YouSaid · the spoken record

Bob Litterman

lines on the record: 61
first: 2020-06-15
most recent: 2020-06-15
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“I'm still learning, and what would I have done differently? It's been for me, as I said, a very eclectic journey. And I don't really regret, but I don't feel like there's any one thing that I would say, you know, I wish I'd learned it earlier. I don't know.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, you know, my dad was an engineer, and I've always been kind of in that sense practical. I mean, financial engineer, I think, is kind of form of engineering. When I was young, I used to think I was going to be a scientist. And then my undergraduate major was human biology. Well, I got very interested in journalism at one point. I was a journalist. Then I went back and became an economist. So it's been kind of an eclectic journey for me, but that grounding in engineering and that practical approach of knowledge to solving problems has stayed with me all my life.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“I sit on a lot of boards, and I must say, I learn a lot from those boards. So it's really for me an opportunity to operate in a number of different areas. I'm on the board of the Options Clearing Corp, so that keeps my toe in the water for financial markets. I sit on the Robert Wood Johnson Board, which is focused on developing a culture of health. The Sloan Foundation, which funds science and economics. So, you know, not to mention my environmental boards. World Wildlife Fund. And so I could go on. But anyway, that's plenty of learning. How's that?”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Investors have common biases, and all of us do, and we try and avoid them. So one bias is trying to time the market, you know, and thinking that we know better than others. And I don't know, it's not a peeve so much, but it's a bias that I try to avoid. Whenever people ask me, what do I think about the market? You know, the answer is, I don't know. It's where it is for some reason. And I'm not sure I understand why. And I certainly don't know which way it's going.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“My pet peeve right now is that we're not taking science seriously, right? We're not doing the right things with respect to coronavirus. It just drives me crazy in terms of the lack of leadership in this country. And this country, which is the richest on earth, can't protect its people from a virus. It's kind of sad. But I think we're going to get through it and then we can slam on the brakes on climate. And I'll feel much better after that.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, you know, I'm a cyclist. I have been for a long time. I continue to do that even now. I also like to play golf. I haven't played a lot of golf and I don't imagine I will be anytime soon. The other thing I like to do, which is kind of fun, is in the exercise around Pilates. My wife got me interested in that years ago. Now, I live on the east coast, but I happen to be stuck here in California. So it's a little difficult to go to the gym that I used to go to, but it turns out you can do Pilates remotely, as I've discovered, using an iPad. So I continue to enjoy the Pilates even while I'm out here.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I think that factor is evolving over time and it's evolving because obviously the market expectations are evolving as well. So if everything's priced in that context, there's not really a factor because assets are priced appropriately. So I think it's always the new evolution. And for me, the big opportunity here now is the recognition that the response is not going to be a slow increase in concern about an action on climate. We haven't taken appropriate action yet, and we're going to have to. And when that happens, it's going to be more of a phase change than a slow evolution. And so once that phase change happens, obviously there's a different approach to it. And now you're looking for, okay, what are the physical risks? Where are they going to start showing up? And how do I invest based on that kind of? Outlook”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“In a matter of days or weeks. So we're not high frequency, but we're relatively short-term investors. And so to take a position that, you know, there's going to be a rapid transition to a low carbon economy, that's a little longer term than we usually focus.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's more the latter. I mean, I think that the key here is to create those appropriate incentives. And that's what I'm focused on. But as an investor, I happen to be watching this space, especially since the World Wildlife Fund put on its swap six and a half years ago. And I've been saying to myself, you know, this is an opportunity. I'll tell you the truth. It was about a year after we put that swap on at WWF. And my wife said to me, Bob, why aren't we doing that? You know, it was up 40% already. You know, you got a point there. So we did it personally. And I think my partners at KEPOS were watching this as well and came to the same conclusion. Why aren't we doing that for our clients? It wasn't the most natural thing for a quant investment firm to do. Our main product is, you might say, liquidity provision, and we tend to be in and out of position.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Expectations of emissions pricing that you can track over time, and we don't really have a good measure, but you can, you know, conceptually, you can think of trying to measure that embedded in the prices of things that you've already identified are exposed. I can look at how our coal companies behaving, how our oil companies behaving, all the things that I think are going to be impacted by investor expectations of policy. How are they moving? And then I can look at another company, XYZ, in a different sector, and say, what is its exposure to this factor? That's kind of what we often do as quants, right? So we can try and estimate what we call a beta or an exposure to this factor that is noisily measured anyway. And then I can use that to identify, all right, here's a company that has a positive exposure and here's one that has a negative exposure.