basically says in

457
00:25:11,320 --> 00:25:15,400
Speaker 2: the modeling, essentially you have these carbon prices that are

458
00:25:15,600 --> 00:25:18,919
Speaker 2: applied to every single economic activity across the world and

459
00:25:19,000 --> 00:25:23,560
Speaker 2: are driving up the cost of carbon intensive activities and

460
00:25:23,960 --> 00:25:27,880
Speaker 2: sort of helping also climate solutions to come into the system. Now,

461
00:25:27,920 --> 00:25:30,879
Speaker 2: in reality, what we see in practice is only a

462
00:25:31,000 --> 00:25:35,480
Speaker 2: quarter of global emissions are subject to an actual carbon price,

463
00:25:35,640 --> 00:25:39,760
Speaker 2: and outside of the most carbon pricing schemes or taxes

464
00:25:39,960 --> 00:25:42,959
Speaker 2: are well below thirty dollars pert on. So this is

465
00:25:43,200 --> 00:25:47,560
Speaker 2: a level that's not necessarily extremely material for corporates, and

466
00:25:47,600 --> 00:25:52,160
Speaker 2: they're often applied to corporate activities or industrial activities. So

467
00:25:52,359 --> 00:25:56,040
Speaker 2: the central point in the transitional scynalysis of NGFs or

468
00:25:56,080 --> 00:25:59,199
Speaker 2: those carbon prices. But actually when you think about the

469
00:25:59,280 --> 00:26:01,920
Speaker 2: transition and the weight it manifests, you know, it might

470
00:26:01,960 --> 00:26:05,439
Speaker 2: be for example, the cost competitiveness of electric vehicles that

471
00:26:05,600 --> 00:26:09,399
Speaker 2: is driving market adoption, and in turn this means you know,

472
00:26:09,600 --> 00:26:12,520
Speaker 2: the sales of internal combustion engine costs are going down,

473
00:26:12,640 --> 00:26:16,320
Speaker 2: So this is a financially material risk for a number

474
00:26:16,320 --> 00:26:21,200
Speaker 2: of automakers, and it's not currently captured in the nngfscenios.

475
00:26:21,240 --> 00:26:24,000
Speaker 2: So what we've seen is up until phase five of

476
00:26:24,040 --> 00:26:28,280
Speaker 2: the ngfsscenios, the scenarios really looked at transition risk in

477
00:26:28,280 --> 00:26:31,600
Speaker 2: the power sector and also transition risk coming from you know,

478
00:26:31,720 --> 00:26:34,879
Speaker 2: higher carbon prices across the economy, but it didn't necessarily

479
00:26:34,960 --> 00:26:38,040
Speaker 2: assess the risk across you know, all the different sectors

480
00:26:38,240 --> 00:26:41,439
Speaker 2: you can think of transport, but also transition metals that

481
00:26:41,480 --> 00:26:43,760
Speaker 2: are going to play a key part in the transition

482
00:26:44,400 --> 00:26:46,800
Speaker 2: just on the on the physical risk side as well.

483
00:26:47,040 --> 00:26:50,720
Speaker 2: The NNGFS being a bit of a global baseline for scenarios,

484
00:26:51,040 --> 00:26:53,800
Speaker 2: it looks at physical risk very much through a macro

485
00:26:54,080 --> 00:26:58,720
Speaker 2: economic lens. It tells us something about the macroeconomic impacts

486
00:26:58,880 --> 00:27:01,520
Speaker 2: in a location in a country that is, you know,

487
00:27:01,560 --> 00:27:05,320
Speaker 2: the kind of jurisdiction where we'd measure GDP, so that

488
00:27:05,320 --> 00:27:08,480
Speaker 2: that's countries, what the impacts from physical risk may be

489
00:27:08,760 --> 00:27:12,080
Speaker 2: at the aggregate level. In practice, physical risk is something

490
00:27:12,119 --> 00:27:15,800
Speaker 2: that tends to be highly localized. An intense hurricane impacting

491
00:27:16,040 --> 00:27:18,880
Speaker 2: New York City could be very different from a financial

492
00:27:18,880 --> 00:27:23,600
Speaker 2: standpoint from that same hurricane impacting forward. In both cases,

