B (3:36)

Welcome to the show.

E (3:37)

I'm Stephen Lacy.

B (3:38)

I am the executive editor at Latitude Media and I'm joined by my co hosts who after many weeks are finally back together with me. Katherine Hamilton is the chair of 38 North Solutions. How are you?

C (3:49)

I'm doing great, thank you.

B (3:52)

You had a big announcement this morning.

C (3:53)

Yes, indeed I did. I had to divide my time between preparing for this and preparing for the launch of a new organization called Common Charge.

B (4:02)

What is it?

C (4:02)

Well, really excited. It's a group of businesses and nonprofits and consumers that all kind of allied together to try to get distributed assets in the hands of consumers of all types to help on resilience, which we're talking about today, and affordability, in which we are really in crisis. So really excited to do this. It's going to build on what others are doing. It's going to provide additional capacity where it's needed, and we think it will really get distributed energy assets, which Jigger loves, into the hands of everyone.

D (4:36)

The timing couldn't have been better. Congratulations.

B (4:39)

Yeah, indeed. I mean, we're facing a real serious affordability crisis and reliability crisis. And I'm looking at the website here and what I'm seeing are not your traditional solar panels and wind turbines and like mockups of houses that look like they're part of some digital grid. Like, these are very much kitchen table pictures. So how is what I'm seeing here feeding into the actual mission of the organization?

C (5:05)

Yeah, we really want this to be accessible and interesting to everyone. So this isn't just for regulators to try to get them to walk out on good policy, which we want them to do. But we also want this to be really accessible and kind of nonpartisan for everybody out there who's facing all these problems. We all share these issues and we want to get the solutions into everybody's hands.

D (5:25)

Indeed.

B (5:26)

Jigar Shah is a clean energy investor. He's the former director of DOE's Loan Programs Office. How are you Sir.

D (5:32)

I'm good, I'm good. I'm well rested. I did my traditional sort of pink eye flight from D.C. to San Francisco where you land here at midnight, San Francisco time. So like three in the morning and then you go to bed, wake up. So I'm good. I'm refreshed.

B (5:48)

You are miraculously fresh after your late night travel.

D (5:54)

I'm a good sleeper.

B (5:58)

So we are so excited for our guest this week. We are joined by Dr. Sara Kapnik, the global head of the climate advisory at JP Morgan. And Dr. Kaepnick has such an interesting career. She sits at this intersection of climate science, finance and commerce. She started her career as a banking analyst and then pursued theoretical mathematics and geophysical fluid dynamics, eventually becoming the chief scientist at the national oceanic and Atmospheric Administration. And now back at JP Morgan, she helps translate climate science into investment strategy. And we're thrilled to have you here, Sarah, welcome to the show.

A (6:33)

Thank you so much for having me.

B (6:34)

So we brought you here to explore a few things, to talk about this concept of climate intuition, to talk about the state of adaptation investment, and to look at how climate disruptions are showing up in like, insurance markets, supply chains, infrastructure. So we're going to weave all those together. I want to talk first about how you came to this position. So more than 20 years ago, when you were a banking analyst, you imagined the role or some version of the role that you currently have at JP Morgan, but it didn't actually exist. So how would you describe your current role and what did you see then that others didn't?

A (7:12)

Yeah, in my current role, I talk to all of JP Morgan's clients around climate issues and really all the science and technology that I have a background in, having served as an OSG scientist. And it's helping people make sense of how the world is changing, what that means for them and what they should do about it. And I saw this role needed back in 2004 when people weren't aware of climate change at the level that they are now. You have to think back then, there was a lot of discussion around uncertainty, if it was happening or not in the media. And I actually started studying climate as I shifted out of theoretical math and into both finance actually and geophysical fluid dynamics, which were the areas that were really mathy that I could easily apply my skills. And so I was looking back at the time at market pricing models and Monte Carlo methods for trying to understand the markets. But then in climate science, I was learning how physics in the models of the Earth could actually tell us what the future looked like, it wasn't something where you were looking at a wide range of statistics. You were actually some of these things are actually knowable. And so that really became real for me as I started thinking about how climate would affect everything else I was doing. So, like I took a class on Middle Eastern studies and all I could think about was how if the world got hotter and water more scarce, it would drive conflict. Or I was taking another class on catastrophe modeling and how to think about the future and the fact that it was all based on historic analysis of loss. Where by definition with climate change, you're going to start experiencing things you've never experienced before. And so if you've developed your entire model only in the past, you won't have a true representation of risk today, let alone risk in the future. And so when I was working at Goldman Sachs and I was really digging into this about how catastrophe models are built, about the insurance markets, the reinsurance markets, catastrophe bond structuring, and it made it really real for me how understanding the future could start entering into financial models, but also how it wasn't at all at that point. And that was starting to worry me because people kept telling me that this was a distant problem and something's a distant problem until it comes into the present. And so I thought as more people became aware, there would be a need for solutions based in science, based in knowing what the future looks like to help navigate through that change, but also to navigate through that never before experience world. And so I embarked upon a scientific career because I wanted to be one of those experts that can help guide people through this new world.

