David Carlin | Changing the operating system of business & society

How would the Head of Climate Risk for the United Nations get to Net Zero by 2035?  Find out, and lots, lots more.

"In the same way we don't give people medals for not robbing banks, the goal is to drive impact, avoiding greenwashing means that what you're saying and what you're doing are consistent." - David Carlin, Head of Climate Risk & TCFD for the United Nations Environment Programme.

Together we go through many fascinating insights;

- the Network for Greening the Financial System (NGFS)
- Aggregating emission reducers rather than looking for the silver bullet
- Success for smaller countries without a $200bn Inflation Reduction Act
- Pro-action over reaction and my recent whitepaper No More Greenwashing: A regulatory guide to ESG & Impact Investing (which you can get in the comments)
- The Responsible Investment Association Australasia (RIAA) and International Organization of Securities Commissions (IOSCO)
- The high, justifiable fear of business towards regulatory fragmentation
- The strength of adoption with TCFD, and the challenges of comparability, transparency and completeness.
- Not having unadjusted & adjusted financial statements for climate change
- Climate as a threat multiplier
- Volatility and the cost of capital
- The information that matters
- Weaving this into your operational strategies
- The lack of transition finance for developing and emerging economies
- What you need to be doing if you actually want the world to decarbonise
- His recent address at the ESG Investor Stewardship Summit
- the $60BN AUD committed to fossil fuels since the Paris Agreement was signed, by the ANZ, Commonwealth Bank, NAB and Westpac as outlined by Market Forces
- Markets moving in rapid and volatile ways
- Decarbonisation commitments & transition risk
- Net zero becoming law of the land

*****

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Philip Bateman - Strategist & Communications Advisor

"Helping funds tell the right story to investors"

Transcript

Philip - 

A big welcome to my regular viewers and listeners and those of you who are joining us for the first time. It’s Phillip Bateman here, I’m the host of Smarter Impact, and I'm the Managing Director of Bravo Charlie. 

For the past 14 years, I've been supporting CEOs with their strategy and communication. And for the past five years, working mainly with the impact finance industry, helping CEOs tell the right story to investors. 

And to coincide with this interview, I've recently launched our Investor Trust scorecard. So make sure you take 5 minutes to get your results and see how you stack up with the best companies in the world.

Now, with that said, I'm so pleased to introduce our guest, David Carlin, who holds a number of roles. 

These include working with the United Nations Environment Programme Finance Initiative (UNEP FI), where he is the Head of Climate Risk and the task force on Climate-Related Financial Disclosure. That's based out of Geneva in Switzerland. 

He is also the founder of Cambium Global Solutions in New York, which is a team of sustainability experts and holds a variety of other roles which will get into it as we go through.

Thank you so much for joining me for this conversation David. 

David 

Yeah, it's great to be here, Phillip, and really looking forward to our discussion.

Philip

So I wanted to start out strong; Q. How do I win the future with a better climate strategy? 

David

So I think that the right question that not enough people are asking, because right now I think there's a lot of what I'd call playing defense on climate for much of the private sector and even some governments, which is to say, how do we minimize risks and how do we do just what is necessary to meet the demands of stakeholders? 

Obviously, the public now is very much aware of the urgency of the climate crisis, and it's more the case that if you're a corporate there are disclosure requirements. 

We just saw this week the International Sustainability Standards Board put out its guidance on climate disclosures and wider sustainability disclosures. And yet playing offense is really going to be where people win, which is thinking about climate not as a trend, not as a regulatory obligation, but really as a change to the operating system of business and society going forward.

And the people that look at that are going to be most successful because they're going to be innovating not only the solutions that are necessary to build resilience, to transition the overall economy, and they're their own communities to net zero, but they're also going to find those opportunities for growth. 

They're going to find ways to manage their risks. And doing those things together, I think is the way to to play offense here, to see this not as a sustainability commitment, but really as a strategic commitment.

So I think firms that are going to be considering where they're getting their energy from, the kind of products and the markets that they're involved in, those in governments that are looking at growing and increasing the industries that are playing a positive role, both on the resilience side, avoiding physical risks of climate change, but also on the mitigation side, reducing emissions. 

I think these are not only going to be huge opportunities, but really ones that are a move to a different way of doing things. And I think that that to me is the key in the same way that we think about what are the prospects of a typewriter manufacturer after the personal computer came out, or what are the ways that we think about a brick and mortar retailer after the Internet and Amazon?

This is kind of the scale of change. But instead of a single industry, instead of a single product for the whole of the economy, and I think thinking in that expansive way is a recipe for success, because it will lead you to not only the new products, the refinement of what you're doing, but also to really see how to be a positive player in that ultimate social goal.

Philip

On a more tactical level, because I hear you say those things and then at the moment we're in the middle of London Climate Action Week and I know we were moving times around to get the opportunity to speak - And when I looked at that, their opening bar was that tackling climate change requires us to change everything we do faster than has ever happened before. 

And somewhere between these sort of like far off aspirations and you saying, we need to look holistically at things and use this as an opportunity rather than something we're reacting to. 

What levers are there to pull? In the consulting work you do for governments and organizations, How are you seeing people actually pull levers and get on the offensive with this stuff?

David

Yes. So I think that's really where where the rubber meets the road and where the specific changes take place. And so I would highlight maybe three areas what governments are doing, what financial institutions are doing and what innovators are doing in the business space. 

And I've worked with a number of institutions in all of those areas. I think from the government side, it's really learning quickly. 

It's seeing where good practices are amongst international peers and it's really trying to create both a level playing field, but a marketplace that is open and transparent as well as one that has the supervisory oversight to manage risks. 

And so some of the work that I've done, both in helping governments, in setting up climate stress testing, in assessing their disclosure requirements versus things such as the Task Force on Climate-Related Financial Disclosures, and now that work of the International Sustainability Standards Board, but really trying to make sure that there is a regime that encourages and accelerates.

