Professor Nicola Ranger, London School of Economics, on Climate Adaptation Blind Spots

Climate adaptation has moved from the margins to the mainstream, but are financial systems evolving fast enough to treat resilience as a core driver of long-term stability? Listen to Jason Mitchell discuss with Professor Nicola Ranger, London School of Economics, about why markets still struggle to price physical climate risk, how traditional investment horizons are mismatched with the realities of climate exposure, and what it will take to close the adaptation blind spots.

Recording date: 05 May 2026

Nicola Ranger

Nicola Ranger is Professor in Practice of Natural Capital, Risk and Finance at the London School of Economics and Political Science, based in its Grantham Research Institute on Climate Change and the Environment. She is also Executive Director of the Earth Capital Nexus. Her work focuses on the intersection of finance, climate change, and nature, particularly how environmental risks can be integrated into financial systems and investment decisions. She is widely recognized for her expertise in sustainable finance and systemic resilience, working with governments, central banks, and international organisations to align financial flows with sustainable development goals.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I'm Jason Mitchell, CIO for Responsible Investment at Man Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow.

Hi, everyone. Welcome back to the podcast, and I hope everyone is staying well. It's pretty clear that adaptation and resilience have moved from the margins to the mainstream for investors, and that marks a meaningful shift. For years, physical climate risk was treated largely as a public sector issue. By that I mean something for governments, development banks, and insurers to manage. My point here is that this paradigm is changing. Today, investors are increasingly being forced to confront the reality that physical climate risk is already reshaping economies and repricing asset values. That could be through supply chain disruptions, infrastructure stress, declining insurance availability, rising sovereign risk, or growing questions around long-term asset resilience.

And yet, in spite of all of this, adaptation finance remains underdeveloped. By that, I mean markets still struggle to distinguish between real resilience and notional commitments around it. Adaptation doesn't even fit neatly into quarterly earning cycles or traditional three-to-five-year investment windows, and in many ways, markets are still optimised for short term efficiency while climate resilience is fundamentally a long duration challenge. That raises a central theme in this episode: our financial systems evolving fast enough to recognise resilience as a core driver of long-term economic and financial stability.

That's why it's great to have Professor Nicola Ranger, one of the leading voices on climate risk adaptation and resilience, on the podcast. We explore how markets still struggle to price adaptation risk, whether traditional investment horizons are fundamentally mismatched with the realities of physical climate exposure and what kinds of data disclosure frameworks and market mechanisms might help close the adaptation blind spots. We also talk about the challenge of moving beyond asset-level exposure to a more systemic approach to understand how climate and nature risks interact across financial systems, supply chains, food systems, and sovereign balance sheets.

Nicola is Professor in Practise for Natural Capital, Risk and Finance at the London School of Economics and Executive Director of the Earth Capital Nexus at the Grantham Research Institute. Her work sits at the intersection of finance, climate risk, resilience, and sustainable development, advising financial institutions, central banks, governments, and international organisations on how climate and nature-related risks can be integrated into financial systems and investment decisions.

Welcome to the podcast, Professor Nicola Ranger. It's great to have you here, and thank you for taking the time to talk.

Nicola Ranger:

Thank you, Jason. It's a pleasure to be here today.

Jason Mitchell:

Absolutely. Nicola, let's start out with some level-setting here. Your new LSC research initiative, the Earth Capital Nexus, was, in my mind, sort of explicitly established to address what you've called a critical blind spot in today's global economy, specifically the invisibility of natural capital and physical climate risks in financial and economic decision-making. Can you start by framing out what's at stake here? And when you look across markets today, what do investors systematically get wrong about physical climate risk?

Nicola Ranger:

Thanks. In terms of what's at stake, the key thing is that where we are heading to now as a world is a world of much, much greater risk, and part of that is driven by the way that our economy is structured. Let me just dig into that. My research, as you mentioned, covers both physical climate risks and natural capital, which is about how changes in water cycles, our food system, how that affects energy, so we look very much at the interconnections between all of these, what we call as these critical natural systems that our whole economy depends on. When you look at the science, you can see that over the last 50 years, we've seen this unprecedented disruption to many of these critical ecosystem services which we're dependent on, which I hold upon our economies and also our lives are dependent on, be that land degradation, be that changes in water use, pollution. I think we often focus just on climate change, but that's only one of many things that's happening at the moment, and obviously on the climate change side, we're seeing rising risks of extreme events.

