Climate Investing, Resilience & the Future of Business

Hi and welcome to the Impact on FinTech TV.

I'm your host, Jeff Guterman.

I'm joined this morning on the floor of the New York Stock Exchange by Sarah Katnick.

Sarah is the managing director and global head of climate advisory.

Sarah, welcome to the show.

Thank you so much for having me.

So, on the show, we have a tradition of asking people why they're using their powers for good.

Can you give us a little insight into why you're working for good and hope and positive things in the world?

Yes, so I am a scientist by training, and I've been a long time researcher and leader in science.

On climate and now I work at JPMorgan giving advice to companies, to governments, um, and investors all on how to use climate science and put it into their decision making to be able to become more resilient as we see more climate events and extreme events and climate change into the future affecting business.

So, when you're talking to these executives, how do you explain adaptation resilience to them?

How, what's the language that you're using that really gets them to want to do something and, and really act for change?

So adaptation resilience is knowing what is going to come into the future, either gradual change or volatility, and being able to plan for that.

And with climate, they do it every day in many industries.

It's called business resiliency, and it's just reframing that to understanding that climate is going to change conditions gradually over time, and we actually know what those changes are going to be.

And so you can actually plan in advance for them to position yourself either to be resilient to the risks or to capture new opportunities that emerge.

As a result of climate change.

So when you're talking to these leaders about like where this shows up on the balance sheet, where do you first see these hits coming to the balance sheet of a corporation?

So across all sectors, most companies are seeing this in their property and casualty insurance as those rates are going up due to inflation, due to labor costs, but also actually due to climate change.

It's actually already in the data that they're seeing.

But also it comes in the form of soft commodity volatility.

So in the last couple of years, we've actually seen elevated pricing, and that's due to climate change and many soft commodities around the world.

So, I'm just curious, where're you're obviously covering global, so are you having easier conversations in Europe and America?

Is Europe ahead at least of the curve of wanting to engage around adaptation, resilience?

Are you seeing American CEOs of corporations start to come along a little bit quicker because they're seeing these hits to their P&L?

In the United States, there is a broad focus on resilience, especially due to volatility in the markets right now.

And so there are conversations around how do I become more.

Resilient to my supply chains.

How do I have business resiliency?

How do I ensure that I am protecting revenues into the future and lowering costs?

So this is one piece of many things.

In Europe and Asia, it's very specific on, I want resilience, but I also really want to focus on what my climate resilience is.

And there's two different drivers.

So in Europe, a lot of it is regulatory, but also social expectations for being able to think about climate.

In Asia, the comments are around.

They have less capacity for adaptation, particularly in Southeast Asia that is closer to the equator.

It's already really hot, it's already really humid.

Many of the countries are island nations that are dealing with sea level rise and water shortages.

And so for them, it's fundamental to keeping the economy going because they have less capacity for adaptation in the coming years.

So they're planning much further in advance, I would say, in some parts of Southeast Asia because they're already dealing with many issues.

They're moving capitals in Thailand, and I mean, very progressive.

I mean, at home we're moving people out of New Orleans, so, and Louisiana because of flood plains rising too, so it, it's the message is slowly getting out to the general public, but I think corporations who are seeing it in their P&L, they have to act quicker.

Yeah, and we're starting to actually have the, the modeling capabilities and knowledge of what the future looks like.

So early modeling of like SUP.

500.

You have losses by 2050 of over $1 trillion if no adaptation takes place.

And actually, the majority of that comes from extreme heat and their analysis of extreme heat, because that affects labor productivity.

Here in the US actually from the US Bureau of Labor Statistics, about a third of all US workers work outside, significantly.

And so when you have heat waves come through, you can't be working at the same level.

You have to have work stoppages, or you have to shift worked hours to when it's colder at night.

Um, and so we actually already see that, and I think this summer there, we've already had a few really early season heat waves in March and then April, and I think we'll have some more this summer due to where the climate is setting up for the rest of the summer.

