A Sustainable Future: Prof. Madison Condon, Boston University School of Law, on the Climate Industrial Complex

Listen to Jason Mitchell discuss with Professor Madison Condon, Boston University School of Law, about whether investors can control climate outcomes.


To what degree can investors control climate outcomes? Listen to Jason Mitchell discuss with Professor Madison Condon, Boston University School of Law, about what universal ownership theory represents in the context of climate change and how this has recently changed. In addition, this far-reaching conversation highlights how private sector ownership of climate models has created a ‘climate intelligence arms race’ that has serious oversight implications.

Recording date: 14 February 2024

Professor Madison Condon

Madison Condon is an Associate Professor at Boston University School of Law where she teaches Environmental Law and Corporations. Her research focuses on climate change and its relationship to corporate governance, market risk, and financial regulators. She was first a Legal Fellow, and then an Attorney, at the Institute for Policy Integrity from 2017-2020. Before that, she clerked for Judge Jane Kelly of the Eighth Circuit Court of Appeals and was a fellow with the Earth Institute at Columbia University.


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

"Welcome to the podcast, Professor Madison Condon. It's great to have you here and thank you for taking the time today."

Madison Condon

Thank you so much for having me. I'm really happy to be here.

Jason Mitchell

"Excellent. So, Madison, I want to jump straight in. Can you take us into the debate that one of your recent papers, Externalities and the common owner, has generated over the last several years? The paper crafts the argument that the biggest institutional shareholders, alongside other universal owners, have a strong financial incentive to advance corporate governance that could, quote, mitigate climate change risks and damages to their economy."

"Marine portfolios. In other words, big institutional investors should be willing to accept the short term effects and costs of climate activism towards individual companies If those engagements help reduce overall systemic climate risk across their entire portfolio. So where are the points of tension? Can you kind of lay out what's going on here?"

Madison Condon

"Yeah, and it's it's both a recent paper and it feels so long ago in part that I that I wrote that paper just because the world around that paper has changed so much. So yeah, it basically says exactly what you say makes the argument that large institutional investors and in the paper, I wasn't super careful about the difference between asset owners and asset managers, which is something I think about in a more nuanced way, I would say now."

"But it basically says if you're BlackRock or you're Vanguard and you own a slice of the entire publicly traded economy, climate change would be really bad for your long term portfolio value. And it would make sense even maybe it would make a sense in a fiduciary duty way for you to work to mitigate damages, even if that meant losses to individual assets in your portfolio, for example, Exxon stock."

"So I was trying to say that institutional investors might have a financial interest in limiting oil and gas profits in the near term to mitigate damages in the long term. And it was very controversial when I first said that. So first of all, this the universal owner argument was not a new argument when I made it had been around for at least a couple decades."

"And then even before that, you know, Peter Drucker was talking about pension fund socialism, sort of saying the same idea that pension funds because they are you know, because their growth is so tightly related to the growth of the entire economy, they should act as like social stewards. He was saying that in like the seventies, what I did that was a little bit different was I connected it to this recent and still growing literature on common ownership, like the effects of when BlackRock owns all the major players in a certain industry, for example, the airline industry."

"There is a growing set of empirical papers from the econ literature saying that, you know, now that we have a consolidation in the institutional investment space and also a consolidation in the real economy, you can you can witness anti-competitive behaviour in certain select industries. Pharmaceutical industries is in one was another one given as an example. So I applied that set of literature to the common ownership framing same it saying like, well, if they can control the economy in those certain ways through corporate governance mechanisms, through controlling who's on the board, through signaling over shareholder calls, annual general meetings, interactions, then certainly they can influence the in the direction of the economy in other ways."

Jason Mitchell

"To what degree do you think investors are really capable of controlling climate outcomes with that context that you just gave? One of the premises of universal ownership theory is that investors who own the market actually can drive change towards, let's say, a net zero outcome through how they direct capital or engage with companies. What's the evidence and limitations of those channels of influence driving climate outcomes?"

Madison Condon

"I mean, that's such a huge question. Maybe I'll just get one piece of your question, which is sort of the counter to this idea that they that they can't drive change, but they're certainly driving the economy like in one way or another. They're the ones who decide what we invest in and like what is going to be profitable in the future."

"That's like the definition of what finance is. They sort of, you know, it's their expectations of what the world looks like that that that future gets built. So the idea that they're like, powerless to change the momentum of the future seems sort of silly to me when like we it's a little bit their job. That's what one of the roles of finance and I guess, you know, this this world is shifting so quickly and it's hard to speak about institutional investors as one group."

