Measuring the Future Financial Impact of Climate Change Using AI Technology
An interview with Marie Cresswell, Thomas Cole Inc. and Ron Dembo, CEO, RiskThinking.AI
Tell me a little bit about your climate action journey, Ron.
I was always a little environmental guy that my father used to take to a game reserve in South Africa. It was very primitive at that stage: no electricity in the camps, and you’d sit outside under beautiful skies; it was pitch-black, with no light pollution. I would sit in a car and watch a baboon family for the whole day. I saw stampedes of elephants. And so I became a lover of animals and the outside world. And the joke that everybody used to have was, particularly when I was a professor, we would go out for hikes in the woods in Connecticut and I would disappear and sit there for hours – “what’s he doing?” I would just be meditating in the woods. It’s the little things that get me excited, like looking at the cross-section of blueberry roots, magnified 2,000 times, if you ever want to see what biodiversity looks like.
I think we live in a spectacular, amazing world; it’s almost too hard to believe how we evolved from a little piece of DNA. Software, you know. And when you think of that, the magnitude of it, and the beauty of the world, it’s almost hard to believe, all this diversity and everything. And I took it personally that we’re ruining it.
This picture says 1000 words. This is biodiversity! The cross-section of a Blueberry bush’s root. Courtesy National Geographic.
Ron, you have been the recipient of many awards. What would you say is the most rewarding one that you’ve received, or that meant the most to you?
The most rewarding things I think that ever happened to me weren’t those specific rewards, but the “people side” of things that were generated through Algorithmics. People would come to me and say they’ve never – and they still do, to this day – worked for a company like that before. And since then they have formed strong bonds. I once posted on LinkedIn and said Happy 30th Birthday Algorithmics and about 47,000 people “liked” the post – 47,000! And obviously, we didn’t have 47,000 employees. But these were customers, employees, and all had positive things to say about the firm.
It had a massively positive brand. But not just for the software, but for its people. A lot of lives were created out of that. Marriages, kids, the companies that grew out of it, people who left and became a huge deal elsewhere.
The brand is global. Algorithmics had about 800 employees in 15 countries. I would stand on a train in Tokyo wearing a backpack with this AI logo – AI was meant to be ambiguous – artificial intelligence or Algorithmics Incorporated, take your pick. People would recognize that logo in Tokyo. Wow, that’s quite substantial. It’s great brand recognition. I never knew I had those things in me.
Is it fair to say that you have gone from creating carbon credits to pricing the financial markets for climate?
The change was due to a desire to have a more significant impact. And I also thought that what we were doing was probably much too early. A lot of what we did in was way ahead of its time, and now it’s so much a part of what many people and countries are taking seriously.
One example of this was the Re-Skinning Awards program we developed and ran to boost the knowledge of retrofitting buildings on scale. Our aim was to stimulate significant advances in the design and technology for retrofitting and re-skinning buildings. Retrofitting is the upgrading or addition of internal building systems and materials., while re-skinning is the replacement or addition of the external envelope, all to improve the energy efficiency, comfort and sustainability of older buildings. Upgrading the existing inventory of high-carbon footprint and water-wasting buildings will give them new life and new aesthetics, and will revitalize our aging cities.
In 2010, Zero Footprint offered prizes to design teams to take an older concrete high-rise structure and, using re-skinning along with other retrofitting technologies, and reduce their carbon, water and energy footprint to net zero while also maintaining the highest architectural design standards.
But I didn’t feel I was having enough of an impact. And so, with my new venture, Riskthinking.AI, I have set out to create the infrastructure to price the effects on climate change on our financial markets. That’s probably one of the most important things – the biggest behavioural change – I could ever achieve. I do not know of any bank in the world that has an adequate picture of the physical nature of its counterparties. Without that, there is no proper way to price all the loans and financial securities issued to these counterparties. We see this as a systemic problem in the world’s financial markets. Fixing this is a necessary step to dealing with the behavioural change we need to see to deal with climate change.
I fondly remember technology that you and your team had developed to measure and change behaviours of building occupants, while we were working on ECSOs. Can you share some of the highlights of this work? And the low points?