Now what's at stake then is that we're seeing these increases in risk, we're seeing these systems being disrupted, and this will have very significant implications for our economy as well as our lives. So it will mean constraints on water that lead to impacts on our energy systems, impacts on our food systems, so changes in water security. We do a lot of work with a wider macroeconomic implications of that, so we look at some of the implications for debt sustainability in countries for fiscal policy. We're seeing this much, much more strained world. We're already seeing resource constraints, but now growing risks.

What we see is that that's not being taken into account in decisions, and not just within the financial institutions, but also within policy, within investment, and because those risks are not being realised, it means two things. One is that they're not being managed, and we would argue as proactively as we would want to see, but it also means that investment is continuing to go into areas that are adding to the problem. Again, we often look at that through the climate lens, but that's not the only thing happening here. If we take into account agricultural system, again, chemicals and pollution, all of these things are adding to the problem, but because we don't value these systems, so we sort of assume that they're there, our water, our food.

We assume that they're stable. Because that's invisible, these risks to those systems within how decisions by governments, by banks, by corporates are being made, it means that it's undermining ourselves. We often talk about it, we're sort of shooting ourselves in the foot at the moment, and meaning that these risks continue to spiral.

Jason Mitchell:

It seems like a common investor reframe is that physical risk isn't really priced correctly, if even at all. That always feels a little bit overly broad just in terms of that claim, but maybe let's dig into that. Where do you see the most egregious mispricings right now, in I guess the most broadest sense, and where are markets getting it right if they are?

Nicola Ranger:

Well, what we've seen over time is first on climate risks and now increasingly on nature risk, markets are beginning to price it in, but what we tend to see is that that's happening after the big shocks happen. For example, there's a lot of evidence from the US showing that after big natural disasters, for example, climate-related disasters, you start to see that being priced into the stock market to municipal bonds. We are seeing that across all countries. We recently did some work showing that nature-related risks are beginning to be priced into sovereign lending as well, sovereign investment. So we are starting to see it being priced in, but it's only after the fact.

What we see less of is that, actually, forward-looking information is being used to anticipate that and to price that in, and the risks associated with that are that then we could see very rapid changes in asset valuation after big shocks happen, and particularly we expect to see more big shocks. We're seeing this rather than a sort of gradual pricing of these risks in a gradual adaptation in financial markets, it's happening in very abrupt changes over time. So this is what we're seeing.

In terms of where the most egregious are, as I mentioned, on nature, certainly the pricing in of these risks is still very, very nascent. You could argue that even on physical climate risks as well, but certainly on nature, the fact that we're seeing these huge, huge changes... I was just reading today about changes in water around the world, water scarcity and how that's already feeding into food price shocks around the world, feeding into hydropower, water crises, leading to energy crises. So all of these things are already happening that are not being taken into account, and I'd say where they're most egregious at the moment is where this is actually undermining action. We know that these risks are there, but then we're not bringing it in enough to actually change how capital is being allocated.

But actually, I think another perspective on this, though, is obviously there are issues within the financial sector that are leading to these not being priced in as proactively as we might hope, but actually I think that the bigger issue is around policy. Policy is not creating the incentives and environment for that bit to be priced in at the moment. I'm speaking recently to some investors that were saying, "We see the materiality of these risks, but if policymakers aren't putting in place the right signals, for us that isn't material. It's not material right now compared to other things that we're looking at." So actually, we've got this linkage between policy and investment at the moment, which seems to be broken. There's a market failure here which is not being addressed. A lot of our work is around that. How do we correct the market failure in the role of policy in that?

Jason Mitchell:

That's really interesting. I want to come back to that in a second, but you've said, I'm going to read a quote, that, "Financial institutions saw adaptation as an issue for government, not the private sector, because adaptation is all about upfront costs and long-run benefits." I've sort of meditated on this a bit. That framing seems to place adaptation squarely in the blended finance development bank lane, and certainly there's a lot of space for that, but does that let private capital off the hook to...

And I think more to that, to what degree did the calls for the private sector to, we hear this a lot, to fund and finance adaptation, this sort of notion of steering capital? To what degree does that end up potentially perpetuating the same issues that dogged the early GFANZ efforts, which assume that most investors exist in the abstract to fund climate action when in reality they have a role of function, which is to price elements within the markets? Maybe it might be resilience, but they've got a fiduciary duty to prioritise financial returns rather than just steer capital.

Nicola Ranger:

Yeah, and I would definitely agree with that. The point we were trying to make there, and this is something that I've worked on for a long time, is not so much that the private sector doesn't have a role and that it is the public sector's place. I think what the point we were trying to make, actually, is that we felt that a lot of the dialogue around adaptation finance actually is missing the point. If you follow this dialogue, both particularly in the sort of international policy level, you see this big focus on we need to mobilise private investment into adaptation, and of the, is it 1.3 trillion now, commitment to invest in climate finance, a lot of that has to come from the private sector.