So we talk a lot about what the incentives are. We talk about managing risks. And so I think having not only a fast learning government, both in terms of the policy side and the supervision side, but one that is going to adapt to the local risks in the local context is really key. 

On the financial side, I think it's about aligning... And if may, as we talk about the Government side, those skills you're talking about, about being forward looking and agile and practical, if you will. 

Sometimes they're not really associated with bureaucracy. 

Philip

Is it like a people challenge? Is it an incentive challenge? Where do you start, if you want to achieve that level of government capacity?

David

This is sometimes swimming against the current. I would say in the supervisory space that it's really been fascinating in the last several years. The extent of interest in innovation that's gone on and a lot of that thanks to the collaborative work that The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) has been doing there. 

But people usually don't consider exploration to be a common word when associated with regulators. But indeed, that's actually I think what has really been taking place. 

And in the UK you have the Climate Biennial Exploratory Scenario (CBES) and that's part of a larger effort that the Bank of England and Prudential Regulation Authority (PRA) have been doing to explore new topics every couple of years anyway. But now climate has been one that they've gone deeper on. 

And so I think part of it at the supervisory space is really to be sharing knowledge across institutions, seeing where good practices are, learning the lessons from others first, rather than trying to do something and see and get the same results.

So if we've done a test and we see what is successful, do we need to run the same one that someone else ran? Or can we build on that? 

And I think you're seeing that kind of iteration. And then the other piece on the more policy front is, this has been a challenge, but I think the countries and societies that have really put something big together have seen the benefits. It seems like just every other day that there's a new graphic or a new announcements in the U.S. based on the Inflation Reduction Act, whether it's a new factory, whether it's a new estimate for output of batteries. 

And so I think that has been a game changer, was that months and perhaps years in the making? Absolutely. But I think that doesn't preclude more local level incentives, whether you're the mayor of a municipality, whether you're looking at a state or county level, that there are actions to be taken. 

And I think part of that is, is getting those incentives to be aligned with what needs to happen. And once that happens, I think it does produce that game change.

To your point, it's not necessarily easy to move fast. I think on the regulatory side, there's more of kind of a learning culture. And on the policy side, sometimes there's a bit more of a response. 

There's no doubt that the Inflation Reduction Act has inspired and instilled responses in other governments because of the fact that it does bring a bit of competitive pressure to them. 

Philip

And excuse me, you were sort of going through three tracks as well. When I dived into Government.

David

No, no, I think government is a big one. I would just say, on the financial side.. Finance should be looking at aligning to net zero, but thinking about what that means in terms of the risks and opportunities that they face. 

And so part of this is being able to first measure those risks, but also have a sense of what new products, what new clients they want to be engaging with. We've seen an explosion the last few years of green bonds, of green loans, of sustainability linked products and ESG funds. Some of these things have been really successful. Others have encountered justifiable scrutiny. But the point is that this is an expanding product market, but that product market really is undergirded by an expanding real economy and real industry. 

And so what does a firm's sustainability strategy look like?

I think it means managing the risks of an increasingly volatile world while aiming for those opportunities. And I guess that brings us to the real economy and to those innovators. 

And I think what I'm always looking for when I think about who to work with is who has scalable solutions that can really drive impact, who is hitting at the leverage point of a system, whether it's informational. 

So, we know that all financial institutions are going to need better information on what the emissions data is of their clients, not just so they can do baselining, but so they can engage better and so they can see who leaders and laggards are.

We know for example that people working on grid stability and using obviously these hot topics of AI and digital assets, but bringing those into into the sustainability space for things like virtual power plants or as I said, balancing loads on grids. These are things that are going to be absolutely needed. 

And then of course, there's a whole fascinating space across materials science and the innovations that go into everything from better solar panels using perovskite to potential methods for hydrogen generation. 

And each of these, I think, has an opportunity to really scale. And part of what we're excited about is because of the diversity, because of the excitement going on. There is a real market competition to be the one that grows to be the big solution, and it's not going to be just one. 

It may be very well an ‘all of the above’, but how much of a role each of these things are going to play is still somewhat yet to be determined because the market will begin to decide that. And that to me is one of the big roles where private innovators play a big and important step in driving this forward.

Philip

Yeah I’m fascinated by all of those things. I was speaking recently with some senior government leaders around playing to strengths rather than going out and trying to compete or trying to implement regulation to slow down the ingress and egress of other people and companies, to look at the organizational strengths, or the countries strengths and then market on those. But then seeing companies who are looking to other markets and offshore markets to bring the ability to actualize this data into business outcomes, for example to look across biomass to provide greater regulation or load balancing systems.

And those two tensions of government wanting a strong economy and playing to strengths. And then the individual actors going well, which governments can we go to where we can achieve scale and play at the edges and create this kind of impact at scale? Yeah, so it's really just a fascinating time. 

David

Yeah, I think it's incredibly vibrant that there's a level of innovation that some people would say is it's only been equaled during during wartime. You think of all of the developments, that old adage of necessity being the mother of invention is really true here. But I also think that while policies aren't always fully comparable, coherent and as effective as they can be, there is a huge move, And if you think about where money will be coming from; Governments, there are major opportunities to grow and innovate, new ideas, new solutions.

We see where we are today and things like the Inflation Reduction Act, and the act around Net Zero in Europe, that's similarly trying to accelerate what Europe's doing. Many other governments, China obviously is a huge investor in many of the renewable technologies that are produced by Chinese companies. But this is just the current state today. The expectations and the needs, when we look at where we need to go, the level of financing that needs to take place is so much larger. So it's not just about how do we capture a static market, but really how do we thrive in a dynamic one. And I think, as you said, there really is room for many different entrants for many different solutions, and we probably need them all. It's very, very much harder to get an 100% solution than to get ten, 10% solutions that will will bring us to the same result of emissions reductions.