"So I think that like whether or not you believe institutional investors can change the direction of the of the climate future, like, I think it really does depend on what countries you're talking about, in which investors you're talking about, whether you're talking about asset managers or asset owners. But I think it's hard to say that the California pension funds announcement that they're going to direct $100 billion towards like decarbonization, investment this it's hard to say that that's like not doing anything right."

Jason Mitchell

"True. I want to get your perspective on something that Tom Gosling, who has a new paper out titled Universal Owners and Climate Change, has discussed over the last two years as well. And it tends to kind of parallel this universal ownership discussion. What I mean is the defense net zero commitment limits global warming to 1.5 degrees Celsius with little to no overshoot."

"At the same time, the UNEP has stated that there is really no credible pathway to 1.5 degrees, something that the IPCC AR6 Synthesis report also reinforced. And I guess it's a big question, something that has sort of weighed in pretty critically about, but I'm kind of curious what your views are, what are the implications for net zero signatory investors with that backdrop or net zero signatories in Tom words on a collision course with their fiduciary duty?"

Madison Condon

"I didn't know that he said that. Yeah. I mean, so yes, I've also made this point that it's a little bit confusing that everyone's going around saying we have these commitments to reach net zero by 2050, to reach one point, you know, to stay below 1.5 degrees when that statement's sort of no longer makes sense for a few reasons."

"Like one, the path that you take towards net zero really matters if you stay high emitting all the way through the thirties and the forties and at the very end emitting, then it's going to be really hot. And it really depends on like how quickly the curve bends a phrase we're now all familiar with, how quickly we bend the curve in bend in reaching net zero."

"And because we lollygag for the last 5 to 7 years and now we now have to reduce emissions much, much faster. So the statement, you know, net zero by 2052 to stay below 1.5 degrees is sort of nonsensical. I don't know that that has to be a violation of investors fiduciary duties, given that it's not their fault that the way like trends that the way we translate scientific targets are the way yeah the way that we translate science into policy targets is imperfect."

"I don't think that's you know, there was no there is no moral intent on the part of investors when they made those. Well and I speak to broadly, maybe there are certain malcontent. I don't think there's malcontent by like the confusion that we have missed 1.5 degrees C, for example. Like, I don't think that that is a thing."

"Maybe some people are willfully denying that, but it's a thing that I think all of society is still sort of grappling with how quickly things are changing and how. I mean, just this past year, how hot it was, frankly, has really, I think, changed even dialog among the scientists about, you know, how how good the climate models are, for example."

So what I think that means to me is that we and you can see this shifting in the policy space. I think a little bit that maybe thinking about temperature targets is just not really the right way to think about it. The right way to think about it is like decarbonize absolutely as fast as possible.

Jason Mitchell

"Yeah, it's a really interesting issue. So I think Tom Gosling's argument is that investors have made a commitment to hit net zero generally on a good faith best efforts basis. But what emerges is this problem where governments either willingly or unwillingly end up not implementing their policy commitments, which ultimately widens the pathway gap in a widening pathway gap, then forces investor net signatories to have to do two things."

"Either they decide whether to exit net zero or to double down on their net zero commitment, which potentially endangers their returns and puts their fiduciary duty at risk."

Madison Condon

"Yeah, I mean, this is but I mean, I think this is just really, again, how you answer that question, I think really depends on who what client you have in mind and like whose fiduciary duty you're even talking about. So you know, what would it mean? So I've been thinking about this a lot. So in the US, which is different than Europe, like basically my employer takes a chunk of money out of my paycheck and gives it to an institutional investor who gives it to it, to gives it to Vanguard, who basically buys the S&P 500 and puts it in a target date fund for 2050."

"So my expected retirement date is 2050 either, which is I find very amusing because that's also the target date for net zero. What would it mean for Vanguard to actually honor its fiduciary duties? To me as a retiree in the year 2050? Like, given what I know about the science and given, you know, it's not just me, right?"

"Like there's I really there's been a real shift. And I think you've seen these reports coming out of alternative scenarios to the GFC, coming out of University of Exeter has been producing these like rather dark, catastrophic scenarios about what the years 2053, 2050 and beyond will look like. I think we should think creatively about like what it would mean for investors to honor their fiduciary duties."

"To me as a retiree with my money right now in the year 2050, I don't think that they're doing that right now."

Jason Mitchell

"Frankly, It's another interesting issue because I know the report that you're talking about and again, I touched on it a little bit with Tom Gosling and in fact, actually a just released episode with Simon Levin, the professor of ecology at Princeton. And I think both of them, what you're basically talking about is that you're not seeing climate impacts in investor portfolios kind of show up."