So we'll see this happen again, and it'll, it'll be interesting to see what those impacts are and then what the responses are as people observe.

What's the common business interruption pathway that you're seeing right now, is it heat?

Most common in business interruption right now is due to severe convective storms taking out either infrastructure or leading to a flood post disaster, which is then interrupting transportation and movement of goods.

Increasingly we'll see heat as one of them.

The other one is in wildfire.

So in wildfire prone zones, which traditionally was the American West, Mediterranean region, parts of Australia, you get outages because you actually damage infrastructure and then you need to rebuild that infrastructure afterwards.

So it depends, and it's really regional.

It's really a local issue, depending on where you are and what types of events that you experience.

You talk about tenure of CEOs, this time being around 7 years.

Do you see that as having a big impact of getting on board to a changing policy and changing rules and regulations within a company?

Most executives think about climate issues originally as something that's far out.

It's many decades out, so it doesn't impact them.

But now we're actually seeing a pace of change where the statistics of climate today are separate from what they were in the past.

And so if there's no planning, there's now exposure.

And increasingly with additional change that will affect property values, it will affect asset values.

And so talking with executives, I'm not talking about how do you manage through what you expect the world to look like 5 years from now, 10 years from now, because assets will reprice in advance of.

That change.

So if you are working through and a manager through the next 7 years, you will actually see the effects of how people are responding to the climate that occurs over that time.

But then also, at the end of it, those values will differ based on what expectations are into the future.

And so when I work with executives, I say, You should have an idea what you think the world is going to look like in 5 or 10 years, and how you need to position your company for that, and then you need to make a plan through that time horizon and work towards that.

Are you finding that people are open to what the models are now saying the changes will be, or is there still a lot of resistance to modeling and the climate always changes, or you still hear, because I talked to advisors mostly around the country and still hear all the time.

The climate's always changing, when we talk about climate change, it's a defensive response, and then you also have, maybe we could talk a little bit about recency bias that, you know, in markets, certainly people have that.

People think the markets are going to do whatever they did in the last 3 months.

Maybe in hurricanes, people think that the hurricane season is going to look exactly like last hurricane season, which was pretty muted.

Is that what you hear sometimes out in the market?

Precisely with recency bias, people believe what they Recently seen and they act towards that, particularly in any extreme events.

So the modeling of climate change, it's very theoretical for people until they actually start observing or feeling that they are seeing climate change themselves.

So it's often after a major event that companies want to reassess and look at what their resilience is and have a holistic review.

And so I see this regularly around the world.

Say, for example, a transportation company had a main line washed out due to a storm, and then they've actually now analyzed all of their lines to know where those places may be that they might.

Want to rebuild or fortify in advance as they analyze how that flows through, uh, all, all of their supply chains and all their capabilities.

And so it's, once they have an event, that is actually often a trigger for the full review.

And the other way that they do full reviews is the regulatory rise or board members observing it and it's pushing it.

The other way that I see it is because of rising insurance rates, people are starting to realize they need to manage those rates, and the way that you manage your insurance rates is through resiliency.

And so there's a few pathways that lead to the conversation, but once the conversation is had, it's a very similar conversation with every company.

It's interesting because until they see the cost of not doing resilience, they usually don't want to act.

But to your point, once they actually see the cost of an event, and you can come in there at that point and talk to them and say, look, if you had spent $1 you would have saved $7 of this actual event, and you, you've published some work about this, and you talk a lot about in the community.

Are you finding that CEOs are, are finally starting to come to grips with the fact that Yes, you can spend a little bit of money and save a lot of money rather than waiting for the event and spending a lot of money.

Yeah, 5 to 10 years ago, most of the arguments and analysis of resilience, they sat in governments like in an emergency management, like in FEMA, if you spend $1 you get $9 to $11 back.

