Ep80 Fixed Income: Influencing Global Climate Action with Jo Richardson, Anthropocene Fixed Income Institute

Jo Richardson, head of research at the Anthropocene Fixed Income Institute, explains why the global debt market holds more power over climate transition than the stock market. Of the world’s 100 largest emitters are responsible for 75% of all emissions, but only 30 are listed on the stock market, yet all have debt outstanding. This reality gives fixed income investors unique influence over governments and private companies through the cost of capital.

This episode investigates the surge in Catastrophe Bonds and Insurance Linked Securities. These niche instruments areveal what the market actually thinks about physical climate risk. Jo discusses why historical, backward-looking insurance models are failing to account for our current reality and why we are on the brink of an unprecedented financial regime shift.

Using real-world examples from California wildfires to World Bank programs in Jamaica and the Philippines, the discussion highlights how pricing tail risk can incentivise adaptation and resilience. 

Discover why the bond market is the front line for pricing the future of the climate economy.

ABOUT JO: Josephine Richardson is the Head of Research at the Anthropocene Fixed Income Institute (AFII). Based in London, Jo leads the development of AFII’s research, which supports fixed income investors in aligning their portfolios to climate and sustainability goals. Jo joined AFII from JPMorgan where she worked for 18 years in fixed income markets. She has extensive experience trading structured, flow and index credit products, and in the modelling and valuation of derivatives. Jo has an MA Hons Mathematics & Management Studies from Trinity College Cambridge and is a Fellow of the Chartered Institute for Management Accountants. She serves as trustee and advisor to a number of charities and social enterprises in the UK.

RECOMMENDATIONS: 

The Prize: The Epic Quest for Oil, Money, and Power: Jo recommends this 850-page, Pulitzer Prize-winning history of the oil and gas industry. It tracks the sector from its discovery in Pennsylvania in 1859 and provides essential context for understanding the role fossil fuels have played in global history.

Wild London: A documentary by Sir David Attenborough that showcases the ecosystems existing within the London area.

Tree Amble: A podcast focused on the ancient trees of Epping Forest, which Jo suggests as a way for individuals to connect with and appreciate local nature.

What the Catastrophe Bond Market Could Be Telling Us About Climate Risk: Joseph Jacobelli recommends Jo’s own report, which provides a deep dive into how "cat bonds" act as a tool for pricing the future of the climate economy.

HOST, PRODUCTION, ARTWORK: Joseph Jacobelli  |  MUSIC: Ep76 onward excerpts from Vivaldi’s La Follia, played by Luca Jacobelli.

Transcript

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Ep80 Fixed Income: Influencing Global Climate Action with Jo Richardson, Anthropocene Fixed Income Institute

[00:00:00] JO RICHARDSON: Not only do the fixed income markets have the ability to influence a far greater universe of relevant actors, right? Only fixed income markets can influence governments. Only fixed income markets can influence private companies. If you even look into kind of which sectors are bond issuers, the statistic that I quote all the time that I'm going to use now is of the hundred biggest emitters of all time who are collectively responsible for 75 per cent of all emissions, only 30 are listed on the stock market. But they all have debt outstanding.

[00:00:29] NARRATOR: Welcome to Asia Climate Finance, your front row seat to the policies, investments, and actors shaping climate, business and finance across Asia-Pacific. Subscribe now so others find this essential guide to Asia's climate economy and note the disclaimers at the end. Now over to the host, analyst, investor, and author Joseph Jacobelli.

[00:00:52] JOSEPH JACOBELLI: Hello. Good morning, good afternoon, or good evening, wherever you may be. Welcome to Asia Climate Finance. Today we're joined by a truly brilliant guest who is changing the way we think about the price of climate change. Jo Richardson leads the development of research at the Anthropocene Fixed Income Institute, and she heads a global team dedicated to supporting fixed income investors. Jo's journey is actually quite fascinating. She's a mathematician who spent a decade on the front lines of credit trading desks during some of the market's biggest crises. You'll want to stick around for this one; we're diving into why the boring world of bonds actually holds more power over global emissions than the stock market. We explore the high-stakes world of catastrophe bonds, instruments that are currently beating the S&P 500 while telling us exactly what the market thinks about our future. Jo also explains why she believes we're on the brink of a financial regime shift unlike anything we've seen before.