B (9:47)

So much has changed in the last 21 years over that period. What would you say is like the biggest impact of climate risk on financial markets or corporate strategy that you've seen?

A (9:58)

I would say over the last five years I've seen this across financial institutions and I'm also seeing it across corporates that people are actually integrating risk specialists with climate expertise. And I'm seeing it happen in various ways. It's either data scientists that are then able to pull information that are strong on financial models, or I see climate scientists going into banks like myself, but on the risk side, in banks and insurers, in credit ranging agencies, they've all been hiring up people with expertise to build out these models. And so there's been this jump forward and how these models are starting to incorporate information and decisions are starting to change around that. And there are individual examples of that. But I think as more of that Information gets integrated as well as events happen, it will accelerate further the use of that and the use of that in decision making. And I think until recently, it's been hard for people to make those decisions because they're so used to this paradigm of making decisions about present and future risk based on past experience, that it's hard sometimes to integrate in that future information about the changing statistics because it hasn't happened yet or they haven't experienced it yet. And we're in this time period now that I call the new climate era, where sufficient climate change has now happened, that we're going to start seeing these events that we've never experienced before. And so that changes how those risk profiles, what they are, but then also how people need to start reacting to it. And as people get more experience with these types of events that haven't happened before, with these new scenarios of volatility and pricing and something, that's when you start seeing change, that people realize that in order to stay ahead, they have to actually start evolving their models in ways that they haven't before and actually have that lead to decisions.

D (11:50)

Well, I mean, what I'm still trying to understand is, you know, like, was it 2015 or so when Tom Steyer and Hank Paulson and Mike Bloomberg got together to write the Risky Business Report and talked about how we needed to start looking at all these real estate models and figuring out which parts are gonna be underwater and where we should put solar and wind? I think you're starting to see some of this data coming into the modeling work, but then they're not actually translating into best practices. Right. So when you buy umbrella insurance policy, right, they force you to like, deploy some sort of ring insurance, you know, ring like alarm system, and they make you test it and they do all this stuff, but they don't separately give you a checklist around whether your sump pump works or like, whether it's backed up or whether all these other things, like, when do we get checklists from these players that say, we're not going to insure your property unless you've met these best practices, or we're going to double your insurance premium until you've implemented all this stuff?

C (12:53)

Yeah, and I would jump in, jigger on. You know, realtor.com has what they used to just do, flood risk, but now they have a whole category for every single listing on realtor.com for homes. It has environmental risk and it has flood, wildfire, heat, wind, air quality, a whole host of them. And when I look at, I looked at my property. Cause I'm like, well, I don't have any flood risk. And I realize, oh, I'm like wildfire and heat risk instead. How does that translate, as you're saying, into how we deal with homeowners insurance and that whole side of the industry? Because the metrics might be there, the risk profile might be there. But what does that mean, Sarah, when we translate that?

A (13:34)

Yeah, and there's been academic research as that data has started, come online at all the different realtor websites that has led to differences in property values or time on the market as a result of that information being out there. And then on the homeowner's insurance market. I've written about this for JP Morgan. Part of the difficulty is climate risk is a factor in rising prices. But there's also inflation is a major driver, construction costs in people building in places that are more vulnerable now. And so it's masked a bit the climate piece with all these other factors. However, we know because climate change is going to continue and what its effects are going to be, that it is going to grow in its impact. And the insurers themselves have been writing about this as well, putting it out there, starting to actually disclose how much they see the rising prices do to climate, how they see that happening also, and where they're writing policies or not writing policies. But it hasn't necessarily started translating into what Digger was saying around, you know, fully writing out what you have to do potentially in terms of resilience to be able to maintain policies. But if you continue to have climate change risk and you continue to have uninsurability, that is a likely path as people try to make sure that they continue to have insurance. And I was really struck recently, some of the insurers and reinsurers are starting to put their data out there for their assessments of risk so that people see risk on a location basis and they can look through the data and understand it based on their assets. And that's the same data that is also used in their pricing models. Like one of the companies that's starting to put out more data is Swiss Re on this information. And I think as more insurers and reinsurers start putting out more data that feeds into the model, so they're also not separate anymore. Where you don't have access to that, people are going to be able to explore it and understand what their physical risk is and how that they can improve it.

