Climate & Finance #4: What Gets Measured Gets Done (Part 1)

Produced by Camille Duran / Published by Linnéa Hultén / Senior Editors Eleen Murphy & Camille Duran / Music Credits: License by Ins. Green White Space.

You know the real problem with money – apart from never having enough? It’s that even when we don’t spend it – to buy stuff that we don’t really need – our bank, pension fund, insurance company are investing it on markets. And with our money, they finance technology and infrastructure projects that are doing harm to the Planet or to society.

This podcast series about Climate Finance was created to investigate what’s going on behind the scenes, and what needs to change. In this episode we talk to Jakob Thomä from the 2° Investing Initiative to review how can the financial sector align with the climate goals from the Paris Agreement. This episode is released in two parts.


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Transcript from the Episode



Camille Duran (CD): You know what’s the real problem with money – except that you never have enough? It’s that even when you don’t spend it – to buy stuff that you don’t really need.

Your bank, pension fund, insurance company is investing it on markets. And with your money, they finance technology and infrastructure projects that are doing harm to the Planet or to society. Infrastructure projects like the wall at the Mexican border.

[Donald Trump clip]: We’re going to build the wall, believe me! We’re going to build the wall!

CD: Your money, right now, may be financing some of the companies that are currently bidding for building that wall. Isn’t that crazy. Have you checked?

[Donald Trump clip]: We’re going to build a wa-

CD: -Yeah, I think we got that part.

Well, if you’re not financing the wall, chances are that your money is used for some dirty and carbon intensive business you don’t really want to know about. And most of us still don’t realise this. So… that’s why we’re here!

This podcast series about Climate Finance was created to investigate what’s going on behind the scenes, and what needs to change. We have published 3 overview episodes already. We are now starting to dig even deeper.

One year after the Paris Agreement, the colour green is on everybody’s lips and one expression is more appropriate than ever: “put your money where your mouth is”.




CD: Today we exchange with Jakob Thomä from the Two Degrees Investing initiative, 

Jakob Thomä (JT): I’ll give you the facetious answer to this, which is once you get rid of humans, you’re probably in pretty good shape on this because we’re just so bad. If we could just make ourselves rewire our evolutionary selves to think just so little bit further than “when I will have my next cookie”, then I think we’ll be a lot better off.

CD: We talk about free-riding all year around (not only during the ski season), a new kind of superheroes going by the name of “REGULATOR”, replacing humans by robots, and why the market doesn’t care about your grand children…


You’re listening to the Green Exchange, episode four of our series about Climate Finance: What Gets Measured Gets Done.

In episode three of the series, we touched on the need for a framework that informs policy makers and investors on how far, or how close, we are to policy targets. We started to talk about measuring. So why is measuring interesting?

All countries that have signed the Paris Agreement have committed to targets that – if everything goes well – will keep us “well below two degrees” of global warming of the climate system. Each country has its own targets, that’s the starting point. Let’s take France for instance.:The French national targets now need to translate into targets for each sector of the French economy, and this for each asset class (so, equities, bonds, cash equivalence, etc.).

When industry realises what those targets are, usually they go, “Oh sh*t! really?”. But in a perfect world, all players are going to work heart and soul to meet those targets. In a perfect world.

Now, policy makers and regulators are here to incentivise along the way based on how close or how far each sector is from the target. Basically they say: “Okay you lazy b******s, here is a bunch of subsidies so you really have no excuse for shifting your practices now, right? Thank you…”.

Long story short: that’s why measuring is such an important topic. So let’s dive in and talk about indicators, measuring strategies, absolute vs. relative performance benchmarking…it’s going to be fun, I swear.

JT: One of the key challenges that we keep returning to is the fact that probably the first generation of indicators around climate change and financial markets focused on carbon footprint and GHC emissions and so that’s really the first generation, but most of the research that we do suggests that this indicator really isn’t fit for the job.

So we’re hungry for – and both trying to, if you will – bring the food to the table on graduating from simple backward looking indicators to forward looking indicators that track investment and production and the real economic activities that ultimately determine if we meet the two degree objective or not. And then I think that we’re going in the right direction there but there’s more of where that came from, if you will.


CD: Okay so from backward looking indicators to a new generation of forward looking indicators – we’re going to get into that but let me introduce you first very quick, Jakob Thoma from the 2° Investing Initiative which  is an independent organisation. Your research is unbiased and pursued independently. Over the last few years the 2° Investing Initiative has researched developed and submitted a number of papers, tools, methodologies, models and recommendations to align the financial sector with the two degree climate goals.

I have to say, your work is incredibly important, and I’m a big fan. Thank you very much for being here.

JT: Well thanks for considering me for this series. I’m interested to be a part of this, I’m glad.




CD: You’re very welcome, let’s get into it. We just set the stage about why we need to start measuring correctly. Could you please elaborate on the specific challenges countries are facing within this discussion about metrics, and maybe illustrate with a specific example?

JT: Sure, so the first is of course that we’re talking here about how we measure financial markets’ alignment with two degrees. So the first challenge is, obviously, what does two degrees look like, right? What is that transition, the combination of different technologies, how do we compare renewable power, bio fuels, electric vehicles, and then even thinking about the next generation of technologies: laser technologies, autonomous vehicles…. I mean there’s really a dozens, thousands of different, of different technologies out there and how do we even… how do we even start to think about that.

The other critical challenge is that we’re always talking about the future. The past is water under the bridge, we might regret having emitted all those emissions or eaten the meat or taken that flight, but it’s done now and we have to live with the consequences. The future is for us to shape and so that’s why we’re interested in measuring what we can expect the future to hold and so that’s what we want to understand in financial markets, even more so than the real economy because at the end of the day that’s what financial markets do, is they finance the future.

