Video transcript
Teymoor Nabili 0:03
Hello there, and welcome to this first episode of Money Meets Mission. This is a new series of conversations brought to you by AVPN in association with Tech For Impact Asia. In these conversations, we’re going to be exploring the links and the spaces between the worlds of finance, investment, philanthropy, the environment, and social impact. I’ll be talking to leaders from across the spectrum of business, philanthropy and impact investing, to explore how they are putting their resources to work, tackling some of the largest and most complex social and environmental issues facing Asia. And today, my guests on this first episode are Alan Hsu and Dr. Philip Duffy. Gentlemen, welcome, many thanks for joining me in this conversation.
Philip Duffy 0:53
Thanks for having me.
Alan Hsu 0:54
Thank you for having us.
Teymoor Nabili 0:56
Alan is the managing director at the investment advisory firm Wellington Management, where he conducts fundamental financial analysis and research on utilities and the renewable energy and clean technology sectors. Phil is president and executive director of the Woodwell Climate Research Center. He was a former senior advisor in the Obama White House, and he’s very engaged in multiple aspects of the US climate policy. You can find full and detailed bios and descriptions of the activities of Woodwell and Wellington on the AVPN Money Meets Mission page, and at Tech For Impact. I’m not going to go into great detail about all the great work that they and their companies do right now, because our aim today, gentlemen, is to discuss the big issues and to benefit if we can from your individual expertise and from the collaboration between your firms. I think that’s probably a decent place to begin this conversation. Alan, I’ll kick it off with you. As an investment advisory firm, living in the world of high finance where quarterly results are one of the driving factors of what you do, where financial return is the key motivation for most of the companies in your business, explain to me a little bit about why we’re here, what you’re doing with Woodwell, and the connection between the investment world that you live in, and the environmental topics that are now dominating global conversation.
Alan Hsu 2:25
Yes Teymoor, thank you very much for having us. It really is an interesting time. And I do think that the singular reason that has brought us to this point or me here today really relates to this idea that climate or sustainability broadly are mispriced risks. I think that it’s really taken the investment community a very long time to recognize that sustainability, climate, carbon et cetera, however you wish to conceptualize it, has really gone from a thematic feelgood idea, invest because it’s a credential or some form of virtue signaling, to in fact this is a systematic risk. Whether you define climate as a physical risk, a transition risk or merely a reporting risk, it is a factor of sorts, a beta of sorts, that impacts companies and sectors across all types of asset classes. As a result, it represents something that is effectively systematic. It is a real risk, because you can see how it’s beginning to impair the ability for companies to grow. It impacts the existing asset values, it will influence how they invest, it will influence how we view certain business models, what is viable, what is attractive for our economies and societies writ large. So, this idea of climate being mispriced and actually representing a risk factor, more than just a thematic opportunity or thematic feelgood mantra, is really what fascinates me most today.
Teymoor Nabili 4:11
There is a very real and immediate financial value in looking at climate issues in the context of investment. Is there more to it than that? In engaging with Philip and his work, and with the overall topics at hand, are you also beginning to come around or thinking about the social impact of the kind of investing that you do, the broader issues and influencing the entire debate from a practical perspective?
Alan Hsu 4:38
Yes, Teymoor, so that follow-up question reminds me that I didn’t fully answer your first question. So, the collaboration with Woodwell really began several years ago, but it’s a relationship we formalized at the end of 2018. The very simple idea is to marry climate science and climate research with investment outcomes, because it was the foresight of some of our firm’s leadership many years ago that, increasingly, climate science, climate modeling, a discrete understanding of climate risks specifically, was going to be a differentiated source or driver for returns and investment outcomes and institutional portfolios, and that this would happen at scale. So being able to better understand and to bring to bear a differentiated way to apply research is what led to this collaboration. We have bi-weekly dialog between Woodwell research scientists and Wellington investors to better understand how their insights might impact investment returns. To your last question, the residual of that can be better social benefit. So if you, for example, simplistically can solve for things like climate, think about the benefit you may have for improvements in air quality, perhaps in some cases, solving for or alleviating the pressure or the problem around water scarcity, or addressing things like climate-related migration, we find that there are social benefits, but they stem from addressing what we perceive to be a systematic risk.
