Episode Transcript
Speaker 1 00:00:05 Even the oil company. So we get it. Yeah. You know, the American Petroleum Institute supports putting a price on carbon, the, the Chamber of Commerce, the Business Roundtable. Our report was written primarily for the financial regulators, but they can't put a price on carbon. The financial community can't put a price on carbon. It's gotta be governments, and it's not the White House, it's Congress.
Speaker 2 00:00:26 Hi listeners, this is Kesa Shrine. We'll be back in the new year with new episodes of the Refinitiv Sustainability Perspectives Podcast. But today we have a special bonus episode for you featuring a conversation with Bob Litman, founding partner at K os Capital. Prior to K Os Capital, Bob led a US subcommittee appointed by the Commodity Futures Trading Commission created to explore climate related risk During the previous United States administration. Bob caught up with our guest interviewer, Jamie McDonald in California, and chatted about why America hasn't done enough, what needs to happen to put us on the right path, and why it's now time to put a price on carbon.
Speaker 3 00:01:14 Bob, thank you so much for taking the time to, uh, chat with us. We want to talk specifically about the world of sustainable investing, but just before we do that, let's talk a little bit more about the, uh, subcommittee. We were just talking about it earlier. Yeah. It sounds like it was the first of its kind to be formed, and what specifically was the role?
Speaker 1 00:01:29 Yeah, it was kind of unusual because it was under the previous administration and one of the commissioners of the Commodity Futures Trading Commission, Russ Benham is his name, uh, is a sponsor of a committee called the Market Risk Advisory Committee. They had some hearings on climate related risk and decided to create a subcommittee. Chairman Benham asked me to chair that committee. I was very honored to do so. There were 35 members of the committee representing a vast, uh, diversity of participants in the financial system, including banks, insurance companies, investors, asset owners, corporates including oil companies, ag companies, data companies, and exchange. Also a number of academics, a number of environmental NGOs. So we really had a diverse group and, uh, the commissioner said, we'd like you to write a high level report. He hoped it would be 50 pages come up with a number of specific recommendations and justifications for those. And he raised kind of a high bar. He said, I'd like it to be unanimous. And, uh, I thought, okay. Didn't realize how high a bar that is. You realize you have 35 people and any one of them can say no. Okay. And in fact, it was even worse than that because he said, we want not just the individuals represented here, but their organizations. So our draft report went to all the general councils and they had to sign off on it.
Speaker 3 00:02:51 This is a very much a cross-industry type of report. Yes. So what I'm interested in is at that time, take the financial world, for example, banks and insurance companies, was, uh, an aim of the report to try and highlight the fact that they were not appreciating what kind of risk the climate change was was gonna happen to their industry. It was more about pricing into their products that they were selling to clients or, or what was the approach of it? No,
Speaker 1 00:03:15 I don't, I don't think it was either of those. I think it was designed to say, what do we have to do to protect the financial system? I see. See, that's what the financial regulators are supposed to do. And the commissioner felt, and the commission itself felt that the other financial regulatory groups, the Financial Stability Oversight Council, the Fed, the s e, had not addressed climate related risk mm-hmm. <affirmative> for reasons that are understandable under the previous administration, but it seemed, uh, to the Commodity Futures Trading Commission that someone ought to do this. It's interesting. The CFTC is responsible for regulating derivatives markets in the us and so it has a very strong focus on risk management.
Speaker 3 00:03:55 Yeah. I guess one of the main primary uses of derivatives is to manage and risk.
Speaker 1 00:03:59 Exactly. So they have a market risk advisory committee, and since no one else was focusing on climate related risk, they decided to go ahead and do that. And, uh, we were very, uh, pleased in the end that we were able to write, actually, we, we accomplished everything the commissioner asked for, except we couldn't keep it to 50 pages. It was like 170 pages,
Speaker 3 00:04:20 But you got all 35 unanimous folks.