In the last couple of years, studies have come out from consulting firms, from think tanks, from corporates, all observing in different sectors in different parts of the world what the return on investment is of of resilient spending, and it's between $2.43 dollars per $1 spent, and it depends.

And so, there has to be a mind frame shift from this is a cost, so this is actually protecting value into the future, and the value that's protected is revenue streams, and it's also replacement costs.

Of actually having that resilience, I mean, it's incredible because the ROI is really there, but it's still money that you have to spend and you're not exactly sure when you're going to get that payoff to come.

So I can grok how it's still hard for some CEOs to manage around that and to get the board.

I would say it's also.

A little bit easier right now with volatility in the markets and the tariffs the last year or so that that company executives are more attuned to trying to manage volatility.

And this is just another source of volatility that needs to be managed like anything else.

So speaking of volatility, they're talking about potentially the worst El Nino that we've had in over 50 years.

Each day that I check the news, it's more and more certain that we're definitely having an El Nino.

Obviously how bad it will be is up for grabs, I think, until we're in the middle of it, but are you talking to corporates and CEOs about the risks that are coming with this, and what are the risks that Come with a potential devastating El Nino.

Yeah, so an El Nino is when the eastern Pacific gets warmer and relative to the rest of the ocean, and that sets up changes in weather patterns that lead to places getting a lot wetter, a lot drier, a lot hotter.

Mildly colder versus what they are on average.

And so these pattern shifts affect anything that is out in the physical, uh, being out there.

So, the main pathway is often through agriculture and soft commodities.

I have been talking.

To a lot of clients about this because we also have had the Straits of Hormuz closure, which has affected the production of fossil fuel-based synthetic fertilizers coming out of the Middle East.

About a third of all urea, uh, so a nitrogenous fertilizer comes from, from the region.

And that has been shut off because they haven't had the natural gas to be able to supply it.

There's been damages to the natural gas plants and the fertilizer plants, and then it hasn't been shipped.

And nitrogen as fertilizer, you have to apply it when you're doing the planting, cause it has to be in the soil for the seeds.

So if you miss application at planting, you're waiting until the next season.

And so, Early in the conflict, most places had the fertilizer that they needed, but as time went on into the summer, uh, there has not been the availability of fertilizer and the fertilizer prices spiked.

So what we've seen is people are applying less fertilizer around the world, which will lead to lower productivity, but now you're getting an El Nino on top of that.

And so it takes months for the fertilizer costs and availability to normalize after an event like this.

We saw this after the Ukraine conflict that has taken a very long time for fertilizers to normalize.

So this is another price spike and shortage that will take time at the same.

Time that the El Nino is brewing and will affect soft commodities.

So overall, this is inflationary to, so it costs of, uh, food production and soft commodities, and then it will also affect supply.

So, we're going to see this into the next couple months, into the next year, as that fully plays out.

And that's the immediate one with an El Nino.

The secondary one is because we've had a background of a warming climate.

And then now you're getting El Ninos.

With every major El Nino we've had since '97, 98, we bleach more and more corals around the world.

So in '97, 98, it was a little over 20% of all corals bleached at the last El Nino, 23, 24.

We bleached over 84% of all corals worldwide.

So I'm really watching this El Nino closely about what it will do to global corals, because if you have another bleaching event this close to the last one, you'll see extinctions of some of the corals regionally.

And why that matters is you remove those corals, you remove the sponge and the for waves into the shoreline, and that leads to increased erosion.

Loss of corals also decreases tourism in those places, and then it decreases fish availability.

So this will impact into next winter to spring tourism in any place with coral reefs.

So think Caribbean, people will not want to be there as much with that.

And then it will have this longer term effect on coastal erosion in those places due to the loss of corals, which would be many years after.

So this event is a point in time, but it has a long tail into how it affects things.

And we've already seen that in places that lose their coral, their property and casualty insurance rates go way up because coastal resilience, it has a lot more erosion and it becomes much more exposed.

It's interesting.

