Carbon Risk Assessment in the Financial Sector

This post was first published on the blog of Strategic Sustainability Consulting on August 4, 2015

How can financial institutions and individuals factor climate change into their decisions about investments?  This question was considered at a meeting hosted by Moody’s Investors Service on Paving the Road to Paris COP21: Discussing Carbon Risk Assessment Strategies on July 27, 2015.  (The list of speakers may be found here.)

Those of us focused on sustainability are well aware that over time climate change will impact every aspect of the economy.  The finance sector is facing this fact now that governments are beginning to introduce regulation requiring disclosure of the risks that climate change poses to investors. At the meeting there was a lot of talk about France, where legislation has just been proposed to require disclosure of climate risk.  China is also considering legislation.  The European Union already requires pension funds to consider climate risk.  The SEC requires that companies disclose material risks from climate change, although the speakers described this requirement as “toothless.” 

What risks could climate change pose to financial returns?   The most obvious risk is that companies will be impacted physically (operator risks) and investors will bear the costs. The risk that seems to be most on the minds of experts is changes in policy.  As one speaker put it, “it is becoming more expensive to pollute.”  Changes in technology which may make businesses obsolete or lead to falling prices are another risk.  And there are reputational risks.

Much of the meeting focused on just how the financial risks of climate change can be quantified.  The two big sources of uncertainty are first, that we don’t know how much and what kinds of actions will be taken to mitigate climate change.  And second, we don’t know how much the climate will change.  Risk projections are usually informed by past experience, but there is no historical data that can be used to build and test models of climate risk.

The speakers presented several tools that are designed to help investors at various levels incorporate climate into their risk assessments.  Speakers from the World Resources Institute and UNEP Finance Initiative gave an overview of their Carbon Asset Risk Discussion Framework.  The framework, which provides questions to ask but no answers, provides a structured approach to assess exposure to climate risk, valuate, and manage it.  Mercer has released a report on Investing in a Time of Climate Change that is meant to help investors assess their portfolios using four climate-risk factors to assess exposure under four possible climate scenarios.  Mercer’s approach is more user-friendly because it provides answers based on assumptions about how investments in certain sectors and regions will be impacted under specific scenarios.  However, given how much is unknown, this approach obviously requires making a lot of assumptions.  2 Degrees Investing Initiative has worked with UNEP Inquiry and CDC Climat Research to produce a review of various approaches to carbon risk assessment: Financial Risk and the Transition to a Low Carbon Economy.  The Bloomberg Carbon Risk Valuation Tool (available to Bloomberg subscribers) was also mentioned in passing.

This meeting was focused on technical questions about how to assess climate risk in order to protect financial institutions and individual investors. However the speakers also alluded to the critical need to mobilize the influence of financial markets to accelerate action to mitigate climate change.   On this point, speaker after speaker emphasized the issue of the difference in time horizons for investment decisions and the major risks to investments from climate change.  Most investment decisions are made for 2-10 years, while these experts expect to see major impacts on investments from climate change only in 25-30 years.  In order to leverage the power of markets to address climate change something will have to change.


Stop Now! 'Shmita' and Climate Change

Published in Shma: A Journal of Jewish Ideas on 12/27/2014

Imagine that you’re a wealthy landowner in ancient Israel. You know the shmita (sabbatical) year is coming and what’s required: You must stop planting and let your land lie fallow for the year. You must forego a year of profit. Not only that: Over the past few years, you have lent money to your poor neighbors and now you must forgive their debts so that your neighbors can also let their lands lie fallow. If they were obligated to pay you back, they would not be able to participate. These laws are good for the fertility of the land and for your neighbor’s livelihood and dignity.  But observing shmita, and putting the community’s needs ahead of your own, requires a sacrifice from you. Would you do it?