Philip

And that was a slight addendum to that point about playing to strengths, because it was in the context of not being able to do something like the Inflation Reduction Act for a smaller economy, that there simply isn't the money there to support that level of adjustment to the market and therefore having to look at what technology, what resources, how can we value add to our supply chains as a way to not only achieve this net zero outcome, but to be competitive, to get on the offense, not to sit there and say “regulatorily, we're going to get thrown out by our constituents if we don't do this” because that isn't a sustainable or practical strategy as a way to go forwards.

David

Absolutely. I think that this is really a time of proaction rather than reaction. The governments that do this will be leaders. And it's not just about their electoral prospects, but really thinking and using national pride in the best possible way to say where can we be world leading, whether it's you look at the Netherlands in terms of providing advice around flood defenses, around engineering for physical risks. You think about what Denmark is doing around wind power. You consider the scale and scope of supply chains and the role that China has staked out and then a number of other countries in the solar generation space. We're seeing in the Gulf, which isn't necessarily seen as a exact hotbed of renewables because of the huge oil and gas reserves.

They have record lows in terms of the generation cost for solar farms. And so these are real changes where not only countries have an opportunity to play to their strengths, but also where there is this element of wanting to stay out in front and wanting to continue pushing. I'm sitting here in London speaking to you that there's clearly a view that London wants to be that net zero financial center. That is something that was stated by the Prime Minister when he was chancellor, and I think it continues to be a guiding ethos and very much needs to be because there are others, whether it's in New York and Singapore, that are also actively looking to take that leadership role for financial markets on this topic. 

Philip

There's a whole lot of things firing off in my head as we say these things, because I've got a bunch of questions in different areas and it's sort of opening all the doors to them. As a relative aside for the listeners, Previously we did a paper called No More Greenwashing around ESG and Impact Investing and the regulatory environment that was coming to bear to support just better transparency and basically bring the market to heel a little around Disclosure, around this proliferation of green bonds and things.

I know with the Responsible Investing Institute in Australia recently at the annual conference, we had the head of our Securities and Investment Commission talking about how they were proactively going into the market and really just hitting people with a stick and saying, we’re de-listing funds, you can't do that, you can't say those kind of things. 

Now, one of the major reasons I reached out to you is because the ISSB have released the new IFRS standards and this is quite a big deal. to paint a contextual picture here for the listener, I'm going to put up the slide you recently shared of the TCFD, the ISSB, the GRI and the mix of things.

Can you take me through the basics of this?

Are they voluntary or mandatory standards?

And, what's the benefit of complying, if you will?

David

So to tell you a little bit of a story on this, if we we rewind back to 2015 and we think about what questions the G20 was asking and the Financial Stability board that they convened was asking one of the questions about climate change was it had been recognized many years prior that this is a major market failure.

Clearly, if this problem were something markets would solve on their own without support and intervention, it would be solved.

And the fact that we continue to see record levels of emissions, we continue to see increasing warming is evidence that this problem isn't being solved in a way that perhaps we would have desired.

And so seeing this as an informational failure and a market failure, realizing that climate risks are a lot more apparent than many people think, one of the goals was how do we get the markets better information on climate and how do we consider both the risks of companies that aren't going to be able to transition as well as companies that are going to be impacted by physical risks and the societies in which they operate.

And so out of that came a series of four framework pillars from the taskforce on Climate Related Financial Disclosures.

So the FSB had convened this group known as the TCFD, to put together those recommendations, which came out is 11 recommendations based on those four pillars of governance, strategy, risk management and metrics and targets.

And that work really catalyzed the industry when it was finally released in 2017 as a voluntary standard, but one that came out to get people to start disclosing what climate risks they faced.

Even in the intervening few years before this ISSB work that you mentioned, there were a number of supervisors in the UK and Canada, in New Zealand, in other jurisdictions that very readily and rapidly adopted this as part of their own disclosure expectations.

And one of the big things to note there was that was moving from the voluntary space of the TCFD to now a mandatory and regulatory regime.

However, TCFD didn't exist in a vacuum.

You also had disclosures on emissions which had been going on for many years that the Carbon Disclosure Project now just called CDP had been collecting.

You had other initiatives around sustainability, the Sustainability Accounting Standards Board or SASB, the GRI, the Global Reporting Initiative.

All of these pieces providing standards that in many cases were complementary, but also somewhat interlocking.

And so now you had this profusion of both voluntary and mandatory standards in the marketplace.

And if we know one thing about business, we know it's typically that there is often a high fear, justifiably so of regulatory fragmentation of different standards.

And what this looks like more than anything else is a big party where we're all trying to communicate, but we're all beginning to speak different languages.

And so in 2021 at COP26 in Glasgow, the IFRS Foundation launched the International Sustainability Standards Board.

And the vision there was really to bring together under a voluntary framework all of the different existing voluntary standards related to sustainability and more specifically to climate change.

And so they adopted the TCFD framework, those four pillars I mentioned in 11 disclosures really as the starting point and said the strength of TCFD has been in its adoption.

That's been really powerful.

The challenge has been in comparability, in transparency and in completeness.

And this is an area where supervisors are really important in moving that playing field forward.

But to give those supervisors a stronger baseline to to start from.

This work of the ISSB, was really to further elaborate on TCFD to explore what this meant in the context of sustainability by taking some of the great work that had been done by some of those other organizations I mentioned.

And either have those organizations feed in their standards, actually directly absorb them, in the case of the Climate Disclosure Standards Board and in doing so, put together a series of voluntary recommendations that could be relatively easily syndicated by securities regulators.

So there's been work with IOSCO, which is a group of over 140 securities regulators, but also with supervisors across the world in a number of different contexts.

So that move from voluntary to mandatory could take place.

But what came out of that wouldn't be 140 or the number of countries 200 different standards, but rather a common and interoperable one.