"And if they are, they seem pretty minimal. And I guess what they point out with is that, you know, when you're talking 30, 50, 70 years out, you've got this discount rate problem."

Madison Condon

"Yeah, but that's also doesn't need to be that way is the thing. I'm just I just think it's so interesting that like the pension funds that have more democratic accountability, I feel like the finance people think that those people are like, wrong, that they're not investing their money. Right. And I don't know. I would just like to broaden the conversation and be like, are we doing like, I really do believe that we are really heading off a cliff."

"If we believe that, let's design our society in a slightly different way. And like I think we could do that in a way that doesn't lead to ruin. And I think we should think more creatively about what, you know, honoring fiduciary is like what fiduciary duty to people below the age of 40 means. And I don't think it is what it's going, what it is now, frankly."

Jason Mitchell

"But I'm curious, as a legal scholar, I mean, to what degree do you think terms like fiduciary duty or materiality can be reshaped, particularly in the US context? I'm American, but I live in the UK. I understand that the US is is about case law. Things aren't suddenly kind of reshaped overnight. Interestingly, in the UK, the House of Lords is will be having a conversation about potentially expanding definitions around fiduciary duty."

But what are the channels to kind of rethink it in the US or is it fairly fixed?

Madison Condon

"Well, so there's a few channels. So one is of course the court of Delaware, which controls most of the corporate law, although there's a big there's a big fight right now about whether or not Delaware will remain the reigning champion of the states in corporate law right now, basically because Elon Musk is waging war against Delaware. But for now, it's the reigning champion of deciding what fiduciary duty means and I think it's not clear that the court of Delaware is about ready to jump on board with the shareholder commons view of the world that CEOs and boards have a duty to diversified shareholders like over and above duties to like single shareholders in the firm."

"I think that the extreme polarization of of quote unquote fiduciary duty in the United States around ESG issues almost serves as an example of how open to interpretation it really could be like. It's not clear to me, I think that something has really shifted and people now realize that there's lots of different ways to to conceive of fiduciary duty on different time horizons, frankly, like the fact that that the New York State treasurer wants to do something so very different than the Texas Treasurer."

"I think there's like something has changed about the myth that there's some sort of like quantified right way that is like the not political way forward. I think that, you know, there's something has shifted about it's like the politics all the way down, even when it comes to the stock market. That's what I would say in response to that critique."

Jason Mitchell

"Madison, I want to get your read on fiduciary duty in the context of investor initiatives, which many would say is evidence of universal owner motives among a base of diversified shareholders. In my mind, the investor agenda is global investor statement to governments on the climate crisis is kind of a good example. It traditionally issues a statement just before cops."

"So in 2021, the investor agenda statement accounted for 733 signatories representing more than 52 trillion. And even in 2022, only a year later, signatory count fell to 602 signatories, representing around 42 trillion. So it's essentially a 20% decline on both measures. I've thought about how to explain this shift. On one hand, the change in a can be explained by weak ESG performance and redemptions, both phenomena in 2022, but the signatory to claim is more difficult."

"Signatories don't just vanish. The one thing I can point to between those two years is potentially conflicting or dueling definitions of fiduciary duty. And what I mean is that the 2021 statement provided one definition of fiduciary duty. It reads Investors are taking action as it is not only permitted by law, but it is in many cases required to ensure their ability to generate returns in the long term as a core fiduciary duty and benefit from the opportunities associated with the shift to a net zero economy."

"So that's the first definition. So in 2022, a second definition within that statement, the second half appears and that reads Robust climate action is being driven by our need to decrease our exposure to climate risk as a core fiduciary duty and by the potential opportunities associated with the transition to a net zero emissions economy. And so what's interesting is that first definition is anchored."

"It's very tethered to returns. And in that second definition, that second instance that disappears, it feels very tethered to climate risk in general. What's your read about the relationship between these two descriptions?"

Madison Condon

"I really like the quotes that you pulled out because I think that they do represent slight differentiations of, you know, timescales and interests when it comes to thinking about climate risk versus, you know, you know, sort of responding to the climate actions of others versus driving the transition itself. I think it's so BlackRock gives investors basically the option to navigate the transition or to drive the transition."

"And the idea is sort of like the world's roughly decarbonizing. The question is how fast it will decarbonize If you want to respond, like just in parallel with the world, you can navigate it, but if you want to drive it, you can invest against like a more decarbonized version of the future. You can invest, you know, sort of earlier in lower carbon investments or however they decide to conceptualize that."