B (15:31)

Let me jump back from insurance for a moment and ask what sectors are most at risk today? What are you Mapping like, if we look at the more than $1 trillion in yearly costs from climate impacts that could play out by the 2050s or where do you see those risks being most acute and those costs adding up?

A (15:54)

Most of the analysis that I see show it happening in the utility market, and that's energy utilities. It's also water utilities. Those are industries that have physical assets. Their revenues are directly affected when you have extreme events. And they were built for a climate that is in the past. And so they already see actually the pressures of extreme weather and climate change on their revenues today. A lot of the analysis as well, it's not just wildfires, it's also sea level rise. And actually a major factor for them is also extreme heat. And I know Jigger has probably a lot to say about this, that the extreme heat leads to spikes in energy demand, but that also leads to wildfire outbreak. It stresses the grid, causes for brownouts or blackouts. And without planning for that going forward and how heat, the statistics of heat are going to change, they will experience losses. And so there's a lot of planning happening in that sector right now, particularly as they're also building out for a new grid.

D (17:00)

Yeah, I mean, that goes to trying to figure out how to make this into an investable asset class. Right. Like, you know, when you think about resilience bonds or parametric programs. Right. That, you know, that link to measurable sort of outcomes. Right. You know, part of my challenge is that I worry that after Risky Business was written in 2015, that we're in this situation where the different bonds that utilities are putting out are not trading at different based on climate. That I can tell. Right. And the same thing is true for mortgages. Right. Like if you've got a concentration of mortgages that are in places that have more sea level rise risk or other things. Like I'm wondering, like when does some of this, you know, really get integrated into financial products? Right. At a true portfolio scale.

A (17:52)

Yeah, I think it takes events happening. But also that data going into those credit models and we've only seen a few cases of actually changes in ratings due to resilience. The most notable one being a few months ago, it happened for PG&E with all their resilience spending, they actually got an upgrade and their bonds. And as more of that happens, you can then also have companies justifying doing their resiliency spending because then it actually matters for their access to capital. Yeah.

C (18:27)

And I've noticed that utilities are hiring up many more meteorologists and having much larger teams to try to collect that data. There are companies out there with some pretty cool technologies, AI tools to try to do some predictive modeling for meteorology and meeting with utilities with them. Utilities are just, they've got beefy teams and they're trying to then translate that into putting together their resilience plans. And I think that that link from the data to what's being deployed is going to be really important.

D (18:59)

So then, you know, I think when you think about where we're headed, right, There was this huge backlash against ESG and some of the stuff that was going on there, right? And certain states were saying we're not going to, you know, leave our money with BlackRock anymore because they might, you know, do ESG stuff, right? In this case, what you're saying is there's real data that links to real risk and that changes the pricing of financial instruments, et cetera. But I guess what I'm trying to figure out is whether you look at these first, large pools, right? You talked about utilities, but you can imagine housing or municipal infrastructure, right? What disclosure or verification standard should we all be backing first?

A (19:39)

The other two sectors that are really affected by our munis and real estate is anything with physical assets tied to a location that's not easily moved and the information to knowing what their exposures are. A lot of that actually you don't even need disclosure. You can actually take information of weather and climate data and understand what the exposures are in a location and it's that tied with local building codes and adaptation that's taken place or not, how the entire infrastructure in a location has been planned for this to actually get a whole picture. So it doesn't necessarily need to be disclosed. But investors may demand more of this. And actually in discussion with investors, I'm seeing greater demand about understanding physical climate risk now and trying to search out for that information and trying to bring it in than previously.

E (20:35)

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A (22:10)

Can.

B (22:10)

You talk more about this concept of climate intuition? How are you defining it and how would it work in practice?

A (22:19)

Yes. So on climate intuition the idea is that people just are aware of climate change and they bring it into all of their decision making that they have in the same way that they think about inflation or they think about labor costs. It's just one other thing that needs to be added to strategic thinking in businesses to be able to plan for it. It's just like anything else. And when I also describe that to boards or to C suite leaders, it transforms in how they're thinking about it. Of this is just something along with everything else that I need to be thinking about because it is something that's changing that we actually know and that we can actually manage once we take realize that it is something that is just like anything else that we have to deal with.