493
00:27:23,600 --> 00:27:25,760
Speaker 2: we may, you know, there may be significant impacts, but

494
00:27:26,080 --> 00:27:29,240
Speaker 2: the types of institutions that are impact which companies, which

495
00:27:29,240 --> 00:27:32,880
Speaker 2: households differs quite a bit, and hence, you know, also

496
00:27:32,920 --> 00:27:35,240
Speaker 2: the level of insurance of those impacts may differ, and

497
00:27:35,320 --> 00:27:38,240
Speaker 2: ultimately what the impact of the financial institution is could

498
00:27:38,280 --> 00:27:41,320
Speaker 2: impact quite a bit. Similarly, physical risks, you know, so

499
00:27:41,359 --> 00:27:44,639
Speaker 2: there's this direct damage depending on the location where the

500
00:27:44,680 --> 00:27:48,840
Speaker 2: impact occurs. Damages can also kind of shocked to a

501
00:27:48,880 --> 00:27:51,720
Speaker 2: company's supply chain. So a company itself may not be

502
00:27:51,800 --> 00:27:55,160
Speaker 2: directly impacted by a physical risk, but if a critical supplier,

503
00:27:55,400 --> 00:27:58,520
Speaker 2: say Transition metals, is impacted by physical risk, and that

504
00:27:58,680 --> 00:28:01,760
Speaker 2: chokes the you know, the supply and the distribution of

505
00:28:01,800 --> 00:28:05,399
Speaker 2: those metals, that could impact downstream companies. So there's a

506
00:28:05,400 --> 00:28:08,639
Speaker 2: lot of complexity to physical risk, which requires an understanding

507
00:28:08,840 --> 00:28:11,880
Speaker 2: of the locations where companies operate and the supply chains

508
00:28:11,880 --> 00:28:15,359
Speaker 2: of those companies as well. Now, naturally, NDFS, you know,

509
00:28:15,480 --> 00:28:19,119
Speaker 2: being a global open source model, won't be able to

510
00:28:19,160 --> 00:28:22,040
Speaker 2: capture all of these specificities. So it's an important area

511
00:28:22,119 --> 00:28:24,280
Speaker 2: where financial firms, if they really want to have a

512
00:28:24,280 --> 00:28:27,520
Speaker 2: good grasp of the risk, likely will need additional sources

513
00:28:27,560 --> 00:28:29,520
Speaker 2: of data to supplement that analysis.

514
00:28:29,920 --> 00:28:31,680
Speaker 1: As you mentioned that, I mean, one of the things

515
00:28:31,680 --> 00:28:34,720
Speaker 1: that was occurring to me is that having a central

516
00:28:34,800 --> 00:28:38,600
Speaker 1: bank conducts this exercise and all of the complexity involved,

517
00:28:38,600 --> 00:28:41,320
Speaker 1: that they're obviously never going to capture some of those

518
00:28:41,360 --> 00:28:44,160
Speaker 1: things you just mentioned. And I just wonder if that

519
00:28:44,480 --> 00:28:48,640
Speaker 1: is an issue. Whereas if the model was say, like

520
00:28:48,720 --> 00:28:52,120
Speaker 1: let's in said, say you are an electric vehicle manufacturer,

521
00:28:52,240 --> 00:28:54,479
Speaker 1: then I think that you reasonably could if you were

522
00:28:54,560 --> 00:28:58,600
Speaker 1: running a scenario exercise to identify risks, you reasonably could

523
00:28:58,640 --> 00:29:01,680
Speaker 1: be expected to capture, you know, the risks to your

524
00:29:01,720 --> 00:29:05,520
Speaker 1: supply chain. So does this system need a sort of

525
00:29:05,520 --> 00:29:08,920
Speaker 1: a bottom up complement to provide metrics that can feed

526
00:29:09,000 --> 00:29:12,240
Speaker 1: into the big picture model rather than putting the onus

527
00:29:12,320 --> 00:29:16,280
Speaker 1: on central banks to try and figure everything out themselves.

528
00:29:16,800 --> 00:29:19,600
Speaker 3: You know, certainly there's an aspect of that, and I

529
00:29:19,640 --> 00:29:23,280
Speaker 3: think the TCFD very much try to answer that that question.

