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Climate Change: Emerging Investment Opportunities — and Risks

First Republic Private Wealth Management
October 18, 2021

A summer of extreme weather has brought into sharper focus the need for investors to fully understand the risks and opportunities resulting from climate change. In this session, we share the latest research regarding climate systems and trends, and the potential impacts across industry sectors. The panel will feature a lively presentation and discussion between Dr. Arthur Lerner-Lam, Senior Advisor to the Deans of the Columbia Climate School; Dr. Radley Horton, Research Professor at Columbia University’s Lamont-Doherty Earth Observatory and Christopher J. Wolfe, Chief Investment Officer, First Republic Investment Management.

Read below for a full transcript of the conversation. 

Jason Bender - Good afternoon, and thank you for joining our 2021 Climate Forum. I'm Jason Bender, Chief Operating Officer for First Republic. And I would like to welcome all of you personally today, for today's special educational event. Caring for our environment is a natural extension of caring for our colleagues, our clients, and our communities. And that's why we're so excited to bring you the 2021 Climate Forum, a three part webinar series designed to educate you about climate related economic and social risk and opportunity. The session in the following two sessions will feature expert speakers in conversation about leading climate science research findings. How assessments of climate change may impact investment decisions, and emerging trends in energy technologies. Promoting environmental stewardship has been an important component of many areas at First Republic. To highlight a few selected initiatives, we offer discounted pricing for LEED certified real estate loans and construction loans to replace or rebuild properties damaged by weather related events. We provide socially responsible investing options available for our wealth management clients and an ESG investment option for colleagues through our 401 plan. Over half of our own corporate locations are LEED certified. And in 2020 alone, we recycled over 380 tons of paper and reduced our paper usage by 69 tons. Importantly, we do not lend to carbon intensive industries such as oil and gas or industrial manufacturing. We hope that you'll walk away from our forum today with a greater understanding of climate fundamentals and the links between climate science, environmental performance, and financial return. And that you'll feel you've developed a foundation for better understanding and exploring this space going forward. Today's session focuses on climate change, emerging investment opportunities, and risks. And I'm delighted to introduce today's speakers. Chris Wolfe is the Chief Investment Officer for First Republic Investment Management.

Chris is responsible for leading First Republic Investment Management's research and investment platform as well as the investment strategy and outlook for our integrated investment trust and brokerage groups. Dr. Arthur Lerner-Lam is a Senior Advisor to the Deans of the Columbia Climate School. He is a seismologist and has led scientific expeditions around the world and throughout the United States. Dr. Lerner-Lam teaches in Columbia University's Master's programs in Sustainability Science, Sustainability Management, and Environmental Science and Policy. And Radley Horton is a Lamont Research Professor at Columbia University's Lamont-Doherty Earth Observatory. Dr. Radley was a convening LEED author for Third National Climate Assessment, and is a member of New York City Panel on Climate Change. Dr. Radley also teaches in Columbia University's Sustainable Development Department. I would now like to turn it over to Chris Wolfe, Chris.

Chris Wolfe - Okay, Jason, thank you for that. And welcome everyone to our Climate Forum today. Through our investment management research group, we look to provide best in class forward-looking analysis and thought leadership to you to support your investment decisions with your wealth manager. Increasingly, we are assessing climate decisions as part of the investment process. And really through that lens, climate science is what helps us understand it all. It's important that we understand how this all plays a role when considering risk and return trade-offs in client portfolios. Now, today's session is going to be organized in a way where I'll introduce Dr. Arthur Lerner-Lam. He's going to spend a few moments setting the stage, and then Dr. Horton will walk through some of the presentation materials that we'd like to share. We'll follow that with the question and answer period. We will take questions from the audience through the Q&A, a button located at the bottom. We'll touch more on the topics that Jason mentioned throughout all the climate forms. There's actually three of them, which I'll discuss at the end of the call today. At this point, I'd like to turn it over to Dr. Arthur Lerner-Lam.

Jason - Sorry, Art, I believe you're muted.

Dr. Arthur Lerner-Lam - So sorry. Well, thank you everyone, and welcome to this forum and I'm happy to present on behalf of my colleagues. It really is no exaggeration to say that we're at a pivotal moment in the ways in which governments, the private sector and even the private citizenry are seeking solutions to the climate crisis in ways that will have a significant impact and lead to real solutions and real trajectories toward the eventuality of a net zero energy transition. To begin today, Dr. Horton will be talking about climate science and about some of the highlights from the recent IPCC reports. And some of the risks associated with both the physical risks and the transition risks associated with the climate crisis and the climate extremes in particular. And we'll develop some of these notions in a Q&A afterwards. And hopefully, you will see how these intersect with your decision philosophies. So, at this point, I'll turn it over to my colleague, Radley Horton.

Dr. Radley Horton - Thank you, Art, and thank you all for the opportunity to speak with you today. As Art said, we want to talk about these emerging climate hazards, the impacts that they're increasingly having on society and investment decisions. But also opportunities that go with a transition towards less fossil fuel intensive industry. And those entities that prepare for the physical risks that are increasingly upon us. So, a couple of very recent examples, on the left you're seeing just how unusually warm it was during that incredible heat wave in the Pacific Northwest in late June. These are what we call anomalies, basically temperature differences relative to what would be normal for June 28th. They're in degrees Celsius. So, as you get up towards the Washington state, British Columbia border. You see places where temperatures were running 50 degrees Fahrenheit above normal. We had 120 degrees, for example, in British Columbia, numbers that in North America had only been topped in Southern Arizona, essentially in the deserts to the Southwest. Exceptional events happening sooner than we thought with climate change. And then, obviously I don't have to tell so many of you out West about this remarkable fire season, think about the Dixie Fire, of course, still ongoing. But a graphic here just showing in the last five years alone, how much area has burned. And as you all could tell me, those impacts extend far beyond the burned areas, right? The effects of smoke on the vulnerable, for example, really all of society are affected by these types of extremes that are getting more and more attention. And unfortunately, there is a climate change link. So, I'm going to very quickly run through these five topics. We'll start with a very basic, Climate Science 101. How do we know the planet's changing and why. Then we'll hone in on these extreme weather events that have such big impacts and that industries really need to prepare for. We'll talk a little bit about what those impacts are across society. And then we'll look a little bit at what I'd call sort of frontier or hot topics. The kind of things that climate models aren't yet telling us about. And some of the entities in the investment space that are beginning to talk about climate risks, don't fully have a handle on these hot topics. So, we'll explore a little bit, some of these dynamic areas where we could see pretty rapid shifts potentially, and in asset values and in risk perception.

