Climate science and financial analysis fall in love this week on The ESG Update. Dr. Pooja Khosla and her colleagues at Entelligent dig deep into complex climate models to help investors manage the risks associated with the transition to a net-zero economy.  Tune in to learn how some climate data falls short and how Entelligent is developing better solutions for investors.

Transcript

This transcript has been edited for clarity.

Dan Carreno, Change Finance:
Welcome to The ESG Update presented by Change Finance. I'm your host, Dan Carreno. I am the head of business development at Change Finance, and we are an ETF provider dedicated to environmental, social, and governance investing. Our mission is to help investors align their portfolios with their values without sacrificing returns. And my guest this week is Dr. Pooja Khosla. She is the Vice President of Client Development at Entelligent. And Dr. Khosla is one of the inventors of Entelligent’s Smart Climate® technology that helps investors mitigate climate-related portfolio risk. Doctor, how are you today? Can I ask you to tell us a little bit more about your background and your education?

Dr. Pooja Khosla, Entelligent:
Thanks for having me. I’m Dr. Pooja Khosla, and I started my career back in India in 2002 as a professor and as a consultant to corporate solutions in microfinance. I decided to come to the U.S. in 2009 as a visiting professor at CU Boulder.

Dan Carreno, Change Finance:
Well, I definitely have additional questions about the work that you're doing at Entelligent, but there is an article that we came across from Bloomberg that I wanted to get your perspective on first. So if it's okay, I'm going to summarize the article and then get your feedback. The article is titled “Environmental Debt Risk is Bigger than Japan's GDP.” This article is summarizing a report from Moody's, who has recently flagged $7.2 trillion worth of debt as having high inherent exposure to physical climate risk. Specifically, they've identified seven industries that have very high risk on the physical climate risk spectrum. Those are the fossil fuel industry, coal, oil and gas, the chemical industry, mining, shipping, and utilities. They say environmental considerations are putting at risk $79 trillion worth of assets across the globe. What I was surprised to see is how much the United States in particular is on the front lines of this issue. The United States last year was one of the countries in the world the most heavily impacted by climate change with $60 billion in damages, mainly due to hurricane damage. It looks like this conversation about credit risk related to climate is becoming more front and center in the financial industry. And Dr. Khosla, what is your feedback?

Dr. Pooja Khosla, Entelligent:
My feedback about this risk is that this risk was always there. It came into the picture with the IPCC, and we all realized that this risk is there. Policy, technology, corporate solutions, should take this risk more into consideration than ever before. It's true that the U.S. is behind, but U.S. corporations are doing a pretty good job in accounting for these risks by at least starting reporting. If you have seen the CDP reporting measures, the reporting between the S&P 500 has increased from where it was, which was less than 25%, five years ago, to 75%. We observed that corporations are reporting because of shareholder advocacy and pressures to report more. The climate policy from Biden's presentation looks very solid. The U.S. will join the Paris Agreement. Fingers crossed that this happens fast and smooth. And the central bank commitment to join other banks in order to make sure that the metrics and the standards of these climate reportings are set right where the U.S. can take some leadership and transparency in its reporting, as well as achieving the target metrics. So, we may see this change with a higher momentum than what we have seen before, because the power of emotions from investors and corporations was always there, but now we have the power of policy on top of these emotions. 

Dan Carreno, Change Finance:
Excellent. Well, I would highly recommend anybody who is involved in fixed income investing and is concerned about this credit risk to seek out the article and specifically the underlying Moody's report, which is about 53 pages. But let's take this opportunity to talk a little bit more about climate-related financial risk, and specifically from the perspective of the work that you're doing at Entelligent. Can you tell us a bit more about the organization and what specifically you are offering to financial professionals? 

Dr. Pooja Khosla, Entelligent:
Absolutely. So Entelligent has been granted a U.S. patent on scenario analysis and climate-related risk assessment. This gives Entelligent and its licensees exclusivity regarding security selection and index construction using scenario-based climate risk assessment. These elements can, in turn, be included in financial products that stand out in the marketplace. Entelligent’s focus is on climate transition risk. There are a lot of companies like Moody's, Four Twenty Seven, and TruValue Labs, who are engaged in the physical risk aspect. But in order to make sure that this physical risk is minimized, we need policy action. We need technological action. We need increased efficiency and energy. So this is the transition risk component, and Entelligent specifically deals with the transition risk component.

Dan Carreno, Change Finance:
Let me ask you a bit more about transition risk, because one of the things that I sense is that there is not necessarily the degree of urgency around this issue that there needs to be from asset allocators. So help me understand. Is this something that's going to happen ten years from now, five years from now? Can we put it off, or is this a more immediate issue?

Dr. Pooja Khosla:
I will be honest. The targets we are setting, 1.5 degree targets, they align to 2100. I don’t think you and I will be recording a podcast in 2100. For sure, not me. But in order to achieve that transition by 2100, we need a policy action today. Policy action such as a carbon tax, increased energy efficiency, and electrification standards. This is going to impact prices of commodities, such as oil, gas, nuclear, hydro bio, not in 50 years but today. So yes, the results are long-term, but in order to achieve these long-term results, the action is required today. The demand will be impacted today, which will impact supply chains and business models of the companies, reflected in their profitability and balance sheets today. It won’t take 20, 30, 40, or 50 years to do that. 

Dan Carreno, Change Finance:
Can you talk a little bit about the landscape for ESG-oriented data? There has been a big explosion in the ESG industry, and there are many more data providers coming into the space. In terms of Entelligent, relative to some of the other data providers out there, I wanted to get a sense for how you differentiate.

Dr. Pooja Khosla, Entelligent:
Absolutely. I think it is very important to understand who is the company, what are the emotions behind the company, then the differences that company offers to the market. In 2015, our CEO, Thomas Stoner, a seasoned entrepreneur, and Dr. David Schimel, leading climate scientist and Nobel Laureate, founded a research organization to advocate for the use of capital markets as a critical solution to climate change. They realized the need for climate scenario testing before this need was realized by European taxonomy or the TCFD in the U.S. And they wrote a beautiful book, Small Change, Big Gains, Reflections of an Energy Entrepreneur. I'm really attached to this book because this book was a factor in making me passionate about what I am doing today. In this book, they clearly presented that it is possible to stabilize rising global temperature and to remain under global targets, if capital is deployed to limit large scale systematic risk associated with climate change. Then they were looking into how they can actually do it in terms of providing a science-based solution to the investment community. They can go into the climate model, translate the forecast of to 1.5 degree, enable companies to do climate and energy scenario testing, and provide the climate risk data points to the investment community. When they were building the team, I was hired as a data scientist. Today we have the solution available, and leading PRI signatories, such as Société Générale, UBS, and the United Nations Joint Staff