Sometimes it's not until these weather changes hit major events that people really start to take notice, but we look at this year's ski season.

Colorado and Utah got almost no snowpack the entire season.

We, I think as people that are focused on climate, look at the knock-off effects on that, is there going to be enough water going into the summer because that snow usually becomes the water that supplies the communities into the summer.

Roland Garros, the French Open this year, 100 degree temperatures every day, all the top seeds knocked out, the impact on tourism, people being able to go to the Stadium.

So you're seeing these climate changes affect more visible things, which I think maybe helps us make the case to the general public and to corporations that this is a visible problem.

We have to start investing in survivability and adaptation and resilience now, sooner the better.

Yeah, and your comments are also, um, I think a lot of people thought of it as a loss, and I can have insurance to cover that loss, and I'm fine.

But the examples that you were giving, those are revenues.

So revenues of the ski season are hugely important for those communities.

They make all their money in that time period.

And so it's not just loss due to an extreme weather event, which is something we can picture and we've seen, but it has all these knock-on effects on different revenue streams, on different supply chains, on productivity in ways that we've never experienced.

Before, and that's often the barrier that's hard for people to think through is I've never seen this before, so, so I can't fully plan for it, but we need to start thinking differently.

We need to pull information in differently to make plans for this volatile, changing world that we know will happen due to physics.

And so we can actually predict for it, but we just have to plan.

So it's a behavioral science barrier that we have, not one on understanding science and physics.

I haven't answer to this question, but I'd love to ask you, because I hear a lot from advisors when I'm going around the country talking to them about thematic investing and climate change, about the fact that I could wake up in the morning and have it be 40 degrees, and later in the afternoon it's 70 degrees, and that 30 degree temperature change hasn't impacted me at all, so why should I worry about 2 degrees of climate change?

Do you have a good response to that advisor, that I can carry with me as I Go out.

Yeah, the global temperature change is really abstract, but locally you can have temperature increases of 10 or 20 °C versus what is happening at the global level.

And so it's much more amplified at the regional scale in terms of numbers versus that number that's that global number.

And I think that disconnect of communication.

Has been a barrier to people understanding or planning for what that means as a result.

Yeah, I've heard someone said recently that the biggest problem in the US around the climate change kind of communication is that it's in Celsius, and if we had communicated climate change in the US, at least in Fahrenheit, that people would have realized it was more dramatic than 1 to 2 degrees, cause most US citizens don't. have any idea what the conversion rate between Celsius and Fahrenheit is, but I try to explain to people sometimes that the difference in an ice cream is one degree of whether it's ice cream or not ice cream anymore.

And that is what we have to think about when we think about climate change, and vegetation, plants, and agriculture that rely on very steady historical temperature ranges to be able to survive.

Um, go away on vacation for a week, forget to turn the air conditioning on, you come home, all your plants are dead.

These are problems of very small temperature changes, not huge temperature changes.

One last thing that you can say to our audience about why they should care so much today about adaptation and resilience.

I see it affecting all sectors, and to your point, we need to think about how it affects our businesses, how it affects our daily lives to understand then how to prepare, um, going into the future.

And one of the ways that I think about this is that it will affect everything, and it's no longer just climate is placed over here separate from everything else, because it needs to be integrated into those decisions.

And one of the ways that I'm starting to see it with investors is they're thinking about climate adjusted returns.

So as you said, You've built a property with expectations for certain temperature ranges, which affect heating and cooling, which affect, you know, how did the building expands or not, if it cracks or not.

Um, you need to have all of these considerations in there with everything else that you generally do because it's now starting to affect costs, affecting supply chains in ways that it hasn't in the past, and it will only continue because we know that climate change will continue until emissions go to zero.

And so we've felt it's just one of many things that we now need to plan for and incorporate.

Sarah, thank you so much for being on the show today.

It was a pleasure having you.

Thank you for having me.

That's it for the impact on FinTech TV.

I'm your host, Jeff Guderman.

Until next time.