Now, the point we're trying to make is that we agree with that, but we don't think, actually, that the dialogue is particularly constructive at the moment. We don't think that there's enough of a recognition about what the role of the private sector is and what it isn't. I think this speaks to your final point, that if you look at the types of things that private finance can finance, they're not necessarily the things that public policy, particularly in adaptation finance, is asking them to finance. For example, for obvious reasons, there's a big focus on how can we support the most vulnerable communities, really local, very high-vulnerability communities in developing parts of the world. Now it would be great to bring private finance into that, but that's one of the most difficult areas to bring private finance into. Private finance in general doesn't flow into those sorts of areas for obvious reasons. So what we're saying more is that we have to focus on, okay, well, what can private finance do?

One point I always make is that if you look at infrastructure investment, for example, infrastructure investment around the world, about 2.9 trillion a year. This is something that the private sector finances all the time, and we need that to be resilient. So if we're going to focus in an area, I think we need to focus on how do we ensure that that 2.9 trillion that the private sector is already deeply involved in is resilient, and how do we ensure that agricultural investment, which I think is about another six trillion a year, how do we make sure that is resilient? It's about recognising that the private sector can play a role, but more explicitly being pragmatic about what it can actually do and what it can't do.

So that's the point we were trying to make, and certainly what we've found from working with the private sector on this over a number of years is that when you do have that more pragmatic discussion about what they can and can't do within the constraints that they're facing, actually, it can unlock a lot of barriers, and actually so then they realise, ah, actually this is about looking at, how do we manage risk better? How do we bring these longer-term climate risk into the way that we're making an infrastructure investment today? So focus there rather than focusing on things that just don't have returns is really difficult for them to finance. So that's the key point that we're trying to make.

On the point you made about, are we saying this is all about blended finance and development banks? Obviously they play a really important role, but take something like blended finance. Only my view is that, again, we're not necessarily using it in the right ways. We often think that the solution to everything in adaptation is blended finance, and I don't think that's the case. I think there are cases where blended finance is needed, but in other cases it can be about, how do we incentivize financial institutions to be accounting for risk in the way that they're making decisions today?

That doesn't need trillions and trillions of blended finance. It can mean more regulatory standards on how they're managing risks in those investments, for example. So I think we're talking about having a much more pragmatic dialogue about what actually needs to happen to make all private investment or all private financial flows resilient to climate change.

Jason Mitchell:

That's really, really helpful framing, because you're right, I do find that there's a lot of conflation in this area with many investors walking away thinking, look, is it really investable? Well, you're right. As you said, in certain areas it might not be, but in other areas it certainly could be.

How do you think about the temporal dynamic or dimension in all this? I ask because, in my experience, many investors tend to address physical risk mainly or purely from a risk management perspective through stress testing portfolios. That might be 25, 30 years out. Inevitably, I find that, first, it sucks the oxygen out of the discussion a lot and it creates this sort of moot debate around the underlying assumptions, mainly what discount rate are you going to use, or do you have a unique view around cascading tipping points, or these nuances which are highly debatable.

But why aren't investors taking more cues from the insurers who are working to price physical risk on a shorter-term basis, i.e. on a one-to-three-year forward basis using current earth observational data, weather data? Why aren't investors doing more to examine, I'm thinking specifically the relationship between asset pricing and a firm's resilience to different individual physical risks?

Nicola Ranger:

Yes, I think there's a number of pieces there, and also to say that things have come on a lot in the last couple of years, so I think we can now say that all investors are not doing anything. I think there are a lot of investors that are quite active in this area. I think in terms of why, so certainly the timeframe issue is a big one. If you take an infrastructure investment, we often think an infrastructure investment, that's going to last for decades, but actually, many of investors will only potentially be holding that asset for a couple of years before they expect to be moving out of that asset. For them, again, motivating them, convincing them that actually, A, that physical climate risk could have an impact on that asset within the timescale that they expect to be holding it, and B, even if it doesn't, is not directly affected, that it will affect the asset price when they sell that asset on, that's still a more difficult sell. I think it is becoming clearer now.

Certainly, again, what we see is that when we start to see these impacts happening, and I should say this isn't a long-term issue anymore, these impacts are happening now, but when we see that when investors are starting to see actually this location is being affected, then they are acting. So this is what we see in the data. There is a timescale issue there, and that's related to these assets not being held beyond a couple of years. Where we are starting to see more action certainly is amongst the longer-term investors. For example, we are doing a lot of work with sovereign wealth funds and more institutional investors at the moment who will be holding these assets for longer, and there we are seeing them taking this very seriously and really engaging with their investees on this. For example, I'll mention Norges Bank Investment Management, which has put out a lot of materials around the engagement they're having with their investees and the frameworks they use and their expectations on investees.

