02:35ladies and gentlemen I hope I'm not
02:38interrupting your lunch and I hope
02:39you're also enjoying your
03:00please welcome kikil advani Chief
03:02Executive Officer of AA Thailand to
03:05deliver his welcoming
03:16sikap distinguished guests Partners
03:18ladies and gentlemen a very very warm
03:21welcome to all of you and thank you for
03:23making the time to join us this
03:26afternoon it is my absolute pleasure to
03:29host the a Nobel laurates lunch and talk
03:32facilitated by the International Peace
03:34Foundation today as many of you
03:37know AIA has set an ambitious goal to
03:41engage a billion people live healthier
03:44longer and better lives and we aim to do
03:482030 we are also committed to achieving
03:51net zero emissions by
03:542050 and so we are dedicated to creating
03:57a more sustainable future for everyone
03:59that is included in our contribution for
04:05planet during the past decade climate
04:08change has become one of the key risks
04:10that has impacted communities around the
04:13world and in many aspects including its
04:16impact on global economic conditions AIA
04:20as the largest panan life and health
04:23insurer as significant assets and as an
04:27investor we recognize the scale of
04:29positive positive transformation that we
04:31can make to helping people live
04:33healthier sustainable and better lives
04:36for generations to come our ESG strategy
04:39is built around five key pillars health
04:42and wellness sustainable operations
04:45sustainable Investments people and
04:48culture and effective governance
04:50together we believe that the integration
04:52of these pillars contributes to a
04:54sustainable and healthier development
04:56for the people in our communities and
04:58ultimately for our planet
05:00I'm truly honored to be a part of this
05:03exclusive opportunity to hear from
05:05Professor Robert Engel Nobel laat for
05:08economics on how organizations can
05:10foster Global cooperation in addressing
05:13climate related economic Challenge and
05:17create a more sustainable future for all
05:19of us most importantly I hope that the
05:22noble laurates talk will facilitate the
05:24exchange of valuable knowledge and ideas
05:27among the great minds in this room so
05:30without further Ado I'm going to say uh
05:32welcome to Dr Angel and I'm going to say
05:35enjoy a great speech and great
06:14a financial approach to
06:25climate ladies and gentlemen here comes
06:27a highlight of today's event I'm honored
06:29to welcome Professor Robert Engel who
06:31was awarded the Nobel prize in economics
06:33for his research on the concept of Auto
06:35regressive conditional Heros acticity or
06:39Arch model which led to the probation of
06:41tools for analyzing stocks and enabled
06:44economists to make better forecast in
06:472003 Professor Engel was recognized for
06:49developing methods for analyzing
06:51economic time series with time varying
06:54volatility due to his research in the
06:56decades prior on mathematic techniques
06:57for evaluation and for casting of risk
07:00which was beneficial to financial market
07:02analysis especially for assets that
07:05could face volatility from various risks
07:07including climate risks let us hear more
07:09from Professor Engle on his perspective
07:11on climate challenges and how we can
07:13better address these risks ladies and
07:15Gentlemen please join me in welcoming
07:17Professor Robert Engle for the highly
07:19anticipated talk on the subject of a
07:22financial approach to climate risk a big
07:24round of applause to
07:26welcome Professor Robert angle
07:36well thank you very much for that kind
07:38introduction and thank you to AIA and uh
07:42thank you to uh Nick for uh for
07:47inviting me here and I want to say also
07:51a thanks to the International Peace
07:54foundation for organizing this whole
07:56trip and my uh speaking Arrangements
08:00I want to talk to you today about
08:03climate risk and I'm going to talk to
08:07you from a financial point of view and
08:11it Bears a little bit of a relationship
08:14to the Nobel Prize but not too much I'm
08:18going to tell you what that relationship
08:20is but then I'm going to talk a little
08:22bit about how at the volatility and risk
08:26Institute at New York University we're
08:28analyzing in the financial structure of
08:32climate risk how we're measuring it how
08:36we use that measurement in actual uh
08:39behavior and then talk finally about
08:42some current events to understand uh
08:46what we see in these risks
08:54this is the wrong set of
09:08them well maybe maybe it's okay maybe it
09:12it probably doesn't matter uh so this is
09:16the Nobel Prize this you may not know
09:19what it looks like but that's what it
09:20looks like but it instead of it being
09:24this big it's this big and and uh
09:30it sits in a drawer but what is it for I
09:33get asked so many times what it's for
09:35and you just heard one paragraph answer
09:38as to what it's for um when I first got
09:42it I couldn't say it even in a paragraph
09:45I had to say it in in an hour
09:49lecture I've learned to say it in one
09:52sentence it's a statistical model that's
09:56used to predict risk in financial
10:00so we want to be able to predict risk
10:04and this is a very easy to understand
10:08idea there is some statistical analysis
10:12of this including the word
10:14heteroscedasticity which you just heard
10:16but we're not going to have to deal with
10:20today but we do want to talk about
10:23risk and the first thing I want to show
10:31some ways we measure
10:33risk at the volatility and risk
10:36Institute which I co-direct and we have
10:39a website which if you choose you can
10:43see on your telephone just by typing in
10:46this uh URL and one of the first things
10:49you'll see is a description of where
10:53volatility is high and on the left is
10:57the country vola ility that's highest
11:01and you see turkey is on the top of that
11:03list in the lower left is where
11:07volatile on the upper right is where
11:10Industries are volatile and on the
11:12bottom right is Commodities so this is
11:15just a summary of something like 10,000
11:19assets that we look at every day as we
11:22measure volatility and post them on the
11:26Internet so people can see where risks
11:30another way we post them is on a map so
11:34here is a map of where volatility is
11:38high and green is where it's low red is
11:42where it's high and it's a nice thing to
11:46look at periodically when you first open
11:49this website where where are the risks
11:53where is risk High and the answer is
11:56here Argentina Mexico India India