Then we'll talk briefly about some of the solutions to this challenge posed by climate change, and why it's going to be an enormous opportunity for first movers. Okay. So, jumping right into this Climate Science 101, back to anomalies again, departures from normal temperatures. This is an animation where we started about in around 1900 as greenhouse gas concentrations have gone up. We're seeing that these five-year periods now the animations up to 1990 getting warmer and warmer as you see with these yellow and red colors. So, this is not some kind of natural variability that we're seeing here. In the early period, you see some areas warmer than normal, some cooler. But as you get towards the end of this time period, towards the end of the century the statistics have shifted. We're no longer talking about the climate envelope that so much of our infrastructure was designed for, that we as a species basically adapted to as well. So, this requires fundamental shifts in the way that we operate. By the end of this time period, you can see that there are some regions on the planet that are, again, in degrees Celsius, two and a half degrees warmer than their long-term average, more than four degrees Fahrenheit. And as we're about to see this leads to enormous changes in the frequency and intensity of dangerous, extreme events. But it's not just temperatures that are going up, it's called global warming, but it has a lot of other effects. The upper ocean is warming. As the atmosphere warms it can hold more moisture causing, paradoxically, as we'll see, more droughts and more heavy rain events, we'll look at how that's possible. We're seeing loss of land-based ice sheets, that ice is making its way to the oceans and causing sea levels to rise. Just to give a few examples of all these changes that we're observing. Now, the latest IPPC report, this assessment by a huge number of international scientists just came out. Here are some of the high level takeaways of just how unprecedented things are right now in recent history. So, concentrations of carbon dioxide in the atmosphere, the highest they've been in at least 2 million years. Sea levels now rising faster than they have in at least 3000 years. Arctic sea ice is lower than it's been in 1000 years. And the glacier retreat unprecedented in 2000 years.

Now, that doesn't mean that if we went back a little further in time than this, suddenly you would see these events happening. It's really about the limitations of our data, the further back we go in time. But these are the time periods where we have sufficient data and you can see how exceptional events have been. So, just to key in on the first example a little bit. Carbon dioxide, a dataset showing a proxy or sort of remote measure of carbon dioxide in the atmosphere going back 800,000 years. So, you see these cycles of how much CO2 might've varied during that time. And then you can see at the far right of this graph, we're off the charts, literally above now 415 parts per million. So, this is unprecedented. We can look at the chemical composition of that carbon and see that it's primarily due to the burning of fossil fuels and other human activities since the industrial revolution. Okay, so, now I just showed you some data indicating that the climate is changing and that carbon dioxide concentrations also changing. How do we know that this isn't just a correlation without causation? How do we know that these two phenomena are related? Well, one way we know is just basic physics. It's trivially simple why greenhouse gases should warm the planet. The chemical composition is such that high energy sunlight, short wave energy is basically impervious, it can pass right through those greenhouse gases. but the earth when it attempts to reradiate its heat to space at much lower temperature, and much lower energy that's long wave radiation. And it just so happens that the wavelength where that radiation is re-emitted from space resonates, interacts with those carbon molecules in a way that leads to some of the heat and energy getting sent back down to the surface. That's the greenhouse effect. Trivially, a simple really well understood since about late 19th century. Third key uncertainties about what happens once you get that initial warming, but the basic physics, trivially simple. So, we have these tools called climate models, which are another way that we can assess just how much warming we've seen. So, let's just hone in on the image on the right here. This is a very important graph for understanding where we've come from. Because that's important because these models are one of the main tools we use to project where we're going in the future. So, the black line on the image of the right is the globally average temperatures in degrees Celsius going back to 1850 or so. And you can see this real ramp up in the warming and that black line since roughly 1970 or so. But I want you to hone in on these two colored bands instead.

First looking at that sort of teal, I don't know what you call that, aquamarine colored band. That is the global average temperature you get when you run a climate model over a historical period. So, not for a future projection, but if we start that climate model with the conditions that existed back in 1850, with the carbon dioxide levels about 30%, 35% lower as they were back then. And when we run that climate model for 150 years, keeping carbon dioxide concentrations at the levels of 1850, but still having things like volcanoes, which can cool the climate happening when they did. Still having these very small variations in solar energy you may have heard about, that's where you get that teal colored band of temperatures with no real increase in warming, but some small variations related to things like volcanoes. Now, what happens when we run those exact same climate models? Everything identical, the models, the timing of the volcanoes, except with greenhouse gases, again, starting where they were in 1850, but this time tracking what actually happened, a hind cast whereby the year 2000 with that model we're at the greenhouse gas levels that we really had in the real world. That is the 10 band of temperatures that you see there. You see there's uncertainty like any type of projection going towards the future. We don't know the exact number, but from a risk management perspective, look at the band and then go back and look at what actually occurred with the black line. That is why we have a powerful model here. And as we look to the future, assuming we're going to get the climate of the past, or the temperatures are going to go back, is not a prudent assumption to make as we think about the future. Okay. Quick pivot to what really sort of matters in a direct way for investors, for individuals, the most extreme events, okay? So, basic statistics, if you increase the average a little bit, we have a distribution of temperature here. Let's think of this, if daily temperature in Los Angeles, you have a few days that are really hot, where maybe it gets up to 95 Fahrenheit and a few days which are really cold, where maybe the temperature goes down to sea level, somewhere in the high thirties. In between we have a lot of days where temperatures are in the sixties or so. Now, the Y axis is showing the probability of getting a day of a certain temperature. So, the point is if we just warm all days by two or three degrees, you get a big change in the frequency of those 95 degree days.