Fast forward to today: You live in one of the world’s richest countries and you depend on cheap energy extracted from the earth for your livelihood and your lifestyle. In neighboring countries, though, people are poor. They use little energy and they have little money to invest in new infrastructure. Will you try to use energy more efficiently? Will you invest in renewable energy sources that don’t damage the earth? If you will, further warming of the atmosphere will be prevented. Your neighbors, more vulnerable than you because of their poverty, will be protected from rising seas, heat waves, and drought. But caring for their lives requires a sacrifice from you. Will you do it?

Shmita is the Torah’s prescription for environmental, social, and economic sustainability.  Today, climate change is the biggest threat to sustainability. Although the scale of the problems brought on by climate change were unimaginable in the time of the Torah, shmita addressed certain maladies of human society that have not gone away and that now threaten us with self-destruction. As in ancient times, self-interest, greed, short-term thinking, and unsustainable exploitation of people and the earth endanger our existence. Climate change is not a scientific or technical problem. The science is clear and the solutions are ready; it is an ethical problem. Will we, who have benefited from the burning of fossil fuels, take responsibility for the damage and make it right? There are at least three lessons we can learn from shmita.

First, shmita forces us to acknowledge that human existence depends on our relationship to the earth. In ancient times, almost everyone was a subsistence farmer. Agriculture depleted the fertility of the land and, so, it had to be limited. Today, we are all dependent on energy. And our energy system is unsustainable. The mining and burning of fossil fuels is poisoning fresh water, acidifying the ocean, warming the atmosphere, and disrupting the climate. Putting a complete stop to this destructive system seems impossible, just as it must have seemed impossible to our ancestors to stop planting for the shmita year. Shmita challenges us to look beyond the short-term hardship and imagine the future we can create if we act boldly to right this wrong.

Second, shmita teaches us that caring for the earth and caring for people are inseparable. Letting the land lie fallow cannot happen without also forgiving people their debts; in order for all to participate in shmita, the poor cannot be indebted to the wealthy. Those who have more have to make sure that everyone’s needs are met. Today, it is only fair that we who have benefited the most must take the largest responsibility for addressing the climate crisis. Individually, we can reduce our own energy use, purchase electricity from renewable energy suppliers, stop investing in fossil fuel corporations, and vote for leaders who will push for change. As nations, the United States and other wealthy countries must enact ambitious policies to replace energy from coal, oil, and gas, with solar and wind. 

Finally, shmita sets a deadline for action. When the seventh year arrives, it has to be observed. Shmita teaches us that we cannot delay taking action until it is convenient or until we are convinced that there is no other choice. Fulfilling our ethical responsibility  is not optional. Even if it seems imprudent or extreme, every seven years we must rededicate ourselves to building a sustainable society in harmony with the earth.

Do we really need this deadline? We certainly do. The first congressional hearings on climate change were held in 1988. The Kyoto Protocol, the international treaty that the United States refused to ratify due to pressure from self-interested industries, was adopted in 1997. The United States has had more than 25 years to commit to stop burning fossil fuels and accelerate the transition to renewable energy, but it has not made nearly enough progress. Although individual cities and states are taking action, there is still no progress in Congress. Fossil fuel companies that care only for profits continue to confuse the public by claiming that there is no need to move away from fossil fuels and that renewable energy technologies are not ready. They hope to extract all of the fossil fuels they have in their reserves. 

Each of us has benefited from the burning of fossil fuels that is harming the atmosphere. Each of us has the power to help prevent the worst projections of climate change. Now is the time to take action. The Torah’s wisdom is timeless. And human beings rise to the occasion when we are saddled with an intractable deadline. That’s why we need shmita


Fracking Not the Answer to Energy Security

This op-ed was published by The Jewish Week on March 28, 2013.

Energy companies are bombarding us with television commercials that claim hydrofracking, the controversial form of drilling for natural gas, should be allowed in New York State to increase America’s energy security. 

We recently learned that oil and gas companies are making special efforts to bring their message to the Jewish community.  According to a report from the JTA, these companies have recruited Jewish leaders to support their interest in expanded drilling for fossil fuels with a new organization named the Council for a Secure America. 