CD: Yes that’s a very good point, it seems that carbon foot printing in a portfolio mainly focuses on what was emitted until today and traditionally we never talk about aligning with specific trajectories. We typically say, “Oh look this year I emitted 20% less carbon than my competitor, that’s great I’m doing good!” – but actually it doesn’t say anything on how we’re doing against the climate goals. That’s what we call relative performance benchmarking – relative to others within your class.


CD: Actually, that reminds me of when I was getting a bad grade at school. I was usually hiding behind my friend’s even worse grade – and then my Dad would tell me “ I don’t care about the neighbour, get to work before I get on your case!“. Yeah, good times…






CD: Now, let’s talk about the right way to do it: Absolute performance benchmarking:  Can you please give a specific example to explain how this works?

JT: So let’s take, you know, your typical European equity portfolio manager: he’s running let’s say 100 million, maybe a little bit more, maybe a little bit less, but you know your run-of-the-mill equity portfolio invested in European companies. So, let’s say we’re trying to see, “Well, how am I doing in for renewables, right?  Am I on the right track when it comes to my renewable investments?”

So, the first intuitive thing to say is, “Okay well, you know I’ve got a European portfolio and in Europe according to the International Energy Agency, renewables are meant to be, let’s say 20% in 2020 – 20% installed capacity. So the intuitive thing to ask is, “Is that what’s happening in my portfolio?”

Now the first challenge is that, that 20% is obviously is not just companies, there’s households, there’s cooperatives that are not just companies, so we have to understand, well what would we expect in equity markets the percentage to be? And that’s likely different because household, the solar panel on your roof, is not going to show up in equity markets in terms of someone owning that, because you own that you yourself individually.

So we have to find some type of an adjustment to try to understand, well in equity markets let’s say if the economy is 20% in 2020, we’d expect equity markets to be 18% or maybe 22% right? And so then we can start to think about okay well what do I have in my portfolio, 20 to 18-22 and how does that compare to what I would expect to have for that market which I’m invested in?


CD: Right so let me repeat this for the listeners because it’s important – what you’re saying is that for instance a 20% target for renewables in Europe needs to be translated into targets for each asset class (equities, bonds, cash equivalents.). In your example of equities, your equity portfolio manager for instance needs to know exactly what target to shoot for on equity markets.

JT: Absolutely. So that’s a simple blueprint for thinking about that. Now, let’s complicate that just a tiny little bit…


CD: Hey listeners, every time things are getting a bit more complicated in the discussion we will play the “complicated” jingle so you can increase your focus for a minute.


JT: So the first way to complicate that is to say, well you know it’s all good and well that you have 18% but what we really care about is the rate of change. Maybe you had 5% in… 5 years ago and now you’ve got 15%. It’s still less than 20% but wow you’ve done you know, you’ve put in a lot of effort.

So one way is to say if you had 18% five years ago and now you still have 18% is that going to be better than having 5% five years ago and now having 15%?


So this sort of, the distinction between what’s the total view of your entire stock if you will of renewable power plants that you own through your companies that you are invested in, versus, what is the rate of change, what are the investments that are actually taking place in those portfolios. And there’s two different ways to view that. Now, we’ve been working with a hundred investors or so on trying to identify that and you know, the different investors think one or the other is more important.

CD: Yeah, and I want to make sure we take this home it’s such a great point: It’s an important question – how do we value the rate of change, no defined position on this yet. Again it reminds me of school days,  there was this guy in my class, he was getting all the credit because he was continuously improving his grades, week after week, and we were like, “Of course he is, he never gave a damn about the course, he’s starting from zero and now that he’s getting to work he’s a hero!? Are you kidding me?” It felt so unfair at the time. But now that I think about it, the rate of change, the pace at which you operate your transition really matters and it  should be taken into account. It’s as always, this eternal fight of making sure  everyone is doing the maximum. But the point is, it’s still unclear how to value the rate of change in practice, in the financial sector.

JT: And if I can just add one, in another complication…



JT: Now this isn’t all rocket science really, but it’s just to give you a flavour for the type of steps you have to walk through to get to the answer that you’re looking for, is that European companies are obviously invested all over the world, so actually, it’s good that you’re running a European equity portfolio. But you’re – bad news, or good news – you’re going to own power plants in United States and Latin America and Africa and Asia. Even though you’re just invested in Europe because European companies own power plants all over the world.

You can just look at your European exposure, but then ideally you say, well in Europe I have this much, but what about Asia or United States or Latin America? And so that gets you into a situation where what you really want to do is control for the geography. So look at really assess where you are in the different geographies in which you’re invested in, but also in which the companies in which you’re invested in are invested in. And in control for the asset class, so are you in equity markets? Are you in bond markets? Are you in an infrastructure? So, those are the, sort of, the two key parameters that you’ve have to, you have to control for.

Now the fascinating thing, or the great thing is that with the rise of new data collection technologies, and big data and the like, we’re able to have a much, much clearer picture about what actually what those ownerships look like. And so you really can start working with databases where you can map individual power plants all around the world to that person sitting behind the Bloomberg terminal in Frankfurt or London or Stockholm, managing those portfolios.

And that’s really incredibly powerful in assessing forward-looking asset class specific and technology specific climate performance of portfolios.

CD: Interesting… This is very encouraging, watch out people sitting behind the terminal, we can see you! We can see what you’re doing.

Ok, this is the end of part one – we’re going to take a break, in next episode we’ll jump right in and continue with Jakob and other guests that were kind enough to join this discussion about Absolute vs. Relative performance benchmarking, and measuring in general.

This episode – and the next one – are made possible by WWF, it’s thanks to their support that we can afford spending time on those very important issues, please check out their resources on the subject matter, we’ll put the links on the episode page.

And I’ll catch you soon for part two!


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