They become not a little more common, but much more common percentage-wise than they used to be. And now we're starting to get some unprecedented days that couldn't have happened essentially without climate change. And when we think about human vulnerability to heat, crop vulnerability to heat, the demand for things like air conditioning, we see thresholds in terms of impact. So, what really matters if that 95 degree day becomes 100 degree day, that matters much more than a 60 degree day becoming a 65 degree day. How did those tales of the extreme temperatures as we're all seeing, whether it's something like fire risks, which we'll talk about big shifts, big impacts, when those really hot days become more common and more severe. So, that was just a theoretical kind of stematic. This is a depiction of actual data across the entire US for about the last eight decades or so 80 years. Showing you how often across the country, you had a record breaking high temperature for a day at any weather station compared to a record breaking low temperature. And you can see here again around the 1980s or so, the statistics just shifted profoundly. So, when someone talks to you about, we've had one degree Celsius of global warming or two degrees Fahrenheit. I don't blame you for initially thinking that sounds like nothing, right? We much more variability than that every day. But the takeaway from this graph and the last one is that that one or two degrees matters a lot. It shifts the statistics in such a profound way that now we've had individual years with seven times as many record breaking highs as record-breaking lows. So, the statistics shift profoundly. Same story for sea level rise, you may have heard we've had roughly a foot of sea level rise, actually a little less over the last century. It's tempting to think who cares? How could a foot possibly matter when a lot of places have a title range, but over 12 hours from high tide to low tide of three feet, four feet or more. These graphs are showing you how that creeping average increase in sea level profoundly impacts on the left, the frequency of these nuisance flooding events and on the right, these catastrophic one in 100 year events. So, diving into the data on your left, nuisance flooding events, this is the times where you can't take your normal coastal route home driving, maybe you're getting water in your basement. If you live along the coast or your business can open in South Florida.

If these things are only happening a couple of times per year, as if we look back towards 1950 and then the days per year of occurrence, maybe this was something that happened five times a year, you can probably live with that. But for all of these tide gauges, all of these states along the coast. Pick your state in the US by the time we got to 2010 or so, just two generations later, these nuisance flooding events were happening, are happening now in some places once a week on average, there's potential for real non-linear tips, not just in the climate system, but in risk perception in transfer a disruptive potential in a shift in asset values and reallocation of wealth. Once people start to perceive that we're locked in to further increases in these frequencies. And then on the right, slightly different take here you're seeing how often the catastrophic one in 100 year coastal flood, the hurricane Sandy, for example. The kind of thing that determines whether you can get flood insurance. Whether you're allowed to build in a certain areas with just a little bit of sea level rise, that foot we just talked about up to two feet or so. That one in 100 year flood event become something When you see red, for example, around long beach, Southern California. That means every year with one or two feet of sea level rise later, the century, we will see the high water levels that historically happened once every 100 years. So, a roughly a 100 fold increase in that risk doubled two orders of magnitude. Don't focus on the precise numbers, the point is it's a profound shift in risk that society hasn't really come to terms with yet. All right, extreme precipitation, also changing for people who are on maybe in the Eastern US especially. This is not worthy, but we're also seeing it in the west. So, let's look at the Northeast there. You see the number 55, but that's telling you is if we look at the worst rain, the amount of rain and the kind of worst event per year, the heaviest rain event per year, just over the last two generations, again, that worst day of rain per year is now packing more than 50% more rain than it was just two generations ago. Maybe that doesn't sound like a big change to me, even if it doesn't sound like that bigger a change to you now think about our aging infrastructure, our drainage systems, which were designed for a certain amount of water.

If you start going over that threshold, you don't just get a little more flooding, you start to exceed the capacity of those trends in a way that gets to catastrophic flooding and loss of life, such as we saw where I'm sitting here in the Northeast with Hurricane Ida, but we've been seeing sort of all too common. Even in parts of the West that are drying out as you well know overall, the amount of rain in this worst rain event per year has been going up, although arguably to a somewhat manageable level, if it's really just 10% or so. At the other end of the spectrum, I know a lot of the folks listening or out west, want to hear and unpack more about drought and fire. So, drought is complicated. It's easy to think of it as just changes in rainfall. It's actually much more than that. And the takeaway that I'm going to leave you with is how much again, just a little bit of global warming, couple degrees of warming has profoundly shifted the moisture budget in a way where now we get much more drought and much more fire, with just a little bit of warming and also things like wind and sunlight, and humidity in the air matter too. But as we're going to see now, the real takeaway is with respect to how much temperatures have changed. Okay, so, what's been happening with fire? The image at the top right, is showing you what the black line, how many fires there have been per year across the Western US. And then the bars in yellow, are showing you the amount of acres burned by fire. So, you can see in the early eighties, there was this big drop in the number of fires. This is the effect of policy and especially fire prevention efforts. But look how the amount of acres burned in fires actually climb to record levels. And that data does actually stops in 2010. If we ran through the last 10 years, much higher. So, we're getting more of these big, impossible, difficult to manage, extremely costly to manage fires, partly cause of climate change and warming temperatures, partly because of those policy effects. If we try to prevent fire for a long time, and if you have more people moving into fire zones, when fires happen, there's going to be more, what we call sort of litter, trees down, more potential for these catastrophic fires and remote areas where it's hard to fight them. And bottom right image, is just showing you how horrific the air quality as you well know. I don't have to tell you, you can get during these fires. Major population centers during recent fires have experienced this bad air quality, literally as could be found anywhere in the world at that particular time. So, the impacts extend obviously far beyond the fire zone. Indeed, this is a systemic risk that the entire economy faces as we start to think about re-insurance, insurers, and such as real potential for cascading impacts. Okay, so, what's behind this increase in drought and fire in the west? It's not really changes in rainfall.