Speaker 1 00:04:21 We did. And, uh, we got, uh, 53, uh, specific recommendations, including, I was very pleased. The first recommendation and the most important and urgent is that we have to put a price on, uh, climate risk on on carbon emissions. Yeah. And, uh, everyone agreed with that. Actually, that one wasn't hard to get through. The other thing that we got through that I was very pleased with is that climate related risk, uh, it needs to be disclosed. At the time we wrote this report, there was not adequate disclosure. Mm-hmm. <affirmative>, now, uh, we're moving in that direction. There's a lot of work to do. But under the current Financial Stability Oversight Council, which is chaired by Treasury Secretary Yellen, the Fed, the S e C, the CFT C and all the other financial regulators are now really moving forward with the agenda that we, uh, put into this report.
Speaker 3 00:05:11 And can you talk a little bit about other geographies? Um, has this become a more coordinated event, or is this still something that is more specific?
Speaker 1 00:05:19 Yeah. Something that I think most people don't realize is how far ahead of the US Europe is. Europe has strong incentives to reduce emissions. They have strong, there's also
Speaker 3 00:05:27 Markets for carbon trading. Is that right?
Speaker 1 00:05:29 Markets for carbon trading that have a very significant price. Mm-hmm. The, the, uh, diversity of incentives to reduce emissions across the globe is not under appreciated. In Europe, there are incentives over a hundred dollars a ton.
Speaker 3 00:05:44 And so how far do you feel America, how do you think America is doing now if you were to give it a grade?
Speaker 1 00:05:50 It's doing terribly right now. We don't have a price on carbon. We're not moving in the right direction. We're on the wrong path. I think the good news is the corporate community understands that, you know, everyone supports a price on carbon now in, in the business community and the finance community. That was unanimous recommendation of ours. There was no pushback. At the first meeting of the subcommittee, I said, you know, I think we need to put a price on carbon. Does anyone disagree? No one, no one said no. Even the oil companies. So we get it. Yeah. You know, the American Petroleum Institute supports putting a price on carbon. The, the Chamber of commerce, the business round table. Our report was written primarily for the financial regulators, but they can't put a price on carbon. The financial community can't put a price on carbon. It's gotta be governments. And it's not the White House, it's Congress.
Speaker 3 00:06:40 So am I thinking about this right, in that, let's hope we do get a price set for carbon, and then that increases the cost base for those companies, and then investors start directing their money away from those companies. And then, then there's the financial incentives to stop investing in these companies. Does that sound about right?
Speaker 1 00:06:55 Yeah, it is about right. I mean, incentives are so important. That's fundamental. People respond to incentives. They want to change behavior. You change incentives. And in a modern capitalist economy, that's wages and prices. Mm-hmm. <affirmative> right now, we have no price on carbon. There's no incentive to reduce emissions. And so, you know, pollution is free. People are gonna pollute. You know, it's, it's the same in the financial community. If risks aren't priced correctly, then you know, capital flows in the wrong direction. And this is absolutely the case. The only caveat I would say, and it's an important caveat, is that investors are forward looking. And so if I'm sitting here today thinking about a capital investment over the next 20 years, it's not just the price of carbon today. It's my expectations of the incentives to reduce emissions over the lifetime of the investment that's gonna drive the capital.
Speaker 1 00:07:42 And what you are seeing these days is a rapid change in expectations of those incentives. And so capital is starting to flow in the right direction, especially long-term capital. But you know, it's not fast enough and we have to move. And if they're disappointed because we don't get those incentives, well then it's a step in the wrong direction. And we don't have any time to waste. Right. We should have done this 20 years ago, we wouldn't have a problem. Instead, we have an existential threat to the wellbeing of future generations. And that risk is growing. Uh, you know, ver it's quick growing faster now than it was 20 years ago. 20 years ago we had time. Yeah. Today we have no time. In fact, it's too late. We are seeing catastrophic impacts of climate change already. We can't turn back the clock. The best we can do is preserve the wellbeing of future generations. And every day that we delay is a step in the wrong direction. So
Speaker 3 00:08:35 Speaking of future generations, are you somewhat hopeful given, and I hate to generalize and call millennials, but let's say people under the edge of 35 are just so much more environmentally aware than the older generation. Does that give you a glimmer of hope that this can change faster? Or is it still too late by the time they're making decisions?
