This is the first in a regular series of Q&As with global thought-leaders from industry, government, the legal profession, and academia who are domain experts in the consideration of the potential impacts of physical and transition climate risk on systemic financial risk—and the ongoing promulgation of new risk disclosure regulations by jurisdictions seeking to mitigate those impacts.

We asked Dr. Jesse M. Keenan to be our initial guest. An Associate Professor at Tulane University, New Orleans, he is a Jupiter Intelligence advisor who formerly led climate adaptation research initiatives at the Federal Reserve Bank of San Francisco. He is an expert on the intersection of climate change adaptation and the built environment, including design, engineering, regulation, planning and financing. He served as a Special Government Employee Advisor to the U.S. Commodity Futures Trading Commission (CFTC) before joining Jupiter. Dr. Keenan also served as Chair of the U.S. Community Resilience Panel for Buildings and Infrastructure Systems under the Obama White House Climate Action Plan and is a current U.S. delegate to the UN’s Intergovernmental Panel on Climate Change (IPCC).

1. Even before the findings of Working Group 1 of IPCC AR6 were issued on August 9th, multiple observers predicted that the report would add momentum to regulatory efforts around the world to embed climate risk exposure as a financial disclosure requirement. In its wake, the Australia-based law firm Minter Ellison observed that “… the strength of its conclusions are likely to trigger a significant response by policy setters, capital markets, and real economy participants.” Do you agree?

When the science of climate change and climate impacts are translated to the general public, there is greater awareness of a more complete range of physical risks and asset and operations sensitivities. Science is about reducing uncertainty and that can have the reciprocal impact of reducing uncertainty in decision-making across a variety of sectors.

“We are now right on the edge of fully mainstreaming climate-related assessments and disclosure in everything from operations to fiduciary governance to capital and systemic financial stability regulation.”

2. Are you seeing an increase in investor pressures in the USA or in global jurisdictions? Are pressures coming from other sources?

There is a lot of political pressure for regulated public companies to not only participate in climate disclosure activities, but also to be transparent about their role in financing fossil fuels and/or the energy transition. In the first wave, the political pressure came from investors who were a mix of advocates and institutional long-term value investors. That cohort has grown to include every-day investors who are demanding access to corresponding impact or performance products and disclosures. But today’s pressure is also coming from prudential oversight regulators who are concerned about systemic and sub-systemic risks. Therefore, what was a global advocacy movement is now firmly rooted in prudential oversight activities. We are now right on the edge of fully mainstreaming climate-related assessments and disclosure in everything from operations to fiduciary governance to capital and systemic financial stability regulation.

3. Given that transitional risk and stranded assets are often seen as the main cause for concern in terms of impact on systemic risk, do you see AR6 as increasing the focus on short and medium-term physical climate risk in potential regulatory changes?

First, the IPCC does not respond to economics or politics. They focus solely and exclusively on the science. Second, physical risks and the interaction between physical and transition risks is most certainly the new frontier for evaluating systemic risk and financial stability considerations. Unfortunately, there is not a global body like the IPCC that surveys these developments. However, the Network for Greening the Financial System (NGFS) is doing lots of work, and it’s producing important guidance that is broadly useful outside of the financial services sector.

“The biggest methodological challenge is integrated climate and cat modeling. This is the analytical frontier where we are trying to negotiate two different world views operating at different time scales, spatial horizons and levels and degrees of uncertainty.”

4. Where do you think the state of art is in understanding how best to incorporate physical risk into financial reporting?

The biggest methodological challenge is integrated climate and cat modeling. This is the analytical frontier where we are trying to negotiate two different world views operating at different time scales, spatial horizons and levels and degrees of uncertainty. There is an inherent disconnect between degrees of uncertainty between science and financial investment. Yet, with time, we can still narrow those horizons for a more productive engagement that is both empirically sound and transparent about where business judgement controls certain assumptions and outputs. Closer to home for many firms, one of the more impressive innovations relates to managing exposure data across sectors and within portfolios. It is hard to talk about physical risk when so few enterprises internally report and/or collect physical data on everything from assets to supply chains. That is a quickly evolving technology landscape and its development plays an important role for intra-firm climate risk management.

5. The existing slate of TCFD reports that have been voluntarily provided are far from uniform in their format and content. Along with mandated reporting, would you also support or suggest reporting follow a standardized (potentially machine readable) format to facilitate easier cross entity examinations?

I’m not sure that uniform standardization is necessarily the best route at this point. Having some standardization in state variables for scenario planning or even stress testing is key for infra-sector development. It can help peer-to-peer benchmarking. At the same time, you want firms to be able to experiment with innovative technologies and management strategies that allow for a deeper assessment than may be currently outlined in best practices. Therefore, the best way to move the needle on benchmarking is to balance some measure sector-specific standardization with firm-specific experimentation. Ultimately, external third-parties from credit markets to investment analysts will make judgments about who is more or less successful at the task.

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