The energy industry is targeting Jewish leaders because claims that fracking will make America more secure are persuasive to Jews, who worry about America’s dependence on Arab oil.  We understand that fracking is a dangerous and dirty method of extracting natural gas that threatens our land, air and water.  But we wonder whether the trade-off is worth making.  Is this a case in which Jewish self-interest should trump other concerns?  

Fortunately, there is no trade-off to make.  America’s energy security does not depend on fracking.  Despite the misleading claims of the industry, more drilling will not increase energy security.  In fact, opening New York State to fracking for natural gas will make no difference in the short term and will stand in the way of investment in renewable energy that offers the only hope of increasing long term security.

Currently America imports over 11 million barrels of petroleum per day.  But natural gas is a different story.  America has plenty and does not depend on foreign sources.  In fact, due to a glut, prices have fallen so low that fracking is a losing proposition.  The industry desperately wants to export natural gas to Asia, where prices and profits are higher.

What about the long term?  Cheerleaders for natural gas claim that we have enough for 100 years, but these estimates are wildly exaggerated.  They are based on unrealistic assumptions that consumption will not increase and that drilling will be allowed everywhere, including environmentally sensitive areas.   More realistic studies project the gas will run out in less than 50 years, even if drillers gain unrestricted access to all deposits.   While they peddle these projections, the same cheerleaders are pushing Americans to use more gas than ever by substituting gas for oil in the transportation sector.   But building new infrastructure based on natural gas will only lock us into the same dependence we now have on oil.

Even if we could depend on an unlimited supply of domestic natural gas, would it improve our security?  Surely not.  Burning fossil fuels, including oil, gas, and coal, is the main cause of climate change.  And that means insecurity.   The World Economic Forum recently found that 1,000 experts from industry, government, academia and civil society view rising greenhouse gas emissions as one of the three greatest threats to global stability.   And a National Research Council study for the CIA warns that climate change will have serious implications for national security in the coming decade.  Among the negative impacts worldwide, this report predicts conflict over water in the Middle East.

The way to insure America’s energy security is to convert our economy from dependence on fossil fuels to renewable solar and wind energy.  As President Obama said in his inaugural address, “The path towards sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition; we must lead it. We cannot cede to other nations the technology that will power new jobs and new industries – we must claim its promise."

Through a combination of improvements in energy efficiency and investments in renewables, America can become energy independent.  A study by Mark Delucchi and Mark Jacobson, featured in Scientific American, concluded that with aggressive policies the entire world could be powered by wind, water and solar resources by 2030.  Even if that is overly optimistic, it makes no sense to invest in new infrastructure for outdated fossil fuels when we could put the same money into renewables.

New investments in renewable energy will also strengthen the bonds between the US and Israel.  After the Arab oil embargo of 1973, federal policy briefly supported solar energy.  Between 1984 and 1991 Luz International, an Israeli company, constructed nine solar power plants in California that continue to operate today.  This year, Luz, reborn as BrightSource, will complete a plant in the Mojave Desert that will power a quarter of a million homes.  That’s not all. Better Place is the world leader in establishing the infrastructure to support electric cars.  Arava Power Company, developer of nine solar fields in Israel, is taking its know-how to Europe.   Through the US-Israel Energy Cooperative Agreement the two countries are again jointly supporting the development of cutting edge technologies.    

Governor Cuomo has an important decision to make about whether to allow fracking in New York.  Increasing America’s energy security is important.  But despite industry claims, that’s not what fracking will accomplish.  Jews who care about energy security should let the Governor know we want him to ban fracking and put in place policies that will make New York the nation’s leader in renewable energy.


Realizing the Behavioral Wedge - Getting Tenants Involved in Saving Energy


Published June 4, 2012 by The Sallan Foundation: Useful Knowledge for Greener Cities


Foundation Communities, the largest provider of low income housing in Texas, offers tenants the opportunity to participate in Saving Green. The program introduces tenants to simple behavior changes such as adjusting thermostats, unplugging appliances and changing light bulbs. According to Stephanie Perrone-Freeborg, Director of Green Operations, on average the 500 enrolled tenants have reduced their electricity use by 20%.