12:01China maybe Saudi Arabia and so
12:07forth but not so much in the US and not
12:15Thailand so when we use these models to
12:19measure risk we're typically looking at
12:22the risk just a few days away in other
12:26words when we talk about the volatility
12:29if it's high it means that there's a
12:32bigger chance that it could go down
12:33substantially over the next few
12:36days if we want to know about longer run
12:41risks we might need different tools and
12:43that's what we want to talk about
12:46today we want to talk about climate risk
12:49which is clearly a longer run risk
12:52and the science of this is pretty well
12:56understood in a lot of ways I think the
13:00warming and it has enormous consequences
13:04which economists are spending time
13:05trying to figure out it will lead to
13:10productivity uh population migration
13:12stranded assets fossil such as uh fossil
13:16Fu fuel reserves or maybe more
13:20importantly stranded assets like capital
13:23and land which are no longer going to be
13:25productive it will lead to Global
13:28conflicts and reduction in the quality
13:30of life and in the most
13:36uh disastrous outcome the end of our
13:43species the thing is we see
13:46already impacts of fin of climate change
13:51this weather we're seeing outside here
13:54is evidence that the climate is changing
13:57this is especially warm for this time of
14:00apparently uh but we also see big major
14:06see Deluge of rain in some places and
14:09droughts in other places uh I've been
14:12told that the that the solinity of the
14:16rivers in Thailand is increased because
14:19the the sea level rise is pushing salt
14:23water upstream and there's not enough
14:25rain to bring it back to the Sea there
14:28are all sorts of things that happen as a
14:30result of this global
14:35warming but most of these consequences
14:38that we see today are small compared to
14:42what we can foresee in the distant
14:45future we think that the worst of these
14:47damages are still likely quite far in
14:50the future and so we have to decide what
14:55today as a consequence of these risks
14:59that are in the future and asset prices
15:04and finance is a way of thinking about
15:06this because asset prices
15:09reflect the long run risks of that are
15:15that are coming down the pike and asset
15:19prices today are therefore an indicator
15:23of what to expect but they are also the
15:27leaders that tell you
15:29where the money is going to go so the
15:33response to climate change is driven by
15:40prices so for example if you
15:44think we need more investment in
15:49energy that will be much easier to make
15:53happen if renewable energy stocks are
15:56high so that there's some profitability
15:59in building new renewable energy
16:01resources if we're saying it's just our
16:04because we personally think it's a good
16:06idea but it's not profitable we're not
16:09going to get nearly as much financial
16:11support for it so that we need to use
16:15these asset prices to Monitor and direct
16:19investment to solving climate change
16:23problems so you may wonder whether
16:27expectations of the future are really
16:30very accurately priced in today's market
16:34but just a simple little example here at
16:37the end when you look at the stock of
16:40Tesla it's about 60 times its current
16:43earnings when you look at the stock of
16:45GM General Motors it's about five times
16:48its earnings why is that well we think
16:51that Tesla has a much more profitable
16:53future and a much longer Horizon future
16:57than maybe General Motors does
17:02expectations show up very powerfully in
17:06today's asset prices and that's what
17:08we're going to be looking
17:10at so to start from the beginning what
17:13do we mean with when we talk about risk
17:16a risk is a event that's in the
17:19future it's typically a bad event that's
17:22in the future and it has some
17:24probability of occurring and if it does
17:27occur there's going to be be some bad
17:32so we need to understand what the
17:36probabilities of these risks are and
17:38what the consequences of the risks are
17:40in order to decide what to do should we
17:44avoid the risk should we try to change
17:47the probability should we try to change
17:51whatever if these bad events or in the
17:55distant future we call this a long run
17:58risk and climate change is mostly about
18:04risks we could think of this as long run
18:07risks of hurricanes and droughts and
18:12rise but we also want to think about
18:14this as the long run risk of our policy
18:17response to this we need to
18:21know is our government and other
18:24governments around the world are we
18:26going to respond in a creative
18:29impactful way to these kinds of physical
18:32dangers that are that are on the horizon
18:36and the uncertainty of political
18:39response is probably even greater than
18:42the uncertainty of the physical
18:47coming so I'd like to start with an
18:50example and this is just a simple way to
18:54think about a new type of risk that I
18:59suppose you're the owner of a beachfront
19:03luxury hotel there are many such hotels
19:07in Thailand I'm sure and there are
19:11longrun risks associated with owning
19:13these hotels but one of the long run
19:15risks is that sea level rise is
19:19ultimately going to destroy this
19:23hotel there's not much the owner can do
19:25about it but you don't know when it's
19:28going to happen happen how soon it's
19:29going to happen but he has to manage the
19:33hotel what does he do well he might try
19:36to sell it but at least in finance we
19:40assume that other people know the same
19:42thing you do so you can't really sell it
19:45for a lot more than it's actually
19:49worth a second thing you might do is
19:52that you might decide not to do a big
19:54expansion or a big upgrade of the hotel
19:57because the payback period perod might
19:59be relatively long compared to the
20:09underinvested you some money so your
20:12cash flow actually is going to be bigger
20:16that so you you might look more
20:18profitable temporarily because you're
20:23much but that would be rational in this
20:26case it might also be that other Hotel
20:30owners are doing the same thing and so
20:33the supply of uh hotel rooms may be
20:39reduced and that will drive up the price
20:41even more some monopolistic uh component
20:45to this so one of the things that you
20:47might expect is that the cash flows of
20:50this hotel might actually be improved by
20:53good management even though there's a
20:57risk that will be destroyed
21:02well maybe we should think about the
