Risk game: What a warmer planet means to the bottom line
Kate Gordon has been described as Tom Steyer’s “secret weapon,” but it turns out that finding her is as simple as making a phone call and then riding up the elevator to her office in San Francisco’s Financial District. Here, Gordon is managing Risky Business, an ambitious project that aims to quantify the financial risks that climate change poses to the American economy.
The report, which is slated to be released this June, is headed by Steyer, former New York Mayor Michael Bloomberg, and former Treasury Secretary Henry Paulson, and features input from an eclectic Risk Committee of former cabinet members and other political heavy-hitters.
A former housing activist, Gordon has taken an unconventional path to environmentalism. Before she became the vice president and director of the energy and climate program at Next Generation, Steyer’s nonprofit policy think tank, Gordon spent a decade drawing up strategies for boosting green jobs and manufacturing, some of which found their way into state and federal policy — most notably in President Obama’s American Recovery and Reinvestment Act.
I recently met with her in Next Generation’s offices to talk about quantifying disaster risk, the fate of the “green jobs” boom, and finding hope in numbers.
Q. The first thing I’m curious about is, what kind of climate change data are out there? What do you have, and what would you like to see more of?
A. The climate risk data just isn’t out there. The reinsurance industry is the big exception. They were doing a lot of work around climate risk because they had to — they were insuring the insurers.
But most of the reinsurers — who have been talking about this since the ’80s — are based in Europe. The reason we decided to do this project was to have a very U.S.-focused, business-focused, and investor-focused approach to climate risk, which wasn’t really available outside of some private institutions.
The five sectors we’re looking at are agriculture, public health, energy systems, coastal infrastructure, and then labor productivity — which isn’t exactly a sector. Of those, the ones that have been most studied from a risk perspective are agriculture and coastal infrastructure, and that’s largely because of private industry.
Q. So the ag schools across the country haven’t been doing much research into the financial risks of climate change?
A. It’s mostly been the agribusiness companies. We have Greg Page on our Risk Committee, who just stepped down as the CEO of Cargill, and is now the executive chair of the board. Cargill positions itself as a risk management company in the agricultural space.
At Next Generation we’re not doing the research; we contract it out. We’re working very closely with a company called RMS, which is the big risk analyst for the insurance and reinsurance and hedge fund industries. One of their specialties is coastal risk. Coastal infrastructure is a big issue for insurers — the sea-level rise and the extreme weather events and the capital infrastructure falling apart. That’s something that private companies are looking into.
Energy systems are becoming a bigger deal. The Department of Energy put out a big study on risks to energy systems from climate change. But honestly, again, that’s been from the perspective of coastal infrastructure: flooding, hurricanes.
The area that we’re looking at that is the least studied is labor productivity. We’re working with a team of academic specialists, and I think it’s going to be one of the more interesting things coming out of the report.
Q. And what will climate change do to labor productivity?
A. Extreme heat. And precipitation. There are data on that, from extreme heat events in recent years — what happens to the construction industry, for instance.
Q. And then in terms of energy systems — aside from the effects of wind and heat on pre-existing systems, what else would be affected by climate change?
A. With energy, we’re looking less at infrastructure and more at energy supply and demand. If you have extreme heat, what happens to energy demand? People use their air conditioners more. We’re looking at energy load and our lack of energy diversity.
Q. Is there research that you know is out there but that’s hard to get access to?
A. What I’ve come to understand is that this is really an issue for industries that are thinking more than five to 10 years out. That’s not many industries. For the most part, a lot of it is just in the quarterly business cycle.
Individual sectors of the economy will have very different responses to climate change depending on what kind of industry they’re in, what location they’re in — down to the county level, in some cases. My reaction to sea-level rise as a real estate developer in Miami is completely different than my response as a real estate developer in Northern Florida.
We are not telling people how to react. We’re not dictating solutions. We are doing the work of a risk committee to highlight the catastrophic risks of climate change.
Q. Is there much overlap between the research that is going into the report and the research that Bloomberg has been working on in terms of climate risk analysis?
A. We certainly are in conversation with the Bloomberg folks about how to operationalize this when it comes to the Bloomberg terminals. For Mike Bloomberg and for Tom Steyer and for Hank Paulson, this project speaks really to their backgrounds in taking the data and working with the data. They are all data-driven people.
