Transcript 0:00 [upbeat music] Hi, everyone, and welcome to Climate Proofers, the show all about those on the front lines of adaptation finance, tech, and policy. 0:13 I'm Louis Woodall, the editor of Climate Proof, which you can read at www.climateproof.news. 0:19 Another Climate Week NYC is in the books, and I'm seeing the usual avalanche of posts about how folk are energized, thrilled, excited, and encouraged by the events and conversations they had in the city that never sleeps. 0:31 For me, this Climate Week was a quiet one. Having a five-month-old baby and a content backlog the size of the Empire State Building necessitated this. 0:38 But I won't pretend, I also didn't have the same fire in my belly this time around anyway. 0:43 Arguably, the joy of Climate Week is the concentration of climate folks all in one place, and the reunions and IRL connections that professionals who don't often get the chance to speak with their peers in climate world can indulge in. 0:55 Unlike most attendees, though, I'm always talking to people in adaptation land, so don't have the same level of FOMO that others may have. 1:02 Also, and again this is obvious, but at least in the public-facing parts of Climate Week, such as the panels, the conferences, and so on, most people are talking their own book, promoting what they want to or what they're paid to promote, and often engaging in violent agreement with one another. 1:17 These kinds of displays are certainly helpful to those who want a morale boost, as it reaffirms for many isolated and poorly supported professionals that they are not alone. 1:26 But when it comes to generating new ideas, new perspectives, and yes, selfishly, new stories to pursue, I find these less useful and less interesting. 1:35 This dynamic, though, makes the occasional exception all the more exciting, and that's what I have to share with you today. 1:41 It's a live recording of a panel event hosted by Climate Proof and Earth Finance titled Securing Growth in a Resource-Constrained World. 1:48 My guests were Joanna Millstein, senior earth scientist at Earth Finance, Ben Caldecott of the Oxford Sustainable Finance Group, Ron Stimol, one of Amazon's first energy hires and a former CEO of floating solar developer Norea Energy, and Lisa Sachs, the director of the Columbia Center on Sustainable Investment. 2:07 While the event was nominally about the importance of place-based analytics for understanding climate risk and adaptation strategies and how spatial finance approaches can help with this, as you'll hear, the conversation went down some intriguing and occasionally controversial avenues. 2:21 Lisa Sachs sounded off on what she called the conspiracy theory behind the last 10 years' worth of climate disclosure and regulation. 2:27 Ben Caldecott got heated on green taxonomies and sustainable finance's pivot to nature risks and opportunities. 2:32 And Ron, Joanna, and I got into the weeds of the data center build-out and why climate risk may not be a factor in hyperscalers' investment strategies. 2:40 It makes for a compelling listen, although, this being a live event, there is some cross-talk and clunky transitions. I've done my best to edit these out and use the whoosh sound effect to indicate where I've made cuts. 2:50 But do be gentle with me on this. Live recordings are never the cleanest, after all. 2:54 Before we get started, my weekly reminder to all you climate proofers out there to please give us a star rating on Apple Podcasts or Spotify and drop a review too if you have the time. 3:04 Also, remember, you can get lots more climate adaptation finance, tech, and policy content by becoming a Climate Proof member at www.climateproof.news/upgrade. 3:14 Not only do you get more, it really helps keep the lights on here at Climate Proof HQ too. Right, in a minute the panel recording, but first a rundown of last week's top adaptation and resilience stories. 3:24 [whoosh] In finance, Christian Aid has launched a social impact investment fund to help small businesses in the Global South adapt to droughts, floods, and other climate hazards. 3:33 The Resilient Futures Fund is targeting some twenty-six thousand dollars in assets under management by twenty thirty, which it plans to deploy through specialist impact investors as well as its own direct lending book. 3:44 Partnership agreements have been signed with Talanton and Blue Orchard, two major impact investment funds. 3:50 [whoosh] In policy, the United Nations reported that one hundred and thirty-six countries now have multi-hazard early warning systems, up a hundred and forty-three percent from twenty fifteen, though the figure still falls short of its twenty twenty-seven goal to provide warning system coverage to the world's entire population. 4:06 One third of countries still lack any kind of early warning systems, and fewer than half report comprehensive systems providing weather forecasting, alert communications, and preparedness in an end-to-end package. 4:17 The UN says countries with comprehensive systems see disaster mortality rates six times lower than those without. 4:24 [whoosh] And in tech, sustainability data company Clarity AI has merged with Glass Lewis, the proxy advisory firm, in an effort to bring institutional investors a unified platform for ESG information and shareholder engagement activities. 4:37 The transaction closed on September twenty-third. No financial terms were disclosed. 4:42 The combination represents a bet by Glass Lewis on the European market, where Clarity AI is working to achieve authorization under the EU's ESG ratings regulation, which would put the merged entity in a position to capitalize on tightening investor stewardship requirements across the block. 4:57 [whoosh] Right, that's it for this week's roundup. Now let's get to the conversation. [upbeat music] I'm Louis Woodall. I'm the editor of Climate Proof, which is a publication for those building the adaptation economy. 5:11 Uh, every week we cover finance, tech, and policy relating to how organizations of all types are preparing for a hotter, wilder world. 5:20 It's a pleasure to be here at Ink Forty-Eight in this moodily lit room with, uh, finance, uh, for the panel Securing Growth in a Resource-Constrained World. And now is a good moment for this panel. 5:33 Across the economy, growth plans are running into physical limits, grid connections that take years to secure, water basins under strain, and infrastructure that was never built for the climate that we have today. 5:45 And these constraints don't show up evenly. They land on specific sites, specific assets, and specific balance sheets, and most traditional risk models and approaches fail to capture, capture them 5:56 So that problem and how to solve it w- is what Climate Proof and Earth Finance, uh, explored together in a recent report, how spatial finance can create competitive advantage across the energy, water, food nexus. 6:08 Uh, that report makes the case for spatial finance, combining geospatial data, AI, and financial analysis so that physical and transition risk can be measured at the asset level. 6:18 If you haven't read it yet, I do encourage you to download a copy by heading to www.climateproof.news. 6:25 We have a strong panel to take these ideas further and talk more about, uh, the approaches to dealing with a resource-constrained world. Uh, I'll ask them to introduce themselves, starting off on my left with Joanna. 