[Cities 1.5 main theme music]
David 00:03
I'm David Miller and you're listening to Cities 1.5, a podcast by University of Toronto Press, produced in association with The Journal of City Climate Policy and Economy and C40 Cities, a global network of nearly 100 of the world's megacities, committed to accelerating climate action. C40's mission is to halve the emissions of its member cities within a decade, while improving equity, building resilience, and creating the conditions for everyone, everywhere to thrive. Join me as I connect with leading mayors, experts, policymakers, and youth leaders who are helping ensure a 1.5-degree world by leading city-based climate action.
Each week, we delve into the necessary transformative solutions to today's most pressing climate challenges. The fight for an equitable and resilient world is closer than you think. [Cities 1.5 main theme music fades out]
[urgent music] For much of the 20th and 21st centuries, climate action has been delayed by arguments that it's "too difficult" or "too expensive" but, in the face of increased extreme weather events, we are being forced to confront some hard truths. Climate breakdown is happening and the cost of ignoring this phenomenon will be far greater than the cost of immediate action. [music fades out] This means that we need to stop financing fossil fuels, and instead, start financing the clean economy of the future, which is the goal of the divest/invest movement.
[upbeat, energetic music] We know that green investments promote the transition to a more resilient, prosperous, and sustainable economy, but what are the steps that cities need to take in order to shift their investments away from fossil fuels? What should policymakers be thinking about in order to support the creation of good, green jobs, while still protecting the climate? The finance required to support a clean transition and pay for much-needed urban adaptation amounts to trillions of dollars – that's trillions with a T. Access to capital for investment will play a large role in determining which cities, and the people and places within them, are exposed to—or protected from—the harshest effects of the climate crisis. [music continues]
In light of the increasing loss and damage associated with the use of non-renewable resources, many private and public financial institutions, such as bond rating agencies, banks, and insurance companies, have already started making adjustments to their underwriting, lending, and investment practices by including climate risk. Cities need to be aware that their investment funds, like pensions, face climate risks too. As the shift to renewables speeds up, divestment from fossil fuels will not only make environmental sense, but also financial sense as investments in fossil fuels become increasingly risky. [music continues]
It's critical for cities to understand practices of climate risk assessment and valuation in public and private finance in order to unlock the necessary resources for climate action, because cities can start taking key actions now to help them divest. [music continues then ends]
In this episode, we speak with three special advisors to help us gain a better understanding of the risks and the opportunities of divestment. [light, rhythmic music] First, I speak with Dan Zarrilli, the Special Advisor on Climate and Sustainability at Columbia University in New York City, where he is supporting the creation of its new world-leading Climate School and advising on pathways to achieve the university's decarbonization goals. Dan will also be sharing his experiences with divest/invest as the former Chief Climate Policy Advisor to the New York City mayor's office.
Next, we'll hear from Savannah Cox and Zac Taylor in conversation with Rachel Huxley, the Deputy Editor of the Journal of City Climate Policy and Economy, and the Head of Climate Mitigation and Health at the Wellcome Trust. Savannah and Zac are special advisors to the Journal's special issue – Changing Urban Riskscapes: Climate Change, Finance, and the Built Environment. These experts explain how vital research is on this topic, and how issues relating to climate justice intersect with finance. So, let's go. [music continues then ends]
[percussive and orchestral music] Dan Zarrilli is the Special Advisor on Climate and Sustainability at Columbia University in New York City. He joined Columbia University from the New York City mayor's office, where he served most recently as Chief Climate Policy Advisor. During his time working in the mayor's office, New York committed to divesting entirely from fossil fuels. Dan supported Bill de Blasio, the former mayor of New York, and the current C40 Chair, Mayor Sadiq Khan of London, when they founded the Divest/Invest Forum, an initiative aimed at building capacity and knowledge-sharing for cities about divestment. Dan joined me remotely for a conversation on July 19th, 2023.
Today, I'm delighted to be speaking with my good friend, Dan Zarrilli, about his perspective on the divestment/investment movement. Dan, thanks so much for taking the time to talk with us today.
Dan Zarrilli 06:22
It's really a pleasure to be here. Thanks, David. It's good to see you.
David 06:25
How are things at Columbia?
Dan Zarrilli 06:26
Things at Columbia are great. We are creating the world's first climate school here at Columbia University. We've graduated two classes of students.
David 06:35
Oh, wow.
