GARP Risk Institute President Jo Paisley spoke with Entelligent’s Chief Innovation Officer Pooja Khosla and Chairman David Schimel about an emerging revolution in how businesses think about risk in the face of climate change and the energy transition.
Dr. Khosla, an econometrician and inventor of Entelligent’s Smart Climate methodology and Dr. Schimel, the company’s cofounder and a Nobelist joined GARP’s Paisley on the GARP Climate Risk Podcast (listen now on Apple Podcasts or Spotify).
The Big Idea
Businesses — and the asset managers and banks that finance them —are increasingly recognizing the shortcomings of traditional avoidance- and exclusion-centered approaches to climate risk. A better approach is to focus equally on the opportunities inherent in the energy transition. This is a complex and multidimensional problem with many inputs — economics, investment markets, climate science, sectoral and regional differences, individual company decision-making, present and future regulation and more. But it is solvable.
Integrated assessment models (IAMs) alone can’t harness these dynamics. Dave said: “Basically those models do what you tell them to do. They’re a valuable tool, but they’re only as good as the inputs that we have and the assumptions that we can make.”
Forward-looking data matters. Pooja said: “We need to significantly increase usage of future energy prices in order to make decisions that are not only mitigating risk, but also directing financial practitioners towards opportunities. We’re still at the pivot point and we have a very long journey ahead, to put the capital markets in a position to respond to incentives.”
Yes, climate alpha is real. Dave said: “Reducing risk is an opportunity to create wealth — and the key technical question for risk professionals is, can we create the correct financial instruments to price the avoided risk correctly into present day investments?”