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“So we talk about insurance, we talked about oil and gas, we talked about utilities, autos. I mean, I think it's a question of, you know, where are they priced today versus what kind of market share are they going to get? Do they have an advantage that's going to be permanent, a particular company? Or are they at risk because someone's going to come in and what are their supply chains look like? Where are they going to be able to sell? Yeah, a lot of these questions are similar to the types of questions you address all the time in investing. And it's just a particular scenario that you're thinking about, which is one that's pretty complicated. What's going to be the policy? Is it going to be a carbon tax or is it going to be regulation? And if so, what kind of regulation? And what are investors betting on? What's already embedded in the price? There are other things that you can do if you've got a measure of market.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Oh, well, each industry is different. And so when you think about some of the risks, I don't know, insurance companies, you have to ask yourself, are they exposed or is this an opportunity? Maybe if they see it coming, and I think they all see it coming, I can't imagine they don't see it coming. There's also issues, though, about do the regulators allow them to build it in California, okay, wow, wildfire risk is growing exponentially if you're an insurer, you have to provide fire insurance. Are you able to pull back? Does the insurance regulator tell you that you have to make it affordable? And does that make it a risk? Or are you selling a lot more fire insurance because everyone needs it and you can jack up the price and now it's a profit opportunity? Yeah, there's a lot of subtleties that go into figuring out what's going to be the impact on the valuation of these companies.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“We don't have a product right now, but we're working on developing a product that will, as I say, do well in the context of a rapid transition to a low-carbon economy. And so we're working with, actually we're getting pretty close to launching it, and we're working with some seed investors and trying to figure out exactly what should that look like. We tend to manage products that are market neutral, and we think that that makes sense in this context as well. And so it's going to be long and short. across multiple sectors. And we're doing all the research that I was talking about before to try and figure out how to do it. And yeah, there's some interesting issues. If we are going to try to benefit from the valuations in fossil fuels,”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Developing countries helping development is fine, and we should do that in terms of, as I say, transfers of wealth, transfers of knowledge, transfers of food or housing or whatever, but not by subsidizing pollution. That's not the right way to help those countries. So we just have to separate those and recognize they're two different problems. And the timescale is also very different. We have to slam on the brakes now with respect to climate and that's by pricing emissions globally. And we also have to address income inequality and all those other disparities across developing countries versus the developed world. And that's going to take a long time. So we've got to separate those two issues.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's two important things to say there. Number one is that in many contexts, renewable energy is now the cheapest source of new energy when you're building out solar and wind. And so it's very natural that developing countries will be putting in a sustainable infrastructure. Now, the other thing to say is that we really have to separate two different issues. One issue is what are the right incentives to reduce emissions? And that should be globally harmonized. The CO2 that's emitted in India in terms of its impact on climate change, then CO2 emitted in the US. And so we should have those same incentives to reduce emissions everywhere in the world. The other problem is inequality and health equity and all those, you know, we should be transferring knowledge and income or wealth to those.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Big disparity in developed market economies who have been using carbon and a lot of the emerging countries where it seemed like the use of fossil fuels is kind of an early step as they grow their economies and move from relatively poor nations to lower middle class to middle class. So how does the energy use required by those countries to work their way up the economic trajectory align with the desires of, say, a US?”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“When it's not built into prices, then I have to figure out how big is the carbon footprint of a hamburger versus chicken nuggets when I make a decision. And it's just unrealistic. I don't have that information. Should I make a phone call or should I drive to this meeting or should I too many decisions? You can't do it. I don't even have the information. You build it into prices. Now I don't even worry about it. I just worry about how do I allocate my resources and I see the prices and I make those decisions and they happen to be the right decisions. It's what we call the invisible hand.