And so that really has been the journey that we're on.

And I think everyone has been very, very impressed with the speed.

When people think about standard setting, they don't associate that term with with fast moving and dynamic.

But I think to the credit of the IFRS Foundation and those directly involved in the ISSB, there's been a tremendous move toward a greater and and more comprehensive view on what interoperable standards are about the types of emissions that need to be captured and disclosed, about the use of scenario analysis, about questions of how to integrate risk and climate related topics into governance and into risk management processes.

And so providing that I think is really about providing that common language.

And so now you're seeing supervisors adopting or connecting to this, whether in Europe, whether in North America, in Asia and around the world.

And so that's kind of where we are.

And obviously we're only a few days into these new standards, but they're both impressive, but also unsurprising in the sense that we've been fortunate to have amendments to them.

The fundamental ideas here of trying to be comprehensive about the climate journey that a firm or a organization is on still remains at the center of what ISB is doing on climate and in extending that to broader sustainability as well.

Philip

I was really taken by reading through the standard, and I quote it here in the opening, it says this requires an entity to disclose information about climate related risks and opportunities that could reasonably be expected to affect the entity's cash flows, its access to finance or cost of capital over the short, medium and long term.

Now, that's quite a broad sweep of things, and I assume there's more detail.

Well, I mean, there's a lot more detail because it's many, many pages.

But the essence of reasonable in there and that kind of affects something.

I mean, there's almost an existential question that looms over this about, well, surely all of climate is an existential threat to the businesses operations and how far out do you go with assessing this kind of thing?

And I wonder about the compliance with that sort of requirement to disclose.

Do you have any thoughts on that about the like sort of the burden on business and then back again to that voluntary vs mandatory.

Is this an offensive tool to get on the front foot with access to further capital to create change in the world?

If you are using the standard to disclose to your investment partners?

David

To answer that second piece first, it certainly is.

And I think that one of the places where this actually has been not discussed enough is in emerging markets.

We know that their are data challenges in those places.

But I've spoken with a number of institutions in those emerging markets, and they recognize both the desire to scale what they're doing, but also the need to provide greater information and transparency, because this is expected by those that will be their financial stakeholders.

And so I think there's been very strong interest and uptake there.

I think likewise within that, this first question of what perhaps does materiality mean?

I think this is where supervisors and mandatory standards become so important because it's about helping to set those expectations in a clear way.

Unlike some of the work in Europe on the European Sustainability Reporting Standards, the ESRS, as well as some of the guidance that is coming out around their mandatory expectations.

This isn't necessarily a chapter and verse of go to Article 39, item two, to see; ‘we mean 1 million USD when we say materiality’ those kind of definitions are going to be a little bit more free flowing and a little bit more devolved to the individual supervisors as well as to the marketplace.

And I think if we think of the best analogy to this, it really is financial reporting.

And I think part of the terminal state of this is to really see climate integrated into that financial reporting.

I think what we're doing right now is an interim phase of this, which is we need to bring climate, we need to bring sustainability out in the open so we can begin to gather the information we need.

But ultimately, similar to financial statements where interpretability still is a area that that people spend a lot of time trying to assess with a single piece of information, whether that is is it positive or negative or neutral piece of information.

I think this is where it's not about any one thing, whether it's one scope, three emissions or whether it's one's losses under scenario A or B, but really a whole of the the firm perspective.

And that I think is where we're going, which is to begin integrating this into financial statements.

We shouldn't have adjusted and unadjusted financial statements for climate change.

You should have ones that take it into account in the same way that a company that is a major polluter will have line items for potential lawsuits.

We'll have line items for the reserves for remediation.

And so those that are financing big emitters that are big emitters are going to need to begin to think about what does that mean, what does it refer to for the useful life of assets if there's potential risk of stranding?

And right now, I think what we're seeing is trying to bring those things out in the open and seeing where decision useful information comes from.

But I think in the longer run the goal is to have this information be really something that somebody at a glance should see together in terms of other risks that the firm is facing because climate doesn't necessarily sit alone.

I think the incremental idea of it, of ‘here's my risk plus climate’ actually kind of misses the main points as well as misses the main risk, which is this is what and I like the term that the U.S. Pentagon used of a threat multiplier.

But what I would I would say is it's a volatility multiplier for markets and for actors to say it's not just about what your incremental climate losses are, but how does that change your cost of capital if it is going to be negatively impacted by the fact that you are a high emitting company?

Or how is this going to change the costs?

And in terms of income, if your insurance policies are changing significantly because coverage is becoming harder to get or more expensive?

So these are the kinds of places where we see these intersection points, and I think that is ultimately the road that we're on is if we really want to work this information in, it's to work it in through the financials at the same time.

That is still a market based solution.

I think governments are also going to very much need this information and this is why these questions, as you said before, of materiality, of what these things mean, need to be defined by those that are using this information to get a sum total view of the risks that their societies, that their supervisee, that their financial systems are facing.

So I see both a kind of market based view, which I spent most of the time talking about, but also a real supervisory view of how this information can and will be further defined.

Philip

The work I do when I'm not having conversations with leaders like yourself is running a strategic communications firm.

And I was doing some positioning work and interviews with a leader of one of Australia's biggest impact research houses.

And I asked, what's her hope for the industry?

And she was saying, well, I hope we become extinct.

That risk, return and impact are simply all of the things that are considered.

And impact isn't this additionality or other consideration.

It's just what happens when you put money into things.

David

Yeah, absolutely. I think that’s the terminal state is that this information matters and it matters so much that it's directly considered in anything that you're doing, not as an on top adjustment, but really woven into the fabric in the same way that we'd love to see companies take these challenges and weave them into their operational strategies, into their business.

If it's simply an exercise that generates a large stack of papers, we're going to fall well short of any of our goals.

