Ethic Co-Founder on Climate Change Financial Risks

Summit in terms of racial injustice and institutionalized racism. We're also talking a lot over the past couple of weeks and continuing to engage our efforts around the climate. So we want to focus on that today with Jay. It's really nice to have you back with us. It's a

touch to be back. Thanks having me. So Jay talk to us about climate here, because you know, this is something we spent a lot of time actually with our Green Festival last week here at Bloomberg and and we dug into a lot of the investment aspects of this. But I wonder what your take on it is, because this is at the core of what you're doing with ethic right, tell us your approach of course, of course, and I think that you know the way that we

are seeing investors consider the climate conversation. The climate crisis right now is really a topic of risk, right, and the kinds of risks that investors can actually proactively mitigate from their portfolio if they know what to look for with regards to certain information data that is out there about companies. And we can break that down into two primary risks, you know, whether that is physical risks or

transition risks. I'm happy to go into more detail about well, talk to us a little bit about that in terms of how because I'm always curious when we talk about this, how do you look at a company Like we did a story earlier about how Amazon doesn't have a plan to solve emissions. The company gave itself about two decades to reach zero emissions, you know, but it's like, can it do what its customers and want it to do? And also put the climate first? Can put both constituents

of you home first? And I do wonder when you look at a company, how do you decide whether or not they are hurting or helping or or taking the initiatives to be better when it comes to the climate. How do you how do you make an investment ruling on something like an Amazon is It's a fantastic question.

What you're talking about specifically, is what you would consider to be a transition risk, right, which is this risk associated with the change in economic incentives um as they transition to a low carbon economy and as you know, increasing consumer sentiment shifts towards a desire to have more sustainable companies they're buying from. And as companies recognize that, you know, potential regulatory changes in the future may actually

you know, put a price on carbon. They're recognizing that they have an incentive boat to keep their consumers happy as well as keeping an eye on what their bottom line is going to be, because you know, if these regulatory changes do happen, if a price to carbon does occur, which we believe to be an inevitability at a certain point, you know, they are they want to be ahead of the curve and they don't want to be caught incurring those increased costs when a price is put on you

know what it is that they're ultimately releasing in the form of emissions in cobbon through what you're discussing. So Jay, you you brought up a really important point, which I think is consumer behavior. And you know, we've been talking about this also in the context of equality, and in fact, part of the conversation we're gonna hear later in the hour which John Winkle Reed and Ursula Burns addresses this, this notion of where the economic pressure is ultimately coming from.

It's coming from consumers who are ultimately demanding more of the companies that they buy from, but it's also needs to come many would argue, I would be among them, that it has to come from the institutional investors, is as well? Are we seeing pressure from both sides? And is it equal or how would you describe it? Well, I think that you are seeing, you know, a two prompt approach, because you know, it's it's impossible now to

ignore what is going on in the climate spective. We've got fires on the West coast, we've got a historic hurricane, sees and performing in the Gulf, and you know, the conversation about whether this is a topic that needs to be addressed is now over right. It's now a conversation of how do we address this and the consumer sentiment around that has shifted towards people recognizing that their purchasers do make a difference. And that's why you're seeing certain

companies coming out and getting ahead of it. Right. You had Microsoft come out talking about going carbon negative. You are Delta coming out saying they were going to be the first carbon neutral airline, and those first movers, we believe are going to benefit from being you know, proactive in this sense. But from an institutional investment perspective, you are seeing, you know, not billions of dollars flow into

more sustainable investments. You're seeing trillions of dollars as investors that are investing for you know, they're not investing for ten twenty thirty years. These are investment portfolios that are looking at the true long term fifty years, you know, the generational investments that are saying we don't want to be overly exposed to companies that are not being considerate of a changing climate and the risks that you know essentially come with that. So if I can follow in

that and that excuse me? What turned that institutional spigot on, as it were? Was there a catalytic moment? Was it the kind of accumulation of a lot of the things that you've been alluding to where you just can't ignore it anymore, or was it they needed to see performance

like what happened? Well, the you know, the performat performance question is so interesting because if you do look at this as a risk mitigation strategy, and as these kinds of risks become more pertinent, with companies having their supply chains disrupted, having their you know, physical assets to put at risk, having an increased risk of stranded assets as a result of a changing climate, you're actually going to see these companies that are not taking climate change seriously

get affected and as a result, they are not going to be great investments when you know, they are overly susceptible to drought or their supply chains start to fail.