B (23:07)

So when I listen to Jigger, I'm hearing him, he's being somewhat pessimistic here. How optimistic are you that companies, investors, boards are building climate intuition into their decision making? Can you give me some real tangible examples?

A (23:22)

Well, Jigger may have pessimism, but I'm out there talking to clients and having client demand asking me to come. And so I'm seeing it firsthand going into boards and talking to C suites about what they're seeing and what they're trying to figure out. So for me it's very real in my day to day. And the reason I have a job is because there's demand for this to talk about specifics. I see it popping up first in a lot of industries where either people have experienced an issue and so they're trying to make sense of it and think through it. So a Commodities business has recently seen a spike in one of their raw materials that they need. And they're thinking through, do we do the traditional things? Do we need to do futures hedges on this? Do we need to be worried about the price volatility of this product in a way that we do with normally, or is there something more systematic here where our access to this product or to this raw material or the volatility or the price of this is going to change over time in a way that we need to respond totally differently? Like, do we need to be thinking about geographical diversification? Do we need to get out of this product? Do we need product diversity now? Because that product line will not make us the money that it has in the past, and we need to be worried about that for our growth story going forward. And so there's these much more nuanced conversations depending on the company and depending what they're facing. Like with utilities, for example, part of the reason that they're so focused on the resiliency issue is because there's also regulatory requirements for business resiliency and being able to come back online really quickly. And. And so as a result, with extreme weather in general, they have to be managing extreme weather, but then they're seeing that their costs for that are growing. And then they also saw that there has been bankruptcies in the industry due to extreme weather events, and they're concerned that they don't want to be the next one. And so they're thinking through how do we ensure that we are as resilient as possible, what are other people doing, but also what should we expect going forward in terms of various types of weather phenomenon, and then what can we do about that? So there's these whole rich conversations around what to expect in the future, what others are doing, what they can do, and then also how they should be talking about these things, talking about the challenges they see, and also how should they start planning for this and how should they be funding it? Because as you said, Jigger, it's not necessarily in all the modeling. And so they don't necessarily get the benefits if they start spending, but they know they need to start spending if they want to be in a better position five or ten years from now. And I think that's the real challenge of this place we're in in right now is that people are realizing there's risks and they're realizing they might need to start preparing that. Those times of Preparation may be five to 10 years, which can be beyond the lifetime of a board member on a board or beyond the time that a CEO is in a certain position at the five to ten year point. But they're also realizing if they don't start preparing, their company may be in a worse position five years from now if they don't start preparing. So it's this overall strategic thinking about what do you need to do? Do you start planning and then how do you start communicating that to be able to be set yourself up in the position, continuous position for growth in what you need to do in dealing with this climate issue.

C (26:48)

It's interesting because when I was, when you use the word climate intuition, it wasn't intuitively obvious to me. Oxford says intuition is the ability to understand something immediately without conscious reasoning. And yet a lot of what you do is conscious reasoning. So one of the things that you talk about in one of your pieces, and they're all really good people should go and read them. All the blogs are amazing, is that there are different kinds of adaptation postures and you're talking about people having to try to figure out what the risk is and then manage that. And the sort of four different things are you've got people who are early adopters or companies that are early adopters, more cautious amortizers, procrastinators, and then status quo. How is that manifesting? What do you see as kind of the breakdown of those groups?

A (27:35)

Yeah, I see it as most people for a very long time were status quo. They were not dealing with the problem. They were thinking this is something I need to do in the future. And I'm seeing a shift towards some procrastinators. But they, I get invited into the room because people are curious and they want to talk about the issues. So they're generally the procrastinators or they're someone who really wants to start doing something but they aren't sure what the speed will be. And so I'm seeing a shift of people moving into the amortizing space where they're starting to figure out how can I deal with this? And like what do I need to start planning and what, what is generally my one year to three year plan that I need to have? Or what does the world look like five to ten years on my long term strategic plan. And so they're moving into the that space of the amortizing slowly and trying to do this. The people that are really at the forefront and are thinking of it ahead of everyone, they are the ones that either see I want to be the first to the market on new products or thinking around what the climate looks like and I think I will capture market if I am there first. So they're either more of a growth company, so they're trying to be able to actually be there when people need to be ready, or there's someone that either has a very passionate board member or a visionary leader who thinks, who is thinking through what the risks are and what the opportunities are. And they've made this decision that if they don't start acting now, they are going to have fewer options later on and so they need to act faster. And I am starting to see this play. You're starting to see it play out in how certain companies are talking about it where you have certain insurance companies, particularly in Europe, are starting to be much more vocal about how they see its effect on their business because they're a little bit further ahead. They are the early adapters that are trying to figure out this problem because they see it as a big issue. But they also have some of them also have these much longer term views based on how they invest their money as well through their asset management businesses.