Teymoor Nabili 6:10
Great, thanks for that, Alan. Phil, what about from your perspective?
Philip Duffy 6:13
Well, a couple of things. From my perspective, first of all, the work with the investment community is based on something pretty fundamental, which is that the idea that human well-being and indeed prosperity depend on the natural world, and that we’re actually all more connected and more dependent on the natural world than we sometimes realize. And in particular, a really foundational idea is that a rapidly changing climate presents risks. One of the things that I really recognized over the years of looking at how changes in climate affect different societal sectors, is just that human systems, everything, our infrastructure, the way we manage natural resources, water, and so forth, all of it is very, very finely adapted to a certain climate, whatever it is. It’s not to say that the present climate isn’t optimal, and certainly in many parts of the world, it’s not optimal. But we’ve learned to live with it. And if it’s changing very rapidly, then we have to rethink all kinds of fundamental things. How do we build buildings? How do we protect ourselves? How do we grow food and make sure we have enough food? How do we manage water resources?
Teymoor Nabili 7:42
Let me interrupt you for a second. From the scientific perspective, obviously, all of that makes perfect sense. But as I said at the introduction of the show, one of the things that we’re really trying to do, and I think much of the planet is trying to do, is to interconnect all those different variances and variables that you talked about and more – one of which is how does finance and climate interact. How do we bring together those two elements and look for the spaces and the overlaps between them to make sense, in order to impact and bring us to the goals that we’re trying to achieve? From your perspective, as a scientist, do you think that engaging directly with an investment management firm is something that will fundamentally change the way we do things?
Philip Duffy 8:31
I do and as Alan said, I think this is very rapidly changing, but at the time that we started talking to Wellington and formed a relationship with them, there was a really big disconnect between the climate world and the investment world. One thing that’s clear, is that the climate change is here right now. We’ve just had this seemingly never-ending series of different categories of extreme weather events all over the world. Those things are having material impacts right now. And so the investment world, I think, is really rapidly grasping the idea that these physical risks are a now problem, not a future problem, and those risks need to be properly evaluated on price. At some fundamental level, that’s what the work we do is all about.
Teymoor Nabili 9:34
Let’s dig into that one a little bit more if we could Phil because Alan also mentioned the mispricing, the fundamental disconnect between appreciation, understanding and action in certain sectors. Let’s talk about the scale of that disconnect for a moment. I know it’s contentious. I know a lot of people will deny it. But as we watch heatwaves in the most unexpected places, as we watch flooding all over the world, tell me about your scientific perspective on the realities and the impacts that we’re seeing already, and the amount of response that we’re getting.
Philip Duffy 10:10
Scientifically, it’s actually quite interesting. All the things you mentioned, the wildfires, the extreme heat, the floods and so forth, these are all the sorts of things that we know will become more frequent with climate change. When an event like the ones you mentioned, when those events occur, scientists retrospectively analyze how much more likely did climate change make this event. And so there’s no question that climate change is tilting the odds for these kinds of events. But what interests me as a scientist is some of the recent events that we’ve experienced have been, not just record-breaking, but record-breaking by enormous margins, just off the charts. And that’s remarkable. I mean 121 degrees Fahrenheit temperature in Canada. It’s shocking. And the city of Seattle, similarly, set a new temperature record by some enormous margin. California last year, where I’m from, it was a bad fire year, but the area burned was more than twice that in any previous year. That seems to suggest that there may be something fundamental going on that even the scientists don’t understand. It suggests, it doesn’t prove, that that these sorts of extreme events are unfolding more rapidly than anticipated.
Teymoor Nabili 11:36
Alan, in the context of the gaps that Philip is talking about, do you see a similar situation in the financial sector? Do you see a big gap between the response and the preparation of financial companies and business in general to the kind of threats that Phil is talking about that?