I do think data is an issue. Obviously, I'm a data geek. I don't want to give the impression that data is the whole problem, but certainly we hear that investors and banks and others are still really struggling to assess risk at that asset level. For example, there was some great research done by GARP as part of the Climate Financial Risk Forum in the UK last year that looked at analysing risks from physical climate, specifically flood. Obviously you would've thought that's one of the best known risks, flood risk. They looked at how flood risk estimates varied across, I think there's about 12 or 13 different providers, and found radically different estimates for flood risk at a specific asset level. So we do still have this big issue. I was just talking to a bank recently who was saying they have to have a whole team that's just trying to understand these different models and the different predictions that they're making and why to interpret that. So I think there is a data gap there or a capacity gap in how do you use that sort of information well, which is still acting as a barrier.

One of the areas that we work on a lot as well is looking at the wider understanding of what a company's doing, because the physical hazard that the asset is exposed to is only part of the picture. Actually, that company may be managing that risk extremely well, and that, we have less information about. So one of the things we're doing now is analysing company reports to create indices of how well companies are managing those risks as a way to get more information to investors.

These things are improving over time. Certainly we haven't solved all of the problems yet, but what we've seen certainly in the last couple of years I think is a massive enhancement in the capability of investors to be accounting for this. Certainly we're seeing a number of the big investors, we are seeing them now acting in this and a lot of the big asset managers as well. All of the big asset managers that we talk to are actively considering physical climate risks now.

Jason Mitchell:

That's good to hear. That's super interesting. I wanted to move to your recent co-authored article in Nature titled, We Need a Global Assessment of Avoidable Climate Change Risks, which makes a pretty strong claim that despite decades of climate science, there has never been an internationally mandated global assessment of climate change risks. That's really, really interesting to think about, but you essentially argue that the IPCC focuses on what is known with the greatest confidence, whereas a risk assessment would ask a fundamentally different question, namely not what's expected to happen, but what could happen that would adversely affect society's interests and how likely are those outcomes. For investors who rely, let's say, on IPCC-derived scenarios, including the NGFS scenarios that underpin a lot of that, what are the implications of that distinction? Are they optimising for the wrong question?

Nicola Ranger:

Yes. I think there are big implications to that. Just to recap on that paper, which was written by a group of experts that have been involved in this space for a long time, both within the IPCC and risk assessment, and how climate science works, I started out my career as a climate scientist, actually, and all of the incentives as an academic researcher are to be conservative. Whenever you're doing an assessment, the peer review process, for example, points you towards producing analysis that is very conservative in looking at what is the empirical evidence for this? What are the central estimates for this? And, I'm not sure if penalises is the wrong word, but certainly, if you move too far out of history and what we know from history, it's much more difficult to make a case.

There's another thing that goes on here as well in that a lot of the climate science that exists was not designed for risk assessment. It was designed to inform climate policy. A lot of the early climate science and climate impact science as well was all about trying to secure a global agreement or provide the evidence base to secure a global agreement. It was all about showing that the risks associated with going above two degrees or more, 1.5 degrees or more, were very high, and how to keep emissions to around the sort of 1.5, 2 degrees, that that was feasible. So there's a huge amount of research around that 1.5 or 2 degrees, and a lot of research that's around smooth transition pathways down to a net-zero path.

Now that's great if you're trying to inform climate policy because we now have this incredibly strong evidence base around that central pathway, showing us that it is feasible, that it manages risks, et cetera, but that's not necessarily what risk managers need. Risk managers need to know, well, hang on, if we don't manage to get on that optimal pathway, if the transition isn't smooth, and I'm sure you would agree that looking out the window at the moment or looking in the newspapers, this transition is definitely not smooth at the moment, we don't have really the research around that, or we have much, much less research around that, and suddenly we have very little research on more worst case scenarios. There is research, for example, around tipping points or more extreme climate scenarios, but it's certainly not as much research as around the central case.

That is reflected then in the climate assessments. The climate assessments, IPCC was really designed at the outset to inform climate policy, not risk management. That was the point that that article in Nature was making was saying that, look, the way that the scientific process is structured at the moment isn't designed to help us understand risk, it's to help us understand this is the optimal pathway. There's a great book that I would recommend called Five Time Faster by Simon Sharpe, where he makes this point as well. In his experience, when he was at the foreign office in the UK, he was tasked with looking at the risks and working with governments around the world to look at the risks and just found that the evidence base for that was extremely limited. Everything is around the central best-case pathway down to a net-zero.