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“My personal background at Goldman Sachs. So that's where I have expertise. This is a risk management problem. And so I just try and speak out wherever I can at places like this and say, look, this is not that difficult. There's a risk management problem. We're not pricing the risk. That's the fundamental problem. We've got to do it. Everyone who looks into this problem seriously reaches the same conclusion. There's not a lot of disagreement. Now, there are a lot of people who say we're never going to get there. And so let's do this or let's do that. Let's plant trees. Let's stop driving. I'm not against those kinds of things, but it's just they don't operate at the same scale as providing the collective incentives that allow everyone to move in the right direction. And by the way, you don't even have to try. On the one hand, if I try to reduce my carbon footprint today,”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“To do that than others. So some are more exposed. And you look at those different factors. They're going to be different in different industries. And as I say, it's a little bit like fundamental analysis and the scenario you're looking at is how will this company do in a rapid transition scenario relative to that company?”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. Well, we started years ago actually at WWF looking at research that was put out by third parties, for instance, a group in UK called Carbon Tracker that has done a lot of good work saying, okay, which of the companies are most exposed to this and which not? And now we're working with other data providers and looking at different sectors. So as I mentioned, you look at oil and gas one way, you look at utilities another way, materials, transportation, et cetera. As a quant, we often talk about factors. So emissions, for instance, can be one factor. Within the utility sector, for instance, there are utilities that have more carbon dioxide emissions per unit of energy than others. And that's one factor. But then you have other factors. For instance, can a utility pass on the cost of reducing those emissions to a three-base or not? Some have more freedom.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Get the question who would take the other side of that bet? The reality is, of course, more than. Now you could be more sophisticated about it, certainly, but that's a simple way to do it.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Going to have to get out of those funds. You may have to sell this private equity. You're going to take a 20% haircut. It's less than 1%. Just don't worry about it. And we said, no, we're the World Wildlife Fund. We want our portfolio to reflect our mission. We don't want to be supporting these activities. Help us out here. They came up with a very innovative solution, which was what we call a stranded asset total return swap. We basically took all those assets that had been identified and said, we're going to sell the return on those assets and receive a return on a broad portfolio, the market. And in doing so, we basically adjusted our portfolio in a very inexpensive way so that we no longer had the economic exposure to those stranded assets. What we didn't realize was how well that stranded asset would perform. I mean, I thought, yeah, these assets are probably going to underperform.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I'm glad you asked that question. I've been chairing the investment committee at WWF for a while. Actually, I no longer chair it, but I was chairing it back in 2014. And we had a discussion about how should we be positioning our portfolio. So there were a number of trustees who thought we should divest. And we talked about divestment, and we looked through our portfolio and said, well, what would we divest of? What are our stranded assets? And they were tiny, as you might imagine. We didn't have a lot of coal and oil. We had a little bit here and there through external managers. And in private equity or in hedge funds. And our advisors told us it's going to be very expensive for you to get rid of every last piece of it. You've got less than 1%, but it's all over the place and tiny little pieces and your managers, you're part of funds that will make decisions.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Moving in the same direction and responding to those incentives, and I think we will quickly be able to reduce emissions. Now, I think we're also going to have to do geoengineering to reduce the existing CO2 in the atmosphere. So one way to think about how bad this problem is is to recognize we're probably going to have to pull most of the CO2 that we're putting into the atmosphere here today back out. That's an expensive proposition. That's a huge liability for the next generation. And the sooner we get started on that, because it's a lot cheaper not to put it in than it is to put it in and then pull it out.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a lot of different ways, and it's not so obvious as you suggested, the first easiest thing to talk about are things like coal and oil. And if we're moving rapidly to a low carbon economy, that's not going to be good for those industries in general. And then within other industries, transportation we talked about, you're looking for the companies that are going to be positively impacted by those, but it's not so obvious. If it was obvious, everyone would already be doing it. And I guess some people think, and so far it has been correct, that we're not going to slam on the brakes. We're just going to keep moving in the wrong direction until it's too late. It's a pretty depressing thought, but I think we're going to get it right, I hope. I think that once we do create those incentives, I'm an economist. I know how powerful incentives are. You're going to have every entrepreneur, every business, every investor, all.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“That the transition to a low carbon economy is going to be faster than what's built into market expectations. And I think that's true, but to be honest, so far I've been kind of wrong. We have not slammed on the brakes. Our foot is still on the accelerator, and we're going in the wrong direction, other than the COVID. Now, COVID is a whole other issue, but the bigger picture in the longer run, we haven't yet gotten started.