And so I think institutional investors are really recognizing that, you know, they want to invest in a more sustainable way to achieve the goals of you know, driving a more sustainable future, but they also need to protect that capital and they need to be thinking as long term investors and in doing so recognizing that by mitigating risk, you're probably insulating the portfolio from you know, the kind

of climate. I think events that we're seeing globally, Jay, what about the other problems, big issues that face us And it's something we've talked about with you before, but you know, the racial inequalities um that are out there in our society. How do you think about that. I'm curious what you're hearing from investors about how they are applying that too and thinking about that when they make investments, of course, and it's you know, it remains a huge

priority for so many of our clients. And one of the interesting things, you know, in this conversation about climate as well, is seeing the interconnectivity between these issues, right, and you're seeing on the West coast now with these obviously these unprecedented fires. You know, one of the mediate side effects that everyone is talking about is the immediate climate migration that is going to be a factor as

people lose their homes at kind of unprecedented numbers. And one of the natural effects of that is that, you know, it is the most vulnerable in society that are going to be most disproportionately affected by that if they cannot afford to relocate their lives, if they cannot afford to rebuild their lives, and if they are essentially forced you into unprecedented times for themselves and that does disportionate affect people of color as a result, and so um, you know,

as as our investors think more about racial justice investing, I think that the entire climate conversation does factor into so many elements of it, as well as other factors like criminal justice reform and where their companies are profiting from a systemically unjust and racist criminal justice system, which companies are positioned to, you know, honestly benefit from that system, as well as certain industries like predatory lending that disproportionately

predate upon or affect people of color in the country right now. Yeah, And it's interesting, you know, on the on the climate point, in the climate exacerbating inequality point. You know, Jay, you mentioned earlier in the conversation the hurricane season in the Gulf, and you know, it was fifteen years ago, and I was involved in some of

the Bloombird's coverage around it. When Hurricane Katrina obviously came on shore in Mississippi, it was a little less well covered, but certainly when we saw what Hurricane Katrina and the levies breaking ultimately did to New Orleans, the disproportionate effect it had on poor black people in the lower ninth ward and also the economic response to that, I think is so interesting to think about as well, in terms of what get really what gets rebuilt, and what doesn't

and who is able to essentially show any measure of resilience.

And I have to think that that's part of the equation too, of course, of course, and you know, a very sad part of all of the displacement that has created either from the flooding either from fires, is that you know, small business owners, people that are dependent on the community element of you know, for their kind of economic support and the economic sustenance you know, that's wiped out as the entire community is pushed out, and you know,

does not necessarily have the financial resilience to return to that area, and especially as you said, not to do so quickly. So when you think about what we're increasingly calling and we had the the creator of this concept on our show yesterday, Peter Atwater, the economists that this

K shaped recovery. You know, I feel like investors are sort of of of of many minds here that it is maybe easy, as it were, to sort of invest in in that upward part of the K in tech and other companies, UM, and and maybe ignore some of the the opportunity or maybe ignore some of the implications of the other part of the k with this widening gap, Um, how do you continue to sort of make sure that you and and on behalf of your clients sort of

making the right sort of investments when some companies are doing quite well A bit all this well, I think that you know, one of the considerations we have to make is, you know, there are obviously those larger companies that are going to benefit from the displaces of the market and from consolidation, and that will continue to grow

an accelerated rate through COVID and through the rebound. But you've also got to look at the companies that are kind of systemically positioned to benefit from you know, honestly extracting from the communities in the country that are the

most vulnerable. Right, So as we look at industries like predatory lending that benefit most when people are financially destitute and are honestly in desperate need of financial support, that's when they are strongest, right, because they're able to position themselves as you know, a provider of financial services that does exploit its clients right, and there's industries like that that are going to make the situation honestly, dramatically worse for those people that will not be part of the

economic uplift, especially if they are not you know, asset owners, and if they're not holders in some of those companies that are going to see the largest expansion in their share price because they're not you know, honestly participating in the kind of economic uplift because they don't have investment portfolios.

And so you will see that disparity grow even further, either from that corporate activity or the fact that you know a lot of people in the community don't actually have ownership of equities that will grow from the benefits of the Upland to a quick question, just kind about a minute left here, how does your how do your you know, algorithms, you know, how do they see Big Wall Street pigs amid all of this. It's a great question. I think that you know, it really depends on how

you actually judge the various practices. And I think that you know, looking at things like carbon risk, carbon exposure, um, you know, isn't going to be material when you're looking at a financial institution, and so you know, deciding on whether to invest in a company based on how much carbon it emits is not going to be applicable to an institution that doesn't create as part of its business activities.

And so you look at the various ways of that bank kind of operates with regards to things like the financial systems risk, whether or not they are participating in or profiting from predatory lending, and look at the things that are relevant to their honestly their business practices and see how they connect to either you know, climate conversations, whe justice conversations, or other things that are connected to

the factors that we consider. Well, it's so fascinating, um, and I know hopefully you'll come back at another day so we can just kind of continue this because it's just kind of the investment world where it's important loading these kinds of areas. J Littman, co founder, president of Ethic, joining us on the phone from New York City,