D (29:37)

Yeah, I mean I love this work and certainly have followed the work that Jay Ko and some of his folks have done, Sanjay Wagle, et cetera, on adaptation finance. I'm a huge fan of the work that everyone's doing here. What I don't quite understand is how it's going to prevent us from the next financial crisis. Right. Like it's very obvious to me that the vast majority of banks in the United States have been told by the Federal Reserve that real estate is a tier one asset. Right. And so they love investing in real estate. Right. Like in all these places. And then separately people are like sugar, Miami is going to be underwater in like 20 years. Or there was a recent house that got sold in Nantucket that's got used to have 100 yards of frontage and now is down to 20 yards of frontage and is clearly going to drop into the ocean soon. Right. But like it wasn't like the, you know, bank like refused to give them a mortgage. And so I'm just trying to understand when does all of these quiet conversations that people are having now turn into a resiliency footnote like in their 10k? Like when does it say we have this real risk where our company could go out of business if these three things occur? And in the next 15 years, like when are they required to tell investors who are not going to be have a climate intuition like they're just not going to. Right. They're like Reading analyst reports, and they're saying, this one's a buy, this one's a sell, this one's a this, this one's a that. This one's triple A, this one's single A. Should I buy this bond? Should I not buy this bond? They need something to be disclosed to them.

A (31:17)

And I think that that is a regulatory question of when everyone does it, it's usually regulation that is forcing of it. But for those leaders that see it as a risk and a material risk to them, they are disclosing the aspects of that that are material risks as they are required to by law.

B (31:35)

And can we make meaningful change without significant changes in regulation? How far can we go without rewriting the disclosure rules?

A (31:44)

I think the question that we have here also is, what is the speed of adaptation versus what is the speed of risks? In certain regions of the world, in certain sectors, the speed of adaptation may not be fast enough to deal with the speed of risks. And that's when you get these crisis points, these bankruptcies. And I think as more of those events unfortunately likely happen, that is when there'll be more knowledge and modeling and capability and understanding and better pricing of it based on where the models are. It's not necessarily priced everywhere, but that pricing will evolve as more knowledge comes in about how to deal with this.

D (32:24)

I just don't see how we get from here to there with folks like Catherine, like looking up realtor.com and like, looking up all their risks. Right. Like, I just, at some point, it feels like banks have enormous financial risks that they're holding on their balance sheets through the mortgage portfolios and other assets that they have investments in where they should be proactively writing letters to people saying, here are the risks that you have for your real estate. We would love to work with you to actually solve this problem. Like, I just think that the part of my challenge is I have these conversations regularly and have had them for 20 years. And I've had lots of conversations with people who are super smart doing this work. And I still can't tell you, like, what that process looks like. Like, does a bank go, okay, I'm going to, like, map out all of the real estate that I have mortgages on. They, like, identify where that risk is. They identify who those most vulnerable homeowners are. They reach out to them. Do they then, like, identify a suite of products that they might be able to, like, install that, like, protects their investment? For many people, right, this is the largest investment in their entire, you know, like, sort of net Worth, So presumably they care about these things. Like, I worry that like we're just sort of saying, well, when another disaster happens, I think that the regulators will catch up and like when like enough people lose their house that maybe like we'll actually get more people checking. Realtor.com, like I just don't understand how that, that's like the way that we're going to get from here to there. Like, like when do people have a responsibility to take all this data and write me a letter?

A (34:06)

I think what you're outlining is a likely evolution of the sector. As more information comes in and people are more aware of what measures and how much it costs to be able to do resiliency measures and what the exposures are, I think we'll get more information, more transparency and more actionable things to do. And I think, Jigger, you and I live in this world where we are very much more aware of the risks than the average person. And it's a matter as. That's why I call it climate intuition, where I just want everyone to have this in their mind every day. Like me walking down the street in Manhattan, I see different communities, I see what is going on and I think about, okay, this is a place that has flash flood risk, this is a place that has heat island risk, this is a place that has sea level rise risk. But most people aren't like us. They're not walking around doing that on a daily basis. But they don't have these, I call them.