And I think that this is where firms need to be thinking in two minds one as a a reporter and generator of this information, but also as a user of it.

Sometimes we think that that's confined to supervisors or maybe to the financial sector, but internally, if you're a materials firm, understanding your emissions, understanding the potential disruptions to supply chains, these are things that are going to matter to you.

And it's only if you're using that information and acting on it will it have any impact.

If there's a parallel process for climate modeling, for climate reporting, we're going to end up just with a big stack of papers, and that's not going to necessarily be to anyone's interests, whether in terms of the additional burden it provides or in terms of the the usefulness of the outputs.

Philip

And now that we have awareness of the interoperability between digital systems and we can easily share knowledge, we can probably move beyond having information silos and repeating the same work again and again.

As you said, if somebody has already done the test, do we need to do the same test?

And recently you were speaking at the ESG Investors Inaugural Stewardship Summit and you were discussing the lack of transition finance going to developing and emerging economies whilst it was business as usual for fossil fuel financing and this huge demand for building out traditional energy infrastructure, I quote you as saying “..even if we are successful in our US and European Net Zero objectives for 2050, that's not going to get us there as a planet if we don't take everyone with us.” 

And I was wondering what you think is missing and how do we get there?

How do we give them what's missing?

David

What's missing, unfortunately, is really an awareness of how the ground has already shifted, as well as how the ground will continue to shift.

And I think that if we start with the Paris Agreement, there's a lot of really important focus in there that isn't just about the 1.

5 degrees, but really is in this article 2.1 C about making financial flows consistent.

And when you dig deeper into that, that really becomes a question of financial support from the industrialised and developed world that bears most of the historical responsibility for emissions to emerging economies that are still growing, their footprint, still growing, the energy needs that they have, also technology transfer.

And really to say that one's Net Zero target, one's decarbonization goals can't end at their border and they really need be doing more.

I sometimes make the view of, okay, if decarbonisation is your objective, to actually get the world there, what we need to be doing if you're a Western nation, is either moving a good deal faster than you are because 2050 is a global goal for getting to net zero carbon emissions or CO2 emissions.

And so you as someone who is either on the downslope of deindustrialization or on a point of saturation with energy demand needs to move a lot faster because there are other parts of the world that aren't.

And that's really just a question of equity, but also feasibility.

It's going to be a lot harder for Bangladesh to get to net zero than Belgium.

And so when we consider that, it means that we either need to up our efforts to move faster, we need to secondarily help the other parts of the world that are decarbonising to avoid the lock-in of a sort of 20th century energy system, that is heavily dependent on fossil fuels and long lived capital assets that are continuing to generate emissions into the 2040s, fifties and beyond, and ideally do both, which means move faster than we are and provide that support both technologically and financially.

And this isn't compensation.

This is really about a view of we all are going to succeed or fail together.

There's something that is perhaps a little bit poetic or kind of beautiful in the fungibility of carbon, that it doesn't really matter where it's coming from in terms of the global impact.

And so as a result, we don't benefit at all from another country's emissions, in the same way that they haven't benefited from our historic emissions.

And so there's really a need not to kind of increase the recriminations, but really increase the scale of our responsibility to include not just our own local goals.

Because if we really want to talk about being consistent with the science, if you look at any institution that set a net zero target and even any country that set one, that isn't the goal.

That's not the science.

The science is global CO2 at net zero around 2050.

That is a very different point than individualizing or reducing that down.

And it means that you may need to be net negative.

You may need to be there at 2035.

And if we don't allow for that possibility and we pretend that each country is simply a world in miniature, we're going to end up in a place either of recrimination of countries that are developing their energy needs today who are going to be left behind, or we're going to see a greater division where we don't hit our goals and these effects worsen.

So now we're dealing with both the need to continue mitigating in an increasingly warming world, because just if we hit 1.

5 degrees or just if we aren't at net zero by 2050, the clock doesn't stop, as I like to say, 2051 is better than 2052 1.6 degrees is better than 1.7 degrees.

And so this is a continuous function where you keep adding the inputs in just like water in a bathtub.

It will keep rising until we balance the tap and the drain.

And this is the point that it doesn't necessarily matter who's turning on the tap as much as the water level is rising for everyone.

And so I think seeing collective responsibility is; Paris talked about common but differentiated responsibilities.

This to me is where transition finance becomes so key because the rates and returns are really prohibitive in many of these countries for renewable energy.

The need to support both parallel resiliency efforts in countries that are most affected by climate change, as well as the ones that are fastest growing and need the most energy.

These things have to happen in parallel, and I think what we see here is just massively inefficient markets.

We see spreads of in some cases over a thousand basis points between institutions looking at the same project.

And to me that smacks of nothing other than market inefficiency.

And so there is a huge opportunity for someone and some institutions to drive away some of that spread and to really get to a level where maybe we need to rethink risk, maybe our models of risk that have been predicated on a sort of post global financial crisis Western economy, need to consider things differently.

We're going to be looking at younger companies.

In many cases, we're going to be looking at markets we haven't looked at.

How do we think about that in terms of risk?

And I think those are questions not enough people are asking.

And as a result, we're not seeing enough finance flowing, but we need to really tackle those blockers because of the scientific imperative, because of the moral imperative, but also fundamentally because from a positive side, there is just such a huge opportunity in getting this right.

Philip

That collective responsibility for scope three emissions, no matter who's making them, contrasted against the fact that we actually really need to remove GDP as the measure of growth because that doesn't factor in our ability to survive as a biosphere -

I want to play a few quick thought experiments with you, before we get there, the net zero banking alliance.

What is your take in a nutshell?

What is your synopsis?

David

The Net Zero Banking Alliance, and I say this in a non unbiased way as a technical advisor to much of the work that they're doing around sectors and sector pathways, really is the largest collection of banks in the world that are committed to net zero and working on how do we do this better and faster.

