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Economics Nobel Laureate Prof. Robert Engle on February 28, 2024, at AIA Thailand

International Peace Foundation#JAPAN-ASEAN BRIDGES event series
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💫 Short Summary

AIA Thailand's event focuses on sustainable development, climate change, and financial implications of climate risk. Professor Robert Engle discusses economic challenges related to climate change and fostering global cooperation. The impact of climate risk on asset prices and finance is highlighted, emphasizing the need for monitoring and directing investments towards renewable energy resources. Strategies like hedge portfolios and climate-efficient factor mimicking portfolios are discussed for managing climate risk in investments. The importance of global cooperation, government policies, and market forces in accelerating decarbonization efforts is emphasized for a better future.

✨ Highlights
📊 Transcript
AIA Thailand's focus on sustainable development and climate change.
AIA aims to have a billion people living healthier lives by 2030 and achieve net zero emissions by 2050.
Emphasis on ESG strategy pillars including health, wellness, sustainable investments, people, culture, and governance.
Nobel laureate Professor Robert Engle discusses economic challenges related to climate change and global cooperation.
AIA's commitment to creating a more sustainable future for all.
Financial approach to climate risk by Professor Robert Engle.
Importance of predicting risk in financial markets through statistical models.
Analysis of volatility and risk at the Volatility and Risk Institute.
Measurement of volatility in various assets on a daily basis.
Mapping high volatility areas, such as Turkey, and highlighting countries like Argentina, Mexico, India, and China at higher risk compared to the US and Thailand.
Impact of climate risk on asset prices and finance.
Asset prices are indicators for future trends and guide investment decisions towards solving climate change issues.
Monitoring asset prices is crucial for directing investments in renewable energy resources.
Examples from the stock market, like Tesla's high stock value compared to General Motors, show how future expectations are reflected in asset prices.
Understanding long-run risks like climate change is crucial for making informed decisions.
Owners of a beachfront hotel facing sea level rise may need to adapt by not investing in upgrades.
Good management practices can potentially improve cash flows despite looming risks.
The segment raises questions about investor behavior and the possibility of selling shares in a risky but cash-flow-producing hotel.
Overview of termination risk in investments in the hotel industry.
Present discounted value of expected cash flows determines investment value.
Factors such as demand for luxury goods and expiration date impact stock value.
Insurance pricing based on termination risk may lead to increasing prices closer to termination.
Collaboration among firms facing termination events could lead to supply reduction and increased monopoly rents, suggesting potential consolidation among hotel owners for economies of scale.
Transition from Fossil to Renewable Energy
Fossil energy companies are not skilled in renewable energy production or gaining investor trust in green initiatives.
They are more inclined to establish subsidiaries for renewables and sell them off for profit.
Coal usage is decreasing, while natural gas and crude oil are on the rise.
Renewable energy is growing, but still insufficient compared to demand, while nuclear power remains steady.
Government policies for achieving Net Zero emissions.
Policies include taxing carbon emissions, subsidizing renewable energy, regulating emissions, and relying on the private sector.
The 'hope' policy involves hoping the private sector voluntarily adopts greener practices.
Financial incentives are emphasized as necessary to drive green behavior effectively.
Transition risks are highlighted, with winners easily decarbonizing and losers facing challenges in reaching Net Zero.
Creating hedge portfolios to manage climate risk.
Overweight stocks prepared for climate change and underweight those that are not.
Data like ESG and emissions data help identify prepared stocks.
Strategies like the stranded asset hedge portfolio can capitalize on the decline of the fossil energy sector.
Utilizing hedge portfolios requires a fundamental approach to identify winners and losers based on climate preparedness.
Climate-efficient factor mimicking portfolio discussed for maximizing correlation with climate news while minimizing variance.
Portfolio utilizes statistical approach to analyze performance of publicly available climate funds.
Rebalanced monthly based on a year's worth of data and publicly available for investment.
California carbon allowances highlighted as successful investment in recent months.
Comparison made with S&P and other portfolios in terms of performance and sharp ratio, showing significant gains in positive market year.
Negative returns of certain investment models such as stranded assets and climate efficient factor mimicking portfolios.
Correlation between climate factors and investment portfolios, including investing in correlated assets and conducting stress tests.
Importance of analyzing climate-sensitive assets within banks and insurance companies.
Use of climate hedges in sustainable funds and considering climate risk in investment decisions emphasized.
Correlation between green and brown companies in the S&P based on beta values.
Computation of climate betas for major banks and insurance companies worldwide.
Impact of the pandemic on energy companies leading to decreased earnings from reduced oil and gas usage.
Underperformance of sustainable funds due to being underweight in energy which had a successful year.
Explanation of termination risk as a reason for energy's strong performance.
The energy sector is experiencing consolidation rather than expansion due to smaller competitors merging with larger companies like Exxon.
Termination risk can be assessed through price earnings and price to book ratios, with the energy sector having the lowest risk.
Countries like the Middle East and Russia are diversifying their economies away from oil and gas to mitigate termination risk.
Russia's invasion of Ukraine may be part of their diversification strategy, but with potential miscalculations.
The concept of termination risk is a major consideration in today's economic environment.
Impact of Conflict in Ukraine on Fossil Energy Sales and Decarbonization.
Decrease in sales of fossil energy by Russia due to conflict in Ukraine has caused prices to rise and the value of the ruple to increase.
Higher costs of carbon-intensive goods are driving decarbonization and encouraging changes in consumer behavior.
Income distribution issues arise as low-income individuals are disproportionately affected by decarbonization efforts.
Implementation of a carbon tax could provide additional resources to address income distribution issues and support decarbonization efforts.
Impact of climate change on the insurance sector.
Insurance companies are facing physical risks and large balance sheets exposed to climate risk.
US Insurance Commissioners limiting rate increases despite rising risks, causing companies to consider pulling out of regions.
Collaboration among major countries like US, Europe, China, and India to decarbonize economies by 2050 is crucial.
Global cooperation is emphasized to address climate challenges for a better future.
Addressing uninsured homeowners and businesses in relation to climate risk modeling and insurance coverage.
Insurance companies are urged to base actuarial calculations on climate risk modeling to mitigate losses.
Recommendations include avoiding assets exposed to climate risk, promoting net zero emissions, and implementing a carbon tax.
Subsidizing renewable energy and regulating emissions are also proposed as solutions to climate change.
Public support and political will are crucial for implementing carbon pricing in Thailand, with a gradual approach being recommended.
Highlights from Professor Robert Angle's talk on personalized medicine and financial implications of climate risk.
Professor Angle is the CEO of AA Thailand, a Pan Asian life and health insurance company, and an ESG leader focused on sustainability.
The event expressed gratitude to attendees and emphasized the significance of cooperation in healthcare and finance for a brighter future.