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Michael Urban PhD, Deputy Head of Sustainability Research for Lombard Odier, discusses his firm's research with the Smith School of Enterprise and the Environment at the University of Oxford on the predictors of success in a greening world. He also explains the concept of the planetary boundaries, and how the finance and science sectors should work together.
Welcome to the Sustainable Finance Guernsey podcast page.
Guernsey Finance is a joint government and industry initiative tasked with promoting and connecting Guernsey as a leading international finance centre.
Named as one of the Green Finance Guide's top 10 must-listen sustainable finance podcasts, our broadcasts feature news, insights and discussion about green and sustainable finance, and the contribution which Guernsey, as a global leader in green finance, is making in this space.
Rosie 0:04
Hello and welcome to the latest Guernsey Green Finance podcast which is rated one of the top 10 most useful sustainable finance podcasts by green finance guide. Guernsey is one of the jurisdictions leading the way in green and sustainable finance. And as part of this podcast series we'll be speaking to and learning from some of the leading global figures in the field. My name is Rosie Allsopp, I'm communications director at We Are Guernsey, that's the promotional agency for ganseys finance industry. Today, I'm delighted to be speaking with Michael Urban PhD, who is Deputy Head of Sustainability Research at Lombard Odier Group. Michael received his PhD from Oxford University and after extensive work as an academic, he is now interested in building bridges between scientific research and industry. Towards the end of last year, he led a research process with Lombard Odier in conjunction with the Smith School of Enterprise in the Environment at the University of Oxford. It's called predictors of success in a greening world. And I'm very much looking forward to discussing this and more with him now. Welcome, Michael.
Michael 1:16
Good morning, Rosie. pleasure being with you. Thank you for the invitation.
Rosie 1:20
No problem. It's great to have you with us. Now, I think we should start off by introducing you to our listeners. So maybe you could tell us a bit about your personal backstory, how you went from studying and working as an academic, to the transition into the commercial sector, and your work with lombard Odier?
Michael 1:40
With great pleasure. So actually, I started my career in industry. So I went to business school and after business school decided I wanted to work in finance, because I thought the financial sector was so immensely central to a number of topics beyond just financial and economic questions, but also environmental and social ones. And I worked as a product specialist in the mutual fund industry, covering thematic equity long only investments, there was back in 2008, which was an interesting time to start a career in finance, with Lehman Brothers going bankrupt about a month after I joined, and I stayed on in this role for about three years. And I was overseeing, at the time, a range of mutual funds that were labeled as socially responsible investments. And I thought the topic was absolutely fascinating. And I thought there was already actually considerable amount of awareness in the industry, about the importance of sustainability, but just a general lack of momentum, and not necessarily the kind of traction that made the topic, as exciting as it is perhaps today. And so at the time, I thought, if I want to explore this in depth, I need to go back to university and study. And so I did a master's in environmental politics and globalisation, trying to tie together my knowledge of the financial sector, as well as questions that related to sustainability. I thought it was so fascinating to study. And I went to do that in in the UK. And I'm Swiss, originally, also absolutely loved the UK university system, and went on to your PhD at Oxford, as you said, and actually was was really sort of fell in love with scientific research. And so stayed on and did another another four years, working as a researcher on a project financed by the European Research Council titled, finance and development in the 21st century. Now fast track all the way to November 2020. Generally, the more I was doing practitioner conferences, and the more I thought, there is actually really something that's picking up now in the private sector when it comes to sustainable finance. And some companies in particular, including Lombard Odier are really taking this to the next level, with now not only actually really asking, I think the right and the important questions when it comes to sustainability, but also having a lot of potential in terms of addressing those questions at scale through capital reallocation. That made the opportunity to join Lombard Odier, an extremely exciting one. And so I joined number one a year with two key responsibilities. One of them is to manage our existing partnership that we have with the University of Oxford, and maybe I can say a few more words about that in a moment, and also lead our thematic research, which links back to my previous experience and some of the research work I've been doing and the recent guests.
Rosie 4:52
Thanks for that great introduction. So let's cast our minds back to the end of last year and COP26, Lombard Odier hosted the zero hour sessions event which was attended by our head of sustainable finance at We Are Guernsey, Stephanie Glover. Steff said that Professor Johan Rockström's keynote speech on his groundbreaking work on planetary boundaries was the highlight of her cop with both Mark Carney and faithful chief responsible officer for Brunel pension partnership, agreeing that everyone who works in financial services or manages money should be required to watch at least one of those talks. And can you tell me some of the key takeaways from the sessions that stuck with you?