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“If we're in a world where there's a lot lower demand for oil, the first order implication is that the price of oil is going to be lower. And I think that's true. I think we're in for decades of low oil prices. So then you ask yourself, that's not going to be good for the oil industry, but it's certainly going to be much worse for a company that specializes in extracting expensive sources of oil than Saudi ARMCO, which has a huge source of cheap oil. So they're all going to be negatively impacted, but some much worse than others. And then the question is, what's already built into prices? In my career, I've pounded the table on the fact that in most contexts, the market is pretty darn efficient. And so if I'm making an argument that stranded assets are overvalued, I have to be making an argument that I know better than others about their valuation. And really, my argument is”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Even within oil and gas, there's going to be winners and losers. But certainly in other areas, and it's not always obvious. So you say to yourself, I think electric vehicles are going to be a dominant source of transportation 10, 20 years from now. But who are going to be the winners in that space? Is it going to be the new entrant? So Tesla, but is evaluation there realistic? And then is it going to be the entrenched car makers? You know, should I be betting on Volvo or Toyota? A lot of that, it's more like fundamental analysis than quantum analysis. I'm a quant, but quants typically say, well, what's worked in the past? I'm going to project that into the future. We've never gone through a rapid transition to a low-carbon economy. I can't really look at what's worked in the past. So I have to do some fundamental analysis in oil and gas. I've got to think about, okay,”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, when you start looking through the stranded assets might be a little bit easier to identify, right? You can easily point to coal as a starting point and then maybe oil and say we're going to exclude those from our portfolio. How do you work it through in sectors where the impact of some of the stranded assets could work both ways?”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, Kepos, like other businesses, is in the business of making money. So what we are looking at at Kepos and what a lot of investors are looking at is, okay, there is going to be, inevitably, there's going to be a policy response. I can't tell you when or how. Is it going to be a carbon tax? Is it going to be cap and trade? Is it going to be a green taxonomy? What is it going to be? But at the end of the day, we know that humanity has to quickly reduce its emissions. And so there's going to be a rapid transition to a low carbon economy. What we're all facing in the future is transition risk as we implement those policies to move to a low carbon economy and the physical risks from climate change. And so as an investor, what I want to do is I want to tilt my portfolio in a direction that it's going to do better in the context of a rapid transition.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Up incentives. So, in Europe, for instance, they have this taxonomy, they define certain types of investments as green, others as brown, and then they create, for instance, tax incentives, other types of incentives for investors to invest in green investments. Well, guess what you get from that? You get a lot of green investments, but you don't necessarily get a lot of emissions reductions.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Okay, well, investors, and let's just talk about financial markets because I've been in them for decades, they are incredibly efficient at making money for investors and for asset owners, for entrepreneurs, people are motivated to make money. And so they allocate capital in the direction of the incentives that they face. And to this day, we have the wrong incentives. So capital naturally flows in the wrong direction. And people in the financial markets have tried their hardest to come up with ways to redirect capital in the right way. Things like green bonds, okay? And in Europe now, they're focusing on a green taxonomy. Well, okay, but guess what? The incentives go the wrong way. And so it's kind of like trying to push water uphill. It doesn't work very well. You get the incentives right. Get out of the way and watch the capital flow. There are different ways to say”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's Republicans in the Senate. Let's be perfectly honest. I think that's changing quickly. Let's just put it. One of the senators that I often talk to Sheldon Whitehouse says, what we need is a jailbreak because these Republicans in the Senate, they all know better, by the way. They all know it's real. They admit it now. They've changed their talking points. Some people haven't recognized that, but they say, yeah, it's real. Yeah, it's caused by human behavior. And what we need is innovation. Well, okay, but if you want to get innovation, you need incentives. I always pound on incentives, you know, because what are incentives? Anything that changes behavior? Well, we've got to change behavior. We've got to change incentives. And, you know, they all get it. So it's a question of when is the opportunity politically for them to come out and say, yeah, yeah, we've got to do this.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“NGOs, academics, and other interested parties, and we're all working right now to create a report for the CFPC that's going to provide hopefully a kind of roadmap for the financial community on how to deal with climate. And of course, one of our recommendations is that we create appropriate incentives to reduce emissions. Everyone agrees on that. I don't know how it can't be done. It's got to be done. It's got to be done soon, and everyone seems to agree on that.