6:36 Yes. Uh, thanks, Louis. My name is Joanna Millstein. I am Earth Finance's Senior Earth Scientist, and so I will be speaking today from my, uh, career as a physical climate person. 6:49 So I did my PhD in climate geophysics at MIT, which oftentimes you think of geophysics as much more traditional oil and gas exploration, but I was focused on glaciers and coastal change, the soft things that deform. 7:03 Um, and then I worked at Colorado School of Mines as a postdoc and then research professor, and now I'm here at Earth Finance. Physical climate person, that's a cool title. [laughing] Uh, Ben. Hey, guys. 7:14 Um, Ben Caldecott. I'm based at the University of Oxford. I run a research group there focused on finance and sustainability. 7:21 Um, over the last, I guess, ten, 12 years, we've done quite a lot of work on social finance and asset level data, and also integrate geospatial into financial decisions. So it's great to be here to talk about this issue. 7:33 Thanks, Ben. And to Ron. Thanks for having me. I'm Ron Stimel. I'm an energy guy for renewables and climate. 7:39 Um, I was the first energy guy at Amazon, um, helped build most of Amazon's renewables programs over, uh, around the world for ten years. 7:47 Uh, and then s- uh, operating partner for PD Fund, and then, uh, CEO of a solar company, um, that I can't claim credit for inventing, but, um, led, um, Aurora Energy, uh, which was re- acquired a few months back. 8:01 So, uh, as Lisa likes to say, I'm unemployed. [laughing] Did you say that, Lisa? Lisa, Lisa, are you all employed? No, I didn't say that, um, for at least for the moment. [laughing] I am. 8:12 Yeah, um, I, I'm gonna, I'm gonna continue the nice short things. I would say I'm a systems person, um, to complement the energy and the data. The finance person, I'm looking forward to bringing that perspective. 8:23 I'm an associate professor at Columbia Climate School, um, and for 18 years have directed the Columbia Center on Sustainable Investment, um, which is very much an applied center trying to, um, to build the world that we want, understand what shapes it, what do we need to understand, and then how do we make it financial and buildable. 8:40 Fantastic. A well-credentialed panel. I always think it's good when I'm the, the least credentialed person- [laughing]... on a panel. 8:46 Uh, what's gonna happen, I'm gonna ask some prepared questions, and then ten minutes towards the end, I'll open it up to Q&A. So I do encourage you, if you have questions for our panelists, do, uh, think of them now. 8:54 I'll be calling around, peeking at people if there, if I don't see any hands raised. [laughs] So, uh, get thinking. And then, uh, Garrett's gonna, uh, um, provide some comments at, at the end. 9:03 I'm gonna start then by turning to Lisa. Uh, and Lisa, I'll be honest, I've been following you for a while, read a lot of your papers. 9:10 Your LinkedIn is a, it's a treasure trove of controversy and insights, [laughs] like in equal measure. And I wanted to ask, um, for your thoughts on, on this resource constraint world idea, right? So what's... 9:22 We've always lived in a resource-constrained world, but what's changed now? Uh, how do resource constraints brought on by climate change and the scramble for energy translate into financial risks? Yeah. 9:31 Thank you so much. Um, and [laughs] I apologize when I walked in that even if this was a prepared question, I was not prepared with an answer. [laughing] So I'm gonna, um, um... 9:40 But so grateful for the question and for allowing me to, um, tweak it slightly, um, which is why, why my LinkedIn is controver- is, is, um, claimed or said to be controversial, um, is because I s- I think I see things from a different vantage point than some of the, um, 10:00 more mainstream narratives do that approach how we understand different parts of the challenges we face from the, the traditional silos, I would say. 10:10 That's a pejorative way to say it, but from the institutional perspectives that we're trained in. 10:14 So finance sees things from a financial perspective, different companies see it from corporate perspectives, policy per po- And we approach what are inherently systems challenges that require systems thinking and system solutions, um, in very siloed ways. 10:28 And when you look at a problem through a lens like this, you think you can see the problem, you think you can see the solution. 10:33 But actually, when you can see how it's shaped by systems outside that lens, you might, and often do, locate both the challenge but also the solution outside that field of view. 10:44 So having had the opportunity to learn about and work in many different sectors and geographies and seeing international finance and financial institutions and think about things from, and from the perspective, what's the world we're trying to build, not what is the world as it exists. 10:59 I just see things in a different way. So I'm, I'm an, I'm just constantly trying to better understand things, but it's true that that is different from the conventional narrative. 11:07 So that's how I would describe what I'm trying to do on my goodness. I, I think that the way that we've been approaching our understanding, even of risk, um, is, is setting us up for some conflicts, actually. 11:20 And so maybe my short answer to your question is, um, the ways... 11:24 I think the question is right in that resource constraints are, um, [laughs] are growing, but so too are the systems that we're trying to build fundamentally. 11:33 And so I think we sh- I don't look at it just as the quite serious, um, increasing physical constraints and the, um, very serious climate, 11:46 um, related intensified physical impacts and water scarcity and heat and all of the very real effects that are shaping our systems, but that the energy systems that are working within mobility, the cities, everything, the way that these systems are gonna look is different. 12:02 And so the question to me is how do we build the systems that are better because they're more efficient and resilient- Um, affordable, accessible, flexible, create value in different ways, and are resilient to these changes. 12:14 Um, and that requires a lot of understanding of the physical environment, of what the changing risks are, but also how these systems are gonna be changing. Um, so that's, I, I think, what I... 12:25 I think a, a good way to think about risk wouldn't just be how are these physical changes gonna change how I quantify the value of an asset? 12:35 A, a better way, I would say, to look at it would be, how are the change in nature, the physical, 12:41 it, you know, changes which are serious, but also the changing systems, how does that either affect my current portfolio, but even better, how should I look at how to create value and build a resilient asset portfolio looking to the future? 12:56 Mm-hmm. Yes, we have these planetary risks, and then the sec- section with the systems we have is, is where some confusion, some analysis has to take place. 