Climate Change and Mega Disasters Are Reshaping the Investment Landscape

Audio Description

An all-star panel looks at the pandemic through the lens of preparedness, along with our susceptibility to other mega-disasters. How can we move from a patchwork response to one that holistically addresses key tradeoffs? And how can we turn this into a moment of lasting change in the face of so much immediate pain? Experts from Columbia University’s Earth Institute join AB professionals to explore ways investors, and the private sector, can make a difference. 


00:00 - 00:20

Welcome to On Purpose. I'm your host, Travis Allen, Senior Investment Strategist and National anaging Director at Bernstein. Today's episode features excerpts from a climate change webinar that looked at the pandemic through the lens of preparedness, along with our susceptibility to other mega disasters.

00:20 - 00:49

I was joined by my AB colleague, Sara Rosner, director of Environmental Research and Engagement, along with two guests from Columbia University's Earth Institute, Professor Radley Horton, whose research focuses on climate extremes, and Jeff Schlegelmilch, who helps lead the National Center for Disaster Preparedness. To start us off, Radley discussed the global pandemic's impact on the climate and how it has changed society's reaction to climate change.

00:50 - 00:56

As we saw the shutting down of economies, a process that certainly by no means is over,

00:56 - 01:28

there were some very immediate effects on various types of pollutants. We saw small particle concentrations drop in big cities and manufacturing areas by 50 percent, in some cases in the same month or so where we saw this dramatic shutdown of economies, similarly, low-level ozone. This isn't the ozone that's high up in the ozone level. Is the surface ozone, a major lung irritant and a major, major source of pollution. That also dropped by 50 percent or so,

01:28 - 01:36

if we're talking about places like the industrial zone of northern Italy, Wuhan and the broader region in China, in big cities in the US as well.

01:36 - 02:07

A lot of those values have since kind of returned to more normal levels. But then there's, of course, the question of what happened to greenhouse gas concentrations. Greenhouse gas concentrations, emissions, excuse me, globally, probably for the entire year, are going to be down something on the order of five percent to a little more. Still unclear. And it depends on sort of economic trajectory in the second half of the year. Even with that emissions reduction, greenhouse gas concentrations, unfortunately, continue to creep upward.

02:07 - 02:37

And it's the concentrations that determine the warming that we get and the sea level rise. You can think of it as concentrations of greenhouse gases are a bathtub. Bathtub continues to fill because the source emissions, which we could think of as the faucet of the bathtub, even though they've dropped a little bit, are still far in excess of what the drain is able to take out through pulling carbon out of the atmosphere.

02:37 - 02:45

Radley also took a moment to make the direct connection between COVID-19, climate vulnerability, and racial inequality.

02:45 - 03:14

We're learning that it's a lot of the same communities that are affected by our extreme weather events as are suffering so much due to COVID-19. Maybe it's pre-existing health conditions. Maybe it's not having access to good medical care. It's a variety of factors. Maybe it's not being able to shelter in place, having to continue to work. There's a lot of overlap. It tends to be the same communities that are vulnerable and the racial justice implications are immediate and direct here.

03:14 - 03:40

Furthermore, when we think about the heat waves that we're having right now this summer, we have to ask, what if somebody's already had COVID-19? Are they fully recovered? What if they're sick right now? We simply don't know yet, we can expect that there's a multiplying effect if you're experiencing that heat wave and you've been sick. Similarly, what are these resilient strategies we've come up with? Right.

03:40 - 04:02

Whether it's things like cooling centers for people who don't have access to air conditioning. How effective are those going to be if we also need to be doing social distancing? It doesn't mean we shouldn't have the cooling center. It just means there's a trade-off there. And we have to think about these different risks. And this obviously applies to to other things like evacuations potentially as we start to head into hurricane season.

04:03 - 04:37

He then turned to how the perception of cascading impacts in the systemic risks have changed due to COVID-19. As we think about climate risks, this is a critical point to make. A lot of the effects are non-linear. A company, a city can't just say, how is our particular asset, our factory that's right along the coast, going to be affected by sea level rise? Will it be underwater or won't it? That's a critical first-order question. But as we're thinking about risk and opportunities in investment, there's all the second order questions too.