We love to hear from you if you have any questions or comments about today's discussion or ideas on topics, guests, et cetera, please do email the podcast via the address found at the top of the show notes. Now let's get into the conversation. Hello, Jo. Thank you so much for joining the Asia Climate Finance Podcast. I'm really, really glad that you were able to make it.

[00:02:25] JO RICHARDSON: Thank you, Joseph. I'm looking forward to speaking about this topic.

[00:02:28] JOSEPH JACOBELLI: Yeah, I'm actually quite excited about it as we mentioned earlier because, well, a whole bunch of reasons, which I will re-emphasise later on. But first of all, let's talk a little bit about you, if we could, Jo. You've got a very fascinating journey in the financial markets, and could you just start perhaps by telling us a little bit about your background and how you eventually found yourself at the intersection of the credit markets and climate finance?

[00:02:56] JO RICHARDSON: No, absolutely. Thank you. And I think it's actually really interesting often to learn people's journey to get to things, because of course it does influence how you think about things so much and really change what you've done before and how you get there. So, as mentioned, I work obviously in sustainability now, sustainable finance. I do a lot of research in that space. I know we're going to talk about it, but my story really started in traditional markets. Well, in truth, even before that, it started in academics where I was, if you can believe it, a mathematician. And then I fell into traditional markets as a fresh-faced graduate, barely knowing really what I was doing. And I ended up on a credit trading desk as an intern. And I turned up on time every day and answered the phone very effectively. And that was really all that was asked of you then. And I ended up working in trading for about 12 years in market-making and in truth, that really gave me actually a bug for the markets, right?

Seeing them every day, seeing who's participating, seeing what different people want and how they can move and how they can respond to things. I actually wasn't from an economics background; I was really very interested in the markets and how they work, right? So, I did that at a large investment bank mostly accidentally for a long time, which I loved. And of course, that was throughout a very interesting period of the market, which was through the financial crisis and the credit crisis and in many ways the European sovereign crisis. A really interesting time. Then I actually took a sabbatical and explored the impact investing world. So that's not so much public markets, which I know we're going to talk about here, but more small, maybe private credit and even private equity investments designed to help charities develop business models that perhaps don't rely on grant financing. Mm-hmm. So, really interesting, really good understanding of the role between impact and financial returns and different financial models, which kind of started my learning, thinking about sustainability and investing and how these things come together. I actually went back into banking for another five years and actually did a slightly different job, a bit more mathematical and modelling, and then I moved into sustainability full-time about four years ago, which is when I joined the Anthropocene Fixed Income Institute and started doing the work that I know we're going to talk about today.

[00:05:00] JOSEPH JACOBELLI: Well, that's really fascinating. I mean, we have a very similar background. I was an equity analyst for many decades. And I had a couple of corporate, what I call real jobs, working for corporations. And now I'm an investor. But it's a fascinating journey that you've had. Now I'm not sure that everybody may know about the Anthropocene Fixed Income Institute, AFII. So, your work at AFII is quite unique and for those of us who are not that familiar with it, could you just tell us a little bit about the core mission and why specifically it focuses on the fixed income market for climate action?

[00:05:40] JO RICHARDSON: No, absolutely. So yes, I work for an organisation called the Anthropocene Fixed Income Institute. The Anthropocene is, of course, the geological age in which we live, in which it's believed that one can actually see in the rocks the impact that we're having on the environment. So, I think that actually is quite a big image and certainly one that I quite enjoy in explaining what we do. So, we are a philanthropically funded research organisation, so we're entirely philanthropically funded and our core audience is investors in public fixed income markets. And that's, I think, quite an interesting part that maybe we'll get to later. There's lots of really interesting thinking in this area, but not much of it is focused on what one might say are the boring bits of the investment-grade bond market. Right? And actually, this is where money is moving hands, and this is what is responsible for financing a lot of the core sectors and industries that need to transition. So, our mission is to strengthen the relationship between cost of capital and climate and nature loss risks. Mm-hmm. So, what do I mean by that? If we can work with investors and support them in integrating these risks and opportunities in their investment decisions, that will differentiate the cost of capital and that can drive behaviour change.