21:04investors in this hotel what are they
21:06doing the owner of the hotel might sell
21:09shares of stock would anybody pay for
21:12shares of stock in this kind of Hotel
21:15answer is yes because it's producing
21:19flow you would prod expect cash flows
21:23now and maybe they're fairly substantial
21:25but they're going to end at some point
21:28does that mean mean you're not going to
21:29want to invest in this hotel no what it
21:32means is you're going to calculate the
21:34amount you're willing to pay as what we
21:37say the present discounted value of the
21:40expected cash flows as long as this
21:43exists and so there is definitely value
21:46to this hotel even if it's
21:50temporary so we would have
21:53investors and they would be happy with
21:56their investment even though it's got a
22:03life so will the stock fluctuate over
22:07time yes it will fluctuate if if for
22:09some reason the end looks like it the
22:13sea level is rising more slowly or or or
22:16somebody builds a seaw wall the value of
22:18the stock might go up if demand for
22:22luxury goods goes up the hotel stock
22:26might go up and conversely if if demand
22:29goes down and the expiration time comes
22:32shorter the stock will go down so it
22:34it's going to behave like an ordinary
22:36stock but the risk factors are a little
22:38bit different from the ordinary case so
22:41I'm going to give this a name I'm going
22:45to call this termination
22:48risk termination risk it sounds kind of
22:51final doesn't it but when I use the word
22:53risk it means you're not sure it's going
22:56to happen you don't know when it's going
22:58to happen but it's a
23:00risk and we use risk in lots of ways and
23:04this is a great example of longrun
23:06risk and it's an example that I
23:10think will be useful in understanding
23:20sector so there are a couple more
23:23characteristics of of termination risk
23:26that I'd like to just mention now
23:30um uh I mean the first one is the The
23:34Economist way of saying this that when
23:36you invest in any kind of asset you get
23:41payback the first year but you get
23:43payback in the future too because the
23:45asset because it's Capital will maybe
23:48depreciate a little bit over time but it
23:50has a lifetime to it and so if you think
23:53there's going to be a termination date
23:55you don't want to make your stranded
24:00asset too big there are if you reduce
24:05your investment now you're likely to not
24:08have as much value that gets Stranded by
24:14events um if output increases as I said
24:19you might be tempted to increase the
24:22rooms however if termination risk is not
24:25too far away you probably won't increase
24:28Supply very much because you only have a
24:30few years of increased benefit so we
24:33might expect to see terminating
24:35Industries not have very much of a
24:37supply response have a pretty inelastic
24:42curve what's going to happen to
24:44Insurance AIA is an important insurance
24:47company who must have a good answer to
24:49this and I think the answer is that the
24:51price of insurance is going to start off
24:54fairly high and go up over time as you
24:58get closer and closer to the
25:02point it's not clear whether this does
25:06the hotel owner any good but it's what
25:10the actuar fair value of the insurance
25:14would be uh and you know assuming that
25:18you don't have a regulator that is
25:22so pig-headed that they won't let you
25:27increases and and finally when a small
25:29number of firms face termination from
25:33event there might be reasons for them to
25:37collaborate that is they might reduce
25:40their supply together and and get uh
25:46increased Monopoly rents in the
25:49temporary time till it's over and so I
25:52think that you might expect to see some
25:55consolidation of these Hotel owners uh
25:59to uh possibly achieve economies of
26:03scale but certainly to uh re make the
26:07reduced Supply an orderly response to
26:11climate change so take
26:16these this package of behavior and let's
26:20talk about fossil energy companies does
26:23this really describe fossil energy
26:26companies well I would
26:29say most of us think probably not but
26:32let's give it a give it a try here
26:36here's a picture of what the
26:39International Energy uh Association
26:43thinks the future of fossil energy looks
26:48like at least in in power creation coal
26:53blue uh green pale green is a natural
26:57gas and and oil is green and what these
27:02are it talks about different phases of
27:05what you might expect to have happen in
27:07order to get us from where we are today
27:10which is really basically the peak in
27:12this picture down to Zero by 2050 if
27:15we're if we have a 20 Global uh Target
27:19kind of like the Paris agreement has
27:25suggested the CEO of this Energy company
27:28company is going to say you know it's
27:29pretty unlikely that we're going to do
27:32this but there is a risk that they'll be
27:34it'll be successful and there's also a
27:37risk that it'll be half successful so I
27:41need to be careful in managing my
27:44company with this chart in mind I mean
27:48the other chart that he might be looking
27:51at is there is a massive growth
27:55Renewables again we might or might not
27:58trajectory uh but one of the things that
28:01the CEO might do is decide he will
28:04actually start trying to Green up his uh
28:08his his hotel so maybe the hotel owner
28:13decides he's going to start making
28:16vehicles as an investor are you going to
28:19be happy with this or are you going to
28:22say I don't think he knows how to make
28:26vehicles if he doesn't know how to make
28:28make electric vehicles he's just going
28:29to waste the money I'd rather have it
28:31back in my pocket and have my own choice
28:37it and I think that the company the
28:40fossil energy companies are not likely
28:43to be good at producing renewable
28:48least there may not be able to convince
28:52investors that in fact they're a nice
28:54green company now they're not really the
28:57same old fossil company that their name
28:59was and so I think you're not going to
29:01see a lot of fossil energy companies
29:05actually building a green arm I think
29:08more likely they're going to
29:12uh create uh subsidiaries that to do the
29:17renewable and sell them off so that they
29:19can have their own asset prices and uh
29:22and be treated as as a green investment
29:25and not worry about the fossil Energy
29:29company so what do we see when we look
29:32at the data well the good news is we see
29:35coal which has been rising up here
29:40end that actually the peak of coal looks