You see a lot of decade by decade variability and total rainfall shown here. That's what you're seeing with that sort of purple line, the variation you can see warm, wet decades, dry decades, but no overall trend really. But what happens when we look at what's happened to temperature? In California, going back over the last a hundred years. So, here you see that very robust trend again, so that even a relatively cool year now, is warmer than the longterm average, just as a relatively warm year early in the 20th century was cooler than or maybe at the longterm average at best. So, the statistics have shifted profoundly with just that little bit of warming. And that's leading to more of these fires, that's leading to systemic droughts. And as we look to the future one climate model out of Columbia. NASA Goddard Institute for Space Studies projecting that if we don't reduce our emissions dramatically, basically we going to get into a setup where those higher temperatures in this model coupled with a little bit of actual decreases in precipitation lead to not individual years of drought happening more often, but essentially constant drought starting to spread into some real agricultural breadbasket regions. So, the risks are real, demands for fresh water and the need to adapt and use less fresh water are going to be critical. Okay, not much time to talk about impacts beyond what I've done already, but just to sort of quickly pivot and show here that we can't afford to have much more warming without risking collapse of critical systems in ways that we won't be able to adapt to. So, the vertical axis is showing you an amount of global warming. We've already had a degree Celsius, almost two degrees Fahrenheit of warming. That is that gray line running horizontally, that's the warming that we've had already. Now, look at these critical systems like our coral reefs, which are foundation for the biodiversity and the base of the Marine food chain, which of course affects land, affects tourism affects essentially everything. And the color there, that red to purple is essentially telling you that we're already with that one degree Celsius of warming, seeing such profound changes in these systems that we don't know if we'll be able to adapt if these systems are going to be able to adapt. Critical that we not allow warming to get above one and a half degrees Celsius, but it's not just the coral reef. If you somehow sort of thought, "Oh, who cares about our warm water corals," look at some of these other systems, look at the risk we face for crop yields at even just one and a half degrees Celsius. Look at the risks we're facing for coastal flooding as we saw earlier. Sort of major, major threats out there. So, that's why we need to adapt, we need to reduce our emissions traumatically.

So, that's the very kind of linear mainstream climate science take that I just gave you. But I also want to leave you with a few ideas of sort of emerging trends, things that, maybe not that many people have on their radar yet, that would be worth kind of thinking more about. So, we're going to talk about compound extreme events quickly. The need to not think about extremes in isolation, tail risks, and tipping points. Are there things that climate models might miss that could lead to more profound, hard to predict changes. Cascading impacts, this is thinking about something like COVID, all the difficult to predict secondary knockoff effects on supply chains. For example, how do we do a risk assessment for these kinds of complex systems? And something that I know is on a lot of people's minds out West right now, this issue of managed retreat and sort of relocation from some of these vulnerable areas. That's going to be something we see more and more. It's not going to be possible to adapt in place everywhere. I know these conversations are happening in some fire zones too. Very difficult to predict when exactly we'll see a tip and potentially a massive shift and asset values and investment and important to ask, who's going to be left holding the bag? When some of those shifts do happen and how vulnerable communities especially will be affected. Okay, so, just very quickly, those first two examples in green. Maybe what is going to end up mattering the most for reinsurers is if a place gets hit, a country gets hit by more than one extreme hurricane, for example, or maybe it's a combination of a couple of hurricanes on one side of the country and a really bad wildfire season out West, I've shown you that climate change is increasing the risk already of coastal flooding and fires. A little bit of change in sea level and average temperature can mean a lot greater risk of these compound events. Not many risk managers are thinking about how these bundled risks could change in unpredictable ways. Reinsures, insurers, I think are struggling to catch up to some of the implications here. The basic ideas in the past, it may have been safe to assume that there wasn't a correlation between certain variables, occasions, times of year, if you can't make those assumptions anymore, a lot of the assumptions of sort of taylorist and models could become wrong with potentially major and difficult to predict results. And then in terms of the tipping points, I talked about the coral reefs a little bit.

There are a lot of other systems whereby if we don't reduce our emissions, temperatures rise more and more. We have less basis to really assume that those climate models that I've shown have been pretty good so far. They may actually miss factors in the future. If we start to get more and more into this unprecedented world that we've never seen before, you start to see possibility for risks that are very difficult to plan for, things that could surprise us. So, we need to reduce our emissions to avoid some of those kinds of impacts. Okay, turning to the solutions. We could do a tour session on this, for sure. I know there's a lot of excitement around this and tipping points that can work in our favor. This isn't just about climate change happening faster than we thought, impacts greater than we thought, the solution space is also emerging and becoming transformative a lot faster than a lot of people thought to. Which of those narratives is going to win out is the critical question? So, what could we do in the face of this climate change? We could do nothing. We could continue with business as usual, see these, increases in risks, or we could reduce our emissions dramatically. That's starting to happen, right? We haven't moved the needle enough yet, but if you look at how cheap renewables are becoming relative to fossil fuels, for example, you can see batteries approaching that parody. You can see how quickly the world could pivot and arguably already as pivoting away from carbon intensive industries. Mainstreaming of adaptation, every company asking the climate question, how are workers going to be effected by the humid heat waves of the future? How could our supply chains be disrupted? Do we have a plan that deals with the direct linear effects, but also some of these harder to predict knock-down effects or the resilience strategies that make sense across a range of climate futures? Those are the important questions to be asking. We could do more and more on geoengineering. That's, we'll just leave aside for now in the interest of time. But of course it's not just mitigation or adaptation. We need to do both. And we need to think about how they interact with each other when we're picking specific strategies. So, how much do we need to reduce emissions if we don't want to blow through that one and a half degree Celsius target? That's the light blue line there.

