Transform The Norm Before the Storm

Aug 10, 2020 by

This week we are diving into more specifics about the structures of the systems that run our markets, influence policy, and shape the way the world interacts with money. Monday’s Session Two started out with a discussion from Thierry Philipponnat, who was the founder of Finance Watch in 2011 in reaction to the 2008 financial crisis. He conducts research and advocacy on financial regulation, presenting policy recommendations rooted in public interest. Before the session, Mr. Philipponnat had us read an article on “Nine economic and financial reforms to stop the collapse of nature”, making the case for reforming the economy to align with our planet. The essence of the recommendations is based on the fact that “⅓ of economic activity depends directly on ecosystem services provided by nature”, and therefore we need financial systems to align with conserving ecosystem services.

The live discussion with Mr. Philipponnat started out with an overview of Finance Watch and why it was founded: essentially, because currently financial policy is not directed towards public interest, and Finance Watch is trying to change that. Mr. Philipponnat explained that the 2008 crisis was so devastating because the banks were not resilient – and now, with the knowledge that resilience is imperative, the banks have the opportunity to build that up.

Mr. Philipponnat explained the interesting concept of the “Brussels Bubble”, which is a consequence of being a bit removed from the middle of the political world: Different parties are able to work together without the partisan pressure. We also talked about the risk of stranded assets, which is the consequences that assets suffer from devaluation. In a climate change context, this means that in order to stay within the carbon budget there will be significant amounts of fossil fuel reserves that will stay “stranded”, not get exploited. We discussed what this means for the valuation of these assets – just over the past month Shell and BP announced asset depreciations of $40 billion dollars.  Also, he pointed out that so far pricing of climate risk is not regulated in banking or assessed by investors, a fact that the research of the second lecturer of this session, Irene Monasterolo, centers on.

Irene Monasterolo’s part of the session dives deeper into gaps in the current financial system from an environmental perspective. Before the live session, Ms. Monasterolo recorded a very interesting and detailed lecture on her research surrounding that the current financial system needs to rework its understanding of climate risk in order to effectively transition to a low carbon society.

In the lecture, she had a fantastic articulation of two important concepts: why climate risks are mispriced and why we need to use more than just carbon emissions to assess climate risk. Mispriced risks stem from: 1) incomplete understanding of current and future mitigation, 2) disconnect in temporal scale between impacts of climate change (long) and time horizon of investors and policy makers (short), and 3) a lack of investment benchmarks. These 3 points, coupled with the fact that climate risk is currently dependent on past emissions (backwards looking) rather than future investments (forward looking), is what Ms. Monastarolo’s research is trying to shift. During the live session, we discussed her different climate scenarios, how that affects risk of investors and why GDP is not an indicator of resilience (which is also a concept we’ve discussed in previous sessions!).

Also, Ms Monasterolo stressed that climate risks are not only physical but also endogenous in form of stranded assets, which was taken further by looking at the way of transition from brown to green economy. If the transition happens in an orderly fashion, investors can anticipate additional costs and losses and plan the phasing out of brown assets and lower their risk of “stranding”. If the transition happens in a disorderly fashion and regulations or carbon taxing are introduced without giving investors time to adjust, this could mean a sudden loss of capital of brown assets and destabilize the whole system.

Overall, both Mr. Philipponnat and Ms. Monasterolo helped us understand why the inherent structure of the financial system needs to be transformed in order to deal with the climate impacts our world currently has and is anticipated to have. I very much appreciate their explanations of the underlying foundations because we need to understand this in order to explore solutions (which I believe we will discuss in week 3!).


Written by: Maria T.

Based on the session with Thierry Philipponnat and Irene Monasterolo.