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've been doing a lot of different things with a lot of organizations. First of all, I sit on the board of the Climate Leadership Council, which is the sponsor of the Baker Schultz Carbon Dividend Approach. That's probably the leading U.S. effort to price emissions right now. It's a bipartisan effort. It's got support from basically the entire corporate sector, virtually all the economists in this country. A lot of the environmental communities. I like to tell people we've got support from everyone from ExxonMobil to the World Wildlife Fund and everyone in between. So that's pretty broad support. Now, I'm also the chair of the CFTC, that's the Commodity Futures Trading Commission, climate-related market risk subcommittee, which is a group of 35 leaders of the financial markets, including banks, insurance companies.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think you're saying, well, you know, I think the US is by far the stumbling block in terms of global coordination today. Europe and China and the rest of the world, frankly, are ready to move and are waiting for the US. Well, I don't think they're waiting, but the reality is that we should all be moving together in a coordinated fashion. When I talk about an appropriate incentive to reduce emissions, of course I mean globally harmonized. And until the US starts moving ahead, you can't expect other countries to move ahead with a strong response on their own. And it's got to be coordinated. So I'm looking for the U.S. to come to its census that we should take this seriously. And therefore, I would hope to see a carbon tax passed by Congress sometime next year.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Science for recognition of the reality of what science tells us and the need to take it to heart when we come up with government policies. So I'm optimistic that we are going to slam on this break and create the appropriate incentive to reduce emissions that will hopefully allow us to avoid catastrophic climate outcomes.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“I don't have evidence to point to Ted, but I think it's very likely that when we get through this COVID crisis, we're going to see the parallels. They're both global risk management crises. In both cases, they're urgent. And in both cases, we're reacting too slowly. And what we've seen with COVID is the cost of acting too slowly, particularly in this country, relative to some of the other countries that acted quickly and got much better outcomes so far. But we're also seeing a lesson about the collective action, the importance of collective action. None of us can address these on our own. We have to work together. We're all in this together, and that's true for climate as well as COVID. And I just hope and expect that there will be a pendulum swing away from this sort of crazy, populist, ignoring”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“We're in this period of time of this global pandemic with COVID nineteen, and part of what you're describing, this exponential change over time and the need to start earlier, I think is more tangible now to people because of what's happened with this pandemic. Is there any movement that you're seeing yet in the government or the powers that be that need to make these changes to recognize the”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“We're already on a path that will take us above that. And at 2 degrees C, that amount of coral reefs that will be lost is over 99%. So we're basically going to kill off all coral reefs globally. And that's a decade away, something like that. I mean, to me, this is just a huge crisis. And it's sad because had we addressed this 20 years ago, wouldn't have been that costly. We could have had a very smooth transition and the maximum temperature would be somewhere around where we are today, which is to say not great, but not catastrophic. And instead, we have this huge risk and it's growing very quickly.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Kind of the best case, you're going to get somewhere between one and a half and two degrees as your maximum temperature. Depends a lot on things we don't know how good is the technology going to be. Are we going to put on geoengineering? How quickly can we pull the CO2 out of the atmosphere when that becomes economical and so on? So those are a lot of uncertainties, but bottom line is that we can expect that temperature to get above two degrees if we don't act very soon in the next decade. And two degrees C is, according to the IPCC or say the latest science, is just incredibly dangerous. Just as one example, I like to quote, the IPCC report on the impact of one and a half degrees versus two degrees. One and a half degrees, they said we're going to lose 70 to 90 percent of the coral reefs globally. That's already baked into the cake.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Your maximum temperature is going to be higher. You're going to have to slam the brakes harder and try and reduce emissions quicker. But at the end of the day, you're not going to be able to reduce it more quickly. And so you're going to get to a higher ultimate temperature. And the scary thing is how quickly that maximum temperature is rising. We're at about a one degree C above historical average temperature today. And for every three years that we delay pricing emissions, the maximum temperature, the best case, or let's say the optimal solution is another tenth of a degree onto that expected maximum temperature. And so if we're at, I don't know, 1.7 is about where we're at, best case. You don't know for sure, obviously. But in other words, if we had a globally strong incentive to reduce emissions that we put on immediately today, and obviously that's not going to happen.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“On it. The reality is today the incentives globally are very strong to support the production and consumption of fossil fuels. So it's kind of like I say, that's like having your foot on the gas pedal. Now, there are incentives to go the other way. And when you add them all up, the bottom line is something close to zero today. So you've got incentives going against you, you've got incentives going in the right direction. The net incentive globally is close to zero. And the question is, where should it be? Well, instead of a slow increase over time, the reality is in order to take into the risk into account, we should be quickly immediately slamming on the brakes. And I say immediately, and this is kind of an interesting part of our analysis, is we can also ask the question, what happens if we delay that pricing? And the answer is, well, you can't make up for lost time.