"So I guess one question is like, so you so why would an investor why would various investors choose to drive it rather than navigating it navigate it is one question. So think about insurers. You know, like insurers who think that they like includes increasingly think that the world is becoming like uninsurable, or do they not have a duty to their own companies interests to vote their shares in line with like maintaining a viable insurable future?"

"Like how do you interpret fiduciary duty in that context? If insurers like genuinely believe that we need to reach net zero as fast as possible, shouldn't they just simply be allowed to vote their shares in order to maintain the future of their business? Seems like they should be allowed to do that. Another like response to sort of this fight about fiduciary duty, I just think it I think we're in a time of like great transition and tipping points in many contexts, not just sort of like physical tipping points in the atmosphere, the, you know, carbon feedback cycle."

"But things can change really quickly. And the nature of transitioning systems is that they, you know, can seem to not be changing and seem to not be changing and then all of a sudden change really fast on the fossil demand side, I guess I have in mind. So I think, you know, what happens with how we regulate Bitcoin and AI seems to be like a major tipping point forward."

"We just saw for the first time Ethiopia banned the like one for the first time. A country has now banned the importation of fossil based cars. China may have reached its peak emissions already in the year 2023. We don't know for sure, but it's nearing there. China's about to peak and its emissions. Things are changing really quickly and so I think this difference between driving the transition and navigating the transition has so much more to do with how you believe discontinuities will play out in the future, which is fundamentally a judgment call rather than some sort of quantitative calculation or forecast."

"So when and when it's fundamentally a judgment call that sort of is the definition of fiduciary duty. I think Delaware in particular gives a lot of leeway to like, I thought this was the right decision. I use my judgment and I think that a lot of those types of decarbonization decisions are defensible in those ways. Are could be you know it really so factors specific but yeah that's what I would say to that."

Jason Mitchell

"When we started in I introduced your paper externalities in the common owner, you kind of reflect on the fact that it's been a couple of years and a lot has changed what actually has changed? It seems like Chevron's 2020 AGM saw a majority of voting. Shareholders approve a resolution urging the oil company to bring its lobbying efforts in line with the Paris climate agreement goal of limiting global warming to two degrees."

"In 2021, Exxon lost board seats around on a climate vote that was very well publicized. The cost around engaging with Exxon, I think, most recently in the form of shareholder proposals, has now potentially significantly increased with ExxonMobil lawsuit against Arjuna Capital and the Dutch activist group Follow this. So, you know, it feels like a couple steps forward, potentially a number of steps backwards."

Madison Condon

"Yeah, that's one way to put it. I mean, the fact that ESG became like a major pillar of the Republican Party for a good part of 2023 was deeply bizarre to me. And I don't know, it feels like a fever dream that might actually be receding. Who knows? Like, definitely the deep cultural polarization around climate change isn't going away and will manifest in various forms, including it related to insurance, the insurance industry."

"But the fact that, like there are all the various Republican candidates we're going around like talking about ESG as the enemy. Well, like the random, you know, Trump voter in Iowa has just like no idea what ESG is was a very odd moment. And I think we might be moving through that a little bit. I guess how the Exxon Stewart plays out, I think time will tell."

"I think that we'll just keep seeing, frankly, a divergence between the blue state pension funds and the red state pension funds. I think it deep like at some point, does it really matter? Like to me it's sort of fine if we have like blue asset managers and red asset managers, but I think a lot of people think that wouldn't be fine."

"But it does seem there did seem like a moment that that was going to happen, that you're just going to simply have institutional investors that cater to decarbonization and those that didn't. We have that a little bit, but I think it's like less public, I guess. But I'll say what is different is that when I was writing that paper in 2019, I was like an alien in like the corporate governance circuit and like no one, you know, everyone thought I was saying something that was like sort of out there."

"And also talking about climate change was very strange for years later. And like everyone's talking about climate change, like, I don't think this stuff is going away. Like to me, yes, in these like institutional investor battlegrounds, it has become like an intense source of like political fighting and something's going to give. But, you know, more and more and more people care about this than did four years ago."

"And I don't think that's going away, especially as you see banks realizing that they're like in the thick of it, Like they have to figure out how to react to climate change right now. So I feel hopeful, frankly."

Jason Mitchell

"What do you see as the lessons about investors from the ExxonMobil campaign in it? Engine number one was fed it as a climate activist throughout the campaign. Two years later, into number one, voted against an ExxonMobil shareholder resolution to reduce scope. Three emissions sold its transform Climate ETF and ultimately declared itself, quote, never an activist investor. And that activism is a tool of last resort, not a strategy."

How do we take that as a kind of betrayal or a disavowal of climate activism?