I think we can all say this about the work we were doing back in the early-to-mid-2000s that some school boards and some communities were engaging it, but we were ahead of our time: It was more about changing behaviours. And I think some of the technology we introduced was very interesting; measuring it was pretty much funded or subsidized. On the carbon credit side of the business I was quite disillusioned with what I witnessed. We created some very interesting products that were ahead of their time as well.
I remember sitting on a boat in the Galapagos with a party of 20 scientists and influencers and on one of the first iPads every seen (one of the people was responsible for the marketing of the iPad), I showed the audience how we could look into our offices in Toronto and switch appliances on and off using our “TalkingPlug” product. It looked like magic.
Photo courtesy The Globe and Mail.
What was the biggest challenge to change?
The biggest barriers to change were money, complete lack of awareness of climate change, and its true impact.
When we started, we were talking about earlier on in the 2000s. When we did that re-skinning competition, there was a vague sort of feeling that something was happening to the climate. But you know, the CO2 level was at 395 parts per million. I remember the time and we said, we’re not kids, things are really going to change. You know, we have passed that CO2 level already.
Think about it now – the extreme weather that’s happening, and the frequency with which it’s happening – and it’s starting to have an effect. It’s almost as though you need a Pearl Harbour to get people into the war. You think the impact is still not there? It starts becoming more prevalent, and as you mentioned, there is a price. And some of those elements would have an impact. One of the weirdest things of all time is that we’ve got the COP 28 being run by the petroleum industry.
Now, what about shifting forward to RiskThinking.AI and Climate Wisdom, are companies embracing change?
I think there is a fairly significant push within corporations trying to do something. There’s much more awareness and a much more extensive range of people who are now actively pushing for climate action – even regulators have come on board. It’s interesting now, as we are having conversations with regulators. The Bank of England, one the significant regulators here, met with us recently. It’s more a question of how and how fast to regulate this. I think the level of awareness now is light years from where it was in 2002–2005 to here, and certainly with the climate mitigation happening.
Climate change is the most existential threat to humankind. If you can share some of the data with businesses and people, and educate them more, that’s certainly our goal. One of the interesting things that suddenly surfaced is the need to have cost-benefit analysis surrounding mitigation and adaptation.
It’s not like we have infinite money to adapt or to mitigate. Where should you put dollars to have the most significant impact now? That requires measuring climate financial risk. Because if you can’t put a dollar value on these future possible events, how do you know where to mitigate?
It appears as though you have made the shift from climate action to climate risk mitigation, intuitively keeping in front of the curve, and forecasting the risk and mitigating potential financial ruin, while instinctively preserving the planet. Can you provide an example of your work?
An example I always give is that Singapore will be way underwater at some point in the future unless it builds protection. So, the question then is, how much do you need to invest to protect Singapore from sea-level rise? You could build a 10-metre wall around Singapore – a huge expense – but it might be far too much for what is needed. You could also build a 1-metre wall which most people might think is adequate. But what if you are wrong? There is so much uncertainty! The answer you would get from my recent book Risk Thinking is to build a wall but make it extendable, just in case the future plays out differently. The ’’Hedge” is more costly today but could give you protection and possibly save you much more money in the future.
If I asked 1,000 people about sea level rise in Singapore in 2050, I’d probably get 1,000 different answers. When you aggregate those answers, you get a distribution, which is, in effect, our manifestation of the uncertainty about the future in Singapore at that point in time. So, we look for all those possible inputs, every climate model that’s been made and all the experiments that have been done with them. They are essentially predictions. And the ensemble creates a more exciting result than any one prediction.
Who is your primary customer?
Our typical customer? We usually go after large banks and large data providers. But, you know, the onboarding of a new product to a bank today is so demanding that we’ve decided to take a different tack. But what’s encouraging is that in the EU, which is way ahead of us, 50,000 companies are being regulated as of next year. As of January 2024, if you want to deal with those 50,000 companies, you have to report on your climate risk.