530
00:29:23,280 --> 00:29:26,080
Speaker 1: When I spoke just to find the TCFT Sorry.

531
00:29:25,960 --> 00:29:29,280
Speaker 3: Yeah, yeah, So when I spoke about climate related disclosure

532
00:29:29,280 --> 00:29:32,440
Speaker 3: requirements before reporting requirements, part of the idea there when

533
00:29:32,480 --> 00:29:35,719
Speaker 3: regulators ask companies to report on their climate risk is

534
00:29:35,760 --> 00:29:39,080
Speaker 3: precisely to fill this gap that central regulators may not

535
00:29:39,160 --> 00:29:41,960
Speaker 3: have all the information. So if companies themselves, who understand

536
00:29:41,960 --> 00:29:44,200
Speaker 3: their own business model better than anyone in their supply

537
00:29:44,360 --> 00:29:47,160
Speaker 3: chains and their operating locations, if they can analyze the

538
00:29:47,280 --> 00:29:50,640
Speaker 3: risk and report on that, that can then help other stakeholders,

539
00:29:50,760 --> 00:29:54,560
Speaker 3: including their investors and their lenders to assess the risks

540
00:29:54,680 --> 00:29:58,400
Speaker 3: on their part. So certainly that bottom up component is there,

541
00:29:58,440 --> 00:30:00,520
Speaker 3: and this is why we see a lot of push

542
00:30:00,720 --> 00:30:04,600
Speaker 3: for climate related reporting in Europe for example, and in

543
00:30:04,680 --> 00:30:09,200
Speaker 3: across asas specific with the ISSB standards that are being implemented.

544
00:30:09,680 --> 00:30:12,120
Speaker 1: Sort Of just a thought and reflection as well, when

545
00:30:12,200 --> 00:30:14,160
Speaker 1: you know Tiff and just now you are talking about

546
00:30:14,320 --> 00:30:18,040
Speaker 1: shadow carbon prices and their strengths but also their limitations

547
00:30:18,280 --> 00:30:20,280
Speaker 1: sort of on a more macro level, I know that

548
00:30:20,440 --> 00:30:24,840
Speaker 1: climate in Europe is often sort of the main policy

549
00:30:24,920 --> 00:30:27,960
Speaker 1: lever is the EETs carbon market, and also in the

550
00:30:28,440 --> 00:30:32,040
Speaker 1: UK ETS and in Europe we're quite adept at thinking

551
00:30:32,080 --> 00:30:34,760
Speaker 1: of the problem in terms of carbon prices, and we

552
00:30:34,840 --> 00:30:38,240
Speaker 1: know that a lot of the climate stress tests momentum

553
00:30:38,360 --> 00:30:41,000
Speaker 1: came from Europe. Is there an issue that maybe the

554
00:30:41,120 --> 00:30:44,600
Speaker 1: NNGFS is a little bit too eurocentric in how it

555
00:30:44,640 --> 00:30:46,640
Speaker 1: thinks about the world, and that might be part of

556
00:30:46,680 --> 00:30:49,720
Speaker 1: the limitation. And you know that the shadow carbon price

557
00:30:49,920 --> 00:30:51,680
Speaker 1: issue is just an example of that.

558
00:30:52,120 --> 00:30:54,720
Speaker 3: I'm not sure that death characterization would be would be

559
00:30:54,760 --> 00:30:58,440
Speaker 3: quite correct because the NNGFS scenarios are ultimately based on

560
00:30:58,840 --> 00:31:03,240
Speaker 3: academic models called integrated assessment models and global climate models,

561
00:31:03,320 --> 00:31:06,440
Speaker 3: which have been developed within Global academy. One of the

562
00:31:06,480 --> 00:31:11,320
Speaker 3: models underpinning the NFS scenarios is the GCAM model, which

563
00:31:12,360 --> 00:31:14,600
Speaker 3: is a model developed out of the University of Maryland.