Right here in New York City students in seven Yeshiva University residence halls participate in an annual competition to cut their electricity use. Michael Winkler, Director of the Office for Energy and Sustainability, reports that this competition resulted in a 15% reduction the first year and additional savings in each subsequent year.

These two initiatives signal that complicated and expensive building upgrades are not the only way to reduce energy use because changing behavior can result in significant cuts. In fact, in head to head comparisons behavior change programs have sometimes been more effective than conventional projects. For example, a study comparing energy use in four schools in Colorado found that a school with a traditional building used less electricity than a new LEED certified school due to staff and student behavior (Schelly & Cross, 2010).

Why were these efforts successful when so many efforts to persuade people to change their energy behavior seem ineffective? As an environmental psychologist, I think the answer to this question is obvious. In my experience, many efforts to change behavior are just not serious. Typically, tenants are handed a flyer and invited to a meeting where they are told about the many ways they can help the environment. No one should be surprised that this superficial effort does not make a difference.

In contrast, in Saving Green, Texas tenants are invited to participate in a series of three workshops that address how to save money on utilities, transportation and food and after each session tenants make a formal commitment to change specific behaviors. Following the workshops they are offered the option to sign up for a home visit during which a trained volunteer performs a walk-through and suggests energy saving measures. Tenants also have the option to participate in a four-month, energy-saving contest where they give permission for the local utility to analyze their electricity usage and include the results in data reported to Foundation Communities.

What makes Saving Green an effective behavior-change program? First, Saving Green takes tenants' interests and motivations into account by addressing several ways to reduce household expenses. The information provided is relevant. Second, it is offered in an engaging and interactive format utilizing materials developed by Enterprise Communities for low income tenants. Third, it targets specific, measurable changes that tenants can make right away. Tenants are encouraged to make a commitment to take action — a technique that is known to increase the likelihood that they will follow through. Fourth, tenants are provided with feedback about the results of their actions. Finally, Saving Green is only one component of Foundation Community's comprehensive sustainability program and tenants know their efforts are actively supported by management.

Our understanding of how to influence people's behavior around energy is growing rapidly. To review the basics of how to design an effective initiative, I recommend Doug McKenzie Mohr's book on Community Based Social Marketing (CBSM). Mohr lays out the key steps in creating a serious behavior change intervention: Uncovering barriers and benefits, selecting behavior change tools, piloting, and evaluation.

The first step in CBSM is scoping out current behaviors and attitudes of the target audience and identifying obstacles that may be in the way of behavior change. The importance of investigating potential obstacles was brought home to me when I served as consultant on Living Green, a project of the Supportive Housing Network of New York. In conjunction with a large Weatherization Assistance Program (WAP) program, Ariel Krasnow, Director of Greening Housing Initiatives, with the assistance of Johanna Rose Walczyk and Sally Larsen, designed a pilot behavior change initiative tailored to the needs of tenants in supportive housing. I urged the Network to conduct a focus group with the staff of each building to inform the selection of specific behaviors to target. In a discussion with the staff at one building they learned tenants were not turning off their PTAC (packaged terminal air conditioning) units because many units lacked knobs. No amount of programmatic education could be expected to overcome this physical obstacle to implementing energy-saving behavior change.

McKenzie-Mohr and other experts emphasize that there are many different ways to influence people's behavior. In selecting among behavior change strategies change agents must consider the nature of the behavior to be changed. For instance, purchasing a new refrigerator is an indirect way to reduce energy use. The buyer must be influenced to make one decision and s/he is done. In contrast, curtailment of energy use may require repeated actions to turn off appliances and load management actions such as changing the time of energy use may require changes in other activities of daily life. Sometimes we want people to recognize less energy intensive options as desirable. These are known as lifestyle changes. Each type of behavior change takes place in a different setting, involves different obstacles, and must be addressed with a tailored strategy.