Q. And they’re all finance guys.
A. They’re all finance guys. This project speaks to their desire to see a broadening of climate as an issue for a much larger set of people.
There’s a lot of intersection between this work and the other work that those guys are doing. We’re in conversation with Paulson about China, which is where he’s really focused. But Risky Business is specifically not coordinated with anybody else’s efforts.
Q. I know the report’s not even done yet, but is there anything you’re planning on doing further out?
A. It’s not coming out til the end of June. We’re in early discussions about what happens after it. The one thing I will tell you is that everything we’re doing for this phase of the project is open source, so all the data and all the modeling will be open source. We like to think this will be a platform for a lot of people, not just for us.
Q. Do you have multiple carbon-level scenarios?
A. We have four different temperature scenarios. We’re running all of the National Climate Assessment Models, which is 39 models, on each of those. And then we’re doing multiple scenarios on each of those. So it’s over a million. Most of the climate modeling is already online — it’s part of the IPCC process or the National Climate Assessment Process. There are 16 terabytes of data going into this project.
But — just to be clear — we are focused on extreme events. This is a catastrophic risk analysis. So we’re going up to pretty high temperatures. One of them is 2 degrees, which is business as usual, unfortunately. But they go up to, I think, 6 degrees, which is really catastrophic. I can never remember how high because I can never remember what the conversions are because everyone in the climate world uses Celsius. But we’re doing Fahrenheit instead, because no one understands Celsius conversions in the United States.
Q. So if this is open source, is it stuff that was open source before? Since you’re not generating all of your own data?
A. We’re generating a little of our own data. According to the folks doing the research, about 80 percent of this is existing research and 20 percent is new. The labor productivity stuff is new. What is less common is, we’re not just saying “Here are the risks.” We’re quantifying it, sector by sector. That’s basically overlaying an economic analysis on top of a scientific analysis. That’s new.
But I think a lot of it’s probably still private. The nuclear industry’s done a ton, because a lot of nuclear plants are on the water. So the nuclear industry is the perfect example of an industry that deals with very low probability, high-risk events and massive amounts of regulation. And now they’re having to deal with the overlay of climate risk, because what used to be a 100-year flood zone is becoming a 50-year flood zone. And they’re having to deal with that. They’re in a lot of flood zones. There’s a lot — especially after Fukushima — about dealing with climate risk overlaying overall nuclear regulations.
Q. What if I’m a refinery on the East Coast — would I also be looking into this?
A. That’s what the Department of Energy report is about. What they actually find is that the fossil fuel transportation system has huge risks — the grid infrastructure and the actual transportation infrastructure are both at risk, as well as the refineries that are along the coast. People understand the relationship between climate change and coastal infrastructure pretty well. Sea-level rise is one of those things that everyone’s agreed on in the scientific community.
Q. And where is the public health data coming from?
A. There’s not much of it. You’d be amazed. We know what happens with extreme heat and health. And we know things about air quality. But we don’t know about the other impacts. There isn’t a lot of really good research on that. We’d love to see more. We’re not doing a lot on vector-borne diseases because we’re trying to make very conservative assumptions.
We’re also not doing the national security implications of climate migration. Because the amount of assumptions and causal factors you have to sort through are just too complex.
Q. This research sounds pretty depressing. Is there room for thinking about climate change in a hopeful manner?
A. It’s the whole reason we’re doing this project. I felt like the national conversation about climate went from The Inconvenient Truth as the statement of the problem to the Waxman-Markey bill as the solution. And both of those were big and inside baseball, and there was no conversation in the middle of that. It was like, “Here’s a big problem! Here’s the government solution!”
So I actually think this project gives a lot of hope, because what we’re saying is: “Look. We know from experience — from the health sector, from national security, from the insurance sector — that when we understand the risks, the business community responds.”
One of the things you hear all the time is, “It’s too big. It’s too scary. It’s too inevitable. We can’t think about it. It’s too far away.” We don’t say that about threat assessments. Or national security. I don’t say that about the possibility I could get lung cancer. I say, “OK. Well, there are these things I can do: from not smoking to having a sense of health policy. That’s what we’re trying to do here, is bring this to a place where people think they really can act. Particularly in the business community, in this case.