Madison Condon

"I sort of think that the way the media has reported on Exxon throughout the last several years has always been a bit of an overreaction. And so, you know, they sort of overinterpreted the engine number one fight as like, you know, a do gooder pro bono, like we're going to see a climate change fight. I think that if you actually look at the way Exxon has decided to invest and like what assets they're buying and deciding to develop, I think that engine number one, like did change a little bit of the decision making about the future of oil."

"It was way less like drill, baby, drill mentality and much more about like return cash to shareholders mentality. And that's you can see that across a lot of the majors, like this sort of consolidation of who owns stuff in the Permian. You know, Kate Mackenzie, the journalist who I really admire her work, she's written about this. They're preparing, I'm just going to quote her."

"They're preparing for a very lucrative decline, but they're not doubling down on a bunch of capital intensive assets in general, the big the big oil majors. So I think it's both like too much and too little, meaning like they could certainly produce. I think the fight is much more on the demand side. Like, I think I think two different things."

"I think that like how the value, the quote unquote value of Exxon I think has so much to do with the politics of how we deal with the literal, like physical stranded assets. And I think the shareholder proposals that were, I think, very smart and maybe why they stunk on so much was on like, do you have are your retirement obligations satisfied?"

"Are your asset retirement obligations like satisfied in your accounting? I think that that was very smart because I think that is one of the points of change for Exxon's future. So anyway, I think things happen on the margins rather than like big climate shifts when it comes to the big oil companies."

Jason Mitchell

"I want to drill a little bit deeper into this point. Can you talk about the tension between single firm focus and multi firm focus and how to reconcile the two approaches? Yeah, I thought. Robert Tillery This paper was interesting in that he would say that the ExxonMobil shareholder campaign was perfectly justified using a single firm focus kind of profit maximizing shareholder view, and it wasn't necessarily shareholders who were looking at ExxonMobil as a component of their overall portfolio."

"And in that basis, at the same time, I really like your quip in the paper that this debate almost borders on the nonsensical Are we just being too pedantic about trying to pass investor motivations?"

Madison Condon

"Yeah. Or like, you know, so the difference between so Ad-Rock and Marcel Kahan wrote this paper that was basically an argument against the universal earner argument that I put forward saying that similar to reverted Hillary to that the engine number one campaign was, you know, you could explain it through a single firm focus rather than a multi firm portfolio focus, and therefore we shouldn't take too much of it."

"And I've just been thinking so much about the difference between a single firm focus and a multi firm focus and like what that even means in like a very rapidly transitioning system when the institutional investors like own most of the things, I think that that difference doesn't really make a difference. Like I think in the minds of institutional investors, the like the vision of the world changes as you make ExxonMobil like impacts on mobile starts to like double down less on like capital intensive investment."

"And that sort of changes like the political economy of a too I don't want to overstate this at all to like the oil companies are still definitely up to being like bad actors they're not climate champions. So like I'll say this, but I something that I found, like, so fascinating. So so Jeff Gordon at Columbia, his version of the universal owner argument is called systematic stewardship, which the UN, the UN environmental program and then and the UN like net ask the that's your Asset owners alliance has both endorsed saying that institutional investors should behave as systematic stewards that should work to achieve net zero."

"And part of the way that they encourage and the way that they like encourage investors to achieve these goals is through like very specific sectoral engagements that are aligned with net zero pathways. And they've designed these different scenarios for reaching net zero and a bunch of different of the hard to abate industries. So airlines, steel, aluminum, carbon removal, a few and the level of planning and detail that these sector specific scenarios can reach is quite is really interesting to me."

"It would go so far as like where are all the aluminum plants? And you know what, how would we have to switch all of these aluminum plants over to geothermal or hydrogen or whatever? Like what could that look like? Or the supply chains for urging decarbonization in the sector look like what is like carbon demand change, like once that input has changed."

"So these things are so systemic and they're changing so rapidly and they're so interconnected, you know, So it's like investors are at the level of trying to think of like where all the demand from the lithium mines will have to go for all the various different decarbonization that's happening in all the different sectors of the economy. It's just very interesting times and seems to me to be very different than this, like single firm focused versus multi firm focus just from the perspective of like owning a single stock in Exxon, for example."

"It's something very different is happening because they're thinking much more like Intersectoral and up and down supply chains about what a very rapidly decarbonize like decarbonize future looks like. So yes, I do think that we're like overthinking the difference between those two things."

Jason Mitchell

"I mean, the idea that investors can internalize intra portfolio externalities in the interest of portfolio returns, why doesn't this go against the whole notion of shareholder value maximization? And I guess how is that a turn away from earlier definitions of universal ownership or systemic stewardship? I'm thinking Jensen and Maclean's in the 1970s where shareholder welfare maximize ation was less anchored to financial motivations."