Dan Zarrilli 06:35
Really training the next generation of climate leaders that are going to be developing and implementing the solutions that we all need. It's a really exciting time here at the university. There's a lot of energy around what we're doing here on climate, both on our own campus, as well as what the Columbia Climate School is doing and how we are spurring research, educating students, and engaging with the world on climate solutions. It's a pivotal moment, and no better place to do it than in New York City.
David 07:04
Well, of course, given New York City's very strong history of climate action. New York has really been a climate leader, including when you worked in the office of the mayor. When you were in New York City, you were instrumental in the city divesting from fossil fuels. In fact, Dan and I were at a press conference together with Mayor de Blasio when the mayor announced this. Can you talk a little bit about why divestment matters and why it mattered so much to New York?
Dan Zarrilli 07:34
It was such a great event that day, announcing our initial commitment to divest, and then the next several years—which we'll talk about on this podcast—of delivering on that commitment. And maybe it's worth saying a word about the context in New York City, of course, which is that New York City has long been a leader on climate change, and the city has been investing billions of dollars in adaptation, putting new policies forward for decarbonization, for environmental justice, just a range of actions, Local Law 97 being probably the most prominent, which is a mandatory building retrofit for existing buildings that is now being implemented. So, there's the history of adaptation and mitigation efforts, environmental justice efforts all across the city, and it's really transforming New York City.
Divestment was very much a new avenue for the city to pursue, and it came from a couple of places. One is that we looked around at all of the levers that we have to pull to tackle the climate crisis, and all those things I mentioned, slashing our greenhouse gas emissions, and preparing for future risks, doing it in ways that are equitable across our communities, all of those are really important. And then we looked at our pension system and said, "Well, wait a minute. We're still investing in what is causing the problem of climate change, primarily the burning of fossil fuels," and that didn't seem right to us, and so there was clear disconnect.
But what was also clear is that the policy landscape, globally, is driving away from fossil fuels. Now, the world is still far too dependent on fossil fuels at this moment, but we can see where the trends are, whether it's the Paris Agreement or things like the Inflation Reduction Act now, all of the momentum is, "How do we decarbonize? How do we get ourselves off of fossil fuel?" And I think that was how we started the process of thinking about what it would mean to bring our pension investments, the retirement security that the workforce relies on for their retirements, to bring that in line with where the world is going to be and really account for climate risk in our financial investments. It was a clear set of conversations that came about from the mayor, from the comptroller, from the trustees, that led us to a place where we were sitting in that room together, announcing a commitment to divest.
David 09:54
So, announcing a commitment is one thing, and that was an important moment and significant, globally, that the city government of the world's leading financial centre would announce that it was divesting from fossil fuels. Actually, doing it is a separate but important challenge, particularly given that the pensions are at arm's length somewhat from the city, although the mayor has power to appoint the trustees. Can you speak a bit about how New York went from the kind of analysis you just spoke about, about the importance of not investing in the problem as one way of addressing climate change, to actually being able to ensure that the pension funds did get out of their investments in carbon pollution?
Dan Zarrilli 10:42
Well, it started first with a series of analyses, looking at, "When you talk about fossil fuel divestment, what are you actually even talking about?" In the case of New York City, we were very focused on fossil fuel reserve owners... [gentle music] It's the companies that own oil, coal, gas that's still in the ground, and presents an opportunity for stranded risk, meaning things aren't worth as much as we think they are because those fossil fuels may end up staying in the ground.
David 11:11
And should stay in the ground.
Dan Zarrilli 11:12
And should stay in the ground. [chuckles] But the analysis had to look at this from very particular points of view, of satisfying the fiduciary duty and to make sure that we are clearly not harming the retirement security for the New York City workforce, and acting in a prudent manner, and those are very particular terms of art in the investment world. Fiduciary duty and the prudence standards – those clearly needed to be satisfied. [music fades out]
And so, we embarked on what felt like a—at the time—maybe far too-long study to figure out how to define what we were getting out of what the financial implications may or may not be and developing the framework for how to sell securities along that path line. And, you know, when we initially made the commitment, it was a five-year commitment. Thankfully, you know, there was no call to do anything sort of like the next day or immediately. Like, we really did need to take a deliberate approach to analyzing this, bringing it back to the trustees of the pensions, letting them deliberate on that, understanding that we were acting within our fiduciary duty to divest from fossil fuel reserve owners, and ultimately setting a five-year target. It took almost that entire amount of time to be able to come back and get to a positive resolution with three of our pension funds to divest, so it was the end of 2021 when the announcement was made that the city had sold over $3 billion of assets of fossil fuel reserve owners, consistent with the fiduciary duty and with the full approval of the trustees of those three pension funds.