Alan Hsu 11:53
Yes, absolutely, and in large degrees. If you were to boil down or distill the argument to a single idea, it is this – that there is no real price signal from markets that can even remotely quantify the magnitude of the problem. So, if you think about the nature of investments, there can be opinions of fair value, but the most objective construct in markets are prices. They can be wrong at times, and markets can be wrong at times, but they still represent the best of all of consensus’s views of reality at any given point in time. And when you think about the problems associated with climate, sustainability, et cetera, it is that there is no price to signal the liability associated with these negative externalities. So, think about the lack of a price on carbon. Think about the lack of a price on water. Prices are useful, because they allow capital to mobilize, to address inefficiencies. It creates a vehicle or a signal by which we can organize capital, and thus investment, to solve problems or to alleviate fundamental pressures, or to alleviate areas where you have effectively supply-demand mismatch. In the absence of these signals, you can get repeated, sustained, effective abuse of your natural felt environment and the resources that go along with it. So Phil, let’s talk a little bit about some of these dynamics.
Teymoor Nabili 13:26
How do we generate those signals? I mean, how can we get a really good handle on what those prices should be? Because the market’s not giving us those numbers. And you as a financial analyst, in particular, must be looking at the kind of data that comes from science, and wondering how best to put a marker on what it is that you’re going to decide on? Do you know what I mean? And this is, in a way, a question for both of you. Phil, how do you put out information that Alan can use? Because usually in science, you give a range of potential outcomes, you don’t give specific predictions. So, for both of you, how does one utilize climate data, climate science, in a financial decision-making process? Alan, you go first.
Alan Hsu 14:11
Sure. I’ll simply state that we have found significant value in Phil and his team’s research in identifying where there are climate-driven pressures that are effectively building, where we know there needs to be some form of remediation for that, that manifests itself in some amount of eventual investment. So you take, for example, what Phil’s comments have been about what’s happening in the Western Hemisphere. The snowpack levels basically reached 0% in California, as of June 1, the hydroelectricity that’s being produced is something like 70% below normal, and this is at a time when you’re running your AC more than ever because it’s become hotter. And so we recognized that these types of climate-related fundamental pressures can lead to eventual investments, whether near-term in the form of backup generation-type assets, or long-term in terms of finding substitutes for power that may not rely on hydroelectric and/or ways to make climate more resilient, or to make natural forestry or wildlife management much more effective. So that’s how we use their research.
Philip Duffy 15:20
Bridging the divide, if you will, between the research world and what we call the real world, the world of decision-making, the world of policy-making, it is a challenge, and it’s one that fascinates me, frankly, and it’s one that I’ve tried to spend most of my life working on. The reason it’s difficult is this: there’s no simple recipe for how to do it. What always ends up happening, and I’ve been doing this for decades, is it takes a sustained engagement between the scientific community, the research community and the decision-maker. What has to happen is each party has to understand enough about what the other party does, and how they do it, so that they can communicate effectively. So for example, when I worked with water resources in the western US. I have worked for a long time with water resource managers in California. I greatly enjoyed doing that, because it required me to understand: what are the issues they face, what are the risks that they face, what is the drought that will break their system. And then, with some minimal understanding of the decisions that need to be made, we as scientists can go back and produce information which is properly tailored to help make those decisions. It’s fun, but it takes work. And I don’t know any way to short circuit or short cut it.
Teymoor Nabili 15:34
Gents, I want to get on to questions of specifically how we can make the money meet the mission and the kind of actions we’re taking in real time to make a difference. But just before that, Phil, can I just ask, both of you have mentioned specific elements of climate activity that we have seen that are a cause for concern. But can we focus a bit more firmly on Asia for a second Phil? Give us a sense of what the threats are in Asia, that we could be preparing for from a financial perspective. What is your mapping telling you about the trajectories in this part of the world?
Philip Duffy 17:33
Sure. And I’ll mention that Woodwell Climate Research Center has contributed to some work done by McKinsey and company, specifically on climate impacts and risks in Asia. McKinsey released a report on this in November 2020. Our role at Woodwell was to model the physical risks and the folks at McKinsey translated, if you will, those physical risks into socio-economic consequences. But, to answer your question, some of the key risks – and obviously Asia is a big place, and so one thing is obviously the risks are different in different locations – but some of the key risks, particularly in South Asia, Southeast Asia, heat and humidity are really significant risks. And obviously, those two sub-regions I just named are already hot and humid, but we project rapid increases in heat and humidity. One of the impacts of that is simply outdoor labor, the ability to work outdoors. In those regions, their economies are strongly dependent on outdoor labor. We project losses in labor output because of extreme heat and humidity and even lethal heat raises, by which I mean conditions where it’s simply not safe to merely sit outdoors in the shade. It can get that hot and we project that it will get that hot.