13:04 And it's a good point you make that the systems that we're operating are always changing, especially you can see it in real time now with the AI build-out, data center build-out, our energy system is changing so, so rapidly, and that means that these risk profiles and opportunity profile vis-à-vis physical risk is changing too. 13:19 Uh, and then I want to use another, I know the panel to kind of jump on this as well and talk about how a resource-constrained world kind of bumps up against our need as a society and as businesses to, to build adaptation and resilience and, uh, yes, get those resources we need so to 13:36 hang on, you know, in a warming world while the wetter and warmer. Yeah. Thanks, Louis. Um, so I was mulling that question, um, on the way over, and I think the way you framed it I thought was quite interesting. 13:50 And it's essentially you've got, um, you know, these, these escalating risks. 13:54 We've had, you know, at the start of this El Niño season, we've had a terrible set of heat waves in, in Europe and in other parts of the world, um, this, well, most of the summer. 14:04 Um, clearly this is, this is, this is happening. Um, and people, I think, are seeing a need for adaptation and resilience in a way that they perhaps didn't before. 14:14 Um, and that's gonna have an impact on, um, on price stability and inflation, right? 14:20 So, uh, yeah, I think the way you framed it was, you know, there's this demand for adaptation, and then you have the, this, this pressure through physical climate impacts. 14:28 And, and what happens then is that you have, you have inflation, you have higher interest rates, that affects the cost of capital. 14:34 That's gonna make it harder, um, to do the things that we need to do on the transition, but also in terms of getting the capital to flow into, into adaptation. 14:42 And so when thinking about all of this and the geospatial capabilities that are coming online, I think this becomes a sort of question of how we can bring on the supply of, um, resilient solutions efficiently, um, and, and how can we use technology to do that. 14:59 So it's not just about, uh, hard infrastructure that needs to happen, which can take a long time and can be quite expensive. It's also nature-based solutions. 15:07 It's also optimizing systems so they can be much more resilient and using AI to, to try and do that. 15:12 And also, critically, and this is again another area where spatial relationships are really important, is avoiding maladaptation, you know, making the problem worse. 15:20 Um, and you can only really understand that when you are thinking, you know, to Lisa's point, you know, you, you, you're looking across systems. 15:28 Um, and I think, uh, geospatial information helps you, helps you do that actually in quite a powerful way. Mm-hmm. Yes. 15:36 One way to deal with a resource-constrained world is to somehow get more resources, but the other is to become more efficient with the resources we have. 15:41 And you make a good point that technology can help us pinpoint exactly where to make the interventions that make a difference and how much consumed resources are needed to make those interventions. 15:50 Um, Ron, I want to turn now from the macro to the micro here and ask how resource constraints are manifesting when it comes to energy access and the grid, and why location is so important when thinking about this. 16:03 Well, um, if, if you technically have a, a, a constraint in supply to liquid, then prices just rise to utilize everything else. 16:11 But right now we've got a physical constraint that makes the size of that wire, transmission, distribution wire, we just, we just can't stuff enough capacity, enough energy through it. 16:21 So it's, um, it's, uh, it's something that a market alone can't fix immediately. So y- you're, you use the right term capacity, not energy. 16:28 It's not an energy problem, and we can always make more energy in, in the grid, but you just can't get it to where it needs to go right now. And, um, so how that's manifesting itself, um, is, uh, is it's delays, right? 16:44 So right now the, the finding, finding, um, f- in the data center world, for instance, you're getting, um... 16:52 It used to be permitting was the slowest, uh, part in the, in the chain, but now it's finding places to put your extension cord into the grid. 17:00 Uh, or getting, putting, you know, finding the transformer, the grid equipment that's large enough so you don't break the grid, uh, when you deliver that, that energy. Um, did that answer the full question? 17:11 I was wondering- There, there are a few parts to that question. Yeah. I was wondering if you could talk about the, how 17:15 the importance of location might be increasing the cost of the grow- grown out capacity and why location, how location can bring its own risks and opportunities. Gotcha. Thank you. 17:25 Um, so in energy, location's really everything, and it's not just resources, like it's sunny in the Southwest or, you know, Pennsylvania has a lot of scale, for instance. You know, there are lots of layers. 17:36 So there's the natural world, there's the physical infrastructure world, like transmission, which I just mentioned. Uh, there's the policy world. 17:43 So even if it's really sunny in Arizona, it's not the best place to put solar, for instance. 17:48 Uh, and then there's an economic layer, which is, uh, with solar as another example, like behind the meter rooftop solar for, uh, an Amazon warehouse, for instance. If you're, you're... 17:59 It's, it's economic to put solar if it's, if the price to beat getting grid provided energy, retail energy is high. 18:07 So you're deeper in the money for a given solar project if, if your, your incumbent, uh, electricity rates are high. So you've got all these location-based- Uh, factors. 18:17 And, um, an- anecdotally, I, I remember I was, I was, you know, first Amazon guy who knew what a, a megawatt was. [laughing] Um, I, I think that's probably true. Um, uh, back in 2012. 18:29 And, um, uh, the re- the real estate team was, um, across the aisle from me. Classic lease situation. 18:36 [laughing] The, uh, the, the real estate team was across the, the hallway from me, and they were like running, you know, figure out an energy supply, whatever strategy for this, um, go on and do it. 18:49 Uh, and I said, "Well, actually if you, if you lease the, the facility across the street, you'd be in a different utility service territory, and that would give you more access to clean energy options and different rate structures, et cetera and so forth. 19:01 Energy efficiency rebates, uh, and the list goes on." And that's just, you know, one slice of an example. Wonderful. 19:07 So that granularity could actually change an entire, like, the, the financials of a, of a decision when it comes to energy. It's nice and fascinating. Um, Joanna, you've been very patient. 19:17 I was wondering if you could, uh, jump on what Rob was talking about and the importance of place-based assessments for physical and transition risk. Yeah. Um, 19:25 I think that place-based assessment, uh, again, quite obvious it's, it's the ho- it's the where your decision begins. But, uh, as it relates to physical risk, I think the easiest answer is just that, uh, 19:38 physical risk cannot be an average. Uh, climate risk is so systemic and really unlike, 19:46 I don't know, I guess portfolio theory says that if you take a risk and spread it around, that you've covered your bases, whereas these things come together in the climate system and escalate. 19:56 And we've, again, seen this this summer. And so in the past decade really, uh, it's, it's amazing how quickly this has happened, uh, earth observation has just exploded. 