David 12:53
I think that's a really important point for the divestment movement. Whether it's city based like New York, but also hospitals, universities, others who have pension funds, it's really important to understand that there's a process. You can have the goal, but the trustees have a fiduciary duty, and the kind of analysis you just spoke to, I would assume would apply to those kinds of institutions, as well.
Dan Zarrilli 13:25
Pensions are very much treated particularly, and for good reason, because they are the retirement security for the workforce of the city of New York. I think it's also important to note that the union leadership that represents that workforce is represented on the board of trustees for the pension funds, and so they're a key constituency and, at the end of the day, they stood with us to make this happen, which was, I think, an incredibly powerful show of support for what was happening in order to divest from fossil fuels and to demonstrate that it can be done in a way that satisfies the fiduciary duty of the trustees and improves their financial position over time.
David 14:00
From that example, and from your other experience while you were at New York City—Mayor de Blasio obviously took a leading role here—what is the ability and the power of mayors to influence divestment and the broader divestment movement beyond cities?
Dan Zarrilli 14:18
It's such an important point. I make this all the time when we talk about what New York City did—particularly on divestment, but on other things as well (Local Law 97)—is that leadership matters. This is not something that is going to just bubble up and be done on a technocratic basis. You know, we had to do all the analysis, we had to do the policy support, but when it came time to making a decision, this was something that Mayor de Blasio, at the time, saw the power of what we were doing, saw the pathway, saw that the policy work was solid, and put his voice and the bully pulpit of New York City fully behind this effort. And that was critical – one, locally, in order to help bring the other trustees into the conversation so that they could begin learning and understanding and getting comfortable and understanding the analysis that led to the fiduciary decision at the end of the day.
It was also critical that Mayor de Blasio and Mayor Sadiq Khan in London came together to form with C40, the C40 Divest/Invest Forum. And then, we're able to bring along a dozen other mayors from multiple continents that were either going down the road of divestment or were curious about it and wanted to learn more, and we were able to build that network of mayors and cities to help others take those steps to make that commitment to learn more about it, and to work in partnership. And I think the ability to drive media on that was helpful. It helped people realize that divestment wasn't some fringe activist thing. It's actually a solid risk management approach to the climate risks we face, that there are clear financial risks to the portfolios—to their retirement portfolios. They need to be accounted for and, in a lot of ways of thinking, not dealing with those risks could be considered a violation of your fiduciary duty, and I think helped to change that conversation.
David 16:12
It's interesting. If you do a headline search for "divestment" before New York's announcement and before London acted, there's lots of headlines about pressure groups and civil society saying you should divest. These were the first real announcements of major pension funds divesting, and then you start to see afterwards, universities and others divesting. The path that New York showed actually really made a very big difference to the movement as a whole, so congratulations on that. You encountered opposition from the fossil fuel industry, its allies, and organizations that it creates. [driving music] Can you speak to the kind of messaging or myths that the industry used to try and fight back against divestment and any lessons you learned about how to fight back against that?
Dan Zarrilli 17:10
I mean, there's lots of things that were thrown at us, and I think, you know, like many things with the fossil fuel industry, they throw a lot just to see what sticks. First, it was, "This doesn't actually do anything to address emissions." Well, I think there's been a lot of myth-busting on that one and there's been some recent analysis that showed, you know, the divestment movement actually is driving people to emit less because it's driving more investment into renewable solutions. I think there's been the myth-making that you're going to lose money or that this isn't really going to impact the fossil fuel industry when, in reality, they've been disclosing that the divestment movement is a material risk to their finances. It's raising their cost of capital, it is having an impact, they are noticing it. [music fades out] And then, of course, the stock criticism of, "Well, you know, the world is still running on oil," and while that's true, at this point, it turns into an argument of, you know, "We haven't moved fast enough, so slow down." It can be seen, all over, as a pushing back against climate action, that we should take our time, we should slow down, when in reality, we should be moving as much of this as quickly as possible and doing it right.
David 18:17
So, you're now at Columbia. We spoke earlier in our conversation about some of the great things that the university is doing. Just to speak to divest/invest, what's the role of academic institutions and their research?
Dan Zarrilli 18:30
I mean, universities are critical to so many areas of tackling the climate crisis, and I think divest/invest in particular provides an enormous amount of data to work with to help understand, "What are the right solutions? Are we evaluating what we've done and making sure that we're heading in the right direction, learning from that, course correcting?" There's a lot, I think, that, you know, university research can be incredibly helpful. There was a recent study out of the University of Waterloo recently that's, I think, a great case study of this that showed, over the last 10 years, that public pension funds would be billions of dollars richer if they had divested 10 years ago.