The key point that we're trying to make here is then that actually for investors or financial institutions and particularly central banks that I work a lot with that are responsible for managing risk in the economy, that evidence base is very limited. If I can just give you another example, actually, on this. At the moment, we're doing a lot of work on damage functions, so damage functions to link global temperatures to global damages from climate change to help calibrate scenarios that central banks can use. Again, what we find is that there's loads of research around the central case, but when you're trying to understand the tail risks, the evidence base becomes much weaker and you're having to make bigger assumptions around that.

So the point we're trying to make in the article is that, actually, we need a scientific process which is not just about that central case and what's the best outcome, but is really trying to look at what are the risks around that to inform investors, central banks, others that are responsible for managing risks to give them the information they need to do that.

Jason Mitchell:

Wow, really, really interesting. I guess I'm really just struck by this distinction between scientists worrying about false alarms and risk managers, let's say, more concerned about not missing devastating events, which sounds like pretty profound tension that exists there. It's also interesting to see the financial industry borrowing much of its own climate framing from the science community, terminology like confidence intervals, et cetera. But to go back, I guess are you essentially arguing that the financial sector should do what other sectors are doing, let's say defence or the insurance sectors, and focus more on plausible worst-case scenarios? And if so, what does that actually change in practise?

Nicola Ranger:

Yeah. I'd say on your point about borrowing the language, one of the things we see, though, in financial institutions is that there's a bit of a tension at the moment. There's a sort of tension between the traditional risk management approaches and value-at-risk-type approaches, et cetera, and these new, more forward-looking approaches that are based on a very different set of evidence, and we're finding that a lot of financial institutions are struggling at the moment to put those two things together and work out, how do we use these new long-term scenarios within the context of a risk management system that was designed to be much more backward-looking? So I think this is one of the tensions that we need to resolve going forward.

Jason Mitchell:

Are you essentially arguing that the financial sector should do what other sectors do, which is focus more on plausible worst-case scenarios?

Nicola Ranger:

Yes, definitely. Yeah. I've worked on decision-making under uncertainty for most of my career, and actually most of that came out originally from the defence sector, and actually, originally, a lot of the innovation in this area was done by Shell. So Shell borrowing from defence built many of the early approaches to scenario analysis. That whole area developed over a number of decades, and I think that approach to developing forward-looking scenarios and assessing risks I think is now what I think the financial sector will need to adapt to manage these longer-term risks.

I think that, again, there's a tension there between the existing approaches that are backward-looking and the short-term timeframes that financial institutions are used to working on and these more forward-looking approaches that tell us about long-term risks. I think that's a real area of tension of how to bring those together and how to build financial institutions that are resilient over the long run when a lot of decisions are made on a short-term basis. I think that's something that many financial institutions are having to grapple with at the moment.

Jason Mitchell:

Interesting. By the way, the language and the framing reminds me, I don't know if you've seen this paper from Robert Kopp and a few others, that tipping points confuse and can distract from urgent climate action. It just reminded me of that interesting paper about even within the science community, this worry about its misuse.

Nicola Ranger:

Yeah, I agree. I think that the research on tipping points is extremely important, but I do sometimes worry that actually we miss the fact that even on a short-term basis, we have very significant physical risks and growing, and particularly when you take into account how these physical risks are interacting with other types of risks as well, non-climate risks and the amplification effect of that. I think if we focus too much on longer-term tipping points, then we miss those risks that are on our doorstep right now.

However, saying that, obviously on the tipping point side, I think we do need to keep an eye on that because, I'm sure you've seen the literature recently which shows that some of those tipping points may not be quite as far off as we thought originally, and certainly, if you're looking at more tipping points in things like ecosystems, land use and how that translates into big water crises that we're already seeing around the world, these tipping points are already here in some cases.

Jason Mitchell:

I guess by extension, how do you think investors should think about, not risk, but rather uncertainty, especially when the data arguably is never going to be perfect? In other words, the notion of the precautionary principle allows for the adoption of precautionary measures when scientific evidence is uncertain and the stakes are high as they are, and you outlined that in the beginning, but what does a precautionary approach to climate adaptation and nature actually look like do you think within a portfolio? What should an asset allocator be doing differently today, even without perfect information?