Michael 5:39
Yeah, absolutely. With pleasure. So we've we've done, we've done a number of sessions. Generally, the key topics that we wanted to cover, were the race to net-zero, as well as give a perspective on nature, and specifically what nature can do in the race to net-zero. And I think that's an important topic in the sense that increasingly older, we still have this divide between the cops that are focused on climate and the cops that are focused on biodiversity. I think there's really an increasing realisation, not just in the scientific community, but also in the financial sector, that actually, questions related to environmental challenges, as well as environmental opportunities are very much interlinked. And what I'd say really was the key takeaway for me across all of these sessions that we've run at COP26, in some of the discussions we were part of, is that really sustainable finance needs to be rooted in, in science, there really is a need for science based approach to understanding those environmental dynamics, and to then be able to build and make some connections with how certain environmental dynamics are affecting economic systems, but also how economic systems are affecting those, those environmental dynamics. And that, for me, is really the key takeaway.
Rosie 7:05
I think that's a very good point, actually, about the climate and biodiversity being both or that I don't want to put words in your mouth, but sort of two halves of the same coin, really. And I'm also excited to discuss your research with you. But before we get to that, I think it's worth sticking on the topic of COP26. It's important that the major pledges remain very much in frame. Now, a common theme at COP, as with many of these supranational events is how we can unite jurisdictions to combat climate change. And I'd be interested to know what role you think Guernsey and other similar global finance centers have to play in transitioning the global economy into a sustainable force?
Michael 7:52
Sure, yeah. That's a it's a very interesting question. And I think it's, you know, there's there's sort of, there's endless debates between, you know, we were talking about two sides of the same coin when it comes to nature and climates. And in a sense, you can make similar arguments about the economy and the financial sector. And there's sort of endless debates about, you know, sometimes the financial industry talking about the real economy needing to align with net-zero in order for the finance sector to actually deploy capital towards those projects that would be aligned in the first place. But actually also the counter arguments, which is that the real economy complains about not having access to sufficient financial meetings in order to actually enact on a net zero objective. And the reality, at least for me, is probably something that fits somewhere in the middle there very much again, that the the two sides of the same of the same coin, and there is a real need for the financial sector to work together with the real economy, to actually redeploy capital towards projects that can enable the transition to net-zero economy. I'll give you that one statistic, there's probably around a 5 trillion US dollar need in new investments to facilitate the energy transition and lowering them. And that, of course, is something that is pertinent to the real economy when those capital where this capital is actually needed on the ground, but is of course, also incredibly important. For these organizations and financial centres. There's eco systems that actually facilitate the redeployment of capital. And obviously, as you know, now, you know, finances increasingly global. And I think, you know, key financial sectors across the world, including Guernsey have absolutely a fundamental role to play in this redeployment and facilitating the redeployment of capital towards the net-zero economy and even Nature positive economy, which perhaps is a topic for further discussion?
Rosie 10:04
Yeah, absolutely. I think that's a great point. Now, as mentioned previously, you published some research in conjunction with Lombard Odier and the Smith School of enterprise in the environment at the University of Oxford. And one of the key findings was that some of the world's major economies, including the US and China, are the nations that are set to benefit the most from a transition to a green and sustainable global economy. Michael, can you explain a little bit more about how that is the case?
Michael 10:36
Yeah, absolutely. So maybe just just a frame to study. If you if we go back to COP, if you go back, actually to COP15, back in. So that's the Paris agreements. A COP21, excuse me, but in 2015. That's the signing of the Paris Agreement in 2015. At that time, the global economy was on a trajectory of worth for global warming of around four to six degrees. Now, if we look at a picture just before COP26, the economy had realigned itself for the warming trajectory of around three degrees. So considerable progress, but still very far off the Paris Agreement objectives of two degrees and actually, especially the 1.5. Net Zero objective that is really now what we have refocused most of our efforts on, and that what came out of COP26 is actually commitment. And so that would set us on course, for 1.8 degrees of global warming. So the very first time that we did under two degrees are set by the Paris Agreement. Now what happens as the global economy realigns with a different warming trajectory, you end up with a swath of economic activities, that are actually at risks of no longer being meaningful, purposeful in an economy that would be aligned with net-zero, as well as swath of economic activity that was very much enable that transition and could very well benefits in the process. And so that, in a sense, is the kind of background for the study that we've conducted together with Oxford. And here. So the key objective was to look at over the last 25 years, it's like longer timeframe. What actually what economies around the world have basically been capitalising on the transition. I just described by competitively positioning themselves in global trade for complex green products. And by complex I mean, technologically sophisticated green products. And so what the study does is unpacking over the last 25 years, which out of 150 countries have been the winning the winners, sorry, as well as the losers of the green transition.