David 19:11
That is very interesting.
Dan Zarrilli 19:12
Yes. Yes. And so, you know, and this is maybe not inconsistent with the long-term trends of fossil fuel use, that there's a right moment to sell high, which I guess everyone should be trying to do, but over time, you're going to miss your moment in the market to do so, and the longer you stay in, the worse off you're going to be. And I think that's also the incredibly powerful lesson of what New York City and other cities that have divested, like London, have learned at this point. Short-term fluctuations aside, of course, the long-term trends are clear, and even in the last 12 months, you know, investment portfolios without fossil fuels are doing better than they are with fossil fuels. The long-term trend is clear.
David 19:49
In that context, where's the future of the divest/invest movement? Where do you see it going from here?
Dan Zarrilli 19:55
Well, I guess what I see is things that have happened in New York have helped point the way on this, and it first started with a divestment commitment, which was delivered upon. Then, you were there, as well, when we announced that we were going to be doubling our investments in climate solutions with the pension funds – solutions that of course, you know, make returns for the pension funds, but that was delivered upon. And then, most recently, the New York City Comptroller released a net zero investment portfolio plan, a plan that is not just focused on the fossil fuel reserve owners, but also just the role of fossil fuels throughout the portfolio, and with a really thoughtful approach of disclosing climate risk, engaging with companies, you know, across all areas of the supply chain, and just all sectors of the economy, investing greater in climate solutions, and then ultimately divesting from those companies that are not transition compliant or, you know, moving towards a net zero world.
So, things that are happening right now in the pension funds have evolved even further in a great direction for really thinking about what a net zero portfolio needs to look like, and aligning our financial responsibilities and our financial actions with the requirements of a world that is no longer reliant on fossil fuels.
David 21:12
[percussive and orchestral music] Well, it sounds like, yet again, New York is setting the path forward, in a very detailed and professional way, about how we can ensure that the transition to clean energy future is financed, and that cities and their pension funds aren't contributing to the continuation of carbon pollution. So, I think you should take some credit for that, Dan; that's your legacy, your hard work. And whether it's in New York City or Columbia, I want to thank you for your climate leadership, and thank you very much indeed for being with us today on Cities 1.5.
Dan Zarrilli 21:47
It's a real pleasure to be here, David. Always a pleasure to talk. [music continues then ends]
David 21:53
[light, rhythmic music] Zac Taylor is Assistant Professor in the Department of Management in the Built Environment at Delft University of Technology in the Netherlands. His research advances critical and practical knowledge of climate finance, with the place-specific challenges of urban climate action. Savannah Cox is Assistant Professor of Human Geography at Loughborough University in England. She is an interdisciplinary qualitative social scientist studying urban planning for climate change and urban climate justice with a focus on financial systems and infrastructure. Both of these guests are experts in the consideration of climate risk by financial institutions in urban planning. [music ends] Savannah and Zac joined our guest host, Rachel, for a remote interview on July 6th, 2023.
Rachel Huxley 22:45
My name is Rachel Huxley, Deputy Editor of the Journal of City Climate Policy and Economy, and it's a real pleasure to be back on the podcast for an interview with Savannah Cox and Zac Taylor. We are interviewing them because they are two of the fabulous guest editors of an upcoming special issue in our journal on urban riskscapes. This special issue looks at finance risk and urban climate action, exploring how risk is assessed and how this shapes investment in adaptation in cities. I wanted to start by asking you both what led you to specialize in this area of research. So, how come you ended up geeking out on urban finance and risk? Zac, I'll come to you first.
Zac Taylor 23:34
Yeah, sure. For me, this really comes from my experience growing up in Florida. I'm a child of hurricane season, of experiencing, in particular, the 2004 and 2005 hurricane seasons, which were really destructive there, and feeling quite aware of climate risk in my home. And, at the same time, I'm also a child of the global financial crisis; that was a really formative moment in my educational experience as a university student, and it was really a financial crisis that was rooted in particular places and in particular questions of how we finance urban development. It was a real estate and a foreclosure crisis that really impacted Florida. And so, I was always really interested in both this question of ecological risk and this question of finance and how finance shapes the built world, and for me, it's always been a question of how to bring these things together. And for me, I thought that this would take me to urban planners, to mayors, to adaptation specialists, but in my research over the past 10 years, it's taken me to finance.
Rachel Huxley 24:38
Savannah, how come you ended up in this field?