Nicola Ranger:

Well, one approach, which is not one that I would advocate is the divesting from high-risk areas, and that's certainly something that we've seen amongst a number of investors. But I think that's, in the long run, we can't divest from anywhere. We need to look at how we can manage these risks more effectively. I think that we need to better combine an understanding of these longer-term scenarios. When I say longer term, I don't necessarily mean 50 years. 10 years. So what these different views of what the world could look like over the next 10 years in the most important areas for an investment portfolio, combining that more with real-time data. We have a sort of early warning of what path we're on because we're never going to have the perfect data probably ever. We're never going to be able to perfectly capture these risks that we can't with any risk, and it's not unique to climate.

But I think if we have a much better systems in place to monitor these risks so we can see, actually, these things are changing more quickly than we expected and then have systems in place that we can very quickly adapt to that, I think that's the approach. One of the areas in my work on decision-making uncertainty that I was very involved in early on in my career was around the robust decision-making and adaptive pathways. I'd love to see investors thinking about those sorts of pathways. These are pathways and they're very well-established. For example, our Thames Barrier in the UK, which protects London, was designed based on these principles, that you don't know what's going to happen over the lifetime of this investment. In the case for the Thames Barrier, it was potentially 100 years that that could be there for.

We have huge uncertainties, for example, on sea level rise over those time periods. So rather than trying to build, say, hard defence that could protect against potentially six metres of sea level rise if we have a collapse of an ice sheet, you look at ways that you can build in flexible adaptations over time. You try to avoid lock-in to things that may be high risk that would be difficult to get out of, have systems in place that are monitoring risk, and have a phased adaptation plan over time that is robust to different scenarios. Over time you can say, "Oh, okay, this is what we're seeing. We need to switch to this pathway," and that you allow yourself the flexibility to do that. So that's an approach that I would recommend to investors to take what we call these robust adaptation pathway-type approaches.

Jason Mitchell:

Great. Our industry, and by that I mean the finance sector, is generally focused on insurability and asset-specific impacts when it comes to adaptation, ut what about investability? We touched a little bit on that in the very beginning, but where do you see systemic risk from physical climate change that markets aren't yet pricing? And what does that contagion pathway look like? What does physical risk and its spillover effects mean for markets more broadly? I want to dig into this kind of systemic issue.

Nicola Ranger:

The biggest risk I see at the moment in how markets are treating this is that they're looking on an asset-by-asset basis in general. I think what we're not considering is the correlated risks over time, and as you mentioned, the cascading risks as well. If we come back to an area that I've worked on of supply chain risks, for example, at the moment we're looking at these idiosyncratic risks and we're looking at risks... many investors, for example, other financial institutions will be looking at, okay, flood risks to a physical asset or windstorm risk to a physical asset, but they're not taking into account the wider supply chain risks or the risks of energy failure if a big storm strikes, or risks of water crises. So they're not taking into account these what we call the indirect risks on a company, but importantly, they're not also taking into account that these risks are correlated potentially across a portfolio.

Let's take the example of something like an El Nino. An El Nino, which is an event that happens roughly every four years, has very big impacts on climate cycles around the world and on risks around the world. What you see when an event like that happens is it's not just affecting one asset, it's affecting whole global portfolios, and in different ways. You might see all of the Southeast Asian assets suddenly, there's higher risk there associated with flood, whereas at the same time you might see in Latin America big droughts. This is a natural climate phenomenon, certainly one that we expect to see intensifying, but it's these sorts of correlated changes across whole continents and between continents I think we're not expecting at the moment. So we're not looking at the fact that, let's say a big agri-foods company could be affected by climate changes across the world, affecting multiple of its supply chains at the same time, or we're not taking into account the fact that we're investing in huge data centres which are then very sensitive to water availability across very large areas.

So I think that's the key missing piece at the moment, and I think because we're not accounting for these systemic-level risks, I think there could be a lot of surprises coming. For example, some of the work we've done just looking at water, we've looked at water-related risks to the globally systemically important banks. There's 22, 23 largest banks in the world, and there you can see across their portfolio, this isn't just about risk to one asset, this is about whole portfolios being affected in different sectors at the same time and in different ways. I think that's the biggest piece that we're missing at the moment, it's those sort of systemic-scale risks.

Jason Mitchell:

Interesting. By the way, the last podcast which touches on this with Simon Hallett at Cambridge Associates talks about, the title of it is Climate Risk is Bigger Than Any Single Portfolio, which does it, but I guess can you point in any direction, because it's really interesting efforts developing frameworks for how we balance macro and financial system risk versus the asset-level exposure, what kind of work is ongoing?

Nicola Ranger:

For example, in research, there's a lot of work ongoing in that area, so lots of people, for example, on the side of infrastructure looking at global infrastructure networks and how shocks in one area can impact infrastructure systems and lead to big blackouts across very wide areas or disruption to transport networks. These sort of network-based analyses are happening. There's a lot of work on supply chain networks and the potential of interruption of different supply chain networks. There's a lot of work done on financial networks, again, and how shocks can transmit across those. I think what we're not seeing is really those being linked together.