Madison Condon

"Yeah, so I mean Jensen in Maclean's turn, I find that turn so fascinating, this turn away from so both like managerialism at the corporate level where you're not so beholden to your financial interests and you don't think about your shareholders so much to this churn that Jensen and Merkley make about how because managers can disregard what their shareholders want and because we can intuit that what shareholders want must be for share price to go up, which is really one of the jumps that Genting and McLean makes, which I try to, you know, interrogate a little bit."

"There is this jump that the law makes. It simply assumes that the only thing we all have in common is absolute shit, like wanting shareholder maximization at the level of the firm. It's not clear that that's true. And then we have and then, you know, post Jensen and Macklin, which is 76, we built this entire apparatus around incentivizing CEOs to maximize share price through their executive pay incentives."

"And it's always been very funny to me that the Jensen and McLean claim is that CEOs are too interested in kingdom building and they're basically, you know, CEOs are basically like too selfish and too self interested in their own identity as CEOs like to do what would be best for the shareholders. So it's very funny to me that they then engage in all these interventions which just lead to CEOs being paid like way more money than they were ever paid in this era in which they were allegedly extremely selfish gluttons."

"So I find that very funny. So the Jensen Macklin intervention, first of all, so like I find this history really interesting. Political economist Benjamin Braun has written about this, and so has legal historian Sarah Hahn. It was in direct response to like a political like a politicization, again, of investor oversight of corporations very similar to the one you see today."

"So, like, I didn't know this, but the very famous Milton Friedman. Like, the duty of the corporation is to maximize profits. That was in direct response to a shareholder campaign against General Motors to try to get it to be both more environmental and to risk and to engage in like racial justice initiatives to have both. They wanted to add environmental scientists and representative from the black community on the Board of Representatives."

"And the way they were trying to go about this was through campaigning against the institutional investors like Harvard Endowment and the University of Michigan Endowment, and they and the like. Corporate ruling class got freaked out. They were like actually very worried that students were going to be successful in persuading the, like, big educational institutions that they should vote against the board of General Motors and they should make General Motors be more social justice."

"And that is in part one of the kernels of this. Like, no, the only way you have to like the only way you can measure whether or not a corporation is like doing its job or not is whether or not it maximizes share price through profits. And I guess I would say like one one more like addendum to that is Bret Christopher is writes about sort of the rise of asset managers and he's less interested in public equity and public firms and more interested in private equity in the owning of infrastructure."

"But he contrasts the moment that we have now this like profit maximization moment with what he calls fiscal mutualism. When corporate pension funds direct like, we're much more invested in just sort of the local community, they invested in the local schools and the local and the bonds of the local municipality, and they help to build the bridges. And then it was a much more constrained universe that was less financialized and much more built on this."

"Like, you know, we're investing in the economy because it would be good for our business if the roads worked in this area of like Rochester, New York. And that's so different than the mandate that pension funds have now, which is, you know, now that we're super globalized and everything so quantified, it's much less based on like a judgment of what the future of this town will be and much more based on this like short term mechanization, which I think is breaking down in the era of rapid, rapid change."

Jason Mitchell

"I'm sort of wondering, I mean, could we be giving universal owners too much credit? Do they really have the incentives, the competence to internalize externalities at the portfolio level? Are they really this enlightened about the systemic climate risks to the economy as a whole?"

Madison Condon

"I don't know what it means to be so well. I just think things are changing so quickly. What does it mean to be enlightened? Like, I do think that this past year has witnessed a host of characters that you wouldn't normally think about, like freaking out about catastrophic climate risk, pretty much freaking out about catastrophic climate risks. You have Mark Cliffe from KPMG."

"And like, you know, the people who sat. I just think that as people realize just the stakes, just as people realize the level of the stakes and just how close we are teetering has some pretty bad events. The difference between like self-interest and social interests starts to matter less. Because when we're talking about like AMOC breaking down, you're screwed if you're rich and you're screwed if you're poor."

"So. So you look, you know, it was a bunch of private equity people that sat on one of the big corporate scenarios that Mark Cliff produced with the University of Exeter. So it was the universe. It was the largest pension scheme in the UK. They got a bunch of experts together, was led by Mark Cliff. They had a few climate scientists, especially that are experts in tipping points."

"But on the group of people who helped build the scenarios, it was like Blackstone and Beringer and, and it was Mark Carney's group, Brookfield And things are changing. I think that the ALEC people are I don't know that they are going to react the way I would want a government to to react to decarbonization. Like, I don't know if they're going to do like the moves that are like equitable or racially just."