04:37 - 05:04

What happens to the supply chains? I think COVID-19 helped us see this, right, at least at least for me, with my kind of simplistic thinking. When COVID-19 started, my first thoughts were, okay, the main thing to think about is the important first order question. How sick are people going to get? Who is going to be most vulnerable to directly getting ill? That's obviously critically important. Still the first order question. But quickly we started to see,

05:04 - 05:27

right, the supply chain disruptions, the economic impacts even for those less exposed, even in countries where there hasn't been a lot of COVID-19. So I think others on the call would be better suited to spell out some of those cascading impacts, those links in the chain. But COVID-19, this immediate emergency helped us see that we're all affected.

05:27 - 05:46

And I think as we start to think about the climate events of the future, whether it's the heat waves, the storm surges, I think we always need to apply that same system thinking because it's like how do we plan to the second order effects, the responses? That's going to be the key to thinking about climate risk and climate opportunities and protecting people, I believe.

05:48 - 06:06

As Radley pointed out, COVID-19 has made us rethink what we mean by fairness and equality and opportunity. So I asked Jeff, who was already working on a book about resiliency prior to the pandemic, for additional parallels between COVID-19 climate change and other disruptive events.

06:07 - 06:38

So with pandemics, we're encroaching on ecosystems with greater and greater pace, we're living in close proximity to animals and venturing into new areas in tropical and subtropical regions. And at the same time, we're also completely interconnected. You can get on a plane and, well, maybe not right now, but there was a time you could get on a plane and a few hours later be halfway across the world. Just creates this environment for pandemics to emerge and then spread. So it really is no surprise that humanity's visited periodically by pandemics like this.

06:38 - 06:58

But I would actually go as far to say that I wouldn't even rule out seeing additional pandemics in our lifetime of this scale because of these factors that are accelerating the overarching threat and then the underlying vulnerability of not investing in early detection capabilities, not investing in public health and healthcare systems and in supply chains for these very predictable sort of needs.

06:58 - 07:21

And with climate change very similarly, pumping out CO2 emissions, contributing to more extreme weather events while building in vulnerable areas, things like that. So these are areas where the complexity of these ecosystems that we're disrupting, whether normal biological ecosystems or sociological ecosystems or however you want to use that word, that we're creating a tremendous increase in the threats we face, as well as our underlying vulnerability.

07:21 - 07:40

And when you step back and when you look across these different scenarios, you start to see these crosscutting themes. You start to see on a broad scale, I don't think there's anyone on this call or anyone out there who wouldn't agree with the statement, "preparedness saves". It's better to spend money on preparedness than response and recovery. Right. That's a very agreeable thing to say.

07:41 - 08:07

But what does that mean in terms of the individual transactions we engage with? How do we actually turn that into actions that in aggregate diminish these threats and vulnerabilities rather than contribute to them? And I think that that's where with COVID-19, as Radley mentioned, where we're in a position now where we have a lot of data front and center within our organizations, within our households, within our broader society in terms of what is the cost of not being adequately prepared.

08:07 - 08:22

Dare I say, was it worth it? Maybe that's kind of a nasty way to say it. But the point being that, and I think that this speaks to a broader trend of our evaluations of how valuable something is, it doesn't properly include risk

08:22 - 08:48

and what we're looking at. When we're looking at global just-in-time supply chains for manufacturing personal protective equipment, we're not, and we're saying, look, this company has too much excess capacity on hand, so we're not going to underwrite them any further. That's a critical supply chain now that maybe we wish we had, and maybe would be reducing some economic loss. When it comes to climate change, man, it's really expensive to put scrubbers on these smokestacks or change the power source.

08:48 - 08:57

But then you see these billion dollar weather events that are if not driven at least amplified just to some extent by the climate change.

