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Topic: Risk

[Episode #135] – Internalizing Climate Risk

Climate change poses a host of risks to the global economy. From ‘natural’ disasters causing property damage, to climate mitigation measures rendering fossil fuel assets unburnable, to potential impacts of climate change on agricultural production, energy, food, insurance, real estate, and other sectors, it’s clear that private sector companies and all kinds of investments stand to suffer significant losses as a consequence of climate change.

Yet few regulations exist to require these risks to be recognized on balance sheets, or disclosed to investors, unlike many other everyday risks that are subject to such disclosure and protection. A home built in a floodplain and destroyed in a flood, or at a wildland interface and destroyed by a wildfire, has not seen its cost of insurance go up to reflect the rising risk of another loss due to climate change. Pension funds have not been required to evaluate the risk of their investments in oil, gas, and coal companies losing value due to future restrictions on carbon emissions. And entities like the U.S. Federal Reserve have been free to continue lending to fossil fuel producers even as they warn about the damage that climate change is doing to the global economy.

Clearly, it is long past time to recognize the risk of climate change across all sectors of the economy. We must begin implementing ways of measuring those risks, testing portfolios for their risk tolerance, divesting public money from the fossil fuel sector, and start implementing economy-wide ways of pricing carbon emissions.

To that end, in 2019 the U. S. Commodity Futures Trading Commission (CFTC) formed the Climate-Related Market Risk Subcommittee, and tasked it with producing a report to consider what climate-related risks might be; examine whether adequate information about climate risks is available; identify any impediments to evaluating and managing climate-related financial and market risks; ask whether the market can do a better job of integrating climate-related scenarios and use them to stress-test investments; incorporate disclosures of climate risk into financial and market risk assessments and reporting; identify how risks can be managed and disclosed in order to protect the stability of the financial system; and ensure that information about climate-related financial and market risks are internalized into the market.

On September 9, 2020, that report was released. In this episode, we speak with the chairman of the subcommittee, Bob Litterman, founding partner and Risk Committee Chairman of Kepos Capital. Bob has had a decades-long career in risk management, and has been a champion of recognizing and integrating climate risk for many years. We’ll ask him about what the report says, why it’s important, and how its findings might be used to integrate awareness of climate risk into financial metrics and enterprise governance.

Geek rating: 6


[Episode #114] – Cyber and Climate Risks

As energy transition progresses and more internet-connected distributed energy resources (DERs) join the grid, they increase the grid’s flexibility and dynamism, but they also expose those systems to the risk of being hacked. What kinds of protections do we need to have as grid modernization proceeds and more and more devices in the so-called “internet of things” (IoT) become part of the grid ecosystem? Should we be encouraging the adoption of smart, interconnected devices at all? Or would we be better off using devices that were not connected to communication systems in any way, to better ensure their security? And what are the relationships between cybersecurity on the grid, and the effects of climate change?

Our guest in this episode is a cybersecurity expert with the Idaho National Laboratory, part of the US Department of Energy, who provides strategic guidance on topics at the intersection of critical infrastructure security and resilience to senior U.S. and international government and industry leaders. He’s a longtime expert in this domain with a deep and wide set of relevant expertise, and you’re sure to learn a lot in this conversation about things that you probably didn’t even know existed, but that are intimately connected with grid security, climate change, and energy transition. Open your mind wide for this one – it’s a doozy!

Geek rating: 9


[Episode #68] – Environmental Economics

In an economy as large and complex as the United States, how can we tell when our efforts at energy transition are working? How do we calculate our carbon emissions? How do we know why emissions fell, especially if increased efficiency can rebound into more consumption, an effect known as the Jevons Paradox? How should we calculate the cost of damage due to climate change, and how we should choose the discount rates we use in evaluating investments to stop it? And even if we knew the answers to all these difficult questions, how should we act, given how little certainty we have about the future of the climate, and of the trajectory of energy transition itself? Can economic theory even help us plot a sensible path toward energy transition and climate change mitigation? Our guest in this episode has published extensively on all of these thorny questions, and we’ll discuss that research with him, along with his current research into solar geoengineering.

Geek rating: 7


[Episode #45] – Climate Science Part 3 – Paleoclimate

In this third episode of our mini-series on climate science, we talk with paleoclimate scientist Robert Kopp of Rutgers University about what Earth’s past climate can tell us about its future, especially where it concerns sea level rise. We also discuss his research on the relationship between climate science and the economy, and how a transdisciplinary approach using natural sciences, social sciences, engineering, and urban planning can help us tackle the challenges that climate change poses to the world’s coastlines…and how tools like the social cost of carbon and appropriate discount rates can help address those challenges, from New Jersey to Florida, no matter what Trump does with federal policy. Finally, we discuss how ratings agencies and risk adjustors need to start factoring in climate risk, and why they haven't so far.

Geek rating: 5