D (35:04)

That's why they're able to keep their sanity.

A (35:06)

I know, but I call them climate intrusive thoughts. But that is the world that I live in with all of my things. And I'm trying to give it to people, not as you joke there, as they're able to keep thinking and not worry about those things, but I'm trying to give it to people and empower them to then make the decisions based on that.

B (35:29)

We've been talking about climate risk as something to manage and avoid, but I want to talk about it not just as a defensive strategy, but maybe an offensive play that investors should consider. So we talked about climate intuition and it's not just managing downside, but potentially spotting upside. So walk us through how a company might use that intuition to see how they make adaptation investments, not just as a hedge, but as a growth strategy.

A (35:58)

Yeah. So in a world where everyone else is a status quo thinker and doing the same that they've always done, it's the opportunity to be first in the market. And so some companies are seeing that as the opportunity first, like examples that I've seen of this in consumer preferences, realizing that drought risk and water availability is getting worse in certain parts of the world, particularly even here in the United States, in California with the droughts that we recently had, people are realizing people are taking shorter showers for shampoo. You can't lather for five to 10 minutes and then let it sit and then remove it. And so certain consumer product companies are now actually developing shampoos that you spray it in, you put it in really fast, it comes out within a minute. So you can take a shower under five minutes because they're realizing that consumer behavior is changing. And so people will not want their product if there are requirements to take short showers. And so some of those companies that are starting to experience that and see that are the ones that are starting to develop totally new products based on what they're expecting future conditions to be. And they will be the ones that then are ready. They figured out the chemicals or the makeups of what they need to have. And they already have a go to market strategy. So when that hits and when that consumer shift happens, they're ready to capitalize on it before others because they've already done the R and D, they've already done the planning and they are prepared. And they often, as Catherine was saying, they've done the analysis around the world and they know where those conditions are and where they're going to start breaking out more. So they already also have the supply chains ready to be in those markets when they have those droughts and those changing conditions. And so they, by strategically planning, they're then ready for that.

D (37:40)

Are you seeing differences in, you know, the way in which different asset classes view this opportunity? Right. So I mean that's sort of more on the consumer packaging, CPG companies, but like, you know, like you've got GIP going out aggressively buying utility companies, JP Morgan Infrastructure is buying utilities. Right. There's others that are doing stuff on the private equity side, like are they actually looking at this as an opportunity? Like do you think that like certain asset class owners, whether it's like, you know, obviously most investor owned utilities are publicly traded, right. So you've got institutional investors that are investor invested in them. But then you also have folks who've taken some of these utilities private. Right. And then they're like doing a bunch of stuff there. I mean, I'm curious whether you're seeing, you know, more proactive strategies from some asset classes versus others.

A (38:32)

The, the asset Class that's really more thinking on this right now is infrastructure where I'm seeing a lot of that and thinking about it. And I've seen strategies and interests on the water side, I've seen it on the energy side for different reasons of what they're seeing start growing that and the other asset class I'm starting to see it in is also real estate, where there's the analysis that's starting to come in of understanding the physical asset risk. But and it's also it's much easier to connect the climate risk to that. And so they're able to make those connections. And then certain structured products in the insurance market are also seeing interest and growth in this space. Like we're actually seeing a growth in the size of catastrophe bond modeling or Castry bond market. And that is because people are seeking out non market risks due to geopolitics and shifts that are creating market risk, but also because they have conviction about where the risks are and they see pricing that is good in the catastrophe market versus your insurance market and other types of products.

D (39:38)

Is this a place where there is a different level of sophistication in different parts of the world? Like we talked about Europe and the U.S. i think a little bit in this podcast. But like what about like China, India, you know, Australia, places like that?

A (39:54)

I'm starting to see a lot more sophistication in parts of Asia than in parts of North America. In the Americas the investors are talking about adaptation very differently. Like I'm actually going to be in Singapore in a few weeks. There is a lot of demand for discussing this across many different types of investments and many different types of business practices. I'm also seeing a lot more sophistication out of the Middle east developing on different climate topics. I'm getting really complex questions and requests for discussions out of the Middle east and in Europe. The shift, there's a lot of questions about how this intersects with security and I think something that based on what they are facing right now, they are also asking a lot of questions about national security and homeland security related to climate and extreme weather, which is from my background at NOAA and working on thinking through disaster, disaster responses, but also physical assets around the ocean. There's a lot of questions around planning and actually that ports piece was written because I was getting a lot of questions out of Europe about ports and about infrastructure. And I will be speaking at some national security events around port resilience because it is becoming a really hot topic.