One of the areas that we're focused on is around scenario analysis here. For example, we do a lot of work to develop narrative scenarios. We bring together scientists and financial institutions to develop narrative scenarios that look at particularly these compounding, more complex, more correlated risks and providing... Again, we're not going as far as tipping points. You don't need to go that far to get a big adverse risk, but just showing that actually even within the next five to 10 years, if you account for these correlated risks, you can see very big impacts. So I think there's a lot happening there. I think then we're now starting to see financial institutions catching up on that. I've seen some great work, actually, by some of the big banks on these types of scenarios where they're looking at more adverse scenarios and looking at the correlation of these risks. We're starting to see central banks, I think, moving in this area. You might have seen, for example, the short-term scenarios that were published by the NGFS last year moved from the previous approach, which was all about really that central problem that we talked to earlier, so running these quite conservative integrated assessment models to one of looking at more narrative scenarios. They produced, I think it was four different narrative scenarios about how risk could evolve over the next five to 10 years, which much more looked at the interaction of different risks.

So I think these things are happening. I think we're now at a cusp, hopefully, where the tools that are being generated are becoming usable enough that they can be really used in day-to-day decision-making by financial institutions, so taking these complex network models and things like that and actually boiling it down into some analytics that investors can really use.

Jason Mitchell:

Interesting. I wanted to dig into one of your other papers that I really enjoyed titled Empirically Assessing Corporate Adaptation and Resilience Disclosure using AI. Using the AI was really the novel interesting element to it. The paper effectively demonstrates that S&P 500 companies report against roughly, I think it's 20% of adaptation resilience indicators, which implies that the corporate world is essentially flying blind, or maybe not totally, but to some degree on adaptation, despite growing evidence that adaptation is becoming a driver of asset pricing. Maybe again, frame out this, why is this information gap so consequential? Why hasn't it closed despite the clear financial materiality?

Nicola Ranger:

In that work, and this was I think the first time this was done, we looked at based on some existing frameworks for corporate adaptation, including by the transition plan task force and many others, World Benchmarking Alliance, et cetera, so there's been quite a lot of work done on measuring adaptation, we put those together, worked with financial institutions to develop around 80 different metrics to measure company performance on adaptation and then applied that using AI, as you say, to the S&P 500 companies.

What we find is that many companies are now, they're doing the low-hanging fruit. The 20% of indicators that you mentioned, those 20% of indicators are things like starting some risk assessment, starting to put in some governance around this, so integrating at a board level, but what we found that they're not really doing yet, and we see this from interviews with them as well, which we also conduct, is that that sort of analysis is not necessarily feeding into day-to-day decision-making in the corporate, and it's not necessarily feeding into investment decision-making, so planning, where are they going to build their assets? Where do they think the business opportunities are going to be over the next decade? It's starting to, and certainly there's some companies that are doing really great work, but in general, adaptation feels skin-deep for many corporates at the moment.

So I think there's an information gap, but there's also an action gap in corporates at the moment. I think the information gap and why that's so important is, and this is what we were trying to fill, so the audience for that analysis is twofold, or maybe threefold. One is for the corporates themselves so they can see, what are our peers doing? How are we performing versus other corporates in our space? Part of it was for the investors and financial institutions. They were really struggling to analyse at scale what companies are actually doing in their portfolios and also identify where the opportunities are. What we hear from banks and investors is they see the opportunity, but they don't know where to start in identifying for a company what is a specific opportunity for them.

But the final audience for this, and I think this is where the information gap particularly worries me, is actually around regulators and government. Regulators and government don't have a clear view on what businesses are doing in their country, and this means that they're not designing effective policies to manage risks and to incentivize adaptation. In the UK, for example, we do a lot to measure what government is doing on adaptation, but we don't really have any systems to measure what the real economy is doing. That analysis was about filling that gap as well. The whole idea is that if we can make this sort of information more readily available, it can also create a better dialogue between financial institutions, corporates and government. As I say, a little plug is that we'll soon release that data openly. At London Climate Action Week, all of that data is going to be available on a platform called ResilienceArc, which, totally publicly freely available so that then it could be used within decisions.

Jason Mitchell:

Fantastic. Great plug. I also wanted to say, the paper also exposes the idea that nature-related disclosure is essentially invisible. In other words, no companies report on the physical risks from ecosystem degradation, something that you started out mentioning. I like the term you coined around the green scorpion and the hidden risk amplification of climate change by nature. Maybe talk more about that. Why are the corporate investor worlds so much further behind on nature than on climate when it may in fact be the primary transmission mechanism for much of the physical climate risk that they're already worried about?

