Jun 15, 2020 · 55m · capital-allocators
Sustainable Investing 3: Bob Litterman – Pricing Climate Risk (Capital Allocators, EP.141)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Renowned risk manager Bob Litterman joins Ted Seides to explain how core financial risk management principles, quantitative modeling, and immediate carbon pricing can address global climate change. Litterman explores institutional decarbonization strategies, including stranded asset swaps and market-neutral transition investing, while advocating for decisive regulatory and geopolitical action.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 19.7% of the talking time here. How this is scored →
Ted as informed peer 4.6 Guest teaching 5.2 Guest disagreement 0.8 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 26:40 Bob Identifies Senate Bottleneck
Bob directly calls out Senate Republicans for privately admitting climate risk while blocking policy action without proper incentives.
Hardest push from Ted ▶ 42:18 Ted Challenges Developing Market Emissions ConstraintsTed presses on the disparity between developed economies and emerging countries relying on cheap fossil energy for early-stage development.
Biggest teaching moment ▶ 18:55 Bob Explains Urgency and Lost Time MechanicsBob walks through the math showing that delaying carbon pricing permanently ratchets up peak global temperatures by 0.1C every three years.
Ted holds their own ▶ 31:38 Ted Probes Granular Sector Winners and LosersTed demonstrates keen market insight by pressing Bob on how transition risks affect mixed industries rather than obvious binary plays like coal.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Wellington Management Miniseries Sponsorship | 0 | 0 | 0 | 0 | Ted presents a solo introductory monologue and sponsor messages for AlphaSense, Wellington Management, and the miniseries theme. | |
| Alliance for Decision Education Message | 4 | 2 | 0 | 0 | Ted asks Bob about his career trajectory from MIT and the Fed to heading Goldman Sachs' risk management and quant groups before founding Kepos. | |
| Principles of Risk Management Applied to Climate | 4 | 7 | 1 | 0 | Bob delivers a masterclass on financial risk parallels, distinguishing between risk and uncertainty, time compression, and improper discounting in climate models. | |
| Modeling Carbon Pricing and Environmental Fragility | 5 | 6 | 0 | 0 | Ted asks for the basic building blocks of Litterman's pricing model, and Bob explains environmental fragility, damage mapping, and optimal policy discounting. | |
| Slamming on the Brakes: Urgency and Delay Costs | 4 | 7 | 1 | 0 | Bob highlights why we must immediately slam on the brakes, noting every three-year delay adds a tenth of a degree Celsius to peak temperatures and risks wiping out 99% of coral reefs. | |
| Pandemic Lessons and the Need for US Leadership | 5 | 5 | 1 | 0 | Ted connects exponential climate risk to the COVID-19 pandemic, and Bob emphasizes the imperative of coordinated global action and US leadership. | |
| Policy Initiatives: Climate Leadership Council and CFTC | 5 | 5 | 2 | 1 | Bob reviews his policy advisory roles at the Climate Leadership Council and CFTC, pointing out that political stalling in the Senate is the primary bottleneck. | |
| Transition Risk, Physical Risk, and Market Incentives | 5 | 6 | 1 | 0 | Bob critiques current market green taxonomies as pushing water uphill without proper carbon pricing, contrasting transition risk with physical risk. | |
| Fundamental Industry Analysis and Stranded Asset Valuation | 6 | 5 | 1 | 0 | Ted probes how to evaluate nuanced sectors, and Bob explains that transition investing requires fundamental analysis rather than purely backward-looking quant backtests. | |
| World Wildlife Fund's Stranded Asset Swap | 5 | 6 | 0 | 0 | Bob details the World Wildlife Fund's stranded asset total return swap, which achieved a 130% return over seven years by shedding fossil exposures synthetic-style. | |
| Quantitative Factor Modeling and Market Incentives | 5 | 6 | 2 | 0 | Bob explains why personal carbon footprint micromanagement fails compared to price signals driven by the invisible hand. | |
| Harmonizing Global Emissions and Addressing Developing Nations | 6 | 7 | 2 | 1 | Ted raises the conflict between developing nation growth and emissions cuts; Bob reframes the issue by arguing emissions incentives must be harmonized while wealth and technology transfers handle equity. | |
| Developing a Market-Neutral Climate Investment Strategy | 6 | 5 | 0 | 0 | Bob describes Kepos's market-neutral transition strategy and finishes with standard closing questions on personal habits and board governance. |
Statements from this episode (18)
Bob Litterman links financial risk management directly to pricing climate risk.