20:07 Um, and we've seen really exponential growth in the really public goods that exist in terms of satellite data, uh, snow measurements, tide gauges, uh, private constellations. There's just a lot of information out there. 20:22 And so data's no longer this limiting factor. Uh, we... 20:28 You can get at the granularity now quite simply of your yard has greater wildfire risk than your neighbor's yard because of shrubbery or utility exposure, what have you. 20:39 Um, the really powerful thing I think about the place-based data now is that you can get at attribution. Rather than saying this average 20:49 grid cell is at flood risk, you can disaggregate that into saying that you are at risk for saltwater intrusion or actually, uh, we're in a drought, but your problem with this field is due to groundwater supply and you really, you don't need to install drip irrigation. 21:05 You need to do a whole groundwater management plan. So, uh, this at- attribution can lead to interventions. 21:13 And so I think that the, making geospatial data meaningful and turning it into something that's no longer just like, look at this nice map of risk we have here, uh, is quite possible now. 21:25 Um, and that, that feels important, right? Mm-hmm. Yeah. I like that physical risks cannot be an average. I'm gonna steal that and claim that as my own. [laughs] Yeah. 21:35 Um, Ben, so Joanna was talking about geospatial, talking about observation tech, but we have this theme that you've really pioneered, spatial finance, and that kind of is the, the next step after you've got all this, uh, uh, data from sensors, from satellites. 21:50 I wonder if you could explain to the audience how you understand spatial finance and how it can be useful in this world. Yeah. 21:56 So spatial finance is the integration of geospatial data and analysis into financial theory and practice, and it's something we developed as a concept at, at Oxford about a decade ago. 22:06 And the, the kind of origin of, of that was, was very much trying to figure out how transition risk manifested itself, um, at a, at a massive level. And so we were kind of... 22:18 If you're looking at different companies and the fossil fuel stack, um, you know, which companies have more transition risk than other companies, um, and obviously kind of exposed to physical risk. 22:29 Uh, and to, to do that, you need really good asset level data, type of information to do that company by company analysis. And that's sort of, well, well, how do we get that information? 22:38 And, um, uh, you know, at the time you were starting to see this emergence of, uh, increasingly, you know, comprehensive, timely, um, earth observation data sets. 22:51 You had developments in machine learning that could then be applied to those data sets. Um, and i- in, in our minds, it became very clear that this was a, a necessary condition for 23:03 a- analyzing risk exposures across anything related to climate and the environment, but also critically understanding the environmental and social impacts of assets, um, as well in aggregate, but also locally. 23:16 Um, and by the way, actually, once you've kind of done this job of sequencing the real economy, decoding the real economy, um, having comprehensive asset level data sets for, for all sectors locally, type of information, 23:29 you can then do some pretty cool stuff that goes well beyond, um, climate and, and environment, um, with lots of different applications and, and implications including, including finance. 23:39 And I, and I guess the other, the other thing that was sort of going through our minds at the time was, you know, finance is, is, is all about the kind of the, the, the time machine, you know- Mm. 23:49 -discount rates and thinking about time, but it's not really about price. And, um, maybe we could, we could bring those things together. Uh, you know, how do you unlock that? 24:00 Well, you need these, these data sets, and you need to bring this together in a way that covers an investable universe. Mm. So a sufficient number of entities are, are covered. 24:09 Um, you need to cover a sufficient number of sectors, and critically you need financial institutions and people working in financial institutions to invest and use all of this information. Mm. 24:19 Um, and what we've seen, uh, over the last several years is that now, particularly in the last couple of years- Um, 24:27 and this has been one of the barriers, you know, the big barriers trying to get, get people to, to do geospatial at financial institutions. Um, for a whole bunch of reasons. You know, Bloomberg, uh, and other sort of... 24:38 Did, did some of this stuff, but by and large not, not enough. Um, but there was a bit of... It's just, it's just, it's, it's new and a bit difficult, right? 24:47 So, um, but the cool thing with AI now is you can use, you've, you know, have agents that are specialized interpreting geospatial information, and you connect them to financial information and the plot's your uncle. 24:58 So, um, what, we're gonna, what we sort of, um, conceptualized a while ago and hasn't quite got there just because of some of these barriers, um, I think is gonna scale incredibly rapidly because we now have the tech to, uh, to resolve some of the problems. 25:15 It's a very exciting time. Mm-hmm. Yes. 25:17 One of the things you said, I mean, you think there, there's also need for like a cultural change then in, in institutions to get used to using the state and treat it with the sort of legitimacy they treat 100-year-old credit data of your financial institution or, yes, the sort of topographic information that you'd be using from maps. 25:31 They have to trust, uh, geospatial data the same way they used to trust, uh, other, other resources, and I think that's something that we'll still see play out kind of unevenly across, across the private economy. 25:41 I did wanna ask as well, 'cause, uh, how important it is to have like government backing it or support from research institutes like the University of Oxford, because you were behind the Spatial Finance Initiative in the UK. 25:52 Uh, can you talk a little bit about that and how it's going? Yeah. 25:54 Um, so, you know, we had, um, argued for quite a while that really important that you, you have these consistent contents of asset level datasets and type ownership information, but, but that is not a domain where it's helpful to have lots and lots of competing datasets and lots of competition. 26:11 What you want is standardization and coordination. 26:14 And the, and the way we were thinking about it, I've been thinking about it, is that, you know, let's get together a bit like the Human Genome Project to map a sequence of the genome, uh, but do that for the real economy. 26:25 Um, and that would require a kind of coordinated effort with some philanthropy and some public money to kind of do it. Um, and I... And it's totally doable. It was doable 10 years ago. It's infinitely doable now. 26:35 Uh, the thing that's been lacking has been a, kind of a sufficient amount of money, not, not a lot of money, but a sufficient amount of money to kind of coordinate a global effort to, to do that sequencing. 26:44 So, um, that needs to happen. 