Savannah Cox 24:40
I'm also from coastal Florida and, as with Zac, you know, hurricane evacuations were really a regular part of my childhood, as were the anxieties about, you know, what would or would not await me when I returned home from the evacuation process. So, here, insurance was pretty essential. So, I would have classmates who would return to flooded bedrooms, tattered roofs, and so on, and it would take months for anything that looked like repair to happen, right? And that's because of these protracted insurance battles that their parents were dealing with at home – you know, questions of who is responsible for what damage and why, and, you know, what has to get done to address that damage going forward.
And so, you know, moving on, I moved away from Florida and to other places, but those questions seemed to follow me, unsurprisingly. Climate change is everywhere. So, in New York where I went and got my master's degree, it was Hurricane Sandy and insurance. In California, where I did my PhD, it was these historic wildfires, with insurance and debt being these really thorny drivers of subsequent debates about who was responsible for what and why. [pensive music] And so, thinking pragmatically, it really seemed to me that these are the questions that go a long way when it comes to explaining how climate change plays out as it hits cities, and, you know, how adaptation actually happens. It's not this anticipatory practice, as you learn in your urban planning class. As much as I wish that that were, like, how it always happens, it can also be reactive and unplanned and driven by these really arcane financial things that Zac and you were just describing, that we don't often think about, but that are so fundamental to the making and unmaking of urban life. [music fades out]
Rachel Huxley 26:29
Fantastic. Thanks. And I think that paints such a clear picture of why this matters. Like you say, these are arcane sort of hidden topics that most of us don't really want to think about, but they really land in our lives in very, very fundamental ways. So, the impacts of climate change are already upon us from the wildfires and the hurricanes that you were just mentioning just now, Savannah, to many more, and these impacts will intensify in the future, so it's imperative that we make our cities more resilient to climate change. So, in your work looking at urban climate action, you've ended up focusing on finance and risk, so can you just unpack for us a little bit more why? How is that related to this challenge of needing to make cities more resilient?
Savannah Cox 27:17
So, I think the first, you know, almost, like, painfully obvious point is that climate adaptation, climate resilience is massively expensive. You know, cities around the world will need to spend trillions of dollars each year to adapt to the effects of climate change, and just for context's sake, we haven't really seen that calibre of capital mobilization since World War II. And often, like World War II, where that money was spent and developed on projects very quickly, with respect to adaptation, these resources are not flowing. They're not being mobilized at the rate that they need to be. Way more money is currently going to mitigation rather than adaptation projects, despite the fact that we've already blown past [chuckles wryly] a number of emissions reductions targets, which makes, you know, adaptation an unfortunately urgent matter.
But basically, you're seeing these public and private financial institutions, so thinking rating agencies, reinsurance companies—so the insurance companies that insure insurers—and government finance ministries, they're starting to adjust their risk assessment practices in light of climate change and the financial losses that it's bringing with it. What does this look like, practically? Well, some insurance companies in the Caribbean, parts of the US, are starting to raise premiums or pull out of some markets entirely, due to increase losses associated with climate change. And in areas that have been ravaged by wildfires, for instance, or stand to be negatively impacted by sea level rise, we're starting to see mortgage underwriting fees increase and discussion about whether to turn the 30-year mortgage to fall into a 20- or even 15-year mortgage so mortgage markets don't really have to hold on to that risk of default for as long. And these changes obviously stand to have significant equity impacts, so on mortgages, it will make the cost of buying a home even more expensive and push low- to medium-income folks out of an already tight and seemingly impossible market to crack. Similar effects hold for insurance. You know, what can't really be insured is often devalued, meaning that individuals, businesses, communities, and cities, or parts of cities that are deemed too risky for insurance will face significant downward economic mobility.
Rachel Huxley 29:39
So, we're seeing there's a need for a huge amount of money, and the way that that risk is being assessed is absolutely impacting on whether people can get insurance, afford houses. Zac?
Zac Taylor 29:50
[gentle music] I think it's important to say that these things hit the ground in cities in all sorts of different ways, and this sort of interaction between public and private financial institutions and interests creates, I think, quite difficult puzzles that indeed look very different around the world. Savannah and I have both spent a lot of time thinking through this puzzle, in Miami, for example, and here we find different stories of what you could call urban finance and adaptation puzzles. Right? We have the famous story of Little Haiti, in the higher elevation areas of Miami, attracting a lot of attention around the world as a ground zero for what we call climate gentrification. And partly what's going on here are financial market drivers, real estate market drivers, land speculation that are underlying this, so one set of financial drivers, but we also see, in other parts of Miami that maybe we talk about less, places where you have more middle income, modest homeowners, often communities of colour, that have historically struggled to access the promise and the project of home ownership, really facing those, not only high insurance rates, but increasing property tax bills to finance infrastructure that needs to be climate proof. [music fades out]
And we could go on and look to other areas like Miami Beach, where you have a very prosperous property market. You have a lot of financial capacity in that community to leverage municipal bond markets, to raise capital for infrastructure. You're able to secure some places and not others, and when we shift to other places around the world, indeed, we see stories that are reminiscent of Miami. We see different stories where access to multilateral capital through institutions like the World Bank is really important for mediating the kinds of resources that nations and, in turn, cities have access to. Similarly, we see interesting innovations with regional sovereign risk-financing instruments, where multiple countries are working together to try to finance certain types of loss prevention and adaptation, but these are very early days.