08:57 - 09:31

So there is a cost to the decisions that we're making that are not accurately reflected in the calculations we're doing when we're making those decisions. And I think one of the most important things is to integrate that into it. And the other is that we live in a world of uncertainty. There is no magic formula that if we could just put it together, we can predict everything that's going to happen. And so this notion of this sort of checklist driven and algorithm driven approach is useful to a certain extent. But at some point, you need systems that are adaptive, that embrace the uncertainty. What more uncertainty is there than the environment we're in now? Our schools are going to be open in the fall or not.

09:31 - 09:56

When is the vaccine going to be available? What parts of the economy can be open or not? What's going to be the next hot spot within the country? These are all contingencies that we need to create options for. But I will say that I think that for a lot of the folks on this call here, you work in an environment that's mired in uncertainty already, whether it's, what are consumer preferences going to be for these new products? What are market conditions going to be a year from now?

09:56 - 10:21

You have tools and resources that I think are much more adaptable to managing uncertainty and can be adapted to this context than a lot of other folks. And so I think that there's a tremendous potential to harness this ingenuity, harness these problem-solving approaches from different sectors to address these kind of doomsday scenarios that despite the tenor and nature of my book, I remain very optimistic that we're up for this challenge.

10:21 - 10:32

Jeff's reference to AB's problem solving approach was the perfect Segway for Sara, who oversees the firm's new training program with Columbia's Lamont Doherty Earth Laboratory.

10:32 - 11:00

The partnership is the first of its kind in the industry. It's designed to allow our portfolio managers and research analysts to effectively incorporate climate research into our investment process so we can make better decisions for clients. Sara explained more about the collaboration here. There were really three qualities, I think, that really attracted us to partner with our colleagues at Columbia University's Earth Institute. I think number one would just be the mission of that organization.

11:00 - 11:33

So actually, taking all of the scientific research and discovery and advancement that's happening in academia and helping organizations apply that to the business and government context and using that to make better decisions. I think number two is climate touches on everything. And we need that multidisciplinary perspective that the Earth Institute brings to us. I think over two dozen different research centers that touch on everything from social justice to public health, engineering, sciences, et cetera.

11:34 - 11:52

And they really have brought all of that to bear on our relationship so far. I think the final thing that I can't underscore enough is that what really kind of marries these two organizations together, between AllianceBernstein and Columbia, is that on the one hand, we bring the financial markets expertise and experience.

11:52 - 12:19

And Columbia really focuses on scientific research and empirical evidence as well, as we both really, really value that fundamental empirical research and what that can mean for making better decisions for our client, but also helping advance scientific discovery on their end. As we all seek to solve this challenge, we're really very excited to be embarking with Columbia on a number of different research and collaboration initiatives.

12:19 - 12:29

For example, we're working with them right now on helping us to understand and identify the climate value at risk to our portfolios globally.

12:29 - 12:54

And that's something that we're looking to deploy on over the next year or so. Having gone through the training, I left with a lot more questions than answers. The case for urgency was overwhelming, but where do you start? And so we circled back to Jeff for lessons from this pandemic that will hopefully instill greater resiliency for the next global challenge. There's lessons learned and then there's lessons applied. And there's quite a gap between the two.

12:54 - 13:26

You'll find folks, myself included, who will be saying, look, we need more funding for preparedness. And I think when we take a step back and look at this very holistically, we have to look at how our systems and our incentive structures are not aligned to build the kind of resilience that we need in the 21st century. A lot of our response systems globally, locally, nationally, across different nations have largely been built based on disasters in the 20th century, in the early post 9/11 years, focused on terrorism, focused on reorganizing specialized agencies and entities.

13:26 - 13:46

What we've done over the years is we've applied sort of patchwork for everything that's come up. We have these Band-Aids for the different issues we see. We'll add more funding for this, we'll change this law a little bit here, and it becomes sort of this game of Jenga, layering different things on top of our response. And we're really at an inflection point right now to step back and really look at holistically.

