Climate risk management according to Tony

As we launch our newsletter, it makes sense to include a statement of the values that underpin my approach to risk management, especially as it pertains to climate change and financial climate risk.

The core of my philosophy is empiricism. I believe in evidence-based risk management and, by extension, evidence-based public policy. Put simply, gut feelings and unfounded assertions have no place in the toolkit used by modern risk practitioners. Techniques that rely on these features should be called out and given short shrift by interested observers.

The best positive example of this philosophy is the process for the approval of new drugs in most major public health systems around the world. At the baseline, those looking to market a new drug must be able to show that it is safe and that it broadly performs the task it is designed to achieve. If the new drug is more costly than an existing compound, the proponents of the new drug must further demonstrate that the extra cost provides sufficient uplift to justify the increased expenditure. Absent corruption, such a system has been shown to be very effective in a number of countries.

On the negative side, an interesting question to ask is whether the venerable Chicken Little (Henny Penny to many European readers) was a prudent and effective manager of risk. This folk tale centers on a young chicken that becomes convinced the sky is falling and sets off to inform the king. The evidence on which this belief is based – a falling acorn – is hardly convincing.  

So, were the animals that joined Chicken Little's quest rational but highly risk averse or were they positively deluded? Quite clearly, the latter explanation is the one that holds the most water.

How does this pertain to climate risk?

Taking an empirical approach to climate risk means giving support to views that are backed by empirical evidence while being highly skeptical of views that are not.

In terms of the physical effects of climate change, the relationship between human generated emissions and global temperatures and so forth, the evidence is so overwhelming that it must be accepted as fact.  I have absolutely no time for those who espouse views that deny the reality of anthropogenic climate change or, indeed, of global warming more generally.  Such views are obviously anti empirical.

I am nearly as certain that the effects of climate change will be as dire as described by the scientists, should ongoing temperature increases not be effectively arrested.  As such, I believe that we must act boldly and intelligently to "fix" climate change.  We should all do our bit to get the job done, but effective public policy will have a much bigger impact than any of the multitude of actions taken by individuals or even individual corporations.

To achieve salvation from climate change we need public policy to be conducted as effectively as possible.  Needless to say, evidence based policy formation and execution are absolutely critical to these aims.  If our leaders act on feelings as opposed to data we will waste a lot of time taking possibly onerous actions that achieve very little.  If policies are made on the assumption that the sky is falling, these are only likely to work if the sky is actually falling.  If the sky is actually falling there should be more evidence than a single acorn hitting a single chicken.  If the sky is not falling, our public policies and actions must reflect this underlying reality.

I also recognize the political difficulties that have historically hampered our ability to meaningfully address climate change.  I am therefore willing to consider solutions that side step political hurdles even if these solutions are likely to be less effective than politically courageous solutions.  In advocating these second best solutions I will always try to highlight their second-best status and describe the optimal approach.

Finally, I view the need for accurate and fulsome data collection and availability to be a core element of our response to climate change.  More and better data always enhance evidence-based techniques.  As such, I support financial regulators' efforts to require and encourage disclosure of accurate climate footprint data.  This is a major technical challenge but one I wholeheartedly support.  Investors who care about climate should be given the information they need to direct their investments as they see fit.

Some folks who read my views may find them off beat. But when I make observations counter to those of a banker or a regulator, or when I criticize a public official, ask yourself whether the other party is following an evidence-based approach.  

Ten times out of ten you'll find that they are not.