26:46 We kind of have contributed with others, uh, maybe there's some organizations that are working on this stuff, um, on specific sectors to create these asset-level datasets, obviously focusing on ones that are sort of easy to, to see from space and easy to, um, to characterize. 27:02 Uh, but we need to kind of systematically go through, uh, all the key sectors in part to a sort of a non- a nonlinear curve. You kind of wanna... 27:11 Y- you need sufficient coverage to drive, uh, utilization, particularly in finance. And that, and that's, that's been a big barrier. Mm-hmm. And maybe you need to add that temporal into it. 27:20 Maybe it's called spatial temporal initiative [laughs] and then you can really engage, uh, financial institutions. Space, space-time continuum. Space-time continuum. Yeah. You just want to be a Star Trek captain, really. 27:29 You've always wanted to be a Star Trek captain. [laughs] Same here. Um, Joanna, I wanna come to you again and talk about the intersection of, uh, physical and transition risks. 27:37 They're usually thought of as separate, and my publication Climate Proof, I got bored about writing about transition risk. I'm off the line decarbonization carbon standards. 27:44 I thought, "I just wanna write about adaptation and physical risk." And then I [laughs] got to know you guys, and I was like, realized, "Ah, these things are very much intersected." Yeah. In detail and sadly. 27:52 Before you jump into that, I... Something you said, I guess, or just anything on the temporal thing, I think, um, yeah, we think the... 28:00 Climate science is great because we are a very scrutinized bunch of people, so we are very confident when we say we know something and are the first to add uncertainty even when no one knows what to do with that information into our estimates of we know what we know. 28:13 And I think the thing that's been so surprising for me in financial markets is just that the assumption that the past predicts the future is, like, central to the way that we organize our real economy. Mm-hmm. 28:23 And climate science has done an unbelievable amount of work in non-stationary time series really, and thinking about how non-linearities escalate over time. And so, yeah, real, uh, earth genome, but real economy. 28:38 [laughs] But yeah, uh, but moving in space and time is totally, uh, necessary. I think that the analogy is like you're shooting at a... Trying to score a goal, and they've moved the goalposts. 28:51 Um, because we know the last ten thousand years have been so unbelievably stable in human history, enough for agriculture and cities and whatnot. But, uh, the last 150 years have not been. 29:02 I guess we're all, we're all here. We all know that. So, um, how we respond to that, it's not just place, space, it's space and time. Um, but transition risk and physical risk, yes. I, again, 29:15 I, I really think of these physical risks as more of a, 29:20 uh, these chronic and acute hazards, like sea level rise, typhoons, and they're fairly well-constraining by physical equations, and we have a nice sense of how to describe these phenomena. 29:34 But transition risk, a little, it's a little more of an off, on switch for me. Um, and this example, I keep asking people if they've heard of this. 29:43 I don't know if it's a case study in a business school somewhere, but I think it's probably the most prescient for the moment of AI, where, um, in case you've been living under a rock, everyone really loves AI right now. 29:55 [laughs] Um, and we're really committed to spending on it. Uh, 30:01 this compute need is often seen as a kind of digital frontier, but this compute is coming from the NVIDIA GPU wafers, and these chips are so essential to our AI build-out, and almost all of them are built in Taiwan. 30:18 Um, and these fabrication plants, uh, by this company, TSMC, they make the best ones that are in lots of these Taiwanese chips, and these fabrication plants use, uh, 400 million gallons of water a day. 30:30 It's not an insignificant amount. And in 2021, they had a huge drought, largest drought in 80 years or something, which meant, yeah, just one season, no typhoon made landfall, and, uh, basin levels were at 20%. 30:46 When you think of Lake Mead with the rock exposed, it was like that. These fabrication plants trucked in tons of water, and production held up. 30:55 But imagine if that were this year, it just would've been a very different story five years down the line with our... I mean, I don't think my parents knew what an AI agent was in 2021. 31:07 I don't think no one knew- Mm-hmm... anything about that. So, um, great example, I feel. 31:12 I think this is, like, totally interesting 'cause it's got a trifecta of undivi-undiversified supply chain for this seemingly very, like, one-sided build-out of AI. Uh, just geopolitically fraught zone as well, and a, 31:29 uh, huge physical risk if they're susceptible to one season of drought. Um, so Taiwan's projected to get much drier over the next ten, 20, 50 years. So, uh, I know there's a real... We're in this AI buzz era- Mm-hmm... 31:46 but it's amazing that it all just can come back to one little island- Yes... and one little water. Yes. The- Maybe that's an oversimplification, but it's a nice, it's a nice angle. 31:53 Well, there are these choke points of the global economy, the Panama Canal, the Rhine- Yeah... open being hit by drought conditions, and that's been disruptive to industries and governments as well. 32:02 I like the example of the nuclear power plant in Europe that had to be shut down or, or lowered capacity because the rivers that were feeding the cooling were actually too warm. 32:10 Or in some cases, there's a breed of jellyfish that, I think, wasn't climate change, migrates further up, um, uh, uh, latitudes and that would clog up, uh, uh, nuclear power plant exhaust or something. 32:20 It was very kind of weird, but it shows how physical risk can actually upset the energy transition, uh, if you didn't think about that. 32:25 Um, I'm supposed to go to Ron next, but actually, I appreciate you saying that's not said tonight's meeting for the first for a while. [laughs] Was there anything said here that's sparked off to you- Yeah... 32:33 obviously how you think about physical and transitions? You know, super interesting and maybe to try to draw, um, a, a number of threads together. Um, 32:43 first of all, how little we are guided in decision-making in general by real bio-geophysical realities, uh, is pretty shocking. 32:54 The scientists are telling us truths, and then a lot of the frameworks that we've built, um, in all sorts of ways about not only how we assess risk, but also the solutions that we devise for them are completely divorced from physical realities, and that's a bit odd, uh, but we should reconcile them. 33:08 That said, um, and, and so all the information, the frameworks that we're producing really are kind of divorced from these realities. 33:16 The, the thing that I think about with this information is, um, what type of information is decision-useful, and then what will result from the use of that information? And I, so I would distinguish two things here. 33:27 [coughs] The, the, the, um, the real spatial data that would help a company or a financial institution make a place-based assessment of risk, that can be useful with two limitations. 