Behavior change tools and techniques are based on insights about human behavior. Past efforts to change energy use behavior often rested on narrow assumptions about human motivations. A review of programs implemented by utilities in California found most were based on a perception of human beings as economic actors who make decisions based on calculation of financial returns expected from investments in equipment, even though we know from our own experience that money is not our only motivator. Frequently, the prospect of future savings fails to motivate people at all and when economic incentives do not work other approaches must be employed.

What type of insights provide a basis for a behavior change strategy? One is that humans are social beings who make most decisions about how to act based on what we see others do. An eye-opening study conducted by Aronson and O'Leary found that 67% of students entering the shower room in a university fitness center would turn off the shower while soaping up if they saw two other people engaging in this water-saving behavior. This study spotlighted the power of social norms to influence the behavior of complete strangers. Since home energy use takes place in private, harnessing the power of social norms to influence tenant behavior often depends on finding ways to making energy-saving behavior visible to others. One strategy now being employed by electric utilities that harness the power of social norms is to send out bills that show customers how their energy use measures up to that of their neighbors. In the right circumstances it is possible to achieve a similar effect by publishing the names of tenants who have pledged to reduce their energy use, asking tenants to serve as spokespersons for efficiency measures, and posting charts in the lobby showing the energy use of an entire building over time.

Another useful and related insight about human behavior is that people are motivated by participation in a group. This is one of the reasons that Green Teams have been recognized as essential components in corporate sustainability initiatives. In David Gershon's Eco-Teams, small groups of neighbors support each other to implement behavior changes based on the Low Carbon Diet. Participants in Portland reported average household reductions of carbon emissions of 22%.

It is also important to recognize that changing tenant behavior takes place within a system. Tenants live in a building and their behavior is influenced by the actions of management. Obviously management can do a great deal to remove obstacles — both physical (like the PTAC knobs) and social (such as lack of trust between tenants and building staff or owners). Tenants are more likely to adopt new behaviors desired by management if the system supports the change. This means that initiatives to change tenant behavior must also address how to change the behavior of building staff. Changing employee behavior is an area that has received more attention than has tenant behavior. A helpful place to begin is with an approach developed by Jerry Dion's team at the Department of Energy which advises addressing how roles, rules and tools can be employed by organizations to incorporate the goal of reducing energy use.

What can we hope for with the smart application of the right behavioral strategies? Overall, studies estimate that US households could reduce their energy demand by 20–30%. Many of the most effective changes are low or no cost. Whether they require one-time purchasing decisions, use of available technology, or adoption of new daily habits, human behavior is the key to these savings. Researchers and practitioners are increasingly focused on how to achieve the reductions in energy use represented by this behavioral wedge. (Picture a pie chart of our total energy use. The slice that can be eliminated through behavior change is the behavioral wedge.) Just this past December, over 700 people attended the fifth annual Behavior, Energy and Climate Change Conference to explore how to make these reductions a reality. Initiatives to engage tenants in achieving the potential of the behavioral wedge will be successful if they are comprehensive, serious efforts that draw on what we already know about what works to change human behavior.

When I tell engineers that changing tenant behavior is a good way to save energy, they tell me that it's a very hard thing to do. I tell them that as a psychologist, I could never do what they do, but I think it is easier to change people's behavior than to construct a building. Here's my takeaway for getting tenants involved in saving energy: Don't just hand out a flyer. Do it right and it will work.


My Fracking Nightmare and a Jewish Ritual of Dream Interpretation

Published in the Huffington Post on March 7, 2012

I had a dream about hydrofracking. The dream did not come totally out of the blue. I had stayed up too late talking about how Jewish summer camps in the Poconos and the Catskills are threatened by this destructive form of drilling for natural gas. But I was not aware of the depth of my own feelings.