Speaker 1 00:08:52 Well, it gives me a lot of hope. And I think we're on the, a cusp of, you know, globally harmonized pricing. Mm-hmm. <affirmative>, at which point the whole capital markets will move in the right direction. Technology will be developed, people will have the right incentives, and I think we'll make a lot faster progress than people expect. So that gives me hope. But every day that goes by that we haven't done it. Yeah. Is a problem.
Speaker 3 00:09:15 I was watching an interview recently with a man called Robert Friedland, I dunno if you know who he is from, from Ivanhoe. And he was really saying that we are just gonna have to transform the world away from hydro carpenter to electric, but we just don't have that, the electric grid infrastructure right now. And actually his point was that China was slightly head of the us. A lot of the US electrical grids are still quite dated. So we need this big infrastructure spend to go into having the capability to, to have enough electricity because we'll take for granted that, you know, when we switch on the lights, the lights comes on. But if everyone's driving a Tesla, is it gonna be ready for that? No,
Speaker 1 00:09:49 You're right. There's a lot of money that has to go into the grid, uh, making it a available for intermittent sources of, uh, electricity, like solar, like wind. We need backup storage. We need a base load. Uh, that doesn't create, uh, pollution. Maybe that's nuclear, maybe that's batteries or hydrogen. The technology has to be developed, but I'm sure it will be developed. It's just what's the most efficient Technology is the only issue, but it won't be developed fast enough unless we have those incentives in place.
Speaker 3 00:10:18 Even with Biden's infrastructure plan.
Speaker 1 00:10:21 Yeah. No, we, uh, you, you, you have to start with a price on carbon. Yeah. If you don't get that right, infrastructure won't do the trick. Right. And we don't have a price on carbon yet.
Speaker 3 00:10:31 Bob. So final question I wanted to ask you is we're asking a lot of people, um, about their outlook. So in five years time, call it 2026, do you think we'll have a price of carbon by then? Are you, do you feel that we'll be taking the right steps by then? How do you sort of see the world of sustainable investing by then?
Speaker 1 00:10:46 Absolutely. We will have a price on carbon and we will be on the road to net zero. Corporations will make their pledges, they'll have their targets, they'll be, uh, making progress. I'm sure we all will. There's a lot of uncertainty about what the technology will be, uh, how these will develop. But I have no doubt that by then in five years, you know, e either we're on the road to net zero at that point, or it's too late.
Speaker 3 00:11:10 Right. Okay. But, uh, conferences like COP 26, are they helpful or is it too much just lip service?
Speaker 1 00:11:15 Well, so far the UN process has not delivered, let's be honest about that. However, they are now moving to develop the mechanisms, the government, the governance to allow for globally harmonized pricing. So that's a key step. I think the next step that's, uh, being developed right now is the ability to create a market, a global market for carbon credits. Yeah. Credits that are real, that are reliable, that can be used in the compliance markets. And, uh, when that happens, that opens up the gates for investors to start investing in these technologies, investing in, uh, reducing emissions. And, uh, and we're off to the races. So I'm excited about all that. There's a lot of opportunities as well as a lot of risk.
Speaker 3 00:12:01 Now, if most of the world is committed to, to net zero within a pretty short timeframe, um, how do you feel about China? And, and I know India just said they'd commit to it, but only by 2070. I think it seems a long way out. Does does that give cause for concern?
Speaker 1 00:12:15 Well, the, the relationship between China and the US is key. And right now it's a bit fraught. Right. But you have to understand China's way ahead of the US in terms of having a federal, uh, electricity, clean electricity standard in terms of the number of electric vehicles, the number of electric buses, the uh, amount of solar and wind. They're just, uh, racing forward. Mm-hmm. <affirmative>, and, you know, we are behind in
Speaker 3 00:12:39 Terms of the infrastructure,
Speaker 1 00:12:40 In terms of the infrastructure, in terms of pricing, in terms of many different things. It's really kind of sad the US should be providing leadership. We haven't been, where are we? That's the problem.
Speaker 3 00:12:51 Well, let's hope that all changes. But Bob, it's been really great chatting with you today. Thank you so much for your time.
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