Hi and welcome to the Impact on Fintech TV. I'm your host, Jeff Guterman, and we're down on the floor of the iconic New York Stock Exchange. I'm joined this morning by Gabrielle Toomey. Gabrielle, welcome to the show. Thank you. Jeff, it's great to be here again. It's always an honor. So I always like to start our interviews by asking people there, why?
Why are they doing something for good? Why are they using their powers for good? Was there a moment in your life that kind of pushed your direction towards impact, and the work that you do? Yeah, there have been multiple moments. There's been like a moment.
00:00:50.120 — 00:02:03.670 · Speaker 2
That then gets reinforced and reinforced, and the reinforcing mechanisms have been both. There's a a values based decision, but then there's actually it works. it's impactful and it makes a difference. And oftentimes it's been very profitable and successful. So for me, Jeff, the first moment was in 1987, I come home, I'm in high school.
I tell my mother I'm a raise $30,000 and buy an ambulance filled with medical gear and drive it down to Mexico. Now don't worry. I also liked guns N roses and it was having fun too. But it was a very difficult process and we did that. And then after I graduated in high school, the kids went down there and they built an orphanage.
And then later on in the early 1990s, I worked in the North Atlantic as an oceanographic research assistant, and I was collecting bottles of water with plastic. And then I was seeing whales that sadly had died because they were wrapped in plastic. I was like, there needs to be a different way. So then I started in about 25 years ago looking at impact and sustainable finance.
And there are pathways where you can make an extraordinary difference that are profitable and are create community wealth That, uh, I just, uh, generative for the economy, for individuals and societies. So. Yes.
00:02:03.870 — 00:02:16.310 · Speaker 1
So my message for this week is choosing Hope. And we were talking before the show about what's changed over the 25 years that you've been doing this from a positive perspective. Can you touch on 1 or 2 things that you've seen change?
00:02:16.350 — 00:03:11.880 · Speaker 2
There have been so many positive changes. Well, it's easier now to doom Scroll or what the latest person say, get focused on something like that. But we just talk about an example. Climate change and climate science is now rigorous, understood, and new and universally applied to all sectors of the economy and every country in the world.
That's tremendous natural capital and water risk, which are right behind that, are now being deep and in the same way, the same place that climate change is maybe five, uh, climate risk analytics was 5 or 6 years ago, but on top and top of that stack, we have equity and community wealth. When we have extraordinary innovation happening.
And so yes, things are challenging, but we're also here. This is our time. And if if we're not up to the challenge, why are we on this floor? New York Stock Exchange. Love it. Or show up or go away.
00:03:11.920 — 00:03:17.960 · Speaker 1
Exactly. Go harder. Go home. Yeah. So tell me a little bit about what your company does today.
00:03:18.200 — 00:04:03.580 · Speaker 2
Dow Responsible Alpha is a staff owned public benefit corporation or a B corporation. And we're about about ten countries around the world. And what we do is we sit at the intersection of finance, natural capital and energy transition, public health and risk. We help investors and corporates and family offices understand the risks that they are facing, price those risks.
But how do we do that? We generally use publicly available data. We provide dashboards and analytics, but we only invoice the client after they can replicate the work themselves because this world is based on trust. We have to trust each other when we want to envision what a hopeful future looks like.
00:04:04.340 — 00:04:28.060 · Speaker 1
Love it. Talk to me about the evolution of ESG. I used to call ESG the GPS of investing, because I always thought it was a data set that was evolving, that we used to get from point A to point B. It became a lot of things along the way that it wasn't for time. Certainly it wasn't an alpha driver specifically. But talk to me a little bit about your view of the evolution of ESG.
00:04:29.820 — 00:05:08.750 · Speaker 2
ESG. ESG is a risk management approach, and does it at times identify alpha across sectors and for firms now? Let's define what we're referring to when we say ESG. Well, there is a 2004 definition of environmental, social and governance. But many of the underlying metrics are much older. We're sitting in New York.