And so it's trying to establish clarity around what does a net zero commitment mean through their target setting protocol?

What does a science based target mean, and how do we create the right incentives for both overall decarbonisation but also sector by sector?

What are the challenges and tension points, both in the fact that we have institutions operating in different markets, in different sectors, that the pathway is not necessarily going to be a smooth and straight line, but is going to be a bumpy and nonlinear one.

And so the goal there really is to build institutional capacity to share challenges and experiences and think about where synergies can be created.

But part of that goal is in doing so, it's not as a regulator, it's not as a standards setter per se, but really as a place both to maintain the high integrity of commitments but also to provide the resources, provide the connection points that will help people move faster and be more effective, and to take also a holistic view, I think one thing that gets overlooked when we talk about many of the decarbonisation alliances is the interest they have both in transition planning, in transition finance, and in recognising that one's work is not simply done by dumping previous clients that are high emitters, but really by thinking of the whole of the economy transformation.

And so what role can banking play in that across different sectors from steel to the energy sector or to agriculture?

And I think that role will look different.

But this is where the engagement with climate modelers is so important.

This is where the engagement with other parts of the financial system are key.

And I think that's very much what you're seeing here in terms of the dynamics around the Net-Zero Banking Alliance.

Clearly it's a challenge because it's an unprecedented step many of these institutions are taking, and it's on a topic that many are not familiar with and many I sometimes joke, have jumped into the pool and not necessarily known whether they can swim or not.

And that question of what does it mean to be net zero?

What does it mean not just to make a sustainability commitment, but to really turn one's organisation toward this?

The scale and scope of that commitment, I think is only becoming apparent now to some institutions, and I think it's one of those things that is a bigger challenge than just making an announcement.

Having your CEO stand with the Secretary-General.

And now that we're seeing the rubber does hit the road when it comes to these real steps of making not only the long term commitment which we all know about of 2050, but the interim steps for the sectors that you're engaged in, for the market you're involved in, the support for transition finance these are the pieces that I think will make this happen.

But they're also the ones that show that this is a lot more of a comprehensive approach when you're committing to net zero.

And the goal really of the banking alliance, if I could say it in a word is to help.

To make this process smoother and easier.

So institutions aren't trying to do this on their own, but are doing this in a place that also will make it easier when supervisors come in, when laws get passed, as we saw just a couple of weeks ago in Switzerland, about getting a law to mandate net zero.

When that comes in, these institutions who are involved in this work will be in a lot better position to play that constructive role and not need to backtrack on what they're doing.

Philip

And the Swiss thing you mentioned is fascinating and I've got that just a little up here in my notes.

And because when I think about the Net zero banking alliance for listeners, I'd say look up your local banks to check what I'm about to share.

As I’m mostly based in Australia and I see the signatures on it of our Big four, the ANZ, Commonwealth, National Australia Bank and Westpac.

Though when I look at MarketForces.org.au, since the Paris Agreement, they've tipped in around $60 billion AUD and in the last year alone they increased their spend in fossil fuel funding by 15%.

And when I think about the activist side of me or even the scientist or the emergency response volunteer; if somebody was on fire and somebody was standing there pouring petrol on them, I would say stop pouring petrol on them.

And it's not a very nuanced view, but it is a practical way to reduce things.

How does that stack up in your mind when we see this accelerating pace?

Emerging economies, need energy - So we're going to do fossil fuel intensive energy production.

They need financing - the banks say ‘well, they need the energy’ who calls it quits?

Maybe it's the Swiss regulating law which says we've got to get there.

How does it land for you?

David

I think that this is getting very rapidly into the realm, not just of the decarbonisation commitments, but of transition risk as well.

We know markets have the tendency I was going to say the possibility, but really the tendency to move in very rapid and volatile ways.

And I think what we're doing is hanging this Carbon Sword of Damocles as it were, above our heads and sort of waiting.

And the firms that are beginning to decarbonise are beginning to at least sort of take that off and away from themselves, because I think government policy is going to be a big role here, which is net zero has been a commitment many firms have made, but it's not yet really a law of the land in many places.

And I think as that becomes the normative policy of institutions because their governments are following it and pushing for it, it's going to be a much bigger issue in terms of what is valuable, what is worthwhile, what clients are going to continue to be viable.

And so doing that work now I think becomes so key to to your point, though, about fuel on the fire, continued fossil fuel investments is a really important topic to explore more deeply because there's been such a change just in the last couple of years with the windfall profits that the finance that the fossil fuel sector has made, just in the last couple of years with the windfall profits that the fossil fuel sector has made.

And in some ways I think it's reduced some of the dependency on traditional bank lending.

The capital markets are so much bigger nowadays and the ability of these big companies to raise money, they look as if they are banks in and of themselves with the cash hoards that they they hold.

So I think one of the big questions is we had a thesis about transitioning of if there is a significant disruption and transition finance is adequate, will the transition then take place at a faster rate?

And I think what we saw here the last couple of years is that that alone is not sufficient.

Just giving more money to companies that need to transition doesn't necessarily make them transition.

And so while I did talk about a absolute need for more transition finance globally, in some cases, it's not just as simple as big energy company A is a fossil fuel producer.

They need more in the way of transition finance because transition is expensive.

Just giving them that funding may mean that they take the least cost and shortest action to continuing fossil fuel investment.

And so I think we've helped to at least if not disconfirm this, then at least make that theory more problematic, that it's purely transition finance without nuance.

I think there's a lot more to it.

And what we're seeing here is institutions themselves in the financial sector.

If you look at what the IEA has said, if you look at what almost all the net zero pathways have said, it's not that there is no fossil fuels used tomorrow, we're not shutting off the tap.

But the idea of continued expansion really is inconsistent with 1.5.

This has been said for a number of years now, but I think it's been thrown into starker and starker relief as our budget continues to dwindle for remaining emissions.