Teymoor Nabili 19:20
Are there more specific areas that you have predicted as being particularly vulnerable?
Philip Duffy 19:25
To heat and humidity, South Asia, the Indian subcontinent, Southeast Asia, and again, this is detailed a bit in the work done by us with McKinsey. So, heat and humidity is one risk. River flooding is a significant and rapidly increasing risk. In some regions, typhoons, tropical cyclones, hurricanes are a significant risk, storm surge and flooding associated with those. Obviously, those are risks in coastal regions. And another risk in Asia is grain yields. With climate change, we project increases in year-to-year volatility in grain yields, not necessarily systematic reductions but year-to-year volatility. And volatility in yields is not great. It just makes things more more unpredictable. The other thing I would mention is, Australia is somewhat different from other parts of South Asia, but obviously in Australia we’ve seen terrible wildfires, and that’s not a coincidence. That’s not a one-off. We project really enormous increases in wildfire risk and drought risk. Unfortunately, those tend to occur within Australia in heavily populated regions, particularly in the South and Southeast.
Teymoor Nabili 21:09
Let’s take those concerns and those warnings, Alan, and translate them into some kind of activity. How do you use that information to create an investment thesis? Talk us a little bit through your process, and how you act on this stuff.
Alan Hsu 21:24
Sure. Adding on a little bit to what Phil has said, if you think about some of the water shortages in Taiwan that have contributed in part to the inability to produce sufficient semiconductors by TSMC for the rest of the global economy, it has impacted multiple sectors. If you think about air quality, or air pollution in areas or over areas or originating in countries like [the People’s Republic of] China or India, and how that can permeate quality of life for people in the surrounding areas, all of these types of examples Teymoor can lead you to what are the types of products or services or technology that may be required to remediate some of this. So, it has led us, not just in our strategies, but as a firm to contemplate more seriously as an almost strategic type view, how do we think about agricultural technology, the type of agriculture technology that can improve crop resilience or crop yields? How do we think about the need for air conditioning, or HVAC technology, as the world is getting potentially more indoors to offset or to avoid some of the heat and or to help cool? How do we think about water infrastructure and water technology? Because shortage seems to be a problem that’s getting more acute virtually everywhere. Being able to pair or marry a lot of the insights from Phil’s team at Woodwell with how might this impact investment portfolios is what we’re attempting. The important thing is that what used to be viewed as one-offs is becoming effectively repeatable. You could tell yourself 10 years ago, it’s just one wildfire season, it’s not going to reoccur, and then you start seeing them happening year-after-year and in different places – not just California anymore, but in Australia, now in Canada, Western Canada. You begin to recognize that this is a repeating pattern that is going to require sustained investment and a sustained way to curate your portfolios.
Teymoor Nabili 23:20
But you’ve identified specific verticals, haven’t you, as to where you think the impact is most going to be felt? Tell me about that.
Alan Hsu 23:26
Yes, precisely. Very broadly, we think about the investment opportunity as climate mitigation and climate adaptation. So there’s a longer-term problem around helping to decarbonize, to lower the carbon intensity of economic growth. And that’s, broadly speaking, what we think about when we think about mitigation of climate risk. But then there’s climate adaptation. This is a nod to the reality that there is some amount of climate risk that has been introduced into the physical world that is effectively inescapable at this point. Or it’s a nod to the reality that no matter how much you spend on mitigation, you may not be able to reverse sufficiently over time. And so you need to have ways to develop resilience, whether it’s in mitigating flood risk or water scarcity or air pollution et cetera that over time can make the quality of life better, or help the global economy to navigate changes in the physical environment. That’s a really important point. Anticipating risks and taking steps pre-disaster to mitigate risk is is really, really important. And right now, we’re not doing that very effectively.
Teymoor Nabili 24:41
But to what extent Phil? I mean, the scale and the intensity of the events that you’ve been talking about, you really have been pushing home the idea that we haven’t paid enough attention to how great the threat is. To what extent then, is mitigation and resilience activity the answer? Here in Singapore, as you know, we’ve been raising the road levels to try and compensate for the potential rise in sea levels. But ultimately, is it going to get bad enough, such that no amount of mitigation is going to be enough? Or that the amount that is going to cost to put in those measures of mitigation and resilience is going to be even more than we can afford?