“What I found is that there are a lot of parallels between the way we think about and manage financial risk and the way we should be thinking about managing climate risk.”
Goldman Sachs hired Bob Litterman to monetize risk rather than reduce it.
“And when they asked me to be head of risk management, it wasn't because Goldman Sachs wanted to reduce its risk. They wanted to make more money from the risks that they were taking. And if we were taking risks that we weren't getting paid for, we should identi…”
Economic models must match market discount rates rather than picking arbitrarily.
“You don't get to pick a discount rate. You have to match it to the discount rates you see in the market.”
Bob Litterman's climate risk models price carbon above $100 per ton.
“What I found when I looked into this was that the number that came out of the model, it was hard to get it down below, say, a hundred dollars a ton.”
Climate policy must prepare for the worst-case scenario of planetary fragility.
“So we don't know what the fragility of the planet is right now. It could be very robust. It could be very fragile. Today, we have to plan our policy in a way that prepares us for, you know, the worst case, which is a very fragile environment.”
Delaying global carbon pricing by three years adds 0.1°C to peak warming.
“For every three years that we delay pricing emissions, the maximum temperature, the best case, or let's say the optimal solution is another 10th of a degree onto that expected maximum temperature.”
Global warming will exceed 2°C without aggressive carbon pricing within a decade.
“Bottom line is that we can expect that temperature to get above two degrees if we don't act very soon in the next, say, decade.”
Pricing carbon in 2000 would have cheaply capped warming near 1°C.
“Had we addressed this 20 years ago, wouldn't have been that costly. We could have had a very smooth transition, and the maximum temperature would be somewhere around where we are today. Which is to say, not great, but not catastrophic.”
Bob Litterman views the US as the main obstacle to climate coordination.
“I think the US is by far the stumbling block in terms of global coordination today. Europe and China And the rest of the world, frankly, are ready to move and are waiting for the US.”
Senate Republicans are the primary carbon pricing obstacle but are shifting rapidly.
“Well, it's Republicans in the Senate, let's be perfectly honest. I think that's changing quickly, let's just put it there.”
Green investment taxonomies and subsidies do not guarantee actual emissions reductions.
“In Europe, for instance, they have this taxonomy. They define certain types of investments as green, others as brown, and then they create, for instance, tax incentives, other types of incentives. For investors to invest in green investments. Well, guess what …”
Bob Litterman predicts the global economy faces decades of low oil prices.
“I think we're in for, you know, decades of low oil prices.”
The low-carbon transition will occur much faster than markets currently expect.
“Really my argument is that the transition to a low carbon economy is going to be faster than what's built into market expectations.”
Society will likely need to extract most current CO₂ emissions via geoengineering.
“We're probably going to have to pull most of the CO₂ that we're putting into the atmosphere here today back out.”
The World Wildlife Fund's stranded asset total return swap gained over 130%.
“It's up over a 130% now since we put it on in seven years ago.”
The fossil fuel sector's historical market underperformance is accelerating.
“Fossil fuel sector has dramatically underperformed the market For a long time now, and it seems to be accelerating.”
Developing nations need direct wealth transfers rather than subsidies for pollution.
“Helping development is fine, and we should do that in terms of, as I say, you know, transfers of wealth, transfers of knowledge. Transfers of food or housing or whatever, but not by subsidizing pollution. That's not the right way to help those countries.”
Bob Litterman predicts climate policy action will be an abrupt phase change.
“And to me, the big opportunity here now is the recognition that the response is not going to be a slow increase in concern about an action on climate. We haven't taken appropriate action yet, and we're going to have to. And when that happens, it's going to be …”