"But I do think that they are things are shifting in terms of people with money realizing that they have skin in the game. Well, at least I hope that's true."

Jason Mitchell

"I wanted to change things a little bit. You've recently been spending a lot of time looking into climate models and their implications, which has resulted in a paper titled Climate Services The Business of Physical Risk. So first, why is this, quote, Climate intelligence arms race so important? And second, what's at stake?"

Madison Condon

"Yeah, so Climate services, the business of physical risk is about growing industry of climate services, which is basically information providers that help people get information related to climate risks to make decisions today. So one way to think about it is adaptation science. And a lot of them purvey very location specific scores of, say, your heat score or your score or your hurricanes score at a very granular level."

"And this is used by a whole host of players in the market from ratings agencies to hedge funds to asset managers to index compilers. People are very, very interested, obviously, understandably, in our in future expected risks at the local scale. It was motivated by hanging out on social media and seeing just a host of science scientists concerns that the private sector was selling information that climate science just really wasn't capable of providing at that level of granularity or that level of specificity or that far out in time."

"Does a lot of climate scientists concern. It's just sort of like random tweets out into the ether about how climate provider X was selling something that they like just wasn't methodologically possible. So I have a science background, so I like really went and did so much reading and a bunch of a lot of interviews with a lot of really nice climate scientists to try to lay out for financial regulators really like what we can and cannot know with the state of the science from these big global climate models that we run on supercomputers."

"So most of what happens in the private sector is a translation of what comes out of these big publicly owned huge supercomputers. Two uses, three of them. The private sector basically takes the outputs of those computers, those computer models, and translates them for action today at a more granular level. And a lot can go wrong in that process."

"And it's really hard. And there's right now we have really little, almost none regulatory oversight of those providers of information. And it's really hard for any users to evaluate the information because, one, it's mostly black box. There's a lot of proprietary methods and models. And two, you know, one of my favorite stories is because I think it's amusing is there's no one in the banks that can really evaluate this information."

"Like, you know, traditionally banks didn't have climate scientists on staff. And there is sort of a growing type of reporting in the trade press of which banks primarily in Europe, but it's shifting to the U.S. and which banks realize that they actually just really need to hire ecologists and climate scientists, and they can't apply. They're just standard quants that are on staff to these, like more complicated questions that are about climate science and atmospheric risk and have, you know, cascading effects in how systems work."

"So yeah, that's what the paper is about. And obviously, I mean, to your second question about why it matters and what's the stakes, the use of this information is so pervasive and it can really trickle down even so far as, you know, Can you get a bank to lend you a mortgage on your house? And, you know, now that banks are really being pressed to assess undisclosed climate risk, that's good."

"We should I guess we should encourage that would be really great if that information was correct rather than, you know, force people out of their homes or really jack up the price of ensuring a home or a bond rating, for example, that isn't based on the best information possible."

Jason Mitchell

"I guess I'm wondering why, this just doesn't represent the nascent inefficient markets in the early stages of its own price discovery process. I guess, you know, are there examples or precedents where your concerns about companies not sharing potentially devastating information about climate impacts have surfaced?"

Madison Condon

"Yeah. So I think you're I think yes, that's one way to think of it. That is a very rapidly evolving space. And the institutions that used be bad at this are slowly getting better at this. We're quickly getting better at this. They're hiring the right people. They're learning the right models. That is happening. I there are some key differences."

"So one easy, low hanging response is like it's not happening fast enough and these decisions really matter. And there's a role for regulators to step in and provide this information to a bunch of people all at once, rather than having each of these institutions try to figure it out on their own individually, we should keep letting the private sector try to figure out climate risks like for sure, and let them try to hire away the climate scientists for sure."

"But there is something I've been thinking about this so much. There's something inherent about the way the science of climate forecasting works, but it's just a little bit different than the like hierarchy in all of our all of our disparate information is sort of like coagulate into the market, which then like guides us to the right price. Like actually this information is sort of consolidated in a handful of big complex climate models and like the direction of travel is sort of different then that information then gets used by a bunch of adaptation scientists and applied in certain of their own models."

"And then those like intermediate models have to be then collected again to understand impacts and how unlike the systemic effects, all of that to me just seems like very different. It's not clear to me that the banks can, on their own, with their own secret private model, ever really understand climate risks the way they need to be understood, like given just how systemic they are."

"And like I make this point in the paper that you can have really good science and like a really good score, like a flood score for some factory that you're thinking of investing in, you need like all the different scores of all the different assets of all of different your of your suppliers. You need to know the resiliency of the town that you're in."