We essentially need to reduce global emissions by 2050 to essentially zero, net zero emissions, pulling as much out of the atmosphere as we're putting in. We don't have those technologies yet, but they could be out there on the horizon if we make the investments. And if the financial world leads some of those movements, then you can see the need for that 50% reduction in emissions roughly in developed countries in the next decade. So, that's the basis for why you hear people talking about that. Here's the key points. I think I'll just leave them there as I stopped talking. So, maybe people can ingest those for a minute or two as we pivot towards discussion. So, thank you for listening.

Chris - Okay Dr. Horton, thank you for that, Doctor Lam also appreciate your introduction. We have some questions that have come in. So, I'm going to start with that as part of our Q&A session. And I do have quite a few actually from the notes that I've taken. So, I'll bring those together. But maybe we start with some of the high level points that you brought up. I just want to make two, I think, observations in your data, this may be to draw them out. The first is you had a nice statistical graph and that's often a tough subject, but I think what you were trying to indicate is that if you just shift things a little bit to the right, even though the average goes up a little, a lot more extreme things become possible. That's also true, not just for weather related events, but for sea level rise. And I think that application was one thing I think that would be made clear. And maybe we start with a big question, because I think if we tie it back to the investment story, we have anchored so much of the way that humans consume energy on this planet to fossil fuels. And that's in part a meaningful contributor to the way that you think about not just CO2, but methane. So, from your perspective, when you think about both CO2, methane, and fossil fuel industry, a lot of times folks hear that is, "Oh my gosh, we have to get rid of it." And that's not really a possibility anytime in the near future. So, when we think about kind of the energy consumption and the patterns of that consumption, how it's generated, energy is generated and used, how do you think those things may need to evolve? Because that leads the way to where the capital might go.

Dr. Horton - Yeah, surely, I'll start. I don't know if Art wants to say a few things too. I think you're right. It's really going to be an all of the above strategy. Some things are able to move more quickly now and basically the way I see it is, however much we're able to reduce our emissions in the short term, may bias more time, for new technologies to emerge in the future that may enable us to more effectively potentially pull carbon out of the air or capture it to a greater degree at the sources of emissions where the concentrations are high. Right now, there's a little bit of that going on. It's still very costly, but when you look at the scale of innovation, we can't rule out the idea that if we cut what we can now and act aggressively, there may be technologies in the future that can pull carbon out of the air. But there certainly are a lot of things we can do right now, just as, as you say, we need to acknowledge that right now, we don't have an alternative to fossil fuel associated with the airplanes that are flying or most of the freight travel around the world. A boat travel around the world. Just to give a couple examples, high energy smelting, right? Steel production, all that. We need to acknowledge we don't have alternatives right now for those things.

Chris - That's interesting. You highlight the way that battery technology and energy storage and generation are working at end markets. So, the idea that cars, potentially planes or boats, in some ways they benefit from that. But the reality is in order to make the boat, you actually have to have a steel mill and some other kind of very energy dense application to make the thing that will use the end product. So, there's an entire chain that needs to be examined, I think, is what you were getting.

Dr. Horton - That's a great point. And that's some real cutting edge research that's going on at Columbia and elsewhere, be great to work with private sector on that. It takes a emissions to some extent to, it takes greenhouse gas emissions to get to that green world. That's something we need, that's going to eat some of that carbon budget just as adaptation. More air conditioning can eat some of that budget. We'd have to make sure it's not that much.

Chris - That's interesting, Dr. Lerner-Lam, did you want to add anything, sir?

Dr. Lerner-Lam - No, I think there's a perfect point. We need to buy time, and things are going to be both incremental and disruptive. But the important thing to really recognize is that this is going to be an ongoing trajectory that has to be adaptive to policy, to particular disruptions, to different events. We're going to see tipping points in the climate. And we are going to see tipping points, as Radley puts it, disruption in the solution space as well. So, let's buy time by doing the right thing. But you're quite right, we're going to need fossil fuels, we're going to need fossil energy to get to some of the products that we need to deploy.

Chris - I think that's an important understanding, is that this is a continuum and not a binary drop an X on something and go from A to B. And that a continue, though, needs to really shift direction. I think that's what you were highlighting. Let's take another one of the questions that have come in. And so, the idea is around sea level rise. You thought about it, over a longer window of time, say 30 years, is it something that given what you've discussed, you would anticipate to be linear centimeter a year type of thing, or are there likely to be fits and starts. And are there other things that we just don't understand, whether it's volcanic eruptions or other things that may also change some of what are built into your forecast?

Dr. Horton - Yeah, so, for sea level rise, specifically, this is an example where the news is relatively good, I would say. Sea level rise is pretty linear on the timescales of 5, 10, 20, even 30 years. We can more or less expect that we're going to see the kind of rate of sea level rise that we've been seeing globally for recent years. Roughly an inch per decade, maybe a little bit more. Could go up a bit, but it's not going to shock us in some profound way, as we understand things. It's more if we don't reduce emissions, 50, 75 years from now, we can't rule out the idea that sea level rise rates could be five times what they are now in a worst case scenario. But the next 20 years or so should be pretty well behaved. Unfortunately, as we've seen at linear rate of sea level rise can mean much more frequent coastal flooding. Yeah, potential first surprises, a big volcanic eruption on the timescale of a year or two can cool things down. It can disrupt rainfall patterns even impacts the ozone layer, believe it or not, which is essentially not related to climate change. But greenhouse gases last in the atmosphere a really long time. So, if we don't reduce emissions, we're really locking ourselves into more warming, more sea level rise, more extremes of various types.