Rachel Huxley 32:01
So, climate change is a game-changing thing. This is changing how people are thinking about it. Can you tell us a little bit about why and how climate change is starting to impact that? I mean, you've touched on it already, but what are the trends that we're seeing, and what will that really mean for urban climate action?
Zac Taylor 32:16
On the one hand, you know, there's a lot of discussion about explicitly unlocking finance for climate adaptation goals, and on the other hand, what we see is a sensitization of financial markets, in general, to climate change and to climate risk. And that's why we get this sort of muddy puzzle where mortgage finance becomes climate finance, right? So, as mortgage institutions, for example, wake up to climate risks, suddenly, there's a sort of climate impulse that goes into their business, that has impacts on the ground, and also impacts for what kind of futures are possible in those places. And, of course, that links to other questions about resourcing adaptation in the sense of infrastructure projects, and so on.
So, we've got these two things playing out at the same time, and to really step back, what we see is a real growing awareness in the financial sector, itself, about climate risk, and a concerted effort to try to develop shared understandings, methods, processes for analyzing this, and that's everything from sourcing the right data to drawing on the right tools—whether they come from climate science or insurance approaches—to finding the right ways to regulate it, the right ways to integrate that and make it actionable in financial institution practices as they relate to particular places.
[pensive music] So this is really a kind of story that we see happening right now, and within that, we see networks of financial institutions becoming really important places where decisions about climate risk and how to manage it are being made. We also see particular types of institutions, like ratings agencies such as Moody's and S&P, playing a really key role in consolidating a perspective on how climate risks should be evaluated with regards to financial transactions and their rating, which means, ultimately, the cost of capital, and we're seeing all sorts of institutions, whether they be insurers and reinsurers, or real estate investors, or any other number of institutions really begin to scrutinize cities directly, and here there are questions about what types of climate risks are relevant to those places, and how they can be translated into investment risk or credit risk.
And so this is a really interesting open frontier where we see a lot of open debate. We see experimentation, we see institutions already beginning to make decisions by increasing the premiums they charge to policyholders in particular places or walking away from investments. But we also see, I think, an opening here – unresolved, ongoing conversation about what aspects of climate change and what aspects of climate adaptation are relevant to the financial sector and what roles they can possibly play in this conversation.
Rachel Huxley 35:20
A couple of things that came out for me was that, as the financial sector wakes up to climate risk, we're actually seeing this kind of perverse impact where it becomes more expensive and less available, the money, when we need more of it. Is that way too simplistic?
Zac Taylor 35:36
No, it's not simplistic. I think the challenge here is the tension between what is financially prudent for an investor or a reinsurer is not necessarily congruent with the immediate needs of resourcing adaptation. Right? And there are lots of tensions here. So, you know, to make it really explicit, my pension fund here in the Netherlands is one of the biggest investors in the insurance products that keep Florida's property market afloat. So, should my pension, which is protecting my financial future, should it continue to invest in those products which are really key to keeping Florida's market afloat, or should they avoid the risk and focus their investment elsewhere? So, there are all sorts of these very thorny questions about financial stability, about what good financial stewardship means right now in a warming planet, but yeah, indeed, we're seeing institutions wake up and, if they act in isolation, without a strongly-regulated, well-thought-through approach to really using our collective resources smartly, there really is a risk that they pull their capital out of places that really need it now to adapt. And it's definitely a concern; it's something that really keeps me up.
Rachel Huxley 36:54
Savannah, I'm going to bring you in. Anything you want to add here in what's changing about how risk is being assessed in regards to sort of the increased risk and impact of climate change?