Let's assume I'm the CFO of Total and I'm trying to decide how to allocate capital and what projects to invest in. Mm-hmm. If I am delivered a different cost of capital for those projects depending on the overall climate risk perhaps of those investments, that will impact me and that is a lever that can change my behaviour. As part of lots of the other levers and policy and engagement, lots of things. Ultimately, companies and governments are extremely sensitive to their cost of capital. And I think why are we so focused on public fixed income markets? Aside from the fact that we think it doesn't get as much attention as it deserves, not only do the fixed income markets have the ability to influence a far greater universe of relevant actors, right? Only fixed income markets can influence governments. Only fixed income markets can influence private companies. If you even look into which sectors are bond issuers, the statistic that I quote all the time that I'm going to use now is of the hundred biggest emitters of all time who are collectively responsible for 75 per cent of all emissions, only 30 are listed on the stock market. But they all have debt outstanding.

Now that's because they're governments, because they're NOCs, because they're privately owned entities, but they're all dependent on fixed income markets. So, you have the ability, at least in theory, to influence a much broader range of relevant actors for the transition. But then also secondly, and we do a bit of work specifically here as well, fixed income investors have lots of different levers that they have for influence. Mm-hmm. Lots of people are familiar with, "Oh, I'm a shareholder. I own a little bit of the company. I can go to the AGM, I can vote, I can raise a resolution." Mm-hmm. But actually, in the fixed income market, because of the refinancing nature of the instrument—so again, the US corporate debt market turns over entirely on average every five years—companies and borrowers are constantly coming back to market and asking for money again. Mm-hmm. And at that point, investors have tremendous influence. "Oh, well actually I need to see [highlight: price/performance?] movements here. And actually, if you are going to continue along this transition path, the price I will lend you money is different." So, it's a very different dialogue between fixed income investors that are constantly refinancing and equity. So, we think fixed income investors have tremendous influence.

[00:09:03] JOSEPH JACOBELLI: Also, when it comes to impact investment in general, globally. I mean, if we're talking about where the money comes from—obviously you've got money from philanthropies, multilaterals, some commercial bank lending, et cetera—but the fixed income market is huge. And I think if you look for example at the Climate Bonds Initiative, what they've done with the green bonds and those numbers just keep on going up and up and up and up. So, I think it's very important. So maybe we can focus down on something very specifically because you recently published a really interesting report titled *What the Catastrophe Bond Market Could Be Telling Us About Climate Risk*. And in the report, you have a deep dive into catastrophe bonds or what we call cat bonds. Mm-hmm. Now to get everyone up to speed maybe we can have a few 101 questions for those not that familiar, including myself. So, in the simplest terms, how do these bonds actually work?

[00:10:03] JO RICHARDSON: It is a great question and, in many ways, a key objective of this piece of work is just everyone sort of talks about it, everyone sort of thinks it's an interesting name, but it's quite niche and it can be quite complex. And we are just trying to get more people up to speed with this product. So, firstly, a cat bond is a bond, right? Which means there's an investor who gives some money upfront and receives a coupon along the length of the bond, and they take some risk and then they receive their money back if the thing, they've taken risk to doesn't happen. So, in a regular bond I lend someone some money. The risk is: is that company going to default and pay my money back or not? And I get my coupon. Here rather than a borrower—this is maybe the first complex bit—the funds are usually kept in a special purpose vehicle, so again, that makes them a bit complex. And these special purpose vehicles or SPVs are often in Caribbean jurisdictions because these things are offshore, which again makes them complex. So, I'm an investor. I give my money to a special purpose vehicle, which kind of looks after it. And then there's an extra party to the transactions, which is usually called the deal sponsor. That's the entity who's often an insurance company or a reinsurance company, and they're providing the coupon. So, they're saying, "I'm going to pay you this coupon, a bit like a premium," and then if the event that we are having insurance against—the peril—happens, then I will get some of the money that the investor put into kind of make me whole. Mm-hmm. So, it's very similar to a bond for an investor. I get a coupon and if the bad thing happens, I lose some of my money, but they're structured a bit differently because you have this insurance company or a deal sponsor who may be having the insurance premium type transaction which is referenced by the deal.

[00:11:49] JOSEPH JACOBELLI: Right. So, what is the primary draw for an investor and why would they want to have cat bonds in their portfolios?