In my dream I was at a banquet. Off to the side, a group of respectable, well-dressed men and women were standing and talking. Suddenly, as I watched, one man reached up and began groping the breasts of the woman standing in front of him. I was shocked and I didn't know what to do, but quietly I began to "tsk, tsk" in disapproval. After a moment, the people around me joined in. After a few moments of hesitation, I called out: "You shouldn't be doing that -- we can all see you!"

I bolted awake with the terrible feelings that accompany a nightmare. My heart was pounding and I felt frightened. I knew right away that the dream was about hydrofracking. The woman was the violated earth, and I was the powerless bystander, unable to protect her. I was devastated.

Hydraulic fracturing, or hydrofracking, is only one of many ways that human beings violate the earth, but as with any one of these travesties, the closer you get and the more you know about it, the more awful it is. Hydrofracking is a kind of "unconventional" drilling for natural gas. In "conventional" drilling, a well is drilled through layers of impermeable rock into the reservoirs of gas below. In the past 10 years, as relatively accessible deposits of gas have been depleted, the energy industry has turned to gas trapped in small fissures of rock and in clay and sand. The Marcellus Shale, which underlies parts of New York, Pennsylvania, West Virginia and Ohio, is the largest gas-bearing shale formation in the United States. Hydrofracking, which must be used to access the gas in the Marcellus Shale, is more complex and more dangerous than conventional drilling. The gas is extracted by drilling a well one to two miles down, then the drill is turned to cut horizontal branches for up to a mile through the rock. Water, mixed with sand and toxic chemicals, is injected into the shale under pressure, causing an explosion that fractures the rock to release the gas.

Hydrofracking pollutes land, air and water. Multiple drill pads replace trees and farmland. Methane (the main component of natural gas) is released into the air during drilling and transport. The immediate effect of methane in the air is smog, and beyond the local effect, methane is a very potent greenhouse gas. About half of the millions of gallons of water used to frack the wells remains underground, untreated. Pipes and casings are supposed to contain it, but over time cement shrinks and metal corrodes. The other half of the water is stored in tanks or open pits that are vulnerable to leaks. This water is supposed to be treated, but few facilities are prepared to handle it.

During the day I was able to calmly discuss hydrofracking as one of many energy policy issues. But at night, in my dreams, feelings took over. I tried to deny the import of my dream. I joked about my eco-feminist dream. I was proud that my unconscious mind expressed itself in such enlightened metaphor. But it really wasn't funny. The dream was sending me a message.

Weeks passed, but I couldn't shake the feelings of dread provoked by the dream. Searching for some way to understand my dream I made a foray into Jewish ideas about dreaming. In "The History of Last Night's Dream," I learned from Rodger Kamenetz that the Talmud prescribes a ritual for a person troubled by a bad dream. It is hatavat chalom. The ritual is to share the dream with three friends. After the dreamer describes the dream, the friends say "you have seen a good dream."

On one level, this ritual is about reassuring the dreamer. Don't worry, it says, this nightmare will not come true. But on another level, this ritual hearkens back to a much earlier view of dreams as sources of revelation. Hatavat chalom transforms a private message into a public one. If the dream contains a revelation, a message from God, the community of the dreamer can hear it.

What was the revelation contained in my dream? In my dream I felt the pain of the earth. I also felt the shame of the perpetrator. After all, I use natural gas to cook my food. I use electricity generated by burning natural gas. In the dream I took the perspective of the bystander who felt embarrassed, but also compelled, to speak out. I felt relieved when the people around me joined in to call out the abuser.

By writing this post, I'm sharing my dream with you. You can help me turn it into a good dream by standing up against hydrofracking. Next time someone tells you that natural gas is cleaner than coal, or that we need natural gas to bolster our "energy independence," speak up and tell them that that natural gas is a fossil fuel that causes climate change. Instead of subsidizing hydrofracking, we need to invest in renewable energy. And you can do more than speak up. Stand up and join the movement against hydrofracking.