29:44like it might have been like 2006
29:47something like that but when you look at
29:49natural gas and crude oil you see
29:53they're Rising very substantially it
29:55doesn't really look like the picture
30:00you see renewable energy increasing but
30:03it looks kind of low by comparison to
30:07needs and nuclear power is kind of
30:13so the CEO of the fossil Energy company
30:17may not really believe that the future
30:20is as Bleak as I'm describing or as the
30:24Ia describes but there might might be
30:28still some probability that he's got to
30:30keep in mind that this could happen and
30:33it will be those probabilities that we
30:37want to we want to be looking at so how
30:40would we get from this historical graph
30:43that we started with to the Future graph
30:47that we want to hit if we're going to
30:50Zero well here are four government
30:53policies that you might think of and
30:56governments all over the world are
30:57trying to decide which of these things
31:00do they might tax carbon emissions this
31:03is what all economists in innately say
31:09Choice might not really be the best but
31:11it's we're we're taught this from the
31:16microeconomics this is the solution to
31:21right day two uh uh solution two is to
31:26subsidize renewable energy
31:29energy the Europeans are big on the
31:31first one the US has
31:34recently put together a very
31:38sizable uh policy uh and inflation
31:42reduction act to subsidize renewable
31:45energy a third is to regulate emissions
31:48and most countries do some amount of
31:50Regulation they may regulate what the
31:52power companies can do they many
31:56regulate what kind of uh cars can be
32:00driven and what kind of mileage they
32:02have to get what percentage of EVS are
32:05electric vehicles are required and so
32:08forth there are many different kinds of
32:10Regulation some of which could be very
32:13Draconian you could you could have a
32:15government say nobody can emit more than
32:25otherwise you get a giant fine or
32:31that but there is a fourth policy which
32:37nothing but I've called it
32:40hope so we hope that the private sector
32:44can do this on its own that's because
32:47the private sector consists of a lot of
32:49good people like all of us who really
32:52believe in the revolution of uh climate
32:56change and consumers are going to buy
32:59Goods which are Greener employees won't
33:02work for a company unless it's got green
33:04credentials investors and corporations
33:09to kind of just change their investment
33:13strategies to make them more green
33:17and voluntarily accept Greener behavior
33:22and to some extent this works but I
33:26don't think it can Poss POS be enough
33:28because it doesn't it doesn't give the
33:31big Financial incentive to being green
33:34that we really need from the first three
33:39policies but we're going to talk a lot
33:42about this fourth category because in
33:45fact it's where we are most of the time
33:50are investors and consumers and
33:53employees in economies that have not
34:02step and the policy step is what really
34:09decarbonize and in the process creates
34:14losers so the winners and losers are the
34:23decarbonize get to Net Zero and the ones
34:26for whom it is very difficult to get to
34:34so we call this transition risk and it
34:39is a parallel to physical risk we have
34:42physical risks and we have transition
34:45risks and one of the types of transition
34:48risk is the termination risk that we've
34:54about so how do we think about this in
34:57terms of asset pricing
35:01well in simple terms an asset which
35:05faces a long run risk is less desirable
35:08than one that doesn't so fossil energy
35:12companies that face termination risk or
35:15some kind of transition risk and other
35:18kinds of brown companies have a long run
35:21risk which makes them less desirable and
35:24makes their stock price
35:28when the stock price is lower of course
35:30this means that the expected return is a
35:32little bit higher because for the same
35:34amount of earnings so this is a risk
35:37premium so you get a risk premium from
35:41owning these kinds of assets that face
35:47risks so one strategy is to in invest in
35:54assets which have a positive risk
35:55premium so that you would invest in all
35:59assets another strategy is to say you
36:01know I don't want to Bear climate risk
36:03myself so I'd like to put some of my
36:06portfolio in a climate hedge that is a
36:09hedge that's going to do especially well
36:12if the climate is especially
36:14bad and what is a hedge portfolio going
36:17to do it's going to try to be long
36:20assets which are prepared for climate
36:22change and short companies that are
36:26not and and as a consequence the Hedge
36:30portfolio naturally has a negative risk
36:36it because you're going to underweight
36:46general a hedge portfolio should be
36:51underperform the market in terms of
36:58there is news that the climate is
37:00getting worse that climate risk is
37:02increased in which case the Hedge
37:04portfolio zooms ahead by by appreciating
37:09these stocks that are actually prepared
37:11for uh climate change so it's it's a
37:15there is a expectation in a static World
37:19which is that it will underperform but
37:21in a dynamic world where the climate is
37:24changing it might outperform
37:29and we're going to use that information
37:30to create some hedge portfolios okay
37:35so how do we construct hedge
37:38portfolios well this is a family camping
37:41trip we're working pretty hard going up
37:44this snow field um how do we do it we
37:47want to overweight stocks that are
37:51prepared for climate change and
37:53underweight stocks that are not we have
37:58which that is a problem we use data like
38:03ESG data and Emissions data and Industry
38:08sector data and so forth to try to
38:10figure out which stocks are likely to be
38:13prepared we might do surveys there are
38:16all sorts of things we do to try to
38:17figure out who's prepared and who's not
38:19prepared for climate
38:29that's what I think of there's a
38:31fundamental approach to it you try to
38:33think hard from the characteristics and
38:37so forth as to who is who are the
38:39winners and who are the losers an
38:41alternative approach is when there is
38:43news that the climate is changing you
38:46can look statistically at which stocks
38:49go up and which stocks go down holding
38:52everything else other risk factors
38:54constant so I'm going to show you an
39:00okay so the first one is what we call
39:04the stranded asset hedge
39:06portfolio which is a weighted average of
39:09three exchange traded funds it was