Savannah Cox 37:08
I can speak a little bit more to some motivations as to why things are happening and why they're playing out in the way that they are. So, why is this happening now? Well, for one, there's just obviously a lot of money to be made and a lot of money to be lost, depending on the specific financial institution you are. When it comes to money to be made, are you purchasing, are you acquiring these climate data firms, and can you peddle your wares to various public private institutions that need to understand what kind of climate risks they're anticipating, and this is a move that Zac brought up – Moody's Investor Services, making it required RMS, which is Risk Management Solutions, AMIS modelling firm.
And it's consolidating this power now, obviously, to make new markets, to create new revenue streams for itself. But, they're also doing that because they know that there's significant amounts of money to be lost if they don't think about climate change, and the "right way". What the right way is, as Zac indicated just moments ago, is to be determined. I think that that's the crux of the issue. What is the right way for a financial institution to evaluate climate risk? We don't know. They're still figuring it out.
But I will say, beyond the money question, there's also this question of legitimacy. So, I focus a little bit more on credit rating agencies and municipal bond markets. A lot of critical literature suggests that, you know, these rating agencies played a big role in facilitating this past sort of financial crisis that is so sort of central to, you know, what Zac was talking about with their upbringing. And the folks I've talked to have said, part of the reason why you're seeing Moody's move so quickly and so boldly and so publicly, is to save its face, basically, to say, "Well, actually, you know, we are taking climate risk seriously. This is not going to be a problem that you can pin to us, because look at all of the moves that we're making now." It's almost this redemption narrative that I think is really important.
[gentle music] But I would also add, you know, we're talking about how financial institutions are incorporating climate risk into their operations. Well, the order of operations in the agency here, I think, works both ways. So, it's not just, you know, risk assessment sort of incorporating climate as this kind of anticipatory exercise; it's also just about the fact that climate change is already impacting economies and that's shaping risk assessments after the fact. So, financial institutions here are reactive, not necessarily anticipating things, and how they're reacting is shaping how climate change plays out.
As an example, we could turn to these massive floods in Pakistan, back in 2022. At the time, the economy was already not doing well – you know, significant amounts of debt, and, you know, the floods came, ruined its agricultural sector, and it was the nation's economy in the aftermath of the flood, rather than climate change risk, per se, that Pakistan held, that led rating agencies to downgrade Pakistan's credit rating. [music fades out] And one effect that this had is that it can be harder for a nation like Pakistan to acquire capital for flood risk reduction measures in cities and towns, going forward. So, here, the issue is not climate risk; the issue is the economy and climate change bearing down on it in a big way.
Rachel Huxley 40:33
There's an urgent need to make our cities more resilient. We're seeing that all the time. We know this is going to cost trillions—Savannah, you said the most mobilization of capital since World War II—and how that money flows is impacted by how risk is assessed by financial institutions, and we've just heard from you both how the assessment of risk is changing to take into account existing and future impacts of climate change.
Savannah Cox 41:01
I'd say that that's pretty accurate. Then we might have another example here where, you know, someone, say in Pakistan, can get a flood defense built, but it costs more than it would in the United States, and it also covers fewer areas, because it's much more expensive. The places seem to be too risky for that calibre of investment. But we also might want to think about some knock-on effects, if you will, for cities and people in cities that are protected and at a relatively low cost. So, going back to Miami Beach, which is so exemplary of one kind of adaptation, which Zac and a lot of their work is talking about, is sort of property-led, development driven. We can't afford all of these infrastructural protections, and it's likely to see more development. And over time, what does that mean? Well, further concentration of assets and a place that is still very physically vulnerable to climate change, a thus, will require even more money to protect, over time.
So, we're talking about sea walls. They're not meant to go, like, 500 years into the future. It's maybe 50, maybe 80 years, so we're gonna have to keep building to keep places like Miami Beach in place. Ian Gray calls this a "treadmill of adaptation" which I think is really useful for capturing what is going on in cities that actually do well under climate change, and which I think also speaks to the need to not let go of mitigation. The two have to be viewed together. They have to be acted on together. You cannot have one without the other. The risk can only be meaningfully addressed at its source, which is excess carbon emissions in the atmosphere.
Rachel Huxley 42:43
Zac, did you want to add anything?