C (41:18)

One thing I would bring up about Security is Department of Defense has for a long time looked at climate resilience. I worked at the Federal Energy Management Program designing an energy audit program for federal buildings way back during the Clinton administration. And we were trying to get them to think about resilience, climate. How do you put metrics on it? Over the last 15 years, they've done a lot of work on it. They look at the percentage of installations that are exposed to hazards. These are all their basis, whether they're here or globally, that have risk from flooding, wildfire, drought, sea level rise, et cetera. They have an indexing program to look at the measures of physical resilience, like their hardening, redundancy, ecosystem resilience, so wetlands or buffers and adaptive capacity, like how can they move, who they need to deploy, mission based on climate and based on this resilience indexing. And then they come up with metrics so they have, you know, installation, energy and water plans, resilience and adaptation plans. And what that means is that an installation, a base, for example, can report, all right, we can support X number of days of critical missions without grid power, for example, flood reduction risks achieved through doing, you know, levee elevation, for example, and then 85% of facilities evaluated for heat stress risk. So their climate resilience at the, at our Department of Defense looks at the risk exposure plus adaptation planning plus infrastructure hardening. And in a way that's pretty nuanced and isn't like they look at context in addition to all of these pieces of it. And I'm just wondering if there's, you know, when you think of national security and you think of or just security generally globally, how entities like the military are able to think about it. And can we transfer some of that knowledge into the private sector?

A (43:09)

Yeah, I spent a large part of my career working at that intersection. And something most people didn't know. Do you know what a heat index is and the wet bulb temperature, what feel like temperature is, and your likelihood for getting heat stroke? We actually know about that and created all the modeling around it. Understanding heat index, likelihood of heat stroke, when you shouldn't be outside, how long you can be outside before you get sick, before you die. And that actually came out of marine training camps, that research came out of defense. And so a lot of the advancements in understanding stress and understanding your ability to continue operations actually came out of the connection of weather information with defense information, making sure that you constantly have operability, this concept of constant operability for the mission. There is a lot that has come out of that over the years on trying to make sure that you continue to think through operations and you have this long term strategy because it also has long term strategy. It's not a one year or two year problem. It's a multi year problem that you are constantly planning for in the way that defense plans happen around the world. And that timing of when you're making those plans and strategies coincides with climate change strategies as well because you know that you have these changes over longer periods of time that you need to plan for. And actually there's. So there's a timing match there which has lent itself to being able to develop a lot of the thinking around how to use weather information and climate information for advanced planning. How does one plan for infrastructure along the ocean? Because NOAA's operations were all along the ocean. It was something I had to deal with and we had through and all of our planning for our buildings and our ships and our plane flights and all the assets that we have. And it was just fundamental. This was an issue that people would have to grapple with. You would have to plan for it, you would have to spend money on it. And if you didn't plan for it, you were not going to be able to operate in the same way and you would have a loss of mission. And so I'm seeing this start to be a concern in terms of global trade and shipping supply chains that if you don't start planning for it now, there will be disruptions down the line that you knew would have happened, but you didn't start planning for it today because major infrastructure problems, you often have a multi year planning period and then you have a multi year, multi decade implementation period for that infrastructure. So if you don't start today and the changes are an intended 20 year period where it affects you. If you don't start planning today and implementing today, you know that you are going to have a disruption in 20 years.

C (45:49)

I'm curious, I am most worried in all of this as to whether the data will be available and whether we are going to continue to have good data to be able to make these decisions. And Sarah, you were at NOAA and I certainly worry every day about whether the scientists there are going to continue to give us good numbers that we can then use to make decisions.

B (46:13)

Yeah. Can you comment on that, Sarah? I'd like to hear a little bit more about whether there are worrying gaps in data coming out of agencies like NOAA and what that does to preparing.