[00:11:58] JO RICHARDSON: Yes. I mean, and in many ways that was one of the core things that we found that was really interesting about the market, which we are now trying to talk to people about. Because certainly at the moment, my opinion would be that it's quite niche; not that many people understand them. The bonds are in designated cat bond funds, and it's only if an investor knows about that would they think about that. I mean, maybe let's even take a small step back. What are fixed income investors typically trying to do with their portfolio? It is maybe a different style of investing to an equity. There is very limited upside. I'm really trying to make sure I do get my money back and I receive some kind of yield target depending on my liabilities or depending on if I'm a pension fund or insurance company, et cetera. So, actually, it is a very different payout expectation in fixed income, lower risk, and a steady rate of return. And in that sense, one of the pieces of work we did in this report actually was to compare the recent performance of cat bonds with some other examples. How did the high-yield market do, or the high-grade market or emerging market bonds, as a comparison to trying to think about why investors might choose this product over others. Actually, one thing that we found—and I'm sure we can talk a bit later about why I think this is the case—was what a standout returns this product has been actually over the last 10 years, but over five years, the average annual return is 10 per cent. Comparing that to 14 per cent for the S&P, i.e., the stock market, which has had a stellar five years. Mm-hmm. And versus a standard deviation, which is half. So, often we look at this sharp ratio, which is the ratio between the average return and the standard deviation. Cat bonds on a risk-adjusted basis have really been the standout.

[00:13:49] JOSEPH JACOBELLI: Yeah. And obviously if you're investing in the stock market, the volatility, especially recently, has been absolutely astronomical. And I can testify that I have had several heart attacks in the past 12 months. But anyway, that's a different conversation. Now, in this, as you called it, niche world, are there specialist cat bond traders or dedicated fixed income desks handling these, or how does it really work?

[00:14:17] JO RICHARDSON: Yeah, no, and a great question, and I think, again, I'm not necessarily sure I even have all the answers to this. I've done a bit of work, and I certainly share what I found. And in many ways, the less you find, the more it suggests it is quite a niche kind of product.

[00:14:29] JOSEPH JACOBELLI: Right.

[00:14:30] JO RICHARDSON: Right. I mean, certainly, we did a bit of work as well into who held these bonds and what we could see from the funds. And I would say it seemed to me that the majority of the funds who held these bonds were dedicated to the product. So, either cat bonds or another phrase you might hear related is ILS, which stands for Insurance-Linked Securities. So, lots of the funds had those names or specifically focus on this product. And again, from an investor point of view, they often offer some very de-correlated returns. So, you might say, "Well, I'll allocate 10 per cent of my investment to this cat bond fund," and that kind of sits well alongside. So, I think the structures are quite niche. They do have this usual offshore special purpose vehicle structuring. My understanding would be that it is specialised teams who look at them.

[00:15:22] JOSEPH JACOBELLI: Understood. Final question on the one-on-one kind of questions, if we could. How large is this cat bond market today, in terms of total issuance, and are there any kind of growth projections over the coming years?

[00:15:39] JO RICHARDSON: Yeah. And again, another quick shout-out. I got a lot of information in the report from this website or data provider called Artemis.bm, which is great. They provide a snapshot market report, and they have some volumes which is where we got some of this data from.

[00:15:53] JOSEPH JACOBELLI: We'll put that in the show notes as well so that people can have a look at it.

[00:15:57] JO RICHARDSON: So, in 2025 total issuance was reported to be just over $25 billion, higher than 2024, where the total was 18. So that's quite a big increase actually, year-on-year. However, one other thing to realise about these securities—and another reason why in fact they can often offer some diversification and de-correlated returns—is they're typically very short maturities. Usually, four to seven years. So, fixed income maturities are often very long dated where they have longer duration, as it's called. Mm-hmm. So here, because they're quite short-dated, that means they roll off quite quickly. So, in fact, the total outstanding notional we calculated as just over $62 billion. Now, how do you go about thinking: is that a big number? I mean, I think it sounds like quite a small number. If you compare, for example, the estimated global natural peril economic cost in 2024 was $417 billion. Mm-hmm. So, it is certainly multiples less than that. And obviously these are still insurance products; you're never going to expect them all to pay out. The volume of insurance one would expect to be many multiples of the volume of actual losses. So, it still seems kind of small. However, there certainly are a few interesting things we're seeing, which I know we're going to go into later. In terms of future growth, I saw one prediction which is roughly flat. I don't think people are predicting continued exponential growth of this product necessarily, but I think that depends very much on how we see losses unfolding. We're in, in my view, a quite uncertain period of time for physical losses and losses coming from extreme climate events; they're rising, they're gaining in concern, and people are very concerned about these issues. And this is one of the products that I think people will go to if they want to get some extra protection from those.