"The factory is not particularly good if it's like zero flood risk and all the roads leading to the factory have a bunch of flood risk. So the challenge I would just say like the task at hand and the need for this information to be like modular and transparent to other actors in the system, I think like calls for a bigger rethink than, this is just like a market failure."

And we're like working it out.

Jason Mitchell

"Who is the best owner of climate data and climate models? Is it the government or the private sector? And I guess as a follow on, is the paper kind of a warning call about the emergence of a climate industrial complex? I mean, something the FCC Commissioner Hester Peirce, has also called attention to."

Madison Condon

"Yeah, So I agreed with you know, I really thought it was sort of amusing that Hester Paris was going after the climate industrial complex because I sort of thought I was doing a similar thing at the same time. And we don't always see the world the same way. But I do think that the question that you asked is sort of funny, and it's definitely not the first time I've been asked it."

"You know, a lot of people read that paper, especially in like the law professor world and, you know, still ask this question of like, well, don't we still think basically that like the private sector is just like better at running things and like, we should just like, you know, the government is like bad at doing stuff just pretty simple, like, you know, sort of that like who should really be in charge of this?"

"And I just always found it so amusing because it's like, I don't know what to tell you, but like, it's the government does it in the first. Like it's the only people who have supercomputer climate models are governments. Like they're the only ones who cared to develop this entire body of research and funded this research. And no private sector like has decided to step up and volunteer to build like an enormous global climate model."

"They all depend on this like big government research and all these government scientists and the and basically the entirely collaborative process that is the IPCC. So the idea of like, who would it be like, where should it sit? It's like it does it in the public sector, basically. So the public sector for sure has done less of a good job of providing information at this like very granular, actionable scale."

"And that's part of what my paper really into documenting is part of like why that failure happened. And that's where the private sector has a lot of activity and they should continue to play there. But I'm really like you know, I'm trying to make sort of a Mariana Mazzucato point about like you didn't build that private sector. Like, I do think we give the private sector too much credit about like where innovation comes from."

"Like, I think the government is plenty good at funding lots of different types of innovation."

Jason Mitchell

"I want to finish off with one last question about your paper market myopia as climate bubble, where you talk about how mispricing around climate risk exists at the individual asset level because of a couple of reasons, the lack of data reliance on outdated models, misaligned incentives and agency problems, and short term biases which are worsened by misinformation. How do you see this impacting diversified portfolio, not single issuers?"

And what do you think is the most likely channel from where we are today via climate physical damages to see a correction? Markets?

Madison Condon

What a complicated question.

Jason Mitchell

"I'm sorry, it is."

Madison Condon

"No, it's such a good and hard question. I mean, everything's happening all at once. I mean, for sure you do have the hedge funds and you have the big endowments and private equity in particular that are definitely pricing the risks. And by that I mean they're like buying farmland in California for the water rights and drilling it as fast as possible."

"I still think that financial actors are just not so good at thinking about discontinuity. It is not that everyone not that anyone so great about forecasting discontinuity is, but so much of what the future holds is going to be how society responds to these risks. So like will California continue to allow these institutional investors to buy all the groundwater?"

"That's not clear to me. Like we might have like a like a rapid legal response to some of these privatization of water moves. So that's that's one risk. For example, that they could be mispricing gets sort of tiring to think about like doom and gloom all the time. But clearly people are there's a there's been a shift both when like the big boat got stuck in the canal."

"And right now with the Panama Canal running dry and, the conflict in the Middle East in general, people are really thinking, quote unquote more about like choke points. And again, I think that that leads to like a just a different way of thinking about risk. I think people are much more you know, I think this in the thread to my work in general is noting the shift towards thinking about resilience rather than efficiency and realizing that those concepts are actually at odds and doing your fiduciary duty."

It's like not clear that it's actually always doing the like the quote unquote most efficient thing in a world of like extreme volatility and choke points. So I think that there's just like a re conceptualization of how to plan for the future is happening across all these different financial institutions.

Jason Mitchell

"It's a good way to end. So it's been fascinating to discuss what universal ownership theory represents in the context of climate change, how it's changed over the last 3 to 4 years. Even in my private sector, ownership of climate models has created a climate intelligence and arms race that has serious oversight implications for the public. So I'd really like to thank you for your time and insights."

"I'm Jason Mitchell, head of Responsible Investment research at Mann Group here today with Professor Madison Condon, associate professor at Boston University School of Law. Many thanks for joining us on a sustainable future and I hope you join us on our next podcast episode. Madison. Thank you so much."

Madison Condon

Thank you so much.

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