33:41 One is that it's gonna be impossible to find a place without these physical risks. That's already true. Um, including if you need energy in a country that doesn't have energy, what do you do? 33:54 So, um, so I think one limitation is that, is there, we're not gonna be able to diversify away from or avoid that risk. Mm. 34:02 And the second one is what Ben said that really concerns me a bit in just what we expect these risk models to do, which is that when you perceive higher risk in the more vulnerable areas, the rational response is not to invest in places that are high risk. 34:15 That's rational. But from the perspective of what we're trying to build in this world, we should understand that integrating better risk in financial business decision-making isn't gonna build the systems that we want. 34:26 So that's a second limitation, I think, on the place-based thing. 34:29 But I think there's a very different way that we could and should be using them, and I like what, what Matt or what Ben was describing of like, um, the, the grand magic that's gonna come when we have the bigger system, which is that kind of should inform the systems build-out that will be needed. 34:43 The only way to actually manage and build resilience is gonna have to be at a systems level. Even that is gonna be limited. 34:49 But also, I love Ron's description of how you build an energy system, all the different component parts. We don't think in terms of systems in the West as you described. 34:58 We expect markets to do this, and then we end up with interconnection queues and labor shortages- That's true... and all sorts of things. But some countries know how to build systems and don't end up with any of these. 35:06 Maybe one country knows how to do that and knows how to design a system where all the component parts. And that is very informed by a spatial analysis and by all the component parts. 35:17 So if we want to build an integrated energy system in Southeast Asia, an integrated energy system in parts of Sub-Saharan Africa, so hundreds of millions of people that don't have access to energy, that is where it has to be informed by, 35:30 by physical data, by scenario analysis, not by taxonomies and disclosures and whatever expecting companies to, on the basis of information they have, build those systems. We need all those layers that you describe. 35:42 So I'm most interested in how we use this data at the level that Ben described that we can do when we have all that data to think how do we build the systems that make the world investable for companies and that help to manage the risks that every investor will face. 35:58 Lisa, I might be going with my skis here, but when it comes to decision-useful information, is price kind of decision-useful information? Yes. 36:05 And the argument from those who are promoting disclosures and the inputting of ph-physical and transition risk into asset prices through, for example, the, uh, task force for climate-related financial disclosures that Bloomberg introduced 10 plus years ago, which has, depending on your view, done a lot good or done very little. 36:22 Um, but the idea there was to create price signals that would change systems, right? 36:26 And there's been plenty of papers about, like, pricing of certain types of fossil fuel loans and certain types of assets has changed, but only by very small amounts, which may have had some differences on the, i- and some impact on the margin. 36:39 But I'm wondering, do you see price as the signal- Yeah... that can change the system or something else? Yeah. No, thank you for the question. This was... 36:44 The, the, the most recent paper that I wrote in June was kind of how we've confused risk- Different types of risk and how, and different responses to risk, and then what different institutions can do about that risk, I think with perverse outcomes. 36:56 And I think TCFD and some of those climate risk frameworks have been... have fallen into that trap, which is risk management frameworks where, or risk disclosure frameworks where the... 37:08 At best, what a risk disclosure framework tells you is what are the risks so I can manage them. But they have been, um, pushed as a means to think that that risk management will build a system. 37:19 And I think Ron's description of the layers [laughs] of how you actually build a system fund- I mean, is one of what to me seem like common sense reasons that risk management doesn't build a system. 37:33 It, it can't, and it's not even designed to. 37:36 So my concern about all these frameworks, but I'd be curious in Ben's perception too, both from a corporate perspective and then from a financial system perspective, is that it's created a lot of data that is neither actually useful for companies or financial institutions in really understanding their exposure to risk, because it's not grounded in any of these truths, nor is it even remotely capable of building the systems to manage it. 37:59 So I have found all of these frameworks to be conf- maybe well-intentioned, but very confused in their design and ultimately ineffective. [laughs] I think you're completely right. 38:10 I mean, I think the other bit of the story I was sort of trying to convey earlier was, you know, one of the reasons we, we went down the asset level geospatial kind of route was a deep frustration with disclosure and the ability... 38:20 You know, what, what, what can disclosure really tell you about, about companies, even if companies do disclose, which many of course don't. 38:26 Um, at best it can tell you what, what management thinks about particular set of issues at a given point in time, and obviously it gives you the best, the best perspective, the best version of what the company is doing. 38:37 It doesn't give you, uh, fundamental insight into what's going on, which is why you need these, these other datasets. Um... 38:45 [laughs] I have a thought that the whole scheme of, like, disclosure and trying to price physical risk and transition risk was almost a sleight of hand to try and create the permission structure for central bankers to start saying, "Okay, we have a role, uh, in climate change. 38:59 We have a role to, to enact policy," uh, monetary policy, et cetera, that can actually change the climate trajectory. 39:05 So I see it as a political gambit rather than actually something that was intended to change the market itself. 39:10 And when there was political will, we did see a lot of progress and, you know, companies making commitments, whether or not they were gonna be followed through is to be debated. 39:18 But then there's a moment when political will was useful, and then when we came back to fundamentals of price and then resource constraints, then all that stuff kind of, um, withered away. That's my sense. 39:28 I, I wonder if, Ben, you've seen my conspiracy theory. [laughs] Which I promised I was gonna stop saying the conspiracy theory. Now I talk about it every day. But my conspiracy's growing a little bit, and I wonder... 39:38 I, I have a conspiracy theory- Good... that is conspiratorial, but if it [laughs]... if it turns out to be true, I will have said it first. Which is, if 39:50 this were engineered so that all of the sustainability and sustainable finance professionals spent the past decade 39:58 arguing about disclosures, carbon accounting, uh, alignment, taxonomies, frameworks, revising that, debating that, whatever... 