Chris - Let me pick up on that point. I'm going to just play the role of a bit of a skeptic. So, there's something called the AMOC, the Atlantic Meridional Overturning Circulation which is the Gulf Stream moving warm water from the equator up to the North part. But there's some claims that that will be slowing down, stopping some scientific evidence that seems to back that up. But also the jet stream is moving. There are a series of things that potentially may be hard to forecast. Do we really know? Or is there really a range of probabilities? And then some of these probability assessments not much may happen because two things could cancel each other out.

Dr. Horton - Yeah, very interesting. I think you're absolutely right. Maybe you could start to hear an undertone of this when I said, the basic physics of why greenhouse gases cause warming are trivially simple, that's true. As you're alluding to though, once we start to say, once you get that initial, say two degrees, four degrees of warming, then what happens? That's where the big uncertainties are. How will clouds change? How will the jet stream change? Unfortunately, when we look at paleo climates of the past and we look at what we're observing now, the balance of evidence suggests the potential for more rapid changes rather than what we'd call negative feedbacks, which sort of help us out, right? Which steer us back to where we were. But there's real uncertainty about that. Especially as you go to kind of regional scales, my perspective is a little more, the kind of risk averse idea that, our agriculture, our society is adapted relatively well for certain regions. And if we opened Pandora's box, if we start to untangle some of these ecosystems, surely we'll be able to find individual examples of benefit at least in the near term. But I think the precautionary principle suggests that the bigger, the change, the bigger the potential for net losses, especially for the most vulnerable, but potentially for everyone, if we don't reduce our emissions enough.

Chris - Well, I think you make an interesting point is that, it's not maybe so much knowing that with precision, but it's an understanding of how things are linked. And maybe my simple brain looks at it like, if you have kids, there's a way to understand this. We are putting more energy in the atmosphere and there is no question about that. Something else is going to happen then what has happened historically, a little bit like feeding your kids sugar. You're not sure what's going to happen. But something else, so, what they were doing five minutes ago is what's going to happen. So, I appreciate that, I appreciate the link there. So after the C-Level Story, I think there's another question that has come in around. How you might think about some of the effects that happen on a cyclical basis. In this case, the Southern OSHA Oscillation, what happens with El Niño, La Niña cycles. There's some forecasts for La Niña this year. Are these things in your view, part of what you might observe as having more volatility, they could have stronger impacts, or these things that have another cyclical pattern that we should consider in another way?

Dr. Horton - Yeah, this is another example of something we don't fully know. So, what we know for sure is long-term temperatures are going up because of more greenhouse gases. We also know in the short term that you're going to have these El Niño and La Niña events, which just quickly for folks are basically these internal oscillations relationships between the upper ocean and the Pacific and the atmosphere above. They can interact in ways where they lock into a pattern that leads to sustain warmer or cooler temperatures in certain regions and changes in rainfall. That variability which can be predicted to some extent and leveraged, right? because you know as you just alluded that we may be heading into either an El Niño or La Niña, six months in advance. Maybe you've tried to plan for that. So, that's going to interact with the long-term trends. Over time, the greenhouse gas global warming effect dominates that variability. But for short-term predictions that El Niño and La Niña can be very important. What's going to happen for this coming winter, for example, how are those odds going to ship that's variability. Behind it all though, is I think you were alluding to the further we push the climate system, you start to open up the possibility that maybe El Niño and La Niña could change in more fundamental ways. So, with some of our assumptions now. So, it's roughly once every five to seven years, it tends to lead to this effect in this part of the US. if you change the system enough, maybe we can't count on those things quite so much anymore.

Chris - That's a really good point. There are levels of understanding here, and I think the idea that science presents and the way you're framing it, Dr. Horton and Dr. Lerner-Lam is that, the odds that probabilities are shifting in this direction and that we need to do more than prepare. I think one area though, around preparation. And this is really for folks on the West Coast, that it might be interesting. Didn't see linked here. And maybe it's because it shouldn't be, is earthquakes. So, one question has come in really around global warming and the changes in a number of the factors you discuss and whether or not they're related to earthquakes, either their prevalence or their severity.

Dr. Lerner-Lam - Well, there's certainly been a lot of speculation about the relationship between other factors, climate factors and earthquake current. But we haven't really found a meaningful way to link them. You can hypothesize what that link might infect be. But there really is no evidence that earthquakes are linked to any of these climate variabilities. There's a small amount of evidence that changes in sea level can impact the frequency if you will, of smaller earthquakes on the sea bed. But that's not really of a concern to California. So, frankly the answer is no, there really is that sort of link.

Chris - Okay, I think that's important. Those questions are wonderful. I love that they keep coming in. So, just a quick reminder--

Dr. Lerner-Lam - No, we get that a lot.

Chris - Well, a Q&A button is there. So, if you have questions, please ask them, we're going to try to get to as many as we can. There's another one just related to that, which is around volcanic activity. So, the volcanic activity, whether or not it's related to the climate situation, but importantly, does it have an effect? So, maybe that negative feedback you were talking about, Dr. Horton. The idea that maybe the volcanic ash cools the planet. So, how does that work in your view?