It’s a big market There’s nothing like selling to regulated markets because that’s where you can make the fastest changes. Regulated markets were the first to make changes – in many countries, like Switzerland, and New Zealand. The US will announce measures through the SEC, very soon. Regulating corporations in California is now the law. If you’re a corporation in California, you must present your climate and financial risks, so that’s encouraging, because once that gets in motion, markets will reflect this. Hopefully, soon in Canada, you’ll be able to buy goods from the most environmentally friendly companies so your grandchildren will have a healthy future.
Are you using AI or other technology to help guide the right business risk decisions for clients?
Yes, you can easily see that there’s a lack of tools to make decisions, and the lack of understanding still exists in government of where to invest in infrastructure.
How do we do this when the money is not necessarily going to the right place? So our major focus is making climate risk, fact-based decisions using algorithms.
Our pioneering methodology enables investors to use the uncertainty inherent in climate modelling as a strength to support better investment decisions. We don’t rely on a single model or scenario when managing risks or defining a strategy. Our outputs consider climate projections from 51 leading climate research centers and universities to capture a broad range of possible future outcomes, including our recent partnership with Bloomberg, which recently launched, combining Bloomberg’s data on more than 1 million physical assets with Riskthinking.AI’s highly granular dataset of global climate change projections and proprietary methodology. The indicators provide users with a new and powerful way to assess their exposure to floods, droughts, wildfires, and other climate vulnerabilities.
Anything else that you would like to add?
We know that the climate is changing, but we cannot predict with certainty what this means for the planet and its people, or how it will affect business.
RiskThinking.AI helps companies, financial institutions, and governments understand, quantify, report, mitigate, and adapt to climate risk with more confidence, speed, and cost efficiency by using over 100,000 of the latest climate data sets, 3.5 million assets from over 250,000 companies worldwide, and 16 billion multi-factor stress tests, delivered in near real-time.
About RiskThinking.AI
Founded by financial risk pioneer Dr. Ron Dembo, RiskThinking.AI is a leading data and technology company repricing financial risk with the reality of climate change. Their innovative algorithms generate, curate, and maintain a detailed physical asset, infrastructure, and commodities database covering over two hundred thousand public and private companies. This data, combined with RiskThinking.AI’s patented stochastic and multifactor climate risk analytics, empowers financial institutions, corporations, and governments to capture unforeseen impacts of climate change that current models miss. Their climate risk data and analytics power a suite of integrated software solutions, called VELO®. RiskThinking.AI has operations in North America and Europe and provides its services globally. For more information, please visit www.RiskThinking.AI. Ron Dembo’s most recent book, Risk Thinking, Archway Press 2021, is targeted at nontechnical audiences who are faced with decisions daily in an uncertain world.
Biography
Ron is an academic author entrepreneur and consultant to the some of the world’s largest corporations and banks. He has had a distinguished academic career as a professor at Yale University and as visiting professor at MIT. He is a Lifetime Fellow of The Fields Institute for Research in Mathematical Sciences and has received numerous awards for his work in mathematical optimization finance and climate change action while running Zero Footprint.
Ron was previously the Founder and CEO of Algorithmics an enterprise risk management software provider with over 70% of the world’s top 100 banks as clients and 800 employees. After Algorithmics was acquired by Fitch Group Ron later founded RiskThinking.AI, a company pioneering the use of stochastic analysis to accurately price climate risk into the financial markets.
Awards
In May 2007, Dembo was made a lifetime Fields Institute Fellow.[10] This fellowship is awarded to individuals who have made outstanding contributions to the Fields Institute, its programs, and to the Canadian mathematical community.[11] Dembo’s alma mater, the University of Waterloo, honored Dembo with a Distinguished Alumni Achievement Medal for Professional Achievement in business and climate change, 2007.[12]
In 2009, Dembo was appointed to the Steering Committee of the World Urban Campaign, coordinated by UN-Habitat.[13] In 2008, he received a Green Toronto Award from the City of Toronto for his work with Zerofootprint,[14] as well as a Certificate of Recognition, Champion of Green from the Government of Ontario.[15]
Written by: Marie Cresswell, President, Thomas Cole Inc. and Co-founder Climate Change Leaders
Edited by: Heather Rosen, Writer
https://www.garp.org/podcast/stochastic-vs-deterministic-cr-092823