Rosie 13:15
We see, okay, that's fascinating. Now, what are the implications of this for investors who are seeking to invest in clean energy, but also for those who are currently invested in brown or transitioning assets?
Michael 13:29
Yeah, that's, that's a very good point. So what we've done is at the macro level, we've actually derived two key indicators, one we called Green complexity index, and another one, a green complexity potential that effectively allows you to rank countries over time, but also GCP. Green complexity potential is a leading indicator of how countries are likely to fare in the future. So going back to some of these key findings, we found that Germany is actually very much on in the lead when it comes to its evolution over the last 25 years. But we've also seen a pretty incredible rise of China in the ranks. But also it China is really showing some very, very promising signs to further rise up to the very top of, of the the main trading economy is in producing economies of green complex products in the future. Now, in terms of implications directly for investors, so there's sort of this is this is a two part kind of story. One, there's a question of this macro context, and really thinking about what are the countries that are well positioned to produce high value add green technologies in the future? And there's of course also on the macro context level, some thinking around what trade relations and current tensions with trade relations, what those What those trade relations actually mean for how competitive countries might be in the future. To give you a practical examples, so we know that according to the International Energy Agency by 2050, that about 90% of our energy production should come from renewables. That's a massive scale up from around 10%. Today. And if you look at the corporate context, you see that, as of today, China is actually producing a lot of the raw materials, but also some of the key parts from this wind and solar value chain that is so important to the scale up of renewables in the future. And if you think about the ongoing tensions between China and the US, as far as trade is concerned, you can start really sort of thinking about pretty significant implications, perhaps for for the US more than for China, which has an absolutely enormous domestic market when it comes to demand for wind and solar products.
Rosie 16:02
Wow, that's a lot of food for thought there for investors. Michael, were there any other findings from the report that stood out or that surprised you?
Michael 16:12
And yeah, perhaps one one key sort of more surprising finding for me, particularly because I'm, I'm originally from Switzerland, back when I grew up there. And I was very curious to see how Switzerland would come up in in the results. And it was, it was, at first slightly puzzling for me to find that Switzerland has actually declined over the last 25 years, in terms of its level of competitiveness, and global trade for green products. And we started sort of looking into the data and trying to figure out what was going on there. And actually, after speaking to a number of people and people involved in policy, in particular, we realized that, of course, what the study is really capturing is a question around manufacturing green technologies. Now, that's not the only way economies as well as specific cities can capitalise on the green transition, because of course, there's also very buoyant demand for green services. And so that is really specifically what we would call finance and Advanced Business Services, which of course, is fundamentally important to the Swiss economy and very important for Guernsey as well. And what we find is that as part of the strategic positioning of the Swiss economy, moving away from a green manufacturing economy, and actually capitalising on green services, and particularly green financial services, Switzerland has managed to really position itself as a leader in green finance. And that shows in a sense as also a story of decline in in the manufacturing space. So it's perhaps more reallocation of the workforce and what the economy is focused on, rather than simply a net loss for the Swiss economy.
Rosie 18:09
I see what I mean, now focusing on predictors of success and circling it back to Guernsey, where do you think Guernsey lies?
Michael 18:19
So, I looked at the data to see whether we actually have data specific for guarantee, and unfortunately, we don't, but I can tell you that considering the makeup of Guernsey's economy, which is why in a way, it's similar to Switzerland, if not even more importantly, influenced by its financial sector. So it's just looking at economic statistics. And it's, as you'll know, of course, better than I do, but about about a third of the economy, if not slightly more is financial services, and probably up to 2/3, if not, well, between 50% and two thirds of the economy is finance and Advanced Business Services. So I really think that actually what I was just describing about Switzerland's evolution of the last 25 years, and its potential moving forward, as you position in as a leader to, to facilitate the green transition when it comes to the redeployment of financial capital is a very valid point for Switzerland. But it's also very valid point for guarantee.
Rosie 19:27
Absolutely. Now as a global finance centre, the islands in a particular position to provide assistance to those lagging in transition efforts. Do you think Guernsey should be looking to partner with those jurisdictions in some capacity to provide capital flows their way? Or do you think that's something that they can solve by themselves?