39:11proposed by Bob litterman and has used
39:14as his investment vehicle for uh the
39:17World Wildlife uh Federation and it's
39:20long the S&P 500 short 70% of a coal ETF
39:25and 30% of an broad energy
39:29ETF totally simple idea but it basically
39:33says you know it's the fossil energy
39:35sector that's going to be faces
39:37termination risk it's likely to go down
39:39over time and the SNP is the rest of it
39:43okay so we we'll be using that for some
39:46things a second thing is what we call
39:50climate efficient Factor mimicking
39:53portfolio and this is trying to use the
39:56statistic iCal approach that I said was
39:58the second one uh we described this in a
40:01paper with uh Johan Luka dinard Brian
40:04Kelly and myself and the idea is to form
40:08Dynamic long only portfolios with
40:12publicly available climate funds there
40:15are hundreds of funds which Proclaim
40:21sustainability I'm sure you have many
40:25here that are are vying for your
40:28attention we don't know which ones are
40:31really good and which ones are not in
40:32fact we don't even really know what the
40:34investment manager does we know what the
40:36prospectus says but we don't know what's
40:39exactly going on in these
40:41portfolios so the idea is to look at
40:44their performance and figure out which
40:46of these funds is going up when there's
40:48climate news and which ones
40:51don't so what we do is we we look over a
40:58a a window D moving window at the uh the
41:03of linear combinations of these funds
41:07and we look at the correlation of linear
41:10combination of these funds with the
41:13climate news that we get from the
41:17newspaper and we form our uh Factor
41:21mimicking portfolio by trying to
41:27with the climate news and minimize the
41:32portfolio and we do this using a Year's
41:36worth of data and then we hold it for a
41:38month and then we do it again so we put
41:41on our website what's in the portfolio
41:45each month so it's actually an
41:49investable uh portfolio that somebody
41:52could use if if they want
41:56to um so here's what it looked like uh
42:01in November it had three Assets in it uh
42:04in December it had two in uh January of
42:09this year it has two and in each of
42:11these cases actually it's got California
42:15carbon allowances so these are the
42:17allowances from the California
42:19emissions uh trading system which is is
42:23a cap and trade system and uh so it
42:28turns out in this case it's in this in
42:31fact if uh I looked at in the hotel room
42:35this morning and now in February it
42:38actually only has the California
42:40allowances inent so that's now been sort
42:43of four months in a row that this has
42:44been actually a good thing to invest in
42:48last year though it was not in here at
42:50all uh and this is what the weights are
42:53okay so how do these things work well if
42:56you look at the long run performance
42:59relative to the uh aqu the all country
43:02World index and the S&P you see here
43:05returns over something like the last 20
43:07years volatility and sharp ratio so the
43:11sharp ratio of the S&P is maybe 30% over
43:15over the last 30 years just to give you
43:19an idea the stranded asset
43:21portfolio over the last 25 years has a
43:25uh sharp ratio of 35% just it's a little
43:29better but it's certainly comparable to
43:31to the S&P the climate efficient Factor
43:34mimicking portfolio is
43:3725% if you just shorted the energy
43:40sector that's not as good as giving
43:44extra weight to the coal sector that
43:46would actually have a negative return
43:50years if you look at the performance
43:53over the last year ending uh I think in
43:57in January this year you see the sharp
43:59ratios of all of them are really much
44:03much better this is Been a Good Year the
44:06Market's up a lot uh and these uh
44:10climate portfolios are up a lot the
44:13strained asset portfolio now has a sharp
44:15over two which is you know very nice but
44:21looked a little bit last year last
44:27the one run the one-ear version of these
44:30models had negative returns from all the
44:34indices and including the stranded asset
44:37and the and the climate efficient Factor
44:39mimicking portfolio if you looked um a
44:43couple months later it was a little
44:45better but some were still negative and
44:48so one of the things I want to talk
44:52today is you know why did this
44:59happen Okay um so just before I do that
45:05let me just tell you what we can do with
45:08these climate factors once we have them
45:11I mean I've done some work to try to
45:12figure out what they are but what could
45:15we do well one thing we could do is just
45:17invest in them these are investable
45:20portfolios it's we could do that we
45:23could invest in things which are
45:24correlated with them if or you take out
45:27other uh risk factors and that's a
45:30pretty simple thing to think about too
45:33we can look at stocks to see whether
45:35they seem to be green or whether there
45:38is just greenwashing about them in other
45:40words are they really correlated with
45:43these hedge portfolios or not and the
45:47fourth thing is we can use these to look
45:51at Banks and actually insurance
45:54companies to see whether they seem to be
45:58green or not in other
46:01words the stock price of a bank is
46:04really heavily determined by its asset
46:09mix asset side of its balance sheet for
46:13many insurance companies it's also the
46:16Holdings on the asset side of the
46:17balance sheet that determine this so
46:20investors who pay attention to this
46:23will see when climate sensitive assets
46:29are in there that they're going to be
46:32more correlated with the Hedge
46:34portfolios and that's a way of using
46:36Market data to do uh stress tests so I'm
46:41just going to give you one slide about
46:43each of these applications so if we
46:50uh look at these uh sustainable funds
46:54and we regress the Returns on standard
46:57risk factors like the F of French and so
46:59forth and then the climate
47:03Hedges I'm going to tell you what the
47:05betas are on these climate Hedges and we
47:07can choose funds that have a high beta
47:12so here is the list of the top 10 out of
47:16something like 200 funds that we pay
47:18attention to and we have conventional
47:21things like return volatility and sharp
47:24ratio the next two columns are are
47:27correlations with some kinds of some
47:29news measures the alpha capm is The
47:34Intercept once you regress it just on a
47:36market factor and then the last two are
47:40the betas on the stranded asset and the
47:43climate efficient Factor mimicking