Philip Duffy 25:25
That’s correct. In some locations, that’s correct. I can give you this example: New Orleans, 2005, Hurricane Katrina, massive flooding. We know that climate change plays a role in intensifying hurricanes. So, in response to that event, $14 billion was spent on upgrading levees for the city of New Orleans. Now that amount, $14 billion, translates to $35,000 for every citizen in New Orleans. Our research at Woodwell shows that the new levees would now be overtopped, or one of the major ones anyway would be overtopped, by a 1-in-100 year event, which is not a high level of protection. The Army Corps of Engineers actually disputes that, although they agree that what I just said will be true next year. So effectively, $14 billion has been spent and that bought 15 or 16 years, arguably. Is that a cost-effective investment?
Teymoor Nabili 26:32
I think the answer is fairly evident, isn’t it? But Alan, from your perspective, I guess you have two investment opportunities here. One is to invest in the kind of infrastructure companies that are making those resilience measures. But if they’re only going to be short-term, then what about the longer-term prospects? What does one invest in, given the realities that Phil has described?
Alan Hsu 26:55
I think that the idea would be that we are becoming more realistic about the problem and the magnitude of climate resilience and climate risk. And so I think that the idea would be that, as the climate research and the climate science community is better able to engage with policy makers, that the kinds of investments that we should see going forward are capturing this idea that you can’t just solve for something that is a little bit more tactical. As a result, the type of investment that maybe you would have seen in the aftermath of a Katrina, over a decade and a half ago, would today be something that is more ambitious, is attempting to solve for many more years, many more standard deviations of risk. This is the way that I would think about it. You’re still going to need things like flood management systems; you’re still going to need things like hurricane resilience, whether it’s in your housing materials, your building materials, your construction materials, but the degree to which it is being used to fortify physical assets et cetera presumptively will be higher and greater over time. So I don’t view those types of investments around adaptation as themselves being short-term in nature. It just gets to the idea that these problems are significant, that they’re getting worse, and that you have to think much more comprehensively about how much you wish to address them. It very well may be the case that, over time, you begin to view certain locations as being so at risk that that no amount of capital spent to create resilience is necessarily a better use than simply thinking about a path toward some type of migration. I’m not suggesting that you’re going to see this unfold in the immediate term, but I think in the intermediate horizon, that is not unrealistic. And so this is going to, we hope, kick off.
Teymoor Nabili 29:03
Sorry, what is not unrealistic? The migration of people?
Alan Hsu 29:08
Exactly. It’s not unrealistic to say that at some point, you decide this location is so at risk that, whatever we spend to make it more resilient, is not better than spending capital to migrate, to go to a different location. I don’t think that that’s unrealistic, even if it’s uncomfortable to contemplate that’s possible.
Philip Duffy 29:30
It is uncomfortable to contemplate; it is happening. I use the example of New Orleans. The population of New Orleans is less now still than pre-Katrina. The other place where climate-induced migration is happening, or in a very, very unsatisfactory manner is Alaska, and in the Arctic generally, but from the perspective of the US, it’s happening in Alaska where villages, especially coastal villages, are susceptible to erosion, permafrost thaw, and are facing the need to simply relocate. The government isn’t set up to help them do that. It’s not working well at all. I’ll add another point. Despite the example of the warnings which I just gave, it is true that, in many cases, well-designed adaptation spending upfront is very cost-effective. I think that’s an overriding point, that investing money pre-disaster can save multiples of that amount of money in terms of post-disaster spending.
Teymoor Nabili 30:50
Look, gents, we’re talking about rearguard action here. We’re talking about fighting what we assume and already see to be happening. But what about prevention Alan? Are you investing in anything? Are there other positive investments that you can make? Are you investing in solar capacity, battery technology, wind capacity, all these kinds of things to try and perhaps lessen the potential climate change?