So one of the metrics I like to talk about is number of individuals on the board. That's a whole number. It's a quantity it's not going to be you know, 1.2 is going to be 1110, 12. So, Jeff, do you know what year it became law in New York State that corporations or businesses had to disclose the number of individuals on their boards?
00:05:08.790 — 00:05:14.110 · Speaker 1
No idea. 1811 wow, wow.
00:05:14.590 — 00:05:46.430 · Speaker 2
So some of these metrics have been with us for a very long time. Well, the umbrella acronym is no. 20 years old, right. So as as you've described, these metrics get put into an umbrella acronym umbrella. And then they become there's a ballooning that occurs. And now we're seeing no what's come back now we're at right now is we're seeing that ESG is becoming a form, a regulatory perspective.
It's based on materiality, risk, financially relevant. So there's a bit of a thinning of that balloon. Yeah.
00:05:46.470 — 00:06:16.890 · Speaker 1
Let's talk about climate change. It's Climate Week in New York City when we're recording this. People see this in a couple of weeks, but we're going to see how the world has shifted from last year. And what we're seeing on the street is a lot more focus on physical risk of climate change, that transition risk, a lot more.
Talk about resilience. How are you incorporating data into talking to all of these parties, family offices and others to help them address these points that are becoming, you know, material today?
00:06:17.210 — 00:06:53.100 · Speaker 2
For we use publicly available data. And for a client, a family office client, we modeled out 100 year infrastructure risk for US ports, and he ended up coming up with the values and doing the Monte Carlo simulation of $500 million in that range that are not priced in the actual function of the report today, um, for another client remodeled out the physical and transition risk for a specific, um, 30 year bond issuance.
Um, and you could see that if the infrastructure the, the manner the manager of that infrastructure. Trying to talk about it anonymously here
00:06:54.460 — 00:07:12.420 · Speaker 2
did not include climate risk, uh, adaptation or mitigation. You're looking at a 22% loss on principal over 30 years. So, uh, there's a significant appetite for climate risk, uh, transition and analysis. And we're also seeing the horizon much more interest in adaptation.
00:07:13.180 — 00:07:35.740 · Speaker 1
Talk to me about that, because you're you're talking about resilience. You're talking about adaptation. Are companies willing to start spending money upfront on adaptation? Because up until now it's been a post stress expense or company is now looking at what can they do ahead of the risk to we're yes.
00:07:36.940 — 00:08:06.160 · Speaker 2
We're we're hearing that, um, I'm not going to say the name, but it's a very large right there because of the heat wave that we had in Europe. We're looking at healing heat island effects. And can we create applications and tools that identify behavior changes for the individual at at. At which level the department that they live in is, you know, remind them to open the windows, remind them to change their behavior.
And because adaptation is what we're facing globally.
00:08:06.800 — 00:08:11.040 · Speaker 1
Do you see physical risks becoming a capital markets driver today?
00:08:11.080 — 00:08:12.680 · Speaker 2
100%. It already is.
00:08:13.280 — 00:08:30.640 · Speaker 1
Um, in what ways is it showing up? Because if you talk to people on the floor, New York Stock Exchange in New York City, they are still poo pooing a lot of the risk. But where are you seeing it show up and where our company is getting more interested in really talking about it.
00:08:32.080 — 00:09:06.570 · Speaker 2
Unfortunately for the companies where we've seen it show up, it's often when those that equity prices decline. So in the last 10 to 12 years, there are many examples of corporations in the real economy who do not actively and correctly price out physical climate, physical risk in their financial statements.
And we've seen companies go bankrupt. We've seen companies have significant $100 million impairments. I've been part of both of the examples, you know, working with those companies that pushed them in that direction. Now, the issue is, are we seeing companies receiving an upside in climate risk? Um, that slope is not as steep as the downside.
