Bob Litterman – “Climate Risk Financial Returns”

My guest for episode 112 of Cleaning Up Podcast was Bob Litterman. Bob is the founding partner and chair of the Risk Committee at Kepos Capital, an investment advisor backed by Capricorn Investment Group .

Prior to Kepos, Bob spent 23 years at Goldman Sachs, as a partner and head of the risk function. He is an outstanding authority on financial risk and serves on the boards of the World Wildlife Fund, Ceres and the Climate Leadership Council, among others. He also chaired the CFTC Climate-Related Market Risk Subcommittee, which in September 2020 published a ground-breaking report entitled Managing Climate Risk in the U.S. Financial System.

Key takeaways were as follows:

• Bob is a real pioneer of quantitative financial risk management – he even has a bond portfolio allocation model named after him and Fischer Black, which is taught to CFAs and business school students. If Bob says climate risk is real and quantifiable then it’s no surprise that investors and regulators listen.
• He explains with exemplary clarity that people respond to incentives, and that those incentives are simply not in place. Since we don’t correctly price climate risk, we should not be surprised to see emissions increase. Bob is adamant that the only solution is a price on carbon, along with carbon border adjustments – in other words he is a vocal spokesperson for the economic orthodoxy on climate change.
• Perhaps because of his commitment to carbon pricing, Bob was surprisingly positive about the EU-ETS considering its chequered history and limited impact in driving innovation. He was commensurately negative towards non-carbon-pricing approaches such as the US Inflation Reduction Act (IRA) - which he dismissed as two orders of magnitude too small to correct the mispricing of climate risk. In this, his views differed sharply from those of Ion Yadigaroglu in Episode 109.

It was a fascinating conversation with a true thought leader on climate and financial risk. You can listen to in now on your favourite podcast platform or watch it on YouTube.

#Climate #ClimateChange #Risk #Carbon #CarbonPricing #Finance #Investment #Netzero