Climate & Finance #4: What Gets Measured Gets Done (Part 2)

Produced by Camille Duran / Coordinated by Han Nguyen / 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): Hi there. We’re still in chapter four of our Climate Finance series. If you missed the first part of this chapter you may want to rewind a little bit because we’re going to jump right in and continue our discussion with Jakob Thomä from the 2 Degree Investing Initiative.

We’re talking about measuring the performance of institutional investments, more specifically how they perform against the two degree trajectory of the climate goals. We need to drive a transition in the financial sector and finally measure properly the true impact of our investment decisions. Because what gets measured gets done!




CD: So Jakob, the main point we were making in part one is that, as an asset owner or portfolio manager, I need to benchmark my performance against the climate goals.  And more specifically, I need to benchmark my performance against the climate goals translated into targets for the country, sector, and asset class I operate within. This means that, as an asset owner or portfolio manager, I need to stop benchmarking my performance against what I did last year or how other portfolios performed within my asset class. It’s the two degree trajectory that matters.

Jacob Thomä (JT): Absolutely. The two degree goal is the goal at the end of the day, and it’s not trying to be better than your peers. So from that perspective: all climate assessments in financial markets, in order to be powerful and meaningful, requires a reference to two degrees. Even for the person who is doing it – because at the end of the day you want to understand where you sit against policy goals. And that’s where I think the Financial Stability Board Task Force has done such a great job of recognising that and saying, “You need to measure how you stand against two degrees, we don’t care if you’re better than your peers. That’s not the benchmark we’re looking for”.

CD: Okay, now I would like to talk about free-riding for a minute. The ski season is over, so we’re not going to discuss that kind of free riding, but rather the challenges that financial regulators & policy makers will meet in some cases: What happens when – in a given sector or asset class – some investors are doing the job and performing against the absolute benchmarks – and some others are not doing what they are supposed to really, and instead are hiding behind the good performance of others within their sector or asset class? How do deal with this?

JT: Yeah sure. So there is the classic free riding problem, which is almost an extension of what you just said before. Which is, if I’m better than my neighbour, but my neighbour is doing a poor job – then am I doing such a good job to begin with?

I think one fascinating element that we see now is, thanks, we should say, to the global financial crisis, the tools that financial regulators and policymakers have to monitor and regulate the financial institutions is just on a totally different level than it was, let’s say, a decade ago. And so, I think that also changed the capacity for finance regulators and supervisors authority and policymakers more generally to tackle this question.

To give you one example, after the global financial crisis, new insurance regulation came about to prove the stability resilience of insurance companies in Europe, which is called ‘Solvency Tools’. A solvency tool regulates all risk related issues around insurance companies, both on their liability side (that needs the money they give for the policies that they issued to households, like life insurance etc), and on the asset side – so that’s investment management arm, which is the classic stuff really. And here a part of the seventy tool regulation actually require insurance companies to share the portfolio data with their supervisory authority. That means for about two years now, maybe a little bit less, every quarter, all European insurance companies send their portfolios to the regulator. So, really bottom-up portfolio data. Which means this data is being collected and actually each insurance regulator in each member state country in Europe – and that includes non-Euro so that includes all E.U. countries, whether they’re in the Euro or not – can actually internalize this kind of assessments and climate global assessment, and try to understand, “Is that asset owner doing more or less than the other? Do I need to have a word with them?”, “Do I need to think about policy incentives?”, and that obviously depends on what the regulator wants to do.

CD: I see, so that sounds rather promising.

JT: What I think is really exciting is that you don’t need new legislation in order to create that transparency to begin with many countries, at least for insurance companies.

CD: Yes, definitely and some public pension funds are now providing transparency on their portfolios as well. But the point here is that the global financial crisis gave birth to those regulatory frameworks that we can start to use to see exactly what’s going on financial markets.