Dr. Horton - Yeah, so, this is when initially it's pretty straightforward, just as greenhouse gases are more effective at the long way of sort of low energy coming from the earth and then bring the heat back. In some ways, volcanoes, you can think of as being the opposite. Here we're not talking about a gas so much as we're really focused on these small particles that are emitted from volcanoes. If the volcano is near the tropics, and if it's a type of eruption, that's essentially straight up in the air with a lot of particles, those particles will make their way up higher than 30,000 feet or so, higher than airplanes fly. Once they get up to there, they don't easily fall back out, down to the surface through rainfall. So, now, we've got a lot of small particles high up in the atmosphere. Those are going to actually be very good at blocking sunlight. So, in some ways it's the opposite effect of the greenhouse effect. Not exactly, but the effect is similar in the sense that that can cool the planet a couple degrees, especially in winter for a major volcanic eruption. And important thing to say, though, is at the timescales that we're talking about now, there's nothing to indicate that we'll get more volcanoes in a way that with feedback and stop warming. That's sad, so, it could get sort of get lucky, for a couple of years or so. But no reason to think that something that we're doing in terms of increasing greenhouse gases or warming the planet is going to help us out at a timescale that's useful for us. Over 100,000 years, million years. That could be a different story. But if these sort of timescales of 100, 200 years, no reason to think that that volcanoes will help us out.

Chris - Okay, well, it's probably a strange question anyway. I'm not sure we want to hope for more volcanic help.

Dr. Horton - Yeah, no, that's absolutely right. Direct effects also changes rainfall patterns around the planet. And that the geoengineering issues, which also one stream of which involves intentionally putting small particles up in the atmosphere is similar in that regard to volcanoes and opening up Pandora's box in some ways.

Chris - So, let's keep on this idea that there are natural effects going on. There's a couple of questions that have come in around some things happening in the world today. So, there's a concept called albedo, the reflectivity of different parts of the earth, the planet itself of sunlight. And so, as you change the ice pack, ice is very reflective and oceans are not. You changed something that used to reflect a lot of things back, which is the ice pack in say the polar regions into something that doesn't, which absorbs it, the ocean. Is this kind of feedback loop something that it sounds like it's a strong accelerator. And to the extent you've talked about a few things that are moving and tipping points, you've had a few graphs around that. How do you think about this change in albedo of the planet?

Dr. Horton - Yeah, great question. So, yeah, you gave a perfect example there of a positive feedback. Something we don't want to happen, even though it's called positive, right? You lose that ice that used to reflect sunlight. Now, the sun gets into the ocean, which is actually an incredibly dark surface, absorbing more heat, melting more ice in a potential runaway. What could some negative feedbacks be that could work in our favor. Clouds could change, probably will change with global warming. But how will they change? Which types of clouds will we get more and less, what height will be, will they be at the atmosphere? Will they be at the tropics or at the polar region? Those details will help determine whether those clouds act more like volcanoes and have more of an effect of blocking sunlight than blocking the Earth's heat. We get that, we get a little bit of cooling or will we get changes in clouds that are more like greenhouse gases. Increase the amount of reflection from the surface. Decrease the amount of, it don't have a big effect in the amount of sunlight coming in that gives you more warming. We don't fully know for sure. But the balance of evidence, what we're seeing so far suggests clouds are likely to increase warming a little bit. We're especially concerned about these types of clouds. You find actually off the coast of Southern California, places like the coast of Peru that have the effect primarily right now of blocking sunlight, keeping things cooler. If we start to lose those kinds of clouds, some of which are in tropical areas, we could actually see accelerated warming. But it's an example of something where we're not totally sure. We need to acknowledge that there's risk management dimensions to this.

Chris - As you were talking I actually wrote down the word ASAP and they wrote done ASAP because I'm on our listeners and our viewers here to be familiar with the ant and the grasshopper fable. So, that's a stylized way of saying, you can hope for the best and party on, or you can plan ahead like the aunt did and not end up like the grasshopper begging in the middle of winter to come into the ant's small abode. because I bring that up because I think part of the strategy that many folks may consider in this environment, you see some questions on this is what do we do? What's next? You've made some suggestions, I think at the end, but let's make it a bit more practical when we about, I think maybe three things. So, the first is, at a personal level, were folks decide to live, ultimately determines their energy footprint in a lot of ways, not completely, but in a lot of ways. So, maybe spend a little bit on that number one. Number two is, you thought about where we would be investing going forward. Think about maybe the carbon capture facility that was just turned online in Iceland last month. Is that a viable technology that we're going to see as you mentioned, Dr. Horton? We're going to see the technology, Dr. Lerner-Lam by time for the technology. Are there more things going on there, is the science in these areas advanced enough? So, where you live, is this science advanced enough? That may be the last place is something I heard recently, the idea that until the economics change around this, it really doesn't create a strong enough incentive for changing behavior. So, much like trash collections, fairly recent used to be dumped in the streets. That's a great example I heard from someone, the idea as well, until we determined it was a public health crisis and charge people for it and got them used to it. We really didn't see a change on how we dispose of trash. So, kind of that change in behavior. I know is a big question, but maybe take a crack at those, please.

Dr. Horton - Yeah, let's see. Do you want to start in there, Horton? And then I can, there's a lot of space for both of us in that one.

Dr. Lerner-Lam - There's definitely a lot of space. A lot we can do as individuals is try to promote good practice on an individual basis. Good practice in consumption, dealing with our own private investments or discussions and policy that have to do with finding these sorts of solutions. But practically speaking, I think Chris, you hit the nail on the head. In some sense, the science is there in terms of solutions. We know where the battery technology might go. There might be some disruptions, but fundamentally we need to electrify cars. We need to find storage systems for the intermittency of solar and wind. So, the technical questions are well-defined, what's not well-defined are the financial incentives in the market and the scalability and the commercialization of these technologies. And that's where frankly, the private sector, the financial services sector has got to look carefully with us in looking at what might be the next step forward. And what could use a financial incentive to get the markets moving. If we look at the total cost globally to actually achieve the so-called net zero transition, you're talking about call it 100 trillion, 150 trillion, a trillion here, a trillion there pretty much real money. But 75% of that has to come from the private sector in some way. And that to us really is the issue. How do you commercialize? what's scalable? How will that change policy and individual action?