Michael 19:52
So, I think it's, you know, finances increasingly global and when you look at global capital flows, Today, there is actually tremendous opportunity to help jurisdictions that might not necessarily have the kind of access that Guernsey might have, in terms of raising green finance. It is, of course, also a question of skills and expertise, which I think you know, leading global financial centers that are good at scaling up those skills and expertise in the green finance space, can really, really actually turn that into a competitive advantage for themselves, but also help facilitate the green transition.
Rosie 20:38
That's good to know that we have a part to play. And it sounds like a fantastic piece of research. I'm very grateful to you for sharing your insights. And just for our listeners, you can access that research in our show notes. And I'd like you to tell me a little bit about what you're working on next. And how your partnership with Oxford University works. Can you tell me what you're currently working on?
Michael 21:05
Yeah, absolutely. So maybe just to tell you a little bit more about how the partnership is structured. So there are sort of three key pillars to the partnership. So it's a multi year partnership, which, when it was set up, allowed to endow the Lombard Odier professorship and sustainable finance. This is a professional professorship that's endowed in perpetuity at the University of Oxford. And that, of course, is a key contribution to research production, but also research dissemination in sustainable finance. Now, there's also to two other pieces, which I guess relate to research, production and dissemination, but in the context of how we actively partner with the University of Oxford, on the education side, one thing that we are working on is to deliver custom courses for our clients, as well as our investment professionals on key sub topics of sustainable finance. We've done the first last year with a group of institutional clients. And the course was focused on the race to net-zero, we've delivered the teaching in collaboration with Oxford. So we've had key faculty members coming in and present some of the key aspects around climate science, decarbonisation, but also physical risks to the audience. And then provided also an implementation perspective, sort of providing a better understanding of how this climate science actually impacts financial decision making. And so we're now working on expanding those education courses, for further groups of clients across Europe. And both of our institutional as well as our private clients. So that's on the education side. And then on the research side, I think, you know that the report that we just briefly discussed predictors of success in a green world is a prime example of the kind of work that we're doing together with Oxford. But we're also doing a number of activities, including having access to panels of experts to peer review the methodologies that we develop at Lombard Odier. That includes the methodology that we recently developed for measuring the alignment of investment portfolios with the objectives of the Paris agreements. To give you one more example of the work that we're currently doing on the research side, we are developing a methodology that allows us to track deforestation in real time, and attribute deforestation to individual assets that can then be linked to corporate entities, so that we actually have a better sense of on the ground without having to go through corporate disclosure, what what is driving deforestation, and who's responsible for it, and have a good sense of that, that attribution with direct observations using satellite imagery?
Rosie 24:22
So something we mentioned earlier was Professor Johan Rockström and his work on planetary boundaries. Michael, can you explain for those who don't know what those planetary boundaries are, and what the implications of exceeding those boundaries are for the finance sector?
Michael 24:40
Absolutely, with pleasure, that's a it's a great question. So the planetary boundaries framework are effectively tells you across nine Earth Systems. What are the thresholds past which we risk the resilience? The ends of our environmental system and more broadly and more broadly, societal systems. So to give you a very practical example. So one of those planetary boundaries is climate change. And we know that for climate change past one degree worth of warming, which we crossed, by the way already, we reach a zone of uncertainty. And in that zone of uncertainty starts to accelerate certain manifestations of climate change, including floods, heatwaves, called waves, hurricanes, and so on. Now, that zone of uncertainty for climates extends all the way up to 1.5 degrees, and that's effectively why the zero challenge is set at 1.5 degrees . This is the maximum limit that we have set ourselves in order not to end up in the danger zone past 1.5 degrees, we know that there's actually quite a lot of uncertainty of what would happen in terms of those physical manifestations of climate change, with very probably some catastrophic outcomes on an environmental but also social and, of course, an economic level. So planetary boundaries, those sort of replicates that thinking not just for climate, but for other systems that are absolutely fundamental to the earth resilience. Those include ocean acidification, which actually is a product of our greenhouse gas emissions. There's also agro chemical pollutions, nutrient cycles, phosphorus, nitrates, the use of pesticides as well with toxic release of pollutants, freshwater overuse, deforestation, and of course, an all encompassing planetary boundary, which in many ways is affecting and affected by all the ones I just mentioned, which is biodiversity.
Rosie 27:09
So given how central solving the biodiversity crisis is for combating climate change, this year, Guernsey green finance is going to have an increasing focus on how we can support growing biodiversity movement. What particular issues with respect to the environment and climate are Lombard Odier going to be focusing on in the coming year? And, Michael, maybe you can tell me a bit about what it looks like in practice in terms of developing new financial products and services?