CD: Ok so we now understand better what proper performance benchmarking should look like, what are the dynamics of change in that space and how can financial regulators and policymakers get enough visibility on portfolios to drive the transition. Now, I’d like to take the investor perspective and touch on the why? As an asset owner, why should I change the way I measure my performance and the way I invest right now?  Because I don’t have a regulator knocking at my door with a stick yet! – So I am wondering what are the key drivers for an early-mover in that space?

JT : So you can speak about this three M’s of financial institutions’ motivation, which is management, marketing and morals. So the first intuitive one is that it’s a risk management issue. Climate change presents a risk, both on the physical risk side – so there’s a flood, our power plant gets affected, it doesn’t produce and I lose money. ANd on the transition side – some policy maker says, “Never mind, no more coal fired power plant, no more petrol vehicles, and no more coal mining”, and so the cash flow gets to the transition side. So that’s really where it is prudent management to manage that.

And, I would say, the first objective around this risk for financial institutions is the management side, and the management side is also the policy risk that they face directly, so the financial policy incentives, they might get or the pressure from regulators to manage this.  And so that’s why I would say the management side is part of the equation right now, but probably the more prominent driver of the action that we see is the marketing and the morals. So the traditional goal of: “If I do this, my C.E.O. will be able to sit at the Climate Change Conference and be on a panel and celebrate”, and that’s the marketing side of the story which is probably the most powerful driver at this stage.

And then, finally, there is a moral side, which I think articulates itself in two ways: One is a straightforward moral side which is, you know, “I just want to save the planet,frankly”. The other one is the sort of indirect moral pressure. So, I had a pretty senior member of one of the European Treasuries on a panel speak the other day and he said, “You know, now all of a sudden my daughter likes my job because I work on climate change.”

So I think this kind of moral …I don’t know if it’s in a moral category, but this kind of peer pressure type of, “Oh you know I think this feels funny, I feel good about what I’m doing, this is weird…what is this about?”.  So I think this is not to be discounted, even among the  “mainstream”. So obviously, you’ve got the real moral climate warriors, but even among the mainstream this moral issue can seep in and pollute, in the best of all possible senses,  the actions of the “mainstream actors”.


CD: How do your children feel about what you do, what you work with… Yeah, maybe that becomes a very important driver moving forward.

Now one question that is a little bit on the side, but I would like to hear your thoughts on this. All the green money is going to mitigation, not to adaption. And everything seems to be linked to energy investment and infrastructure development. We’re not talking so much about benchmarks and measuring our impact on bio-diversity, for instance, or on those areas that are probably perceived as “the softer side”. What are your thoughts around this?

JT: Yeah great question. I mean it’s a tough one. So there are lots of moving pieces. I think one thing you could say is, “Ok, do you believe in a crowding-out of crowding-in theory?” Right? So you could say, “Oh you know all the attention that we’re getting on climate change for financial markets is just sort of a Trojan horse that will allow us to start exploring other areas of action – biodiversity, social issues even broader environmental challenges.” So in that case, you’re not worried about it now because we have to focus on climate change and we’ll get there pretty soon.

And the other way to think about it is that it’s a crowding-out. Which is: “All we’re doing is talking about climate change, people are listening to us and all we do is talk about climate change, and we’re missing other areas of action that we should be flagging. Frankly I’m not sure what the right answer is to that. But I do think there is more that could be done on other issues. But partly I think it’s…

CD: It’s a matter of low hanging fruits?


JT: Yeah, I think it’s sort of, “why are we not doing more on that?” Okay, the low hanging fruit is infrastructure…and we love to talk about “shifting the trillions” because it sounds so dramatic and sexy and large and big. But you know, for many sectors what it is about is R&D and developing, innovating our  way out of this mess. And that’s not trillion, usually that is millions and best case maybe a few billion. But let’s take the airplane constructor  Boeing: Their R&D budget on electric airplanes is the equivalent of one motor of one wing of an airplane. That’s their annual R&D budget. That’s how much they spend.