13:46 - 14:18

We know pandemics really require health and public health expertise out front, but it's also not purely a health problem. There are social issues, there are transportation issues. There are mental health issues, child development, schools, all these different trade-offs that need to be part of the conversation as we're going down this road. To that point, I asked if there's any evidence that during this pandemic, governments have spent less on climate change because they've now had to focus so much energy and resources on COVID-19. Both Jeff and Sara weighed in.

14:19 - 14:52

After these major catastrophes, you sort of see two things. You see, on the one hand, you see a lot of kind of short-term spending and we're seeing that. And then afterwards a lot of heavy investments. And what we do now, at the same time, you end up in a weakened economic state for quite a while after this. And I think that that's what we're seeing as well too, the spending sprees, these deficits spending. So the closest equivalent is with major armed conflict, World War II, something like that. You have these periods of intense spending which can be very beneficial, but then at some point you have to dial it back. We saw this after 9/11.

14:52 - 15:16

We saw it after H1N1, it's sort of a pattern that we see. And it perpetuates the sort of short-term funding, maybe quick changes that can be made to align with electoral cycles or things like that. But then what are the long-term investments? The infrastructure investments that can perpetuate the long term tend to take a backseat to some of these more grandiose, shorter-term ideas. After these major catastrophes,

15:16 - 15:47

There's this moment where there's tremendous opportunity to transform civil society, to transform the way that we live. And I give you example, a lot of the 2008 financial crisis. In the United States in particular, there was a large infrastructure act designed to get people back to work. And there was a lot of hope in the beginning that this was going to... there was a lot of funding set aside for high speed rail, a lot of projects that this was going to revolutionize green energy. And there was a lot of investment. Don't get me wrong. But the high speed rail project

15:47 - 16:09

got caught in the complex politics and whose land is it going to run over and all of those typical things. So what ended up happening was a lot of that money really went into... because it was required for shovel-ready projects and getting people back to work very quickly, it went into repairing roads and things that were already planned and supporting the existing infrastructure, which, don't get me wrong, was sorely needed and really, really important.

16:10 - 16:38

But it was also, to a certain extent, a missed opportunity for the kind of transformative investments that could be made if we're willing to hang on a little bit longer. And I know that's not an easy thing to say with people out of work and things like that, but an opportunity to create a more lasting sustainability, that there will be a window that will come with these investments and these recovery funds and these stimulus packages that come as we come out the other end of this pandemic, which we're still a ways from. What we do with that is up to us.

16:38 - 17:13

In addition to interacting with government and different types of sovereign and municipal issuers, what is the role that companies should be playing in responding to these types of events and crises? And I think one of the big takeaways is that there is a much larger role for corporations to play, particularly when we're talking about, in this instance, we've been talking a lot about social justice. I mean, how are companies treating their employees during this particular crisis? How are they allocating capital that they're receiving from the government?

17:13 - 17:15

Is it being used to its highest and best use?

17:15 - 17:30

And I think that in regards to that particular line of questioning, I think, a lot, as Jeff and Radley have both pointed out, a lot of the capital that is being used right now to respond to this pandemic is borrowed.

17:30 - 17:51

And so when you look at that and the company perspective, a corporate perspective, how can we as investors work with these companies to recognize this as an opportunity for these companies to build back better, build back in a more green and sustainable way and juggle those different priorities from different stakeholders. Sara, along those lines,

17:51 - 18:14

I'm glad you raised that, because that was one of the questions that came in about the potential for private sector leadership. Are we seeing any changes in the way that companies are responding to these types of challenges, whether it be COVID-19 or climate change or racial justice issues here in the US? Have there been any positive trends along those lines?

18:14 - 18:39

There's definitely companies that have stood out, I think, in terms of their leadership on these issues, whether that's a large consumer goods company that, or apparel company that is decided to continue to pay its employees and their health benefits, despite sales being down 95 percent or companies that are manufacturers that are taking employee health and safety and local community engagement on those issues to another level.