A (46:25)

The private sector right now with budgets being cut for certain types of data. If that data has commercial value, I see the private sector stepping in for many of those data products to be able to produce it. But it will generally what we see when that happens, in times of budget crisis, like in Canada a few decades ago, when they cut a lot of environmental information, private sector didn't move in in every single place to produce the data that they used to have. And they're still trying to rebuild the availability of certain data sets that they now realize that they need, particularly for climate resilience and understanding. So I think that there will be a disruptive point now if certain data sets are no longer available, and I think we should be expecting that certain data will not be available. And I'm starting to see a trend where my clients are figuring out what data really matters to them. Either publicly available data, but also is there an augmentation of that at a hyperlocal scale that they need? And people are actually starting to invest in their own weather monitoring systems. They're also investing, as you were saying, in drone technology to be able to monitor conditions in ways that they haven't previously, because they're realizing that, that access to the data is so critical for their operations that they can't. And they have a fear that they won't have access to it, that they're starting to invest in it themselves. So it's increasing costs as well as people are realizing that they may need to support their own data streams that they haven't previously had to. And I'll also add, this is a big question that I'm also seeing at the international scale around the world, and I sit on a science advisory board for the World Meteorological Organization, that access to data, information of data, all of this is super important around the world, because if there's also this massive shift towards AI models, those AI models will not perform as well in locations that are data poor. And so if you don't have the data, fundamentally, those models will not be as good as they could be.

B (48:25)

So you have moved back and forth between two interlinked but different worlds. The world of climate science and Wall street, they are now becoming more inextricably linked. What have those two cultures taught you about how humans or how companies, organizations think about risk?

A (48:46)

I would say that everyone can talk about things theoretically, but the majority don't act until they start experiencing events. So this is where I have a little bit of jigger. Pessimism on climate action is that often. And behavioral science also shows it's this that people have a really hard time assessing the risks that they are going to face, particularly when they've never experienced them before. And so what I've learned, both on Wall street, but also at no. 1 in the federal government, tabletop exercises, particularly for things you'd never experience, are really helpful for people understanding problems as they unfold, but also understanding themselves and their decision processes and what they are during those events. To then figure out what is the planning we need? How should we make decisions differently? Do we need to pre position assets or have a plan off the shelf that we can pull off and dust off when we need it to be able to actually act? And with the climate issues, that is really important because we're going to see events, we're going to see conditions that we've never experienced before. It can really help people understand what they don't know. I actually was at an investor meeting a couple months ago where we did a tabletop exercise that I helped lead and set the stage for. And I had a bunch of different types of companies, companies in defense, in fisheries, in agriculture, a consumer brand. After we did the tabletop exercise, they were going to go back and have their strategy team walk through the same exercise because they thought through different issues that they would face that they hadn't thought before and they realized that they needed to do it for themselves. And I'll add, this is broad across society, even with people that only think about risks all day. When I spent time with the National Security Council in my previous job, um, that was a really big thing that I learned that even if you think about risks all day, you need to have action plans when those events happen. Because sometimes when an event happens, it's too late to have your optimal outcome that you want. And so you have to have that planning in advance. It's just human nature across every single sector. And that is why I'm ultimately trying to really help through the work that I do to make sure that people have the ability to start thinking about this much more proactively than they have in the past.

C (51:14)

It's like you almost want people to internalize this risk in the same way they internalize buying health insurance or saving up for retirement. Where you want this just to be the part of what everybody does because they know, because they have climate intuition.

A (51:30)

Couldn't have said it better myself.

B (51:32)

Dr. Sarah Kapnick is the global head of the climate advisory at JP Morgan. This was really informative, fun. Thank you so much.

A (51:40)

Much, Sarah, thank you for having me. I listen to you guys every subway ride, so I feel like you're my subway buddy.

D (51:45)

Oh my gosh.

A (51:45)

Wonderful to actually be on the show.

B (51:47)

Thank you.

C (51:47)

I am so grateful for you.

D (51:49)

Anything we can do to remove those climate intrusive thoughts.

B (51:54)

J Catch you next week.

D (51:57)

Take care.

B (52:03)

Open Circuit is produced by Latitude Media. Jigger Shot Kathryn Hamilton are my co hosts. The show is edited by me, Stephen Lacy. Sean Marquand is our Technical Director. He wrote our theme song. Ann Bailey is our Senior Podcast Editor and you can go to Latitude Media for more in depth reporting on the topics we cover on this show. We also make a show in collaboration with Gritx called With Great Power and there's another great interview with Dr. Kaepnick as well that you can listen to. You can find that on our website and you can sign up for our Day of Weekly our AI Energy Nexus newsletter and find transcripts of this show so you can find it all there on the homepage and hit subscribe to get our emails and you can find this show anywhere you get your podcasts. Please give us a rating review if you can, if you haven't done that already. And we thank you so much for being here with us. We'll catch you next week.