So there’s a few million more we could spend on that to solve these kind of issues but just not quite as sexy as a large renewable story, or even things like electric vehicles, it just seems a little bit more esoteric. And the other challenges, especially when it comes to things like biodiversity, is just the question of management, or even physical even adaptation. I mean at this stage, it looks like the real risk to financial institutions and to society as a whole will be climate change, and not the transition to a low carbon economy.


But eighty percent maybe ninety percent of the models that are being developed focus on the transition piece, and that is because that’s what we want to drive a story collectively, and it’s just more sexy. And so, whether we think there’s a crowding-in a crowding-out effect, for sure there is a certain intellectual laziness that I wouldn’t even exempt myself from around just focusing on the transition story and not the adaptation story, not the broader biodiversity piece.


CD: You know what we should do? To celebrate biodiversity and the soft side of the transition, I am going to put a bit of a nature ambience in the background for the end of this interview, so we don’t forget that we’re going to have to get to this eventually. We’re going to have to integrating all aspects of our impact at some point in our epic story of how we humans came to dominate our environment and rise as the most powerful spices on the planet. Until the bees disappeared, and yes there was no honey anymor,e but also the whole natural system crashed from there – while we were driving around in a Tesla.

Okay sorry, sometimes I get carried away…





CD: A question to wrap up, I would like to ask you more of an opening question on measuring performance but you can expand to more generic views on the transition. According to you, what are the three keys to the shift we need to see happen in the financial sector?

JT: So, I mean, I’ll give you the facetious answer which is: once you get rid of human, you are probably in pretty good shape on this, because it just so happens that we’re just so badly produced, so incredibly bad at managing risk at thinking about the long term…at making decisions between two situations where one is a short term payoff and one is a long term pay off, that we always call for the shorter.

So if we could just rewire our evolutionary selves to think just a little bit further than “When I will have my next cookie?”, then I thin we’d be a lot better off. But now, I don’t know how realistic that is. I don’t know how excited people are going to get about exchanging our humans with robots (laughs). I mean, that’s coming anyway, and I’m not sure it’s going to be so pretty.

But I mean joking aside, I think, I guess…the first step is to say: how we will ever get anything done with our flawed selves is to lock ourselves into decision making and to find mechanisms to trick ourselves into being smarter and better and more long term. I think to create a financial market infrastructure that does that, that creates incentive to think long term, that recognizes and awards long term behaviour, and that penalises short-termism. I think that’s so much more of a market infrastructure issue because again today if we don’t get this right, we can have the best climate assessments and the best models, you know. If I walk into a room and the guy says, “Oh your model tells me in fifty years I’m going to die…”, I don’t care. And so I think that’s a fundamental sort of shift we need.

I think the other shift we need, and that’s actually happening right now, is the financial regulators. I mean, wow these financial regulators are so powerful and so influential and the voice of Mark Carney, the voice of the French regulation on mandatory disclosure, has just woken everybody up. And I know that anecdotally in France  as soon as you have regulation, you’ve got the C.E.O. and the C.I.O. involved. I mean, it’s just too important of an issue for finance institution to handle. Obviously, the day to day of that  is handled at the lower level, but it needs to run by the C.E.O. and C.I.O.’s desk.

And that’s the critical pieces, to make sure that regulation, financial regulation…and this is controversial, I mean Central Bankers and financial supervision authorities are saying, “Climate isn’t our issue”. But well what I would say is that the very least it should be sort of there should be a policy consistency. I think there’s a lot of very very good arguments  against financial policy intervention on climate issues. But none of them are about simply making sure that financial policies don’t sabotage, if that make sense. So, not sabotaging, ensuring stakeholders can make the right decisions, ensuring we have a resilient and official intermediation of capital – that’s the day job. and just making sure that climate is part of that recognition on that day job I think is a second key lever.

And you know what, I think there’s always three that you want to hear, but I’m going to stick in two.


CD: Jakob thank you so much for being with us, this was enlightening and I think we see much clearer on this issue of how the performance of investment portfolios should be measured, and what it will take to keep us on the two-degree trajectory. Congratulations for all the great resources you’re producing, and I hope to speak to you again soon.

JT: Thanks so much for having me and all the best.