40:08 I mean, really, 98% of the field, all those things, when we know exactly how to build systems and what makes them financeable. If that had been designed and engineered to delay and distract- Oh... 40:19 then it was perfectly engineered. Do you know who's at the center of the conspiracy then? [laughs] I know he's very, I know he's very popular at the moment. Popular. Yeah. 40:26 I know, but- I think we all are, like, totally on board for that... 40:28 well, I think, I think, um, the, the, the, the, the, the, the truth is that there are a lot of people that have been now enmeshed in that, that know the system doesn't work and can't get out. 40:37 We have, like, an onion of frameworks, and we impor- and stakeholders are s- I mean, I... You know, stakeholders expect their stakeholders to require this disclosure. No one reads it. No one cares. 40:49 Um- I mean, uh, not to, not to plug my employer here- Yeah. [laughs]... but I do... I, I, I also am kind of horrified by the, like, regulatory disclosure need, like, scope three everything, and it's just the... 41:03 Everyone's screaming about materiality is so... It, it, it's an unsolvable problem in many ways. And I've been 41:11 really intrigued by the work that's happening at Earth Finance, where it's a lot of embedding these companies to actually do meaningful operational transition strategy. And so it's not just like a... 41:23 Uh, I think there's a lot of the, like, this should goes to an ESG person for their disclosure, but it's, um, it's so much more of an operations problem. Yeah. Yeah. 41:31 The only, if I may layer Earth Finance into my conspiracy theory a little bit. [laughs] Only fair. 41:37 Um, even the idea that we should have corporate level, um, ledgers in any way, to me is part of the conspiracy theory, because it's part of my... 41:46 It's part of what, it's part of what makes no sense, let me put it that way. The, the idea of corporate level neutrality doesn't make sense. 41:54 Um, the idea of net zero at, at company, at country level n- neutrality doesn't make sense. That's not accurate. We're trying to achieve atmosphere net zero. Yeah. 42:03 Even NDCs and the CDM, if you look back at the Kyoto Protocol, that was designed by the fossil fuel sector to thwart progress. 42:11 And everything we have now is an evolution of that, which is the idea that we should be achieving neutrality in some way, and that these things are tradable. 42:19 And, and then all we're doing is spinning on the metrics- Yeah... and analysis of this. So- Totally. Cor- yeah, corporate finance 101, no decision is made to purely mitigate risk. Right. 42:29 And so- And certainly not systemic risk. Like, companies and financial institutions are not mandated nor designed to build, to shape the systems that they're operating in. So if, if... 42:38 I have no problem with corporate risk management, with financial institution risk management, if we're clear on what that is. That's risk management. That's always been prudent risk management. 42:48 If we're trying to achieve different societal outcomes, those were never the tools to do it. Doesn't even make sense, and we know that. So- Um, so I think that the same... 42:58 It, that's not a, that was not a slight on the data and how... 43:01 Uh, and, and to the contrary, actual earth spatial data and understanding geophysical models and how systems are built, that is how we should understand the systems that we're trying to build. 43:11 It can also be useful to assess individual risk, but let's not conflate the two, I would say. First, I just wanna clarify for all the hardworking people in the system, that my conspiracy is, who got us on that track? 43:23 Like, who came up with the idea of corporate net zero, for instance, and who... And I, anyway, I am trying to unpack this bit, but it, it hardly matters except to realize how irrational it is. 43:32 But then there are a lot of people that are doing it, not to... Super well-intended, but because our whole framework has presumed this to be true. 43:38 If this answers your question, then the debt, this is where I think Ben is much more informed, um, than I, for sure, is I'm separating out real prudent risk management. 43:48 Like, how we've always under-- And that should never have been politicized. It has nothing to do with building the better systems of the future. 43:56 It became politicized when we purported that risk management could do that, and then we gave it a policy objective. But that, that to me was the, was the conflation. 44:04 Was the idea that if we manage our risk, that will line up to build a better system. Um, and with... And just to say, I don't, I don't know what you're... I mean, again, I don't blame anyone that's part of the system, 44:16 except some people I think that they [laughing]... 44:19 [laughing] But, uh, but I, the climate risk data, Ben, I'm curious for your perspective too, but is that I see s- the su-s-sustainability organizations like S&P Sustainability, their sustainability team is doing a climate risk model, which makes no sense to me. 44:33 Selling it to the sustainability teams, which makes no sense to me, who say that they can't get the ear of the CFO, makes no sense. I mean, why is it going to the sustainability teams? 44:43 And why are we calling it climate risk? 44:44 These are, like, climate driven changes, and they're types of risks that we've always understood and managed, which should be physical, and then go to those who understand how to manage risk. 44:54 What I was trying to say the first time that I remember, and I think I still remember it, is y- your question about, you know, who's responsible for this. I think I've got an answer. 45:01 I, I'm interested whether you agree, which is, is actually it's not the people talking about materiality. It's not the, you know, the credit risk officer or whatever, or chief risk officer. 45:11 It is, unfortunately, uh, a lot of our friends in the climate community- I agree... that, that basically thought, "Oh, we don't really understand finance. Well, this sounds like a good thing, and let's promote it." Yes. 45:21 Um, but, a-and actually it's, we're littered, the whole space is littered with these- Right... with these disaster zones. Um, and, and we, we agree on many of them. I mean- Yeah... 45:29 don't get me started on green tax on it. Yeah. I wanna, I wanna take it out from this, um- Reuse process bombs. Yeah. [laughing] Great. But, but these are... 45:38 And, and, and, and on nature now, you know, people- Oh, yeah, please get into it. Just... Pass another hat. 45:45 People that we, that we work closely with, all of us, um, you know, I think it's a sort of, it's, it's a bit of naive, um, optimism, um, that's, that's been combined with, uh, lots of, lots of poorly deployed philanthropy that's resulted in some of these messes. 46:02 I wanna bring it back to the real world. We're having these ivory tower debates here with the academics- [laughing]... and sales versus the... I wanna get to real world here. 46:11 Um, I was actually speaking to a hyperscaler, a resilience officer at a hyperscaler, uh, recently, and they were... 46:17 I was trying to talk about climate risk and, like, you know, do they use models, asset specific data to understand, oh, should I site a data center here or there? And they said, "Yeah, we've got the data ourselves. 