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a couple of things that's showing. Number one, we should do what I call slam on the brakes. The usual approach, or let's say the usual types of modeling, which don't take risk into account, assume that you should start at a relatively low price for emissions today or, you know, whenever you started, should have started years ago. But then that price rises over time as you get closer to when these damages are coming. And they assume that you know when those damages are coming. Exactly. It's not a distribution of outcomes. So you don't worry a lot about getting prepared for the worst case because you assume you know what the cases are. Anyway, so one of the things is that rather than having a slow increase in price, which I kind of sometimes call an ease on the break scenario, because your one operator here is the price on emissions. And so that's your control. How hard do you...”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“Context One of the important things is that we think about the revelation of uncertainty over time. So we don't know what the fragility of the planet is right now. It could be very robust. It could be very fragile. Today we have to plan our policy in a way that prepares us for the worst case, which is a very fragile environment. So those are the important inputs. And then you make assumptions about those different things and you can look at your sensitivity to the different assumptions and that's kind of how you proceed.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“All right, if I create an incentive at this level, how much am I going to reduce emissions? So it's basically a mapping between where you price emissions. And think of the price of emissions as being a kind of a shorthand for all the different policies that you might use. Some might be regulation, some might be pricing of emissions in coal and oil and natural gas and so on. How hard are we going to push to reduce emissions? And we kind of summarize that in a price and then we map different levels of that price to different degrees of emissions reduction. And we say, all right, let's follow an optimal policy from this point on forward. What does that policy look like? And so we look at different alternative policies. We compute damages. We do a discounted present value of all those damages. And we say, you know, what's the optimal policy?”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's pretty straightforward too. You have emissions, the emissions create warming, and they also create other problems such as the acidification of the ocean and so on. And it has impacts on everything from health to national security, heat waves. You know the whole thing. So you got all these damages. And there certainly are a lot of uncertainties about the extent of those damages, the cost of those damages. And in our model, we put all of that into what we call the fragility of the environment. And then you convert that to a distribution of monetary damages that are occurring at different points in the future, depending on the level of emissions. So there's a whole bunch of approximations that we use there, data from science. So far it's all kind of science, but then you have to assume a cost curve that says,”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“We're talking about existential risk for the planet. So we should be very cautious. And that kind of got me very passionate about this topic. As you can imagine, when I realized that.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“A hundred dollars a ton. And now you say, but the range of uncertainty is much wider than that. It's not just me, the UN a few years ago had a report and they had a table about the limitations of economic models of climate risk. And they listed a whole bunch of limitations. And then at the end, they said the bottom line is you can get any number you want, anywhere from $2 a ton to $200 a ton. So I'm in the middle of that range, but it's still a big range. And the bottom line is what does it mean to say you have to worry about the uncertainty or you have to manage the uncertainty? It is that you have to be cautious. You can't take your risk number seriously. And so to be cautious means you have to err on the side of caution. It means a higher number in this context. You have to price emissions at a level where you're very confident that you're going to solve the problem and avoid a total catastrophe.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source
“On Wall Street, you don't get to pick a discount rate, you have to match it to the discount rates you see in the market. And similarly, I mean, there's a lot of issues with respect to price and climate risk. But the bottom line is that Flank Collie was actually kind of right. These models, they're so primitive. And we have so little data. We're extrapolating 50 or 100 years into the future. We don't know what the technology is going to be. We don't know what the fragility of the environment is going to be. There's these nonlinearities. Science knows a lot, and we know that we're doing an experiment that is very dangerous. But we don't know the full distribution of outcomes. And so when we come up with an answer to the question, where should we be pricing risk? Well, it's a risk number, but the uncertainty around that is so large. And what I found when I looked into this was that the number that came out of the model, it was hard to get it down below 60%.”
2020-06-15 · Capital Allocators · Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141) · IDENTIFIED FROM THE TRANSCRIPT · source