And so thinking about what kind of responsible investment goes into closing fields, what does early retirement look like?

What does maintaining energy stability look like, and how does that reduce some of the demand and pressure on fossil fuels?

All of these are questions and it's not going to be so straightforward.

But the idea is that that new greenfield development really isn't consistent.

And certainly expansion of production is going to be very much out of line with any of the goals that we want to hit.

And certainly with balancing that level of atmospheric CO2, that will then obviously stop our rising of the temperature.

Philip

I've seen reports of essentially board movement where energy companies are doing their last dash to expand production.

Before we get to ten years from now, where it will be impossible to expand those fields because people just won't let them.

It's sort of this ‘do we have enough room to lean in?

And I want to just keep going at a little clip here and we were talking about Switzerland, fascinatingly, their approach to direct democracy.

So they allow citizens to trigger a nationwide referendum on proposals when they gain more than 100,000 signatures.

And last Sunday, 59% of them voted to put into law that they reach net zero by 2050.

So I thought that was fascinating.

When we're talking about the Swiss and as the Founder & CEO of Cambium Global what's the mix like of companies and governments coming to you in disaster mitigation mode versus those coming to you from a strategic future planning mode?

David

I am consistently impressed with the number of institutions that come to me that are really looking to move faster and be leaders, and certainly there is a little bit of wanting to start off on the right foot, but there's a really high number that want to not only do this well, but really be leaders in it.

It's not just say, hey, we want to sit at the back of the class and keep our head down, but we want to show what we can do here.

To your kind of division, I would say in some ways, maybe it's a bit of a false division in the sense that both, companies are realising that this needs to happen, but also that there's opportunity within it.

And same with governments of saying we are behind.

We don't have a climate regulation as of yet, but we really want a good one.

We want one and maybe to be the best in that region that we're operating in.

Maybe it's to be innovative because we're the first ones that have done physical risk assessment in this way.

And so there's both a ‘we're behind, but we want to get ahead.’ So I see fewer companies, fewer governments that say we're already ahead.

We just want to press the advantage.

There are a few of those, but for the most part, many of these are how do we catch up quickly and then how do we reach a level of quality in our sustainability strategy of of innovation, in the supervision?

If you're talking about governments or in the in the strategy that we're following, if we're a company how do we do that in a way that that really positions us well.

So I think it isn't just kind of getting over the line, but the speed and scope of this is really pretty profound.

And that's something that also does come across of ‘we don't know anything, but we want to go from 0 to hero’.

And hearing that both is very heartening, but it's also shows that there's very few companies out there that aren't going to need to make a big journey there.

Very few governments out there that aren't going to need to really retool their incentives.

And so these are big changes, as we talked about at the beginning.

And I think they're ones that really do have a big meaning for these institutions and who they are.

I think that's something that is key, is this is going to get into your bones, into your DNA if you're doing it right and doing it well.

Philip

And the work I do as a Strategy & Communications Advisor is working with people who are at that point who are implementing these sort of visions you're talking about and communicating that to their stakeholders and the broader marketplace.

But usually just to some of the key decision makers, because I find people often get wrapped up in this idea that we have to tell the public, we have to let everybody know what we're doing.

And really that doesn't influence outcomes.

It's a key group of stakeholders who are going to create change.

How do you feel people go in communicating that effectively?

Are they knocking it out of the park or..?

David

Communication's still really a challenge and now I think it's a more complex challenge than it's been before because of justifiable concerns around greenwashing as well as justifiable scrutiny around greenwashing.

And so previously I think I joked that the first stage of of climate and sustainability was putting a picture on your website of your employees gardening or doing something out in a green space.

And that then advanced to a level of complexity of we are going to be getting our emissions to zero but wait, those were only our operational emissions and we’re a big financial institution.

So that's really just buying renewable energy for our branches.

Good, but not really more than surface level.

And now we're talking about the full scale commitments being made that really do get at that 100% of what your impact is and I think the challenge has been that there is a need to connect commitment to impact.

And I think when it comes to spaces like ESG funds, this has been one of the big problems; money has absolutely flowed into those funds.

But the question of what difference that has made not even about active mislabeling, obviously there's a whole separate topic there to cover, but just about is this really driving change, is challenging.

And I think you see now institutions who have perhaps been overly enthusiastic in the past are ones that are really continuing to now figure out, okay, well, we got burned last time because we said too much.

And the goal not is to be totally silent.

This what we've heard is greenhushing and sometimes I, I don't particularly love these neologisms.

I think they're more confusing than anything else.

But this idea of we don't want to share our commitments, I actually think that part of that is if you're not clear on what you're doing internally, then announcing it externally is not necessarily the best way to do it.

I was a Management Consultant for many years with a big firm and we talk about client ready, and public ready, I think is is another thing too.

I think what we saw was in many cases that cart getting ahead of the horse of people making commitments without actually thinking about what they mean.

The goal isn't to be the first to make a commitment.

The goal is to know how that commitment will affect your organisation and to be able to successfully act on the commitment.

If the first guy who made the commitment doesn't reach that commitment, that's not going to be better than the second one he does.

And so it's not about doing nothing.

It's not about being silent with these, but it's about really doing the hard work internally on what does this mean for us.

It doesn't mean you have to have the answers.

We operate in a space of uncertainty.

The future is always uncertain.

That's almost by inherent condition.

And so now I think it's less of that uncertainty and more of doing the planning, doing the thinking, what may this mean for us, and then also really using impact as an anchor to say if we're making a difference, we should be able to see it in certain ways.

And it may be that those ways are non-linear.

It may be that those waves are second order.

So it may not be in our total emissions.

It may be initially in our use of renewable energy, then it may be in our emissions after that.

But the point is, if you don't have a sense of what you're trying to measure and what you're trying to track, then having the commitments be out there, I think only results in that confusion.