564
00:31:14,720 --> 00:31:17,080
Speaker 3: And so these models come out of academia and those

565
00:31:17,120 --> 00:31:20,520
Speaker 3: are the basis for the scenarios themselves. And the tradition

566
00:31:21,000 --> 00:31:25,000
Speaker 3: in integrated assessment modeling in this particular strand of academic

567
00:31:25,080 --> 00:31:29,760
Speaker 3: literature is to use carbon prices as a metric for

568
00:31:30,160 --> 00:31:34,120
Speaker 3: policy intensity. Now, where you know where you might have

569
00:31:34,160 --> 00:31:37,440
Speaker 3: a debate is whether this metric is suitable for the

570
00:31:37,560 --> 00:31:40,000
Speaker 3: use in stress testing, as has been applied by many

571
00:31:40,000 --> 00:31:42,360
Speaker 3: central banks. And I think that's tiffense commons. You know,

572
00:31:42,880 --> 00:31:45,320
Speaker 3: strike a good court. They may not be as reliable

573
00:31:45,320 --> 00:31:48,000
Speaker 3: and in fact, in the stress test themselves, in some

574
00:31:48,120 --> 00:31:50,800
Speaker 3: of them you'll actually see acknowledgments by the central banks

575
00:31:50,840 --> 00:31:53,440
Speaker 3: about the limitations of using a carbon price because it

576
00:31:53,520 --> 00:31:56,680
Speaker 3: won't accurately reflect the true policy environment. It was very

577
00:31:56,720 --> 00:32:00,080
Speaker 3: much acknowledged as a shortcut that could help determine and

578
00:32:00,280 --> 00:32:02,520
Speaker 3: pockets of risk, and you know, I think some of

579
00:32:02,560 --> 00:32:06,360
Speaker 3: the subsequent analysis by Bloomberg and e F and others

580
00:32:06,440 --> 00:32:09,959
Speaker 3: has shown that this shortcut may actually miss significant drivers

581
00:32:09,960 --> 00:32:12,880
Speaker 3: of risk, like the automotive example that Tiffin mentioned.

582
00:32:13,120 --> 00:32:16,000
Speaker 1: This has been a really fascinating conversation and there's so

583
00:32:16,120 --> 00:32:17,960
Speaker 1: much to chew on here. I think we could carry

584
00:32:18,000 --> 00:32:20,520
Speaker 1: on talking all day if we had the time. Tiffin

585
00:32:20,600 --> 00:32:23,680
Speaker 1: and Ado, thank you so much for coming and sharing

586
00:32:23,680 --> 00:32:26,800
Speaker 1: your insights on this, which is a really tough topic,

587
00:32:26,840 --> 00:32:28,959
Speaker 1: but I think one that can really move the needle.

588
00:32:29,240 --> 00:32:31,600
Speaker 1: So it's a really important conversation. So thank you both

589
00:32:31,640 --> 00:32:32,120
Speaker 1: for joining.

590
00:32:32,360 --> 00:32:41,080
Speaker 3: Thank you, thank you for having us.

591
00:32:42,960 --> 00:32:46,080
Speaker 1: Today's episode of Switched On was produced by Cam Gray

592
00:32:46,280 --> 00:32:49,880
Speaker 1: with production assistants from Kamala Shelling. Bloomberg ne EF is

593
00:32:49,880 --> 00:32:53,000
Speaker 1: a service provided by Bloomberg Finance LP and its affiliates.

594
00:32:53,040 --> 00:32:55,760
Speaker 1: This recording does not constitute, nor should it be construed

595
00:32:55,760 --> 00:32:59,520
Speaker 1: as investment and vice investment recommendations or a recommendation as

596
00:32:59,560 --> 00:33:01,200
Speaker 1: to an investment or other strategy.

597
00:33:01,240 --> 00:33:04,640
Speaker 2: Bloomberg ANIAF should not be considered as information sufficient upon

598
00:33:04,720 --> 00:33:06,400
Speaker 2: which to base an investment decision.

599
00:33:06,520 --> 00:33:09,480
Speaker 1: Neither Bloomberg Finance LP nor any of its affiliates makes

600
00:33:09,520 --> 00:33:13,240
Speaker 1: any representation or warranty as to the accuracy or completeness

601
00:33:13,280 --> 00:33:16,280
Speaker 1: of the information contained in this recording, and any liability

602
00:33:16,320 --> 00:33:19,000
Speaker 1: as a result of this recording is expressly disclaimed