46:26 Uh, we have our own engineers who go on site, and we know the risks." Uh, but it was kind of what you said, like risks are some private decisions on its own. 46:34 We have to throw these data centers up because it's existential for us as a business that we are the first to, you know, have a frontier model or, or to be the, the AI winner. 46:42 So that was one perspective I had, that yes, there is an understanding of risk at the exit level, but other powers, other forces kind of pushing against that. 46:50 And so I wondered, uh, Rod, if you could speak to how kind of the scramble for energy, land, water is kind of playing out in the, the data center world, and whether, yeah, any examples you have to share, names redacted. 47:00 [laughing] If you want. Uh, energy, land, and water, um, they're all in short supply. So, so I'll start with land. Um, so recently Amazon, uh, just to pick on them 'cause I know about them, uh, bid 14 times 47:16 the prevailing rate for a swath of land that was not, you know, it was for home development. That was, it was pre-developed and intended for home development. But... 47:27 And so it wasn't even intended to be for a data center use. But it was 14 times the amount of lease rate, uh, than, that it was going for for the home developer. I, I encountered this at, at Nori Energy. 47:37 We were, um, we were putting in a competitive bid for, uh, parcel of land in, uh, Minnesota for a community solar field, solar project. Um, in fact, it was floating solar. 47:49 You guys heard of floating solar by raising your hand? All right. Uh, okay. So we, we're floating solar developers and tech company, and so we were just gonna use the water and some of the land, you know. 48:00 But we were outbid. We put in a bid for, like, six figures. It was deep into seven figures that we lost out from an unknown, uh, data, data center developer. 48:09 And so that's, that's a real, uh, you know, that's, that comes home to roost, uh, in that, in that deal, uh, for us. Um, energy, so a-again, you're, I mean, out, prices just being, being bid up. 48:23 So, um, PGM, uh, the, the grid operator in 48:27 the, uh, Pennsylvania, New Jersey, Maryland area, um, they're, they have these auctions called capacity auctions that aim to meet supply three years in advance, um, for, you know, electricity generation. 48:40 And the, uh, prices were 11 times higher in 2004 or '05 than they were the previous years. Um, so this shows where the constraint is in that. So you've got the power constraints, land constraints, and then water. 48:54 So, you know, con- contrary to what a, a hyperscaler's PR team will say, um, they use a ton of water, and it's not just- at, um, like the perception's true. Like, it's not just in a... 49:07 Some, some use closed loop cooling systems, closed loop systems, which do preserve a lot of water, but not all of them do. Some are open loop. 49:15 Uh, and that evaporating water doesn't necessarily end back up into the water table, in the, into the water cycle in the same community. And as Jonas said earlier, it, it's really hard to move water. 49:26 Just in, in your trucking example. You can't move it like you can, um, you know, a power line. 20% of the world's electricity is used to move water. Um, and which is incredible. Um, so you just can't do that. 49:41 Um, and, but not just localized water usage, but upstream is really where the, the hidden water usage lies. If you're using fossil fuels, 49:51 coal, uh, natural gas uses an incredible amount of water to wash the coal, to cool, um, so that then into fabricated chips. Um, huge water consuming industry. So it's, you know, if you hear, uh, somebody say it's... 50:05 I, I think it's disingenuous to say that they don't use or they have a net zero, but like how, how far net zero are you accounting for, and is this a real, is this a real plan? 50:16 The, uh, count on the clock is, is ticking down to zero, so is the time if you have a question to ask our panelists. 50:22 If you think, think of one, just put your hand up and I'll point to you and, uh, and we'll, we'll get to you. 50:27 Uh, I did have one last question for all the panelists really, which is coming back to this kind of cultural issue, like we have data, we have this kind of spatial finance discipline that's built up over the last 10 years, thanks to folks like Ben and thanks to Finance and others. 50:39 Um, but what does it take to kind of have all this information, have all your planning, have all your spreadsheets in a row, and actually go to the CFO or the CIO or facilities, uh, head of, head of, uh, construction for a different data center and say, "Hey, you should believe this and use this." 50:54 Uh, is it, is it just knowing the right people to give the data to, or is it something about creating a culture where this data is seen with the same respect as a, you know, DCF [laughs] spreadsheet, et cetera? 51:05 We'll see if that answers. Uh, because you're never gonna have me on a panel again anyway, [laughs] I'm gonna half answer your question, but then also really strongly suggest we ask a different question. Mm-hmm. 51:15 I think there's no doubt that the energy companies are going to be attentive to land, water, and, um, access to energy and the best available data they will want somehow. 51:27 I think what we should be thinking about, certainly what I'm thinking about, is the same data that informs the data center, where is there land, where is there gonna be adequate water, and where am I gonna get access to energy that I'd be willing to bid up 14 times for? 51:40 We could, we can and should use that same data to say we have limited and increasingly scarce water. We have limited land, and we have a emergent but still fragile energy system. 51:54 How do we wanna manage that among different users and uses? And do we want that to be determined by market and by those who are looking and can bid up 14 times what the value is? 52:04 Um, I hope that we can use that data, and just to of course say that when the, when, again, just to reiterate Ben's points, I think it's so important that, that a company's view of that risk is often going to be, and it's fine to, but just to understand in tension with the societal risk. 52:20 Companies want to have reliable access to the resources, which means limiting access to others and limiting competition. 52:27 So just the, the, from a societal perspective, the question of how do we use the geospatial data on finite resources could usefully be how do we allocate this successfully in the system? 52:40 And I hope that some of those solutions are innovative models of closed circularity models and how do we use anchor loads to build out energy systems. 52:49 I mean, there are ways now that we can build systems that manage those resources in a collective way much more efficiently. But that has to be planned beyond an entity level. 52:59 So I, again, would just think about how do we get, I mean, the, the entities can and should use the best data, but so too should the systems, and those are very different users with very different objectives. 53:09 [upbeat music] Climate Proofers is a Climate Proof Media production. It is produced and presented by me, Louis Woodall. Subscribe to the Climate Proof newsletter by going to climateproof.news/subscribe. 53:21 And to learn more about the publication, feel free to reach out directly using our LinkedIn page. Goodbye for now. [upbeat music]