[00:17:44] JOSEPH JACOBELLI: Yeah. And I mean, whether you're talking about climate change or not, extreme weather events have been increasing. Whether you're a climate change denier or not. So obviously, I personally think it's going to grow quite a bit, but that's just my own personal opinion. Now moving on to some of the things in the report and things related to the report you mentioned. That cat bonds tell us what the market actually thinks about climate risk. What is the market currently saying about the frequency and severity of these climate disasters compared to a few years ago, say five or 10 years ago?

[00:18:26] JO RICHARDSON: And look, even a little more intro to this—and this maybe goes back to both of our backgrounds—almost, this is an idea which maybe people are more comfortable with in, say, option pricing theory. We are saying the market is never wrong; the market is telling you the fair price between buyers and sellers and the expectation of things. So obviously in option land you might call this the risk-neutral volatility. So, we've got the historical volatility, we've got the realised volatility, and we have the market-implied volatility, which is where people can actually transact and the fair price that will then, through the models, imply what's going to happen. So, two parts for analysis certainly suggest that the capital market is pricing the risk of these losses potentially significantly higher than historical realised. Firstly, we were able to look at the coupons of these bonds. Mm-hmm. So, again, they tend to be quite short dated. They often tend to have floating rate coupons, but you can go and then look at what the first coupon was, right? Which is perhaps a measure of the price that the bond was actually issued at. And this, the first coupon of the bonds, has been moving quite a lot higher in the last five years compared to earlier. In our data, the average was just below 4 per cent in 2021—this is just of all the bonds issued—and it rose as high as 12 per cent in 2024. Wow. Now that is alongside a change in risk-free rates. Of course. That is just one data point, but that's quite a big movement higher. And I would, as we would all sort of say in a market sense, if the price is moving higher, that kind of means there's more buyers than sellers. And here that's more buyers of protection in the cat bond market than sellers of protection. So that would potentially suggest a supply-demand point for me and the price that these deal sponsors are willing to pay for their protection.

The second part goes back to this point that we talked about already, about the performance of these securities. Over the last five years, the performance of these securities has been very attractive. I.e., investors are being well paid compared to the realised losses that they're experiencing. These attractive and consistent risk-adjusted returns can also be interpreted as excess spread in the system. I.e., there is a risk premium because people want to pay for protection and realised losses have not yet risen. So those are the two things we observed. I would interpret that as being lots of demand for protection and potentially also an indication that losses could rise in the future. I mean, I guess no one knows what's going to happen, but certainly the market-implied expected loss is higher than we're experiencing at the moment.

[00:21:01] JOSEPH JACOBELLI: Right. We've talked a little bit about insurance companies, et cetera. Now traditional insurance models rely very heavily on historical data. Why do you believe that these kinds of backward-looking models are now failing or not appropriately accounting for our current climate reality?

[00:21:25] JO RICHARDSON: And this certainly goes into what my view is and what our views are. And you sort of mentioned climate change deniers. I'm not a climate change denier. I think we are in the midst of unprecedented changes to our climate and almost this is, again, the fundamental representation: the past is not an indicator of the future. So, yes, but that's my belief. I believe more and more we are going to see, unfortunately, some of these tipping points move. Mm-hmm. And it's going to be very unpredictable. So, however, even now, back to the cat bond market, though, I think it's a really interesting question of what the role these models have, because lots of insurance premium, insurance risk management, it's underpinned by historical models.

[00:22:03] JOSEPH JACOBELLI: Right.

[00:22:05] JO RICHARDSON: And from my understanding, the insurance sector does use models and there are a few different ones, but each of which is ultimately based on a historical assessment of loss. And, as we said, all market participants will tell you the history is not an indicator, but it also highlights, again, from this kind of option pricing world, if the price is telling you something and you try and put it into your model and it doesn't really work, what does that say about your model? But what we hear on how these transactions are actually priced is the kind of price of the bond is almost a multiple of the model. So, you might say, "Oh, I'm going to price this bond at 2x the risk model, or 3x the Moody's model." And it's actually how we're seeing those multiples change. There is an understanding that the model is an indicator and the price is not necessarily related to the models. The models are more used to say, compare between two different structures. "Oh, how is the different risk in this region versus this region?" So, I don't know. Again, if we get to a phrase in cat bond land where perhaps investors start losing lots of money because there really is evidence that the models are not working, that could also be a really interesting trigger for people to revisit the models more quickly.