47:45portfolio that you get when you regress
47:48the Returns on risk factors and climate
47:53factors okay so I've sorted these by
47:57correlation with the c and so if I want
48:01if I think the C is the best measure of
48:03climate risk then I want to use port I
48:07want to invest in portfolios that are at
48:09the top of this list and here's the
48:13Invesco solar ETF is in the top but then
48:17clean power clean energy clean energy
48:20Battery tech these are all funds which
48:24actually are highly correlated with this
48:29factor if I do the same thing for
48:31individual stocks if I use all the
48:34stocks from the S&P 500 which is a
48:36little more than 500
48:38stocks um and I actually have a couple
48:41more more hedge portfolios in here and I
48:47what what's the average beta on these
48:50hedge portfolios I'd like to know that a
48:53green stock has a positive average beta
48:58from from all the Hedge portfolios well
49:00on the left hand side are all the ones
49:03that have a positive biggest positive
49:05beta and on the right hand side are the
49:07ones with the biggest negative Beta And
49:11the what we see as being the greenest
49:15companies in the S&P these are the ones
49:17we see as being the brownest companies
49:23and you know you can look at this and
49:25say well well you know I think this
49:29makes sense but I'm not really totally
49:31sure and we have we will be doing this
49:36in a systematic way and having this
49:39reported over time on our website but
49:42what we're really trying to do is figure
49:44out whether this ranking is correlated
49:46with any of the ESG kinds of measures
49:49that we tend to use for portfolios
49:51because you you'd like to think that ESG
49:54is actually a part of telling us which
49:58of these columns a firm is
50:01in okay finally Banks so we now compute
50:07climate betas for all the major banks in
50:11the world including and insurance
50:13companies including I think something
50:16like 10 uh Banks here in Thailand and
50:20from these climate betas we can see what
50:25the exposure is to to these climate
50:30funds um and it changes over time and
50:35here's a picture this is City Bank if
50:39you but if you go on the website you'll
50:40be able to see a picture for Bangkok
50:44Bank or uh kazak horn or you know I
50:48think AIA is in there so you can see
50:52what the climate beta has actually been
50:55and typically what we see is that these
50:58betas Rose very substantially during the
51:01pandemic and somewhat thereafter because
51:05the pandemic really is like an extreme
51:08decarbonization we we stopped using oil
51:11and gas as nearly as much we used Zoom
51:14we didn't fly we didn't
51:16drive and energy companies did horribly
51:21their their earnings went down and if
51:24you had a lot of energy companies in
51:26your portfolio you suffered for
51:32down pretty close to zero but it's kind
51:38see what's happening right at the end
51:40here and by doing this on a high
51:44using uh you know financial data we
51:48actually can see this sort of thing okay
51:58um I want to talk about the current
52:00events why did sustainable funds perform
52:03so badly last year and I've kind of run
52:10uh I mean until I get dragged off the
52:13stage let me just try to say what I
52:18on uh and I don't know whether you know
52:21Star Wars but this is the Emperor in
52:23Star Wars who uh says in an ominous way
52:27everything is proceeding as I have
52:29foreseen and the question is should we
52:32have foreseen the declin in these
52:38funds the reason they declined is
52:41because they're all underweight energy
52:43and energy had a really good year last
52:46year but why did energy have a really
52:52year I think you can tell a pretty good
52:55story based on termination
52:57risk that is they stopped investing so
53:01much for the future their cash flows got
53:04high they are returning lots of cash to
53:09investors it's a story that's consistent
53:12with the termination risk and it's kind
53:14of a nice way to think about
53:18um and we also see some consolidation in
53:22this energy sector and we talk about how
53:29competitor we're thinking about that as
53:31Exxon growing but it isn't Exxon growing
53:34it's the competitor getting out of
53:36business and sewing itself to Exxon and
53:39there's no expansion of the energy
53:41sector it's just changing the name but
53:44it's consolidating and I think we'll see
53:50effect how do we know whether
53:52termination risk is really a reasonable
53:54explanation we could look at the price
53:56price earnings ratios and the price to
53:58book ratios for the price earnings
54:00ratios here in 1921 and 22 and 20 energy
54:06is the bottom sector with Price to Book
54:08ratio energy is the bottom sector if you
54:13look January of this year these are now
54:17sorted by pe energy sector is
54:218.38 technology is 38 you can think
54:25about this as how many how many years
54:26are left of of earnings eight years okay
54:31so this the market kind of is saying I
54:36don't think there's a long run future
54:40here the earnings per share grew by 26%
54:44over the last five years it's predicted
54:47to grow by 1% over the next five years
54:52is consistent with this termination risk
54:56hypothesis and you see coal is the
54:59really the got the lowest PE of
55:02any refining and marketing of natural
55:05gas is there oil and gas integrated are
55:15just if I can just keep going just for a
55:18couple minutes uh I want to talk about
55:24countries countries are
55:27are face big risks if their biggest
55:33terminates so termination risk is
55:36actually a country effect if you've got
55:39really just one big industry in your
55:41country and so let's think about the
55:43Middle East the Middle East sees that
55:47their oil and gas business may not last
55:52forever what do they do about
55:54it well they're taking all their
55:56earnings some of it they're giving back
55:58to shareholders but I think a lot of it
56:00they're using to develop diversification
56:04within the economy they're diversifying
56:13education a lot of golf golf uh tours uh
56:19the World Cup I mean there's a lot of
56:21things that they're spending money on I
56:23don't know whether this is money well
56:25spent but that's what they're
56:29doing this is really a real thing for
56:39well Russia also has its major industry
56:43is oil and gas and so Russia is also
56:48facing termination risk in its major
56:54and what is Russia going to do about
56:58this well I think they have restricted
57:02Supply but I think they're also trying
57:05to diversify and the invasion of Ukraine