And it’s a good thing more than anything else, but the public civil society and now supervisors are, I think, more attuned to these things than ever before.

They're savvier than they have ever been.

And they understand these issues in a way that they haven't previously.

So I think that there's a real need to be clear on what you're committing to, what you're doing about it, and whether it's having any positive impact.

Otherwise, I think you will face the scrutiny that is well-deserved.

Philip

And a plug here for a recent paper we did on No More Greenwashing, because there is a whole plethora of impact frameworks out there and understanding where you want to be and where you are on the impact spectrum in relation to your stakeholders and how you're going about things is really important.

Download it at http://bit.ly/nomoregreenwashing

There's a whole industry set up around how you can measure and manage impact that will support you being able to figure out whether or not you actually are generating outcomes and not going to the public with it.

But figuring out internally are we creating impact is probably a great place to start.

David

The point you said about no more greenwashing, it is kind of the anti greenwashing. It we say what is the opposite of greenwashing because firms don't want to greenwash, it's having impact.

And I think that that's a place to start.

Rather than thinking about getting back to what we started with at the beginning about offence and defence, rather than saying ‘let's try to avoid greenwashing’, that that should be a given.

And in the same way, we don't give people medals for not robbing banks - The goal is to drive impact and I think avoiding greenwashing means that what you're saying and what you're doing is consistent and those things are having that impact.

Philip

A bit of fun now.

A quick thought experiment - you can be as conscientious of existing stakeholders as you like.

And you may need to consider that this is the autocracy of David, if you will.

If you had half the resources you do now and you were asked to get double the results, say net zero by 2035, how would you do it?

David

Is that for the whole world?

Is it for a single company?

Philip

If you were to think about the whole world, at surface level?

What's the first thing that comes to mind?

What would you knock off?

David

I think there are probably two just massive areas.

One is on power generation and really electrifying and I would say even over electrifying, creating sources of clean energy that are perhaps even overbuilt relative to the need where energy becomes both free flowing and an enabler.

If we think about today's society being one driven by financial transactions, I think energy is kind of the secret key underpinning so much of modern society.

And if that is readily accessible, it's a game changer for quality of life.

It's a game changer for the other types of innovations we can do.

So really doubling down on that, it's also builds the base that all of this other activity is going to need whether it's;

• How do we charge our electric vehicles?
• How do we consider where storage should take place?

If you're generating more, it takes some of the pressure off some of that storage.

It reduces intermittencies.

So I think that place - Power Generation - is huge the other is land use and I think the two tied together.

But just the sheer scope of land that we're using and that we're changing is so massive that, whether it's through efforts to change our agricultural system, to be more efficient, to produce more nutritious and less impactful food, we just use such a staggering amount of land.

And many of us speaking about this topic are urbanites.

We live in our small apartments.

We kind of are in these densely packed cities, and that is the global trend.

More and more people are moving to urban areas.

They talk about a New York City's worth of new urban residents per month going on in much of the world.

And this is something that because of that rate of movement is changing people's perceptions as well.

But if you look around, most land is not given over to cities.

And in some ways, cities actually are wonderful from a sustainability standpoint because while they use more on a overall basis, the overall footprint shrinks significantly.

And so the question is how do we feed our cities?

How do we feed people globally?

This is something that was staggering to me, that when we consider all of the animal feed and grazing land that is needed globally, we're talking about an area nearly the size of the Americas, both North and South America together.

It's just absolutely staggering.

And if you don't believe that anytime you take a drive in the countryside, take a look, see how much land is being used for agriculture, for grazing, and you'll be staggered that from a overall efficiency standpoint, we're letting so much land not go to waste, but using it actually in a way that is perhaps actively unproductive for the things that we want to achieve.

So whether it's our biodiversity goals, whether it's using reforestation to help take some of the emissions out of the air, these are really places where I think change needs to occur.

And also once that change happens, it really catalyses everything else because I think energy and land are two quantities.

Energy can be one that we make nearly limitless Land is one that's inherently limited.

And the two together, all of the other technologies, developments around transportation, around industry, all kind of flow as what I would say, subsidiary developments of those two.

Philip

Yeah wonderful. And my final question in relation to the work you do, what have you changed your mind about recently?

David

So I mentioned one thing a little bit earlier maybe that I would come back to; it really is always important when you have a theory to ensure that it's testable.

And it's not that we're inherently doing science in working with these companies.

We're using science, we're trying to stick with the science.

But I think the scientific method is invaluable.

And that means having hypotheses, testing them and seeing where they're confirmed and where they're disconfirmed.

And I think one of the ones that has been more disconfirmed just over the last year has been this one of transition finance.

As I said, transition finance itself is absolutely critical, simply the theory that it is a capital shortage that is inhibiting the transition for big energy companies.

That has really not necessarily been borne out.

What we've seen is windfall profits have, if anything, allowed companies to step away, one from their dependency on financial actors, but two from their commitments to decarbonise.

And I think that shows that more is needed.

We've always known that this is a whole of the economy, a whole of society approach.

But really seeing that there are other levers, whether it's through governmental policy, whether it's through the will of the people, as you saw in Switzerland, or whether it's through changes in the marketplace due to the replacement of that generation capacity with renewables, more is going to have to change.

It's not simply a ‘give us the money and we'll solve it ourselves’.

And I think that, that, while disappointing, is an important thing to test out and an important thing also to go back to the plans of institutions and say, hey, are we still using that outdated theory?

And if we are, I think it's time that we update it.

Philip

I really appreciate your time, your knowledge and your deep expertise in bringing this together.

So thanks so much for the conversation.

David

Yeah, Philip, it's been a pleasure.

It's really always fun talking about these topics and it feels like we could have a different conversation every week because of the speed that these things are happening and the comprehensiveness.

It's been really great to talk with you and thanks a lot for for the insightful questions and know I hope this will be interesting and entertaining for those listening.