00:09:07.090 — 00:09:10.170 · Speaker 1
You talk about adaptation finance. What is that?
00:09:10.610 — 00:09:41.290 · Speaker 2
Adaptation finance. Imagine you're in New York, where 16% of the dwellings in the city are at or, or in the flood zone. Uh, how do we before the next flood, before the next hurricane Sandy? How do we create storm barriers and other tools and put them in place, physical structures in place? So when that flood does occur, it doesn't destroy the individual's property.
Uh, here you can partner with insurers on adaptation finance because obviously it helps them with risk management of their premiums.
00:09:42.290 — 00:10:03.260 · Speaker 1
All right. So let's shift gears for a minute. We're seeing a plethora of data center build outs across the globe at this point. Specifically, America is trying to lead the charge. Europe as well. China, obviously. What are you seeing in the risks in that that are potential impacts to the market?
00:10:04.180 — 00:10:11.820 · Speaker 2
A couple of things. During the UK heat wave, which also impacted us in Central Europe, where I live on some of the data centers shut down.
00:10:13.020 — 00:11:05.120 · Speaker 2
So we do see physical climate risk impacting data centers function and functionality. Uh, we need to have a little bit more creativity around the energy source for data centers, enhanced geothermal systems, which is like mimicking fracking, where fracking doesn't exist. Could be a long term tool for data centers.
At the same time, we need to understand that the efficiency of tokens are going to is going to increase over time, both on the hardware and on the software perspective angle, so we price that into how many data centers we build out. Now, what's happened is that the data center build out has done a very poor job of stakeholder engagement, that understanding the communities that they work in and live in and expecting, you know, families in the United States to to see their electricity bill go up by, you know, 300% because the data center is taking the low cost of electricity.
00:11:05.240 — 00:11:38.120 · Speaker 1
Do you think in some ways, the people that are building out the data centers have not done the rigorous amount of work that's needed to look at the energy mix, to look at the water resources that are available. I mean, it seems like a lot of communities, they're running full steam ahead, and now we're getting huge community pushback around the US, at least on these data centers.
How did these two get meted out? How do we meet in the middle to keep this race going for whatever that might be worth, but also not to destroy the communities where they're building them out?
00:11:38.160 — 00:12:18.250 · Speaker 2
So this this makes me smile, Jeff. You know, you know, the 1994 J.P. Morgan Value Risk memo. Yeah. Right. It was every fork was at 415 or 4:30 p.m.. It had to show up on the desk. And that's what we're missing here. Uh, and what I'm referring to specifically is effective Monte Carlo simulation, looking at the non-linearity of risks.
Okay. Water today, energy use today, stakeholder engagement today. My check check check be fine. What about in five years? But about ten years. But about 15 years when we have data centers being funded by long term financial vehicles and debt issuances, we need to have an analysis and risk that goes past that maturity date.
And that's what's not happening.
00:12:18.970 — 00:12:25.210 · Speaker 1
Yeah, it seems like we're running full steam ahead without much thought about the wall that we might be running into. Yeah.
00:12:25.250 — 00:12:30.010 · Speaker 2
So it's not about the data centers themselves. It's about effective risk management.
00:12:30.530 — 00:12:46.390 · Speaker 1
When you look at 2030, there are expectations that data centers energy grid needs can outpace total output of energy today. Like how do you balance that out as a data center or as a consultant working with these firms and these communities?
00:12:48.230 — 00:13:11.550 · Speaker 2
That's a great question. So, Jeff, you know, how many times have we seen in our careers a, a here we are today, here we're here today. And that little line that says things are going to go like this. Yeah. And you're like, you know, five years later you look about back at it in alignment this way. Yeah. I mean, think of what happened with, uh, solar deployment.
Yeah. You know, a gigawatt of solar took a year in 2012. Now it takes, you know, a day or two.