57:08I think is part of that strategy they if
57:11they bring Ukraine on it brings them A
57:13diversity of of businesses and uh I mean
57:19I think they miscalculated that it
57:21thought it would be easy and it's not
57:23easy it's it's hard but I think this is
57:26what they wanted to do and this is why I
57:29think they wanted to do it they should
57:34now I would think because their oil and
57:37gas industry is worth more today than it
57:39will be in a decade and Europe is less
57:41well prepared than they will be in a
57:43decade so there are lots of reasons to
57:46think that it would work best if they
57:49did it now and so I think that this
57:52termination risk idea at least is a
57:56of what has produced this uh this uh
58:04Ukraine what's the net effect well
58:06fossil energy is sales by Russia have
58:11gone down not selling as much but the
58:13prices have gone up and the ruple has
58:15actually gone up so that it looks like
58:18one of these fossil energy companies uh
58:20who are changing the
58:24their uh responding to termination risk
58:29so how do we feel about all this stuff
58:33from a climate change point of view well
58:38decarbonization has always been
58:41something that we think is going to
58:42happen when consumers and producers face
58:50buying goods that are made with a lot of
58:52carbon and a lot of a lot of emissions
58:57words when you go to the gas station and
59:01you say it's this gasoline is so
59:03expensive I'm not going to drive as much
59:05next week you're doing the work of
59:08decarbonization if you buy a Tesla so
59:11that you don't have to use any gasoline
59:14you're doing the work of decarbonization
59:16if you put insulation in your house if
59:21you you know do any adjustment in
59:25response to High Energy prices that's
59:28what's really supposed to happen the
59:30other side of it of course is that you
59:32would like to have some Revenue left to
59:35worry about the income distribution
59:37problems because this is the impact is
59:39greater on low-income people than high
59:41income people but nevertheless they are
59:45actually an important part of how we
59:48decarbonize so first of
59:51all we have gotten some inflation from
59:55the high energy price prices we Pro
59:59and we've probably decarbonized to some
01:00:03extent by people changing their behavior
01:00:07from these carbon prices what would have
01:00:10been different if we'd actually had a
01:00:11carbon tax well then when Energy prices
01:00:16up tax revenue would have gone up as
01:00:20well the carbon tax and so there would
01:00:22be extra resources to use to mitigate uh
01:00:26income distribution issues or to reduce
01:00:29some of kind of tax like a a regressive
01:00:33tax um and so we would not have seen
01:00:38these sustainable funds do so badly
01:00:41because the energy stocks would not have
01:00:43gone up as much if they had to pay taxes
01:00:45on all the excess profits that they were
01:00:52uh but we didn't do that we still
01:00:55probably could good but what do you
01:00:58think we should say now about investing
01:01:02should we no longer invest in
01:01:04sustainable portfolios or is it still a
01:01:07good thing to do and I think the answer
01:01:09is from a uh hedge portfolio point of
01:01:15view there's no reason not to invest in
01:01:17the same portfolios that is we still
01:01:20think if the termination date gets
01:01:23closer um that this portfolio is going
01:01:27to appreciate and if it goes further out
01:01:29this portfolio is going to depreciate
01:01:31and that's what a hedge portfolio is
01:01:33supposed to do so and then of course it
01:01:36does turn out that uh you you would have
01:01:40done well from last year to this year by
01:01:43being in this portfolio already um so in
01:01:48a sense I think that Putin has
01:01:50accelerated our rate of
01:01:53decarbonization but the Biden bill
01:01:56which subsidizes Renewables has also
01:01:59accelerated our decarbonization and so
01:02:02has the EU green deal so that you know I
01:02:06think that this whole
01:02:07story does actually lead us in a pretty
01:02:10good climate Direction the fact that
01:02:12firms fossil energy firms think
01:02:15termination is a realistic
01:02:18possibility actually is going to make it
01:02:20easier for that to
01:02:29um I guess a final speculation what
01:02:32about termination risk for the
01:02:35planet um we do think there's a
01:02:38possibility that the planet
01:02:41will face termination or at least our
01:02:47so what kind of policy should we follow
01:02:51to avoid that outcome and I think the I
01:02:55think the recommendation out of the
01:02:57Paris Accord is that if we can all get
01:03:00ourselves to Net Zero by 2050 or
01:03:03something like that then we will uh
01:03:07avoid these worst the worst consequences
01:03:10at least the science thinks we would
01:03:14consequences but how do you get
01:03:17countries to do something like this how
01:03:19do you make sure everybody does it and I
01:03:21think the answer is we can't make sure
01:03:23everybody does it but if the largest
01:03:27emitters do it if the US Europe China
01:03:33and maybe India actually can work
01:03:36together to decarbonize those four
01:03:41economies then I think the rest of the
01:03:43world will mostly follow a suit and a
01:03:46few countries which will hopefully not
01:03:48be big emitters may not but it's uh
01:03:53that's my hope as to how this is going
01:03:55to happen so I think the collaboration
01:03:57between major countries on this topic is
01:04:01incredibly important because it's got to
01:04:04be if you do it I'll do it too if you
01:04:09it's kind of a one-on-one or one on two
01:04:11or 23 kind of deal because uh otherwise
01:04:19we're we're not going to come out of
01:04:22this very well so these here are three
01:04:26of my grandsons looking out over a
01:04:30Lake they wonder what kind of world
01:04:33we're leaving for
01:04:35them and if we can figure out how to
01:04:39solve these problems
01:04:43then they'll be a lot
01:04:48you big round of applause for Professor
01:04:51Robert ankle thank you very much for
01:04:53that amazing presentation some very
01:04:56insightful information you have given us
01:04:58today I wish we had more time for you
01:05:00sir anyways please remain on stage with
01:05:03me as we proceed to the Q&A session all
01:05:05right so for those of you who haven't
01:05:07sent in your questions please make sure
01:05:09that you scan them in through the QR
01:05:12code which is right on the
01:05:22table okay so let's move move on to our
01:05:26first question shall we sir