Michael 27:42
Yep, absolutely. And I'll link that to what I was explaining in relation to planetary boundaries and climate change in particular. So now, again, the climate science tells us quite clearly about what is that planetary boundary? What is that threshold that we should not exceed, in order to keep our climate stable? Now, the work that we have done that nobody essentially looks at how can we translate that into information that's meaningful for investment decision making. And the way we've approached this is actually take that very same approach, which is this notion of temperature rise, but be able this time to assign a temperature rise metric to individual companies and tire portfolios, in order to get a sense of how aligned or misaligned a given business model or an entire portfolio or an entire investment strategy might be with our climate goal. And so we're now capable of measuring the implied temperature rise of 23,000 companies. And we do that at a very context specific granular level, sort of having a depth of understanding of the decarbonisation trajectories for different type of sub sectors and sub industries. So, to give you an example, if you take food companies, for instance, there are now some decarbonisation pathways for the food sector as a whole. Now, of course, if you take a company that manufactures cereals, its challenges as well as its opportunities to decarbonise its business model is going to be very different to a company that produces beef products. That's true in terms of industrial context. Now, the same can be said about geographical context. If you take a steel manufacturing company in Asia versus a steel manufacturing company in Europe. Here again, the opportunities and challenges to decarbonise, that particular economic activity will be fairly different because of geographical constraints. And so the methodology that we've developed, really seeks to take into account those decarbonisation challenges and opportunities to get a quantified notion of how aligned or misaligned individual companies as well as portfolios are with the climate transition. Moving forward, the research work that we are doing is now converting that notion of alignment, which actually is a good proxy for impact the impact that a company might have on climate into a value a more systematic valuation exercise, what is the financial implication of being aligned or misaligned with a certain climate scenario, and that's something that we call climate value impact. Ultimately, this is work that we would like to extend beyond climate to look across the nine planetary boundaries I was talking about earlier, to derive a notion of the valuation effect of alignment or misalignment across those nine planetary boundaries.
Rosie 31:04
Since fascinating now, finally, given your extensive knowledge on sustainability and finance, how do you think workforces can upskill to enable practical sustainability skills within the finance community? What are the sort of skills that you and sustainable finance industry would look for?
Michael 31:25
Yeah, that's it's a very good question. Interesting thing, because you find, I think, today that the labour market when it comes to sustainable finance is still sort of is shaping up. But it's, it's shaping up in various ways. And it's very interesting to see that different firms have taken different recruitment strategies, some of them looking at sort of hiring people that might have more mainstream financial and economic backgrounds, and then train them up in a house to gain the sustainability expertise. In a way this is, this is slightly differentiated from what we have done here at Lombard Odier, which is to really build in house, a team of people that have dedicated sustainability expertise in the first place that then can feed research and expertise into the wider organizations. So today, we're a team of 27 individuals with backgrounds in climate science, engineering, geospatial analysis. Some of us of course, having also worked in the financial sector, and build careers in the financial sector as sustainability experts. But I think the key thing that we are looking for today, and people for joining our team and joining our organization more broadly is a capacity to work or think interdisciplinary. And I think this is important, not just an industry, but it's also very important. In academia, we see increasingly, a number of fields, including economics and finance, starting to really start to starting to really build bridges with other scientific fields of inquiry, like climate science. And I think that that's extremely important moving forward, that capacity to build links between disciplines, scientific disciplines, as well as different different areas of practice.
Rosie 33:25
Absolutely, interdisciplinary. Yeah, I absolutely see where you're going with that now. I'm afraid that's all we've got time for today. Thank you so much, Michael, for joining us. I've particularly enjoyed hearing about your research and how Guernsey fits into that picture. I'd also like to thank you for listening to today's podcast, we have quite a back catalogue of interviews and panel discussions on the Guernsey green finance podcast channel, and you can check them out by searching for Guernsey green finance wherever you get your podcasts. If you enjoyed today's episode please leave us a review or comment. We always love to get your feedback. And you can also find us at Guernseygreenfinance.org and weareguernsey.com. You can interact with us on Twitter at @gsygreenfinance and at @weareguernsey you can hear more news and developments coming out of Guernsey's finance industry on our sister podcast check out We Are Guernsey on your preferred podcast platform. We'll also have links to Michael, Lombard odier and Smith School of enterprise in the environment at the University of Oxford social media and our show notes to check those out to hear more from them. And we'll be back soon with another edition of the Guernsey green finance podcast.
Transcribed by https://otter.ai