00:13:11.550 — 00:13:21.670 · Speaker 1
I mean, think of late 90s cell phone, you know, hours and stuff, or, like, the hottest thing to invest. And that went quickly. Um, turn direction there.
00:13:21.710 — 00:13:42.240 · Speaker 2
So the issue is technology changes. You have to build that into your financial models. You have to also build into the dynamic nature of people in their communities, into those financial models. So you have an appropriate risk management strategy. So I'm not sure that we'll be at that meet that meet that expectation that people have that data centers will be so such that energy grids suck.
00:13:42.240 — 00:14:02.200 · Speaker 1
So when you're having the ESG conversation today different than it was even a year ago, five years ago, well, what is the real versus noise parameter? You know, where are you helping people travel the right path? And where are you saying to firms and companies that that's noise that you can potentially ignore?
00:14:03.240 — 00:14:38.420 · Speaker 2
Um, honestly, it's much easier now, uh, because of the because of the perceived risks, not the risks, the perceived risks in this sector. Many people in institutions have fled or and now the people are there are the experts. Right. And we know what to do. And we have the case studies and examples of how we use ESG metrics, which are simply non-financial data.
An ESG metric is number of people on the board, uh, number of women in management. Uh, do the executives have an energy strategy? I mean, this is common sense, and we put this into financial models and people are like, oh, that helps them with their decision making.
00:14:39.020 — 00:15:08.700 · Speaker 1
So people are still having the conversation. They've just removed anything from their marketing materials that says the estate. I mean, that sort of it seems to me like the conversations in the boardrooms are still happening. People still care about risk sometimes. It seems lately, people and companies care more about risk than they did even a couple of years ago.
They're just avoiding the public noise, I guess. So that's maybe where the noise is. The noise is publicly, we're backing off from ESG privately behind the scenes. We're doubling down on it.
00:15:09.180 — 00:15:56.070 · Speaker 2
But it's not it's not all roses. Uh, with diversity, equity and inclusion, what's extraordinarily important when we understand that diversity of thought and thinking and processes and how that informs teams and informs products and services over time, whether on the on the for profit side or on the risk management side, when we remove into categories of your client base by removing Dei initiatives, you're hurting your bottom line.
When you have less diverse management and executives and teams and teams themselves are not informing executives through a risk culture matrix across a firm. You're hurting the firm. And that's why Dei is extraordinarily important. So people are not calling it Dei. They call it inclusion, or they're just not publishing that.
They have policies on data.
00:15:56.470 — 00:16:05.830 · Speaker 1
So in closing, talk to me about responsible alpha in how it helps corporations navigate climate, align finance.
00:16:06.510 — 00:17:00.330 · Speaker 2
We helped a large state owned enterprise determine if they expanded their oil and gas exploration. We were able to show them by performing re measuring their financial statements and forecasting those over 20 years. They would in fact, see a decrease in their credit rating. So if they stopped oil and gas exploration, that could increase their credit rating.
That's an example for another oil and gas company. We designed their ecosystem services strategy Where we looked at 1600 ecosystem services. Create a decision tool that then would look at impacts and dependencies. Why does that matter? A wall of water comes down, floods a refinery. That's a bad scenario.
But if it's the same weather event in this water coming down, but more of that water is absorbed by the pervious nature upstream. So could they put a conservation easement and protect a forest upstream as a way of decreasing physical risk to their their operations?
00:17:00.450 — 00:17:18.770 · Speaker 1
I like to close on this, because maybe the rest of the capital markets could get the message that if oil and gas companies are looking at the risks of climate change, maybe climate change is real. Thank you so much for being on the show today. Really appreciate it and hopefully we'll have you back soon.
00:17:18.810 — 00:17:20.250 · Speaker 2
Love that. Thank you so much, Jeff.
00:17:20.250 — 00:17:27.170 · Speaker 1
Thanks, thanks. That's it for the impact on fintech TV. I'm your host, Jeff Kinnaman. Until next time.