Chris - Well, 100 trillion dollars Sounds like a big incentive to me.

Dr. Horton - Yeah, I'll leave it there. I think I'll just maybe quickly say it, things that matter at the individual scale. We're living in an area where, are our homes well insulated? Do they require a lot of cooling and heating size? Those are some of the dimensions. How much we fly does matter. But I think as art as alluding to the sort of larger policy dimensions, government signals, private sector signals, really the dominant going to be the dominant story.

Chris – So let me ask a question whether or not you would agree with the statement. I think Dr. Lerner-Lam and Dr. Horton. Very often the effects can be, that we're discussing here today are very hard to feel, to create empathy around unless you get them, they'll say happen to you individually, like, your house was flooded or a tornado hit your house. You just don't know what that's like until you have that direct experience. It is very hard through a conversation or through a piece of paper to change behavior. So, how would you think about addressing a question like that? "Well, it doesn't really happen to me. "I'm in a safe area. "I'm in the mountains of Tennessee or wherever." For example, and the idea though that the impacts you're talking about have both a frequency more happening and severity. It happens more and it's more severe, sooner or later it comes around. Now, that sounds a little fatalistic, but how might you respond to that, agreeing? If you agree, what would you say?

Dr. Horton - Yeah, so, this is, we were starting to get... It's going to take everybody and everything to address this challenge. And you're alluding to things like human psychology, what motivates people, the role of worry, fear, optimism, feelings of powerlessness. So, you're starting to see more focus on things like storytelling and the arts helping people think about the notion of having to leave a place and sort of grieving having to leave a place is as one example. But yeah, fundamentally part of the climate change problem is that we evolved to think about what's directly in front of us, that we can see with our eyes right now. And climate change is starting to look a little like that, but still to be honest it's mostly an invisible gas, things you hear about in the long term planetary scale. How do we increase our empathy? I think also how do we start to realize that even if we don't get the fire ourselves and the flood ourselves, we may not be as insulated from its effects as we think. Empathy is ideal if we feel and care for those people, but we can also experience direct effects, not indirect effects whether through supply chains or changes in insurance costs, right? Or you name it.

Chris - Dr. Lerner-Lam, would you add anything?

Dr. Lerner-Lam - And I sort of argued that there are very few people who are not feeling the effects of climate change, in one way or another, and this notion that in fact, the area that Radley is working on is an attribution of the events that people feel viscerally to the longer-term trends, that's one element of it. But I'd say now, going back to my unfortunate muting, the introduction, this notion that there has been a pivot in most of the institutions that are making decisions about the future one way or another. And that is real. We're seeing that in your sector, we're seeing that in manufacturing, we're seeing that in policy. There's the remaining issue though, that a lot of the risks that we're talking about is in the future. And so, we worry about the so-called risk discount. How much are we willing to spend or sacrifice today in order to reduce the risk in the future? That to me is a central psychological issue, if you will. But the more that we attribute current events to the background trends, the less the risk discount factor is going to come into play.

Chris - Excellent point, that's a very good point. It becomes harder and harder to say, "Not me, it doesn't affect me." It becomes no, it's part of the entirety of the system. That's great. Okay, well, I'm going to close, I think at least with one thing that we didn't get to, which is more investment related and I'll highlight it, which is the opportunity that we observe many companies embarking on. First, around their reporting. We're starting to see a lot more information coming out from companies. I would expect this third quarter earnings season to be a continuation of that trend. It's actually kicked off recently. In fact, our very own Jason Bender, highlighted some of the facts about what First Republic is doing. So, I expect fully to see much more companies report on this. Why, because investors are demanding it. Even though you may not be individuals, the asset management companies are. Either whether it's on your behalf or in a way that they're looking at it through a lens we are, which is, this is a risk and an opportunity. We want to make certain we understand both from an investment perspective. And I think that maybe nail the point home that Dr. Lerner-Lam made, 100 trillion dollars sounds like a tremendous opportunity. It's something we continually work to capture for our clients. What that's done though, is it's brought us to the end of our time today. And I think with that, what I'd like to do is the following. First of all, thank you, Dr.Lerner-Lam and Dr. Horton, very much for taking the time to share your research, your thoughts, your expertise with us and our clients today. Your sessions provided us with a really good primer, even fantastic primer through which we can take a better look at the critical issues around climate science and how we can think about investment decision-making for individuals, but also at the firm level. And before we wrap up, I do want to share a couple of things, and those are the details about our upcoming client forums in the next couple of weeks. The second of our series, this was the first one. The second is on Tuesday, October 19. And that's at 1 p.m. Pacific, 4 p.m. Eastern. And that's going to focus on the global energy dynamics and trends and innovations for the future. So, we're going to pick up this conversation, which sets the base and talk about how energy dynamics are likely to change and where the technology is headed. That's going to have a stronger investment focus. That event will feature Dr. Michael Webber, the Josey Centennial Professor of Energy at the University of Texas at Austin. And a conversation with Bob Thornton, the president of First Republic Private Wealth Management. That, again, is on October 19, Tuesday. On Thursday, October 28th, again, at 1 p.m., Pacific 4 p.m. Eastern. We'll focus on investment strategy and the geopolitical implications of climate change. And that's going to be featuring Ian Bremmer, he is the President of Eurasia Group. And they'll have a conversation with Gaye Erkan, our co-CEO and president of First Republic. So, we hope you've enjoyed today's discussion. Thank you again for joining with us. And we look forward to seeing you all again in the upcoming seminars. Thanks everybody.

Dr. Horton - Thank you Chris.

Chris - Thank you.

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