Nicola Ranger:

Yeah, and I'd say it's not just the investors that are behind. I think everyone is behind on this at the moment. Just tracking back to the science or the analysis briefly, for example, when we've looked at the UK, we did the first study on the nature-related risk to the UK economy with the Green Finance Institute and a number of other universities, and there we could see that if you put nature and climate together in an analysis, you see a doubling of the risk or almost a doubling of the risks. You're seeing these nature-related factors amplifying the climate factors, and you can see that at more of an asset level as well. It also works the other way around, so climate is amplifying the nature related issues as well.

To give an example of that, an easy one would be water, for example. Climate change will impact on water availability, but that's also being affected by changes in water demand, issues around water quality related to pollution, changes in land use that can affect water flows. All of these things are amplifying, and actually in some cases, those nature-related drivers are actually at the moment at least having a bigger effect than the climate-related drivers. So it is quite a substantial amplification factor, and I think because what we see is that that's not necessarily taken into account. Certainly, for most of my career, I've been a climate person. I've been doing assessments for governments and financial institutions on climate risk, and we often assumed in those assessments that the environmental factors are constant to make it easier on ourselves.

We assume there's no land use change, we assume that pollution isn't a factor, but because we do that, which we needed to do back at the time a decade or so ago because we just didn't have the methods, we were struggling even to analyse the climate risk at that time, but it meant we know now that we were hugely underplaying the risk. If you're analysing climate risks and you're not accounting for nature, actually, you're not analysing the climate risk, you're hugely underestimating them because we're not taking this into account. As I said, in some cases, certainly for some industries, actually those nature-related risks in the short term can be much more material than the climate related risks.

Jason Mitchell:

Interesting, interesting. Last question. I've looked through a lot of your work and I'm thinking of the science paper on adaptation, finance quality, the enabling adaptation report on fiscal policy, but they tend to paint a picture where markets and governments each have critical but distinct roles in driving adaptation that makes sense, but at the same time, poorly designed adaptation measures can sometimes create new risks or end up being counterproductive.

Where is the boundary between what markets can and should drive, for instance, sustainability and finance or insurance pricing and where government intervention is indispensable? I guess more specifically, how do we prevent market-based mechanisms, insurance being the obvious example, from becoming maladaptive themselves by underwriting a return to the status quo rather than incentivizing the new transformative change?

Nicola Ranger:

The way that I look at it is that the finance investors, insurers have a very key role, but I think the role of government is to, and actually government in partnership with the private sector as well, is to identify where the status quo could lead to maladaptation or where market failures will lead to inadequate adaptation, or maybe actually in some cases over-adaptation. I think that's where we need the two to come together, and I think that's where government intervention needs to come in to correct those market failures. A key one is, going back to where we started in this discussion, around infrastructure investment, for example. Infrastructure investors on their own may not have much incentive to be accounting for the full risks over the 50 or 100-year lifetime of an infrastructure investment, but from a social perspective, we need that to be taken into account when infrastructure is being designed now.

That difference in the time preferences between investor and society is somewhere then I would say that there's a rationale for government to step in to bring those two things back into a balance, and there are different ways of doing that. It could be through regulation, it could be through blended finance. There are various ways, but I think that's the nexus. That's where we need to basically enable the market to do as much as they can, but I think government providing that enabling environment that ensures the incentives are aligned so that the outcomes of either a product or an investment are ones that are aligned with those societal goals. I think where we need to get to those is a public-private collaboration on this because I think...

I always say to financial institutions, so financials often say to me, "How can we get government to do more on this and create that enabling environment?" "You just have to tell them. Tell them what you need. Because they're good people in government, but actually, they don't understand all of the incentives on financial institutions now and the things that are acting as blockers for you." So we need that dialogue. Tell the government what you need, tell the government what you need if they want you to make this investment. And I think that's where we need to get to, really, is that is a better dialogue between government and industry.

Jason Mitchell:

Perfect. It's been fascinating to unpack what your work reveals about the blind spots around physical, climate, and nature risk markets, why resilience is so difficult to price and how a more precautionary decision useful approach can drive more resilient outcomes, so I'd really like to thank you for your time and insights.

I'm Jason Mitchell, CIO of Responsible Investment at Man Group, here today with Professor Nicola Ranger at the London School of Economics and Earth Capital Nexus. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Nicola, thank you so much for your time today. This has been really, really interesting.

Nicola Ranger:

Thank you so much, Jason.