Alan Hsu 31:15
Yes, absolutely. And we would categorize those as climate mitigation investments. So, there are a number of ways to both decarbonize the supply side of energy – electricity, moving from coal to solar and wind; transport, moving from gasoline to battery powered electric. Those are ways of decarbonizing supply. There’s also ways of improving the efficiency of demand. So, can you get the same amount of, let’s say, lighting illumination, but use fewer kilowatt hours to produce the same amount of technology? Improved products are all helping in this regard. One of the problems though, and I’m sure Phil can speak to this, is that you oftentimes may not recognize some of the risks associated with climate until it is really staring you in the face. I would say that Phil’s team, their research has probably identified for many, many years, the building risk of wildfire crisis that you’re now seeing, that now people fully understand. But it’s almost the problem that until people see it happen, and it’s really right in your face, it becomes difficult to make the types of investments, because before the problem gets horrible, it almost feels like – again, not our view – but the problem with these types of issues is that it almost feels like an unnecessary type of tax or expenditure to devote billions and billions and billions of capital to solve a problem that isn’t obvious. So one of the problems we have is we wait for things to become obvious before we sufficiently attempt to address them. And I think that’s really the problem that we’re going to see going forward. That’s why we find their research to be so useful in incorporating it into our investment processes.
Teymoor Nabili 33:05
Phil, you’re not an investment guy, you’re a scientist, but from your perspective, as a scientist, are there specific things you think the investment community should be doing right now? Where would you prioritize the activity, and not just firms like Alan’s, but impact investors, we’re seeing that area of social impact investment growing and growing – what do you think the focus should be on?
Philip Duffy 33:31
I would say this. For decarbonization, and this is what we need to do, we need to decarbonize the global economy. There are a lot of things we already know how to do, which we’re not doing. I mean, the electricity sector could be relatively easily decarbonized with technologies that we have now. And anything that would facilitate that, that would drive that forward, would be useful. But the other thing is, there are still unsolved challenges in terms of decarbonization. How do we decarbonize aviation, heavy industry, shipping? There are some really interesting technological challenges that need to be solved, and to the extent that the investment industry can help make capital available to address those challenges, that’s extraordinarily useful.
Teymoor Nabili 34:29
Not just this big picture, 30,000-foot level Phil. What about a grassroots level? AVPN is a philanthropic organization. There are many, many micro non-global activities that are going on. What are the areas do you think, given the social changes and the demographic changes that you’ve touched upon already, where should the attention be from the financial areas that are not massive global enterprises, but much more grassroots?
Philip Duffy 35:00
What’s been powerful in the work that we’ve done so far, not just with Wellington but with other folks in the private sector, is just looking at the physical risks. What’s been powerful about that is it opens people’s eyes to what’s at stake, and not only provides information on how to prepare but it is a very, very powerful motivator. When people really see what’s at stake, when they look, that can be transformative in terms of attitudes. Maybe you would agree or not agree with this Alan, but my impression is that folks at Wellington, in the course of the last several years of really digging into these risks, have become more and more impressed at just how much really is at stake.
Alan Hsu 36:00
Absolutely. I’m generalizing a little bit, but I think that the broader investment community, and this may be true to some degree at Wellington, many many years ago would have eyed a lot of this research angle a little bit more cynically. But the reality is, what has happened has brought to bear or made obvious how insightful taking this perspective is. Many many years ago, you didn’t have the pervasive wildfire problem in California, you didn’t have abnormally low water level surrounding Taiwan, you didn’t have the bushfires in Australia. You’re now starting to see repeated episodes, which has turned I think broader, perhaps, skepticism in the investment community to one where, at the very least, there is an open-mindedness that these issues really do matter.
Philip Duffy 36:55
One thing that’s important to me – which we’re starting to do in our work with you, but there’s so much more to be done – is to look at what you might call the second-order effects or the ripple effects of those risks. It’s easy to focus on wildfire risk, this is the real estate at stake, this is at risk and so on and so forth. That’s one level of analysis but the other level of analysis, which interests me a lot, is what are the broader societal ramifications? Again, say for California, what are the ramifications of wildfire risk, smoke, power outages? I think we’re starting to see that combined with the ability for people to work remotely. Well, I know, in fact, we’re starting to see out-migration from California of the wealthy, of highly educated people, and we’ve never seen that before. It’s historically been the opposite, wealthy educated people converge on California. Now that flow is starting to reverse. And what are the ramifications of that? I think it’s just incredibly profound, and that’s just one example. But that sort of thing is going to start happening all over.