CD: And before closing this chapter we wanted to hear a few other voices that had supporting comments on the subject matter. We edited those quotes as an outro with a bit of music in the background so we can meditate on all this.

This chapter about measuring was made possible by WWF. It’s thanks to their support that we could afford digging deep on those issues. I would like to give them a big thank you. We are publishing links to reports and other resources on the episode page. Our website is now at, like Planet Earth. Now to our final quotes, you will hear – in this order:

  • Stephanie Chang,
    Assistant Director, Sustainability & Climate Change at PwC.
  • Mike Clark, from Ario Advisory
  • Karsten Löffler, who was Managing Director of Allianz Climate Solutions until last week and who is now affiliated with Frankfurt School and the UNEP Collaborating Centre for Climate & Sustainable Energy Finance.
  • And finally, George Latham from WHEB, WHEB is a specialist Investor in climate solutions with great thought leadership.

So let’s have a listen. We’ll be back soon for more green knowledge inspiration and entertainment, keep up the good work in the meantime!


Stephanie Chang: We are seeing shifts towards measuring environmental and social impacts, but I think that’s not enough. And the problem with issues such as climate change, is a classic economic problem of Tragedy of the Commons. As in, a lot of public resources aren’t valued properly and the individual pursuit of self interest leads to potentially catastrophic consequences for the world. Carbon budget is what you could turn a zero-sum game, and this is why absolute benchmarks are particularly relevant when you’re talking about addressing climate change. It almost doesn’t matter that you have, you know, a hundred companies and you’re the top of that one hundred companies, if as a whole, one hundred take us towards busting the carbon budget anyway.


Mike Clark: Investors need to start thinking how their portfolios are positioned against the context of climate goals, and evolve their strategy over time so that the impact of their portfolio is more aligned with these overarching goals.


Karsten Löffler: It’s very interesting to recognise that, in the asset management industry, risk is usually measured on a relative basis, versus a benchmark – which is usually an index, a stock index, or a fixed income index. From the asset manager’s point of view, an absolute performance is not actually high on the agenda because absolute performance means that there needs to be a disconnect to capital markets. The asset owner is the institution that actually has an interest on absolute performance because of its respective liabilities. So the asset management industry, bottom line, will continue managing on a relative basis as long as asset owners do not change mandates that are handed out to the asset management industry.

The biggest challenge right now is that data is more or less lacking, or patchy, because it relies on real economy, on companies data, being published in a way that is sufficiently sophisticated and detailed, and is, at the same time, standardised and easily accessible for the asset management industry to make use of it.


George Latham: You need to move to a longer term, more broadly defined target that is more holistic, and then identify a wider range of key performance indicators, of which the benchmark performance may be one – appropriately used over an appropriate time frame, but also considering risk and also considering the other objectives from a performance perspective. And I think that is the shift that needs to happen.

The roadblocks are partly cultural, because we’ve got into this very imbedded view of how benchmarks operate, to the extent that risk has become viewed by many people as being how different you are from the benchmark. Now, risk has got nothing to do with how different you are from the benchmark, and that completely ignores the risk that is embedded within the benchmark.

We’re talking about, essentially, a much more value added contribution required by the trustees or those people acting on behalf of the beneficiaries. So it requires education, it requires investment; it requires valuing the role of the trustee. What is needed to support a transition, or a shift in mindset, is a culture where those trustees are valued and given the time and support to be able to have a more in depth view of how to operate. How to manage that longer term perspective within their mandate is complex, but it’s not impossible. I think it’s to do with setting out expectations early on and not paying lip-service to them. It’s possible to put in place, say, a [unknown] saying: “This is our expectation of you, and this should be your expectation from us. This is how we set out the way that we’d like this requirement to run”. And this is non legally binding, but is a cultural shift, if you like, that enables people to feel free and make sure everybody’s got the same level of expectation. The real objectives can them be set out clearly, as opposed to “This is our objective, but this is the benchmark”, and then the benchmark comes to define what the portfolio looks like.


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