Q. So an analogy with the business community would be businesses banning smoking in their buildings, rather than hoping for some big comprehensive nationwide smoking ban.
A. Sure. Or, BMW has located their manufacturing plant in Washington state because they want cheap access to green power. They think of it as less volatile than fossil fuel power. That was a business decision. It didn’t have anything to do with carbon being priced.
Look at Florida and hurricanes. Yes, there are building codes around hurricanes that have been put in place. But even before those, people were starting to protect themselves from hurricanes. Businesses are constantly moving to mitigate their risk. Or adapting to it, based on things which are low probability but potential.
People are out there the whole time doing smart risk analysis of things that are way lower probability than climate change. Our entire Defense Department does risk assessments based on the potential for another Arab Spring. Or for mass terrorist attacks.
Some of it is never made public. Shell, for instance, does war games and scenarios all the time based on climate change. We’re never going to see that. It’s all proprietary and internal. But we hear about it.
We did this project outside Washington, and outside the environmental community and the traditional NGO community, because we were basically saying: these are people from business backgrounds and public sector backgrounds who deal with risk. They have dealt with it in public conversations and private conversations for decades. And we need to bring that level of analysis to this problem. We need to bring a similarly business-driven conversation about what those risks might be. Only when you are on the same page about those risks can you talk about a solution.
That’s the long answer. But what I’m really trying to say is: There is hope.
Q. So, if you were working on this in a governmental context, are you saying that what would come out might not be that useful to business? Or they wouldn’t respect it?
A. You might automatically go to a policy solution. Honestly, I think there are really important policy solutions on climate change. But it’s hard to get. This is a very big country. Not every part of it is facing the same kind of risk. Not every industry is facing the same timeline.
So we need to have a conversation first about why this is a problem to people. Why should we even be thinking about this? And then we can have a conversation about, “Oh. There’s X amount we can do through adaptation, and my industry will do this, but frankly this is a bigger problem than all of us.”
Q. In the past, you worked on green jobs policy. I lived in Oakland for years, and this was something that Oakland was incredibly excited about. But it was hard to tell what happened.
A. I think it’s important to look at the history. When we started the Apollo Alliance [a labor/environmental/business/political coalition whose goal was to create a New Deal-like program for transitioning America’s infrastructure to cleaner technology], it was 2003. We were in a very different place in the United States. We were looking at resource constraints with energy. We were importing everything. That was the era of building the liquid natural gas import — not export — facilities. We were importing natural gas. We were importing oil. It was pre all of those domestic discoveries. People were actually freaked out about where we were going to get our energy from.
We were also pre-recession. We still had this Clinton-era surplus. We had the housing boom. Everybody was flush. It was a time where you could talk about big government solutions that had to do with spending a lot of money. And it was a time when it looked like we could actually get national policy constraining carbon.
And so within that context, if you look at the original Apollo Alliance plan, it was a big government plan. It was a moon shot. “For the sake of our national security, and our economy, we have got to transition away from these imported sources and we have to get to domestic sources and they should work for the environment and for jobs and for security.” That was our whole theory. That original paper called for $50 billion a year. For 10 years.
And yeah — why were people excited about it? Because if we’d had a price on carbon, and we’d done a whole-scale transformation of our economy to low-carbon sources, it would have created an insane amount of jobs. There’s not a question about that. The research is there. We would have built out new infrastructure. We would have built out new systems. We would have changed over the whole grid. We would have had all these utility operators in business. We would have built a ton of public transit. Those are big infrastructure projects that create a lot of jobs. And we were arguing about public funding for that.
Now in 2008, we had the recession. We had a total government meltdown. That year we spent $83 billion bailing out AIG. That is more than we ever suggested spending in a year.
Then we had Waxman-Markey, and when that failed it ended the theory of having a national bill. Without a national bill you’re never going to have a market for the jobs that we talked about, unless you do it piecemeal, locally. Oakland is a good example. Really good job training programs for green jobs. But you can’t train people for jobs that don’t exist.
That doesn’t mean we haven’t seen any jobs. There’s been a lot of growth in the renewable sector, in the efficiency sector in particular. But this was also coming on the heels of the recession, so there was a massive job loss from 2008 to 2011 that we had to make up.