01:05:33okay thank you that's a good
01:05:48idea okay so here is your first question
01:05:52sir you can enjoy your drink as I repeat
01:05:56sorry sorry for interrupting sir you
01:05:59have touched on Bank exposure how about
01:06:02the insurance sector what do you think
01:06:04there should be in the adoption of
01:06:06climate risk modeling and insurance
01:06:08products if so could we or should we
01:06:12Benchmark our risk and pricing
01:06:15profile when you're ready
01:06:23um clearly the insurance sector
01:06:27is the industry most impacted in many
01:06:31ways by by climate change because at
01:06:35least the Property and Casualty business
01:06:39is subject to the the physical risks
01:06:43that we're we're talking about but it's
01:06:47also true that the insurance company has
01:06:50very large balance sheets which hold uh
01:06:53assets on on the asset side and so they
01:06:58have sort of two ways they can be uh
01:07:01exposed to climate risk
01:07:05and then of course another complexity
01:07:10which I don't really know how this works
01:07:12in Thailand but in the US anyway we have
01:07:15a lot of insurance Commissioners some of
01:07:17whom have decided that they don't think
01:07:21insurance companies should be able to
01:07:22raise their rates uh as much as as the
01:07:27risks are going up and consequently
01:07:30insurance companies are considering
01:07:32pulling out of regions and leaving
01:07:35homeowners uninsured and and businesses
01:07:38uninsured and this is again another kind
01:07:41of public policy issue that that comes
01:07:45so my feeling is that the insurance
01:07:47company certainly has to start uh doing
01:07:52Actuarial calculations based on forecast
01:07:57Actuarial calculations not just looking
01:08:01Historical frequency of of uh
01:08:08um and I think that's kind of what the
01:08:13modeling in this question is
01:08:18also think there's a lot of interest and
01:08:22I heard it from several of you today
01:08:27uh in the insurance company not holding
01:08:31uh assets which are exposed to climate
01:08:34risk and that is uh an example of for
01:08:40example not holding assets which have uh
01:08:44a lot of emissions so you can you get to
01:08:47net zero emissions on on your asset
01:08:51Holdings um I think if the private
01:08:54sector takes this under its wing and
01:08:57tries to do this it it is a step in the
01:09:02direction I don't think it's enough of a
01:09:05step without the public
01:09:11uh increasing the incentives to do this
01:09:14I think the incentives to do this have
01:09:17to be more than just Goodwill it has to
01:09:21be in fact monetary incentives for uh
01:09:26not holding green companies uh Brown
01:09:29companies and what could those
01:09:31incentives look like well if we did have
01:09:34a carbon tax for example
01:09:36then Foss energy companies would not
01:09:39look as profitable so you wouldn't be so
01:09:42inclined to put them on your balance
01:09:43sheet it just takes care of itself
01:09:46naturally so I still like the idea of a
01:09:49carbon tax I also like the idea of uh
01:09:57think coupled with all both of those we
01:10:00do need regulation but I don't I'm not
01:10:02really a big advocate of the uh the
01:10:07hoping all right well hope that
01:10:09clarifies the question for you on to our
01:10:15question could you suggest Thailand
01:10:17about the strategies for implementing
01:10:19carbon pricing in the
01:10:23country well I don't know exactly what
01:10:29the obstacles to carbon pricing are here
01:10:34uh at home they're political and I don't
01:10:37know whether that's whether they're
01:10:38political here or not I think one of the
01:10:43that is very important is if the
01:10:46electorate really believes that it's
01:10:48important to do something about carbon
01:10:50pricing they should make themselves
01:10:53heard when we have have elections so the
01:10:57elected officials feel like they're
01:10:59doing what their constituents want them
01:11:01to do if they do put attx on uh
01:11:05carbon um I think there are ways to
01:11:09start uh carbon pricing fairly
01:11:12painlessly that is you can set up a
01:11:15carbon exchange and have it be just
01:11:20associated with the electric power
01:11:22industry for example which is much more
01:11:26at the beginning you tend to give uh you
01:11:29you uh grandfather certificates to the
01:11:33big emitters from the past but you but
01:11:36you promise not to do that forever and
01:11:40then you gradually reduce the number of
01:11:43missions that are that are given out so
01:11:46that over time it gets more and more
01:11:50effective so that's kind of the the soft
01:11:56to putting a uh price on carbon it's
01:11:59probably what I would uh suggest
01:12:02probably for Thailand if if that's
01:12:05possible all right sir I'm afraid that's
01:12:07all the time we have for our Q&A session
01:12:09so another big round of applause for
01:12:11Professor Robert angle thank you so much
01:12:14for for honoring us with your presence
01:12:17here today and I would like to invite AA
01:12:19Executives on stage for a brief photo
01:12:21opportunity and to present a little
01:12:23token of appreciation to Professor angle
01:12:26right in the middle sir let us welcome
01:12:29narai independent nonex okay Mr nikel
01:13:03thank you everyone once again for
01:13:04joining us today at the AA Noel Lords
01:13:07lunch and talk on the occasion of Japan
01:13:10aen Bridges event series facilitated by
01:13:13the International Peace
01:13:16Foundation now through the two talks in
01:13:18the series we've explored personalized
01:13:20medicine as well as the financial
01:13:23implications of climate risk
01:13:26not only is AA the largest Pan Asian
01:13:28life and health insur the company is
01:13:30also an investor and an ESG leader with
01:13:33a dedication to create a more
01:13:34sustainable future for
01:13:38everyone here's a little token of
01:13:42you Professor Robert angle thank you so
01:13:47much for being with us here
01:13:59okay a big round of applause for Mr Nick
01:14:01avani CEO of AA Thailand and also
01:14:08Ango now with this in mind ladies and
01:14:10gentlemen we look forward to thank you
01:14:13very much sir to fostering more
01:14:14cooperation in the healthc care and
01:14:17financial communities To Build A Better
01:14:19Tomorrow for all now on behalf of AA
01:14:22Thailand I would like to express my
01:14:24deepest gratitude to everyone for
01:14:25honoring us with your presence
01:14:56healthier longer Better
01:15:07Lives thank you very much ladies and
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