Zac Taylor 42:46
Yeah, I think, when we're talking about a global challenge, when we're talking about financial institutions that are often de-localized, that makes it difficult to think concretely about what cities can do, be it on their own or in collaboration with each other. [driving music] I think there's a negotiation happening. This is a moment for learning and experimentation. I'm doing a lot of work in the Netherlands, and there's many, many differences between the Dutch context and others. There's a really strong tradition of collaboration, particularly on issues of water management – there's a very strong water management system here. And a lot of the financial institutions that are very powerful in this international story, they're also based here. A kind of interesting development here is a growing sense of recognition, and I think it comes from maybe the close connections, the rootedness of people and institutions in this landscape, of the magnitude of the adaptation. Challenges here, even in what they like to call "the world's best protected delta", are enormous, they're existential, and they are fuelling a different kinds of dialogue that I've seen so far, where actors are beginning to think about this in a more collaborative way and realize that there are limits to existing expertise, no matter how strong they might be, say, in infrastructure or spatial planning or finance, and to look for common ground, to look for kind of creative ways of engaging in this conversation.
There is a silver lining here, I think, where there is greater recognition that there's going to have to be new ways of collaborating, new ways of understanding the complexity and the enormity of the problem, that they are going to push our knowledge and collaboration approaches, they are going to require different ways of financing and different ways of framing the problem.
Rachel Huxley 44:38
I want to end with quite, I suppose, a brief but big question. What do you predict? Are the changes that you're seeing going to worsen the situation, or can they be opportunities – those silver linings that you were talking about, Zac, or a bit of both?
Savannah Cox 44:57
One reason I'm cautiously optimistic about how this might play out in the future is because, you know, we are at this really crucial conjuncture. You know, we just went through a global catastrophe – COVID-19 – and saw the extraordinary lengths to which governments, global financial institutions and alike, will go to address it. We saw massive interventions in public health, social welfare, infrastructure, investment, and so on, and, you know, some of those investments, some of those interventions stayed, some of them went away, but they happened, and it happened in an unprecedented time.
Now, some folks in the climate world—if you want to call it that—you know, they're seizing on this. They're saying, "Hey, we saw what you did with respect to COVID-19, and it's this scale of intervention that we need on climate change. You've just shown us that you can do it, and that you will do it. Now, pony up and do it for climate change." Mia Mottley, who is the Prime Minister of Barbados, has introduced a plan to reform what she calls the "architecture of the global financial system" in light of climate change, and she is using how states, multilateral development banks, financial institutions have responded to COVID-19. That is some of her blueprint here, and I think what's significant about this, is that these claims are being taken seriously.
But I think one of the reasons why these talks are being taken seriously, why they remain ongoing, is really because—and this gets to what Zac was talking about earlier, and what I think we really need to hold on to, is—progressive mayors, these progressive urban policy makers, planners and so on, people who live in cities and care about the future of the city, is that we're still figuring out what kinds of problems climate change actually is. [urgent music] But actually, Mia Mottley is turning this on its head and saying, "Exactly, it is an economic problem." And one way you strengthen economies is by strengthening the people who constitute it. So, I think, you know, in other words, because climate change avoids easy sort of classification or resolution as a kind of problem in the world and how to address it, there's so much opportunity here for progressive mayors, policymakers, and activists to intervene and really shape how all of this plays out in a positive way.
Rachel Huxley 47:28
Thanks so much, both, for your time today, and it's just been incredibly fascinating and a real privilege to talk to you both about such a tricky, complex topic.
Savannah Cox 47:39
Thank you. [music continues then ends]
David 47:47
[upbeat, energetic music] Coal, oil and gas, the non-renewable resources of our planet, are no longer the so-called good investment they used to be. The long-term outlook on these non-renewables is poor, while the risks for investment in these resources are increasing rapidly and these risks aren't just from a health, planetary, and environmental perspective, but from an economic perspective as well. Cities can—and are—leading the way on divestment to make for a brighter future, but they need to start now to make it happen, and to better protect their residents from future climate and financial shocks. [music continues then ends]
[Cities 1.5 main theme music] On the next episode of Cities 1.5, we're taking a closer look at a phenomena we all experienced firsthand this past summer – extreme heat. Featuring Eugenia Kargbo, the Chief Heat Officer from Earthshot nominee, Freetown, Sierra Leone, and Mayor Kostas Bakoyannis of Athens, Greece. You won't want to miss it.
[music continues] Thanks for listening to Cities 1.5. I'm David Miller, the Managing Director of the C40 Centre for City Climate Policy and Economy. I was the Mayor of Toronto, Canada, and know, first-hand, the impact cities can have in solving the climate crisis.
Cities 1.5 is produced by Jessica Schmidt. Our executive producers are Isabel Sitcov, Peggy Whitfield, Jessica Abraham, and Claudia Rupnik. Our music is by Lorna Gilfedder. Cities 1.5 is a production of the University of Toronto Press and the Journal of City Climate Policy and Economy.
To find out more, visit the show’s website link in the episode notes. See you next time. [Cities 1.5 main theme music continues then ends]