Teymoor Nabili 38:16
Alan, let me just finish off with a couple of questions for you from the action perspective. Here in Asia, we are seeing an awful lot of activity. We’re seeing companies like yours, we are seeing impact investors, we’re seeing philanthropic investors, trying to address the issue, albeit only just getting into gear. But there’s still a massive shortfall here in Asia of funds that we have already identified as necessary to do the work. How can we begin to better mobilize the capital to do this stuff? What kind of advice do you have for others in the financial field as to what they can do?
Alan Hsu 38:51
It really does begin by expanding your research process. I think for us, if I were to go back and audit the steps that we have taken to get here, one would be to seek broader sources of research, the partnership with Woodwell incorporating the climate research and the climate science. That happened before it became obvious. We had a collaboration, an informal one, before you started seeing this series of wildfires and a lot of these other episodes that we’ve discussed today. So, that is almost step one. The second thing would be to begin to think very broadly about the physical attributes or the physical dependencies of your companies. I don’t think people would have thought a year ago that actually TSMC, the world’s largest semiconductor company, actually needs plentiful water in Taiwan. What happens if you have the lowest level in 100 years of water availability around the island of Taiwan? How does that impact your business? So thinking about that, if you are a business that is energy intensive or process intensive, think about what it means if you were to run through some assumed carbon price or carbon tax through the P&L of a business. How might that affect fair value? So being able to think broader, more expansively, and incorporating other viewpoints, I think is what has helped Wellington to get to the point where we are today. I’m not suggesting that we have it all figured out. There’s still much more to go. But I think that, to me, is sort of steps one through three.
Teymoor Nabili 40:21
Just a quick follow-up on that. The regulatory landscape is changing, and the pace of change there is likely to accelerate into the future. From your perspective, that has a couple of impacts. One is that you’re going to have to deal with a very uncertain environment when it comes to regulatory action on the financial side, but also the other is, you must also want to encourage regulatory action. How do you think we should engage with regulators? And what should be the next step?
Alan Hsu 40:49
Regulation and policy and incentives are all a part of this mix of carrots and sticks, as we like to think about it in terms of encouraging the right types of outcomes. Carrots are incentives, things like subsidies. Sticks are things like regulation or policy. What we want to do is encourage the types of outcomes that we think are the most effectively capital efficient. That includes having a view to negative externalities that have been generated. So being able to work with, in some cases, regulators, we engaged with many of them during the California wildfire situation as an example, to just describe – and again, with the acknowledgement that these are very thorny problems, that there are many more multiple perspectives that have to be brought to bear – but being able to work with regulators to just recognize where are the real pain points, how do you go about addressing them or solving for them in a capital efficient way – which we think, if you include these negative externalities, we think over time can lead to good outcomes or better outcomes?
Teymoor Nabili 41:53
And, Phil, final question to you on that issue too. On your website, it says specifically that your company sees a clear need for a standardized and transparent climate risk disclosure framework. So, just give me a word of what what do you think that framework should look like, and how likely do you think the regulators are to actually impose one.
Philip Duffy 42:13
Oh, I’m optimistic that they will. But what we have in mind there is just very, very simple. Firstly, that risk need to be disclosed, and it’s only helpful if that’s done in a way that’s standardized across companies, so investors can compare the risks of company A to company B to company C. But we also feel that it should be done in a way that’s transparent, that the methods should be made public, should be available so that one can assess the quality of the disclosure. And I do, frankly, have a concern that, without that, there will be a race to the bottom in terms of quality of disclosures; that the process of doing the disclosure and the assessment will become commoditized and the quality will suffer.
Teymoor Nabili 43:11
Gentlemen, it’s been a pleasure talking to both of you. Thank you so much for providing your insight and wisdom. And to your final point, Alan, I really also do hope that we’ll see more financial firms beginning to consult with scientific firms in order to guide their activities and help us through all this. But once again, thank you both for being on this episode of Money Meets Mission.
Philip Duffy 43:33
Thanks for having me.
Alan Hsu 43:35
Thank you very much.