Q. You’re someone who started out working on housing in the Tenderloin, which seems very social-justice-oriented.
And economic-development-oriented, for sure.
A. So how did you transition from that to thinking more and more about the environment?
When I started working at Apollo I started from a consumer rights and social-justice perspective. I started something called GreenMAP – the Green Manufacturing Action Plan. I was working with manufacturers around what types of policy could both help manufacturers use less energy and manufacture clean energy products. I did a lot of work around what turned out to be the Clean Manufacturing Tax Credit, in the Recovery Act.
Manufacturing is an energy-intensive industry. But if you’re going to have this environmental transformation that we’re all talking about, you have to make a bunch of stuff. So how do you reconcile those two things? How do you get manufacturing with you instead of constantly having the National Association of Manufacturing say “No” to everything? How do you make this an American competitiveness issue? So I did a lot of work on that. Not lately.
Q. Any examples? You mentioned BMW.
A. BMW is a great example. BMW is designing a carbon nanofiber vehicle that is electric. They are planning based on their vision of what cities will look like in the future. Cities will be smaller and more dense, and people will drive less and will need a small, light electric vehicle that they can park anywhere. And if they need to do long trips there’s another solution – there’s a car-share solution to that. There’s just a different set of priorities. From a planning perspective, they’re thinking about more than “I’ll sell more cars today.”
Q. Right. I grew up outside of Detroit and every chance they had to plan for the future, they missed. “Maybe we can just put a Jeep on a truck chassis and sell that?”
A. Before 2008, when we were talking about transportation, people were saying, “But Americans like big cars!” And then in 2008, gas prices went up, and we have never seen big cars come back after that. There are some big cars still, but the Hummer went away. There has been a massive shift in American manufacturing toward smaller cars. People are driving less. Look at millennials – people do car-sharing. They don’t own cars anymore. It is a different world.
BMW was ahead of that. GE was ahead of the curve with Ecoimagination. They are still the largest wind turbine and wind component manufacturer, for the global market. Siemens is ahead of the curve on designing on both sides – having a very strong internal policy on using less energy. They’ve also been proactive on carbon policy, and then they design a bunch of these systems. They’re a good example. Johnson Controls. Companies that are profiting from being the company that is ahead of the curve.
And they’re multinationals, and so we think they’re not the company we want to support — but we need those guys. Local startups cannot do manufacturing; it’s really capital intensive. You have to go into huge debt to do it. The ones that do it now, who are in a global market and are sustainable, are the ones that are doing it at scale, and have the capital to back it up.
I did think – and I continue to think – that clean energy is a huge economic development driver. If we do commit to transitioning the economy to low-carbon sources, it’s a massive boon for our economy. And for local economies, in particular.
Economic Development 101 is that you start where people are. If you’re trying to do a plan for a city, you start with what the city’s assets are. If you look at Oakland, you start with the port, the universities. You start with access to San Francisco and Richmond. You don’t come in flying with a one-size-fits-all plan.
The same is true for any economic opportunity. You start with what the region is actually dealing with, and what the sector is dealing with. So everything I’ve done with Apollo, or the Center for American Progress, to here, has been from that theory. You don’t come to someone and tell them that climate change is the biggest issue they’ll ever have to deal with. You start with where they already are, and you talk about why this matters from that perspective. That’s what I did as an organizer, and that’s what I do now.
I think Risky Business is that. What we’re basically saying is, “Let’s do the analysis and find out what the risk is to your industry.” Let’s not start with “WHY aren’t you people thinking about climate change?”
Q. Don’t you KNOW it’s important?
A. Don’t you KNOW it’s the biggest issue of our time? [laughs]
Hey, let’s actually look at the numbers. Let’s do the kind of analysis you would do from an industry perspective. Then let’s look at it and let’s talk. What’s your risk tolerance? What’s your plan? That’s a different conversation than just beating someone over the head with the ideological issue.
The one thing that I think about the climate movement is that it’s so massive. What I can’t stand is when people start to get competitive within it, about who has the right strategy.
It’s important to be getting arrested to fight Keystone – if it’s going through your neighborhood and that’s your issue, that’s what you should be doing. It’s important to be going to the mind-numbing annual UN meetings where they don’t ever get anything done because that’s ultimately going to move the needle at some point.
We all have the right strategy. Every single one of these things is important.
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