18:39 - 18:50

I think we're still one of, some of the research that we're doing right now is looking at how companies are allocating capital in response not just to the pandemic, but in how they're looking

18:51 - 19:23

at this as a strategic shift. And so I think the jury is still out on that in a lot of ways. But it's definitely been a learning experience, I think, for a lot of corporates and definitely for us as investors in terms of how we're thinking about really untraditional sources of risk and how the world is organized around that. One of the biggest questions we hear from clients is, what can I as an individual do to make a positive impact on climate change? Here's Radley's response.

19:24 - 19:58

Number one to me, I think, is just continuing to have the climate conversation, talking to your neighbors, talking to your colleagues, and just really sort of leading these discussions to socialize the topic. There still just, I think, isn't enough sort of open, transparent conversation among a lot of communities, I don't want to push the metaphor too far. But I think one of the things we've learned on the racial justice issues is the importance of people just speaking up, saying this is important when they feel like the issues aren't being addressed, just not sort of sitting back.

19:58 - 20:49

And I think there are some parallels in talking about, I don't want to equate it, but I think there are some parallels, and not just for the racial dimension of climate issues, of just sort of speaking up if this is something that's important to you, something to learn more about, just truly acknowledging, thinking about all the ways that climate impacts everything, including issues of justice and equity and other issues as well, communicating, getting the message out there about a world that could be coming sooner than we think, where young people will basically pick their universities to some extent, pick their first jobs to some extent, based on whether the companies truly are leading on ESG issues all the way to procurement, truly leading on racial justice issues, truly thinking about in a long-term way about the exposure of their assets to these kind of risks.

20:49 - 21:21

That's part of that shift, right, from where it becomes this sort of seemingly sort of burdening extra thing we have to think about to this transition where it's like the opportunities are just enormous for the first kind of movers in this space. Radley raises a great point about first movers in this space. That's why the discussion turned to ways to accurately measure how corporations are preparing for these issues, whether climate change, preparing for disasters, or building resiliency into their supply chains.

21:22 - 21:54

One of the things I think that's always impressed me in my time here is that you're working with investors, analysts, portfolio managers that have been covering these companies and these industries and sectors sometimes for decades at a time. And there's really no one that knows these companies better. And so when you're looking at such a vast array of very customized metrics to a particular issuer, I think we bring as an active manager a lot to bear on how meaningful those are. How realistic they are? Are they being linked properly to a company's performance?

21:54 - 22:23

One of the things that we're working on at AB this year is an engagement campaign with our portfolio companies. So looking to work with them to actually make sure that companies have environmental, social, or governance metrics actually incorporated into the way they compensate their executives. And so that's a really important lever to be able to pull with your portfolio companies if you're looking to make sure that they are going to be making progress and making change as we face these issues.

22:23 - 22:45

So I realize I'm not giving you the black and white answer, but I do think that we are making progress, I think, and it's a really exciting time to be working with our portfolio issuers this way. To close out, I asked each participant if there was only one policy change that you could have at the snap of your fingers, what would that be?

22:46 - 23:18

Getting rid of fossil fuel subsidies. I think that's so underreported. There are so many ways that we still have enormous subsidies for fossil fuels that would level that playing field. Renewables and decarbonisation would win even faster. I think there's exactly 100 pieces of environmentally related legislation that have either been rolled back or are in the process of being rolled back. I would reinstate those. That would be my finger snap.

23:19 - 23:48

Implement a commission with a longer-term strategy to engage multiple stakeholders, to actually really unpack what a transformative approach to resilience would look like. This has been On Purpose. Thanks for joining us, and remember, we all have values we hold dear. Now you can ensure your investments reflect them. If you enjoyed the podcast, please rate us on Apple Podcasts or your podcast service of choice and be sure to subscribe. You can reach me on LinkedIn.

23:48 - 23:58

Thank you. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at

Travis Allen
Managing Director

The information presented and opinions expressed are solely the views of the podcast host commentator and their guest speaker(s). AllianceBernstein L.P. or its affiliates makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this podcast. This podcast is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

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