[00:23:16] JOSEPH JACOBELLI: Mm-hmm. Got it. Moving on to something, putting a little bit of colour. Because we talked a lot on a kind of high level so far, but talking about some real-life examples. For example, just take one extreme event, a weather event—wildfires caused by extreme weather events. So how do you see wildfires as a risk, for example?

[00:23:43] JO RICHARDSON: Yes. And another really kind of interesting thing we observed from looking through the cat bonds was—well, again, anecdotally—if one looks at the kind of perils that are covered traditionally by the market, lots of them are very vague and lots very general. Lots of them use things like multi-peril. What does that mean? Lots of them are entire regions, earthquakes in Asia or storms or these sorts of things. But what was interesting was there was this real uptick that was observed in Q3 of last year where suddenly California wildfires—quite narrow in terms of peril and quite narrow in terms of region—featured in nearly a quarter of the deals in that quarter. And obviously, unfortunately, terrible wildfires in Los Angeles at the start of the year. Lots of insurance companies realised how exposed they were in a very correlated sense and they went to the market to try and get some protection. I also view that as a potential example of what we talked about earlier, which is the opportunity for this market to offer diversification. As events happen, as insurance companies, reinsurance companies, and investors realise how exposed they are, they are going to seek a product which gives them the ability to diversify risk. And I think seeing such a narrow peril feature in so many transactions shows that there can be that response.

[00:25:00] JOSEPH JACOBELLI: I mean, what's interesting about the California wildfires is that it was very high profile particularly because it was this kind of LA luxury area. Where maybe 20 years ago Pacific Palisades... Pacific Palisades, something like that. Neither of us are American, so we're... but yeah, I mean, it was very high profile because my understanding is that the whole area got completely wiped out and doesn't exist anymore. And rebuilding is going to be an issue because if you rebuild, you can't get insurance. So, it becomes quite interesting. Now, insurance losses are rising, right? Mm-hmm. But cat bond issuance seems to be relatively low in comparison to these insurance losses rising. Why is there such a massive gap between the physical damage we see and the financial protection available?

[00:25:56] JO RICHARDSON: Yeah, and I mean, I'd make one point even before we start on that question, which is insurance companies' business is to take premiums and suffer some losses, but hopefully not too many losses. Right, right. Insurance companies, if they pay away protection for all their insurance, are not an insurance company; not going to make any money. They have to balance the premiums they're getting and their investment returns and manageable losses in a "controlled" way. And I think what the cat bond market tells us, or even what some of these events tell us—and I'm in fact going to hark back a bit to my earlier days where, if you can believe it, I was very active in structured credit and tranches in the mortgage crisis—these are the highly correlated events that insurance companies want. Get offer insurance on loads and loads of de-correlated events so that only a few of them happen and they're getting premiums on all of them. Whereas if suddenly you've got an event that is so severe and so correlated in terms of your losses, that it is almost like the super senior tail event in insurance land of what you're talking about. That is of course when you may need to go out and seek additional protection. I think that's the insurance gap we're talking about here, potentially. But so, it's only ever going to be that kind of tail amount. But then I think what's also really interesting about the scenario you just mentioned with the LA wildfires and potentially the rebuilding is one of our views as well, and a potential positive that can be incited by some of these products, is: can you use them to incentivise the right sorts of adaptation and resilience spending?

Mm-hmm. So, let's now say you own one of those extremely high-value properties in LA, and you now need to rebuild it, and you are concerned about insurability or lack of insurability. One would hope there can be a conversation on the lines of: if you rebuild your property using these extra resilient fire protection metrics and leave fire gaps and do all of this resiliency investment in your product, your insurance premium will be X. And if you don't, then your insurance premium will be either impossible to get or significantly higher. Right? And that's obviously a very small-scale example of how insurance premiums and even the cat bond market—which is showing you the price for the tail risk of these markets—can incentivise risk-lowering investments in adaptation and resiliency.

[00:28:17] JOSEPH JACOBELLI: So, what we often think of these as are tools for insurers, right? But how can sovereigns or, I don't know, large corporate entities or others use these instruments to manage their own physical climate risks?

[00:28:32] JO RICHARDSON: Yes, and there certainly have been a couple of really interesting case studies on the sovereign side. So, as mentioned, we talked about the standard structure, which is for the deal sponsor to be perhaps a reinsurance company or an insurance company who uses this to offload their risk. But in fact, there have been some sovereigns who've used them to also fund and get tail protection themselves. The World Bank, in fact, has a really interesting programme where it uses this market to fund its disaster protection; they call it the Capital at Risk Programme. It's reported so far to have issued just under $5 billion of cat bonds. And this programme was also behind something that got quite a lot of press at the time, which was the Jamaica issuance. So, Jamaica had bought disaster protection via the cat bond market via a World Bank issued bond twice. And then unfortunately it was hit by Hurricane Melissa at the tail end of last year. And one of the cat bonds paid out and I think what got a lot of good news stories there wasn't even so much that Jamaica had bought protection and therefore used this to diversify its risk and insure itself; it was actually that, because of the perhaps private sector nature of that transaction, it received its money very quickly. And it received its money really still while it was in the throes of cleaning up and supporting its people after that terrible disaster.

[00:29:53] JOSEPH JACOBELLI: Yeah. And kind of people tend to forget that when a whole area gets completely wiped out, be it by a storm or a wildfire, I mean, we're talking about some very major reconstruction here. The cat bond market has largely been so far North America. I mean, not just North America, but a lot of it has been in North America. Turning to Asia now, we see massive climate exposure in the Asia region but a relatively young cat bond market, right. So, what is the... I mean, if you were to kind of look through your glass bowl of forecasting, what is the scope for growth in Asia, do you think?

[00:30:35] JO RICHARDSON: I mean, exactly as you say. There aren't that many transactions necessarily, though I'd love to share a few examples. There's quite a lot of potential for growth there because it really hasn't developed the products as much as others. And I think, as you say, there are lots of the same factors at play that would make it a suitable product. So certainly, at the moment, the majority of these insurance company issued structures tend to be listed in Caribbean islands and tend to have their insurance company or deal sponsor be North America, but it's worth pointing out a decent number of them—I know Japan and earthquakes, right? Especially in light of, for example, obviously the tsunami from maybe 15 years ago—has been a feature and has always featured as one of the perils as covered, even if it's perhaps a US insurance company who's seeking protection from that. There have been Asia perils listed. I mean, the sovereign transaction I just mentioned as well, where we saw Jamaica use the structure in order to protect itself from hurricanes, we have also seen similar transactions done by the Philippines. The Philippines issued one of these bonds in 2019, also buying protection against tropical cyclones. And in fact, a payment was made under one of those bonds in 2022 after Typhoon Rai. So, we have seen sovereigns in the region do that as well. And I think that whole World Bank programme targets a number of different regions, and one would think that would be quite suitable for ongoing use amongst Asian governments.

[00:31:58] JOSEPH JACOBELLI: Right. Especially because there's so many countries in Asia that are prone to flooding and it's pretty scary. How is the cost of insurance actually translating into the development of, or growth of, transition investment, especially for adaptation and resilience?

[00:32:20] JO RICHARDSON: I mean, this is probably still me, hypothetically telling you how I think it should be and what I think should be the dream of these things. But as we say, investments in adaptation and resiliency reduce risks. And insurance companies and insurance premia are in the market of pricing risk. And it's not just, say, areas where they now can't be insured. And of course, insurance companies commercially want to offer as much economically rational insurance as they can. But also, it's a competitive market. So, if you do things that lower your risk, insurance companies should rationally offer you lower premium for that. So, I think this is a really powerful route to transmitting the financial benefits of adaptation and resiliency. So, I think in terms of transition investments, to the extent that transition investments can be directly linked to lower insurance premium, this is a really powerful route to incentivise those.

[00:33:12] JOSEPH JACOBELLI: Mm-hmm. That's great. Jo, second last question. And it's about your outlook. I mean, you've been, although you're still extremely young, you've been around the block a couple of times, so you've seen a couple of market twists and turns. If you were to tell somebody, how would you see the future over the next three to five years, and also maybe over the next 20 to 30 years? How do you see the relationships between fixed income and climate risk evolving? Will we see climate risk become a standard metric as credit risk?

[00:33:48] JO RICHARDSON: I mean, I think I'm probably older than you think, but I will take the question anyway. Bigger picture, my answer definitely has to be yes. Right? I, as said before, unfortunately, do passionately believe that we're on the brink of a regime shift that we unfortunately have not seen the like of before. More specifically, of course, I wonder if the question is really whether climate risk is a standalone factor, or of course it integrates into so many existing risks. But what I find interesting about your question particularly, and I want to also answer that through the lens of being some kind of geeky bond person, is actually another lens through which the fixed income market is so important is that duration. And the three to five... it's one of the few places where you have a 20-to-30-year outlook. Because if you're lending 30-year money to some company via a fixed income instrument, you are locked into that period of time, obviously. And you can really see the time horizon of these things quite differently. So, for me, fundamentally transition risk and business feasibility risk and profitability will feature much more heavily in general credit risk going forward. I mean, it has to. And actually, it's through those long-dated bond curves. We've done quite a bit of pricing work, for example, on long-dated oil and gas bond curves. Are they pricing stranded asset risk correctly? Are they pricing transition risk correctly? In the short term, we might have a clearer handle on what can happen in three or five years, but 30 years is a long time and there is tremendous uncertainty in my view.

[00:35:13] JOSEPH JACOBELLI: No, that's absolutely excellent. And I, well, I couldn't agree with you more. But let's not have a conversation with two people who actually agree with each other though: it's too positive. But on a completely different note, we started this feature with the last episode. If you don't mind, Jo, a recommendation that you have for listeners? It can be a book, it can be a report, it can be a movie, it can be a documentary, whatever is something that you'd like to recommend?

[00:35:41] JO RICHARDSON: I would love to, and I confess I've got two, if that's okay?

[00:35:44] JOSEPH JACOBELLI: Sure. Of course.

[00:35:46] JO RICHARDSON: Firstly, and this may not be popular, but when I first moved into sustainability about four years ago, I read *The Prize*. Now *The Prize* is an 850-page Pulitzer Prize-winning history on the oil and gas industry. And I'm embarrassed to say I lugged a hard copy of it around for months while I was reading it. So, this begins in 1859 in Pennsylvania where they discovered oil. Actually, for me, this was really important reading. I think you do have to think about the broader context of how we got to where we are. And it's very easy within the sustainability community to be extremely dismissive of the role that fossil fuels have played in history. And maybe this is a "know-thy-enemy" approach to transition. But I knew nothing about the oil and gas sector, and this is a riveting read to the extent that a 900-page book can be considered as that.

Secondly, I also believe very much in the need that individuals need to connect with nature. If we don't experience and enjoy and appreciate local nature every day from a young age, why would we fight to protect it? And I do think on an individual basis, we all should connect with what we love and enjoy the most. I rave about Sir David Attenborough, who has just released a documentary on *Wild London* showcasing some lovely ecosystems that exist around us every day. It's fantastic. And I'm actually fortunate enough to live right next to Epping Forest, which is an ancient woodland in north-east London. And there is a super podcast on its ancient trees, which is called *Tree Amble*, and I certainly find these sides very interesting for me. You do need to know what you are fighting for.

[00:37:32] JOSEPH JACOBELLI: That's fantastic recommendations. And of course, a third recommendation, which I'll make on your behalf, is your report *What the Catastrophe Bond Market Could Be Telling Us About Climate Risk*. Jo, this was a fantastic conversation. Thank you so much for taking us through, first the 101 and then real-life examples and some thoughts about the future. Really appreciate your participation in Asia Climate Finance.

[00:37:55] JO RICHARDSON: Thank you so much.

[00:37:56] NARRATOR: Please note that the Asia Climate Finance Podcast is provided for educational purposes only and does not constitute investment advice. Any information discussed should not be relied upon for making investment decisions. Listeners should always seek advice from a suitably qualified and authorised investment professional. The views and opinions expressed by guests are their own and do not necessarily reflect the views of their current or former employers or of the podcast host or producers.

RECOMMENDATIONS: 

The Prize: The Epic Quest for Oil, Money, and Power: Jo recommends this 850-page, Pulitzer Prize-winning history of the oil and gas industry. It tracks the sector from its discovery in Pennsylvania in 1859 and provides essential context for understanding the role fossil fuels have played in global history.

Wild London: A documentary by Sir David Attenborough that showcases the ecosystems existing within the London area.

Tree Amble: A podcast focused on the ancient trees of Epping Forest, which Jo suggests as a way for individuals to connect with and appreciate local nature.

What the Catastrophe Bond Market Could Be Telling Us About Climate Risk: Joseph Jacobelli recommends Jo’s own report, which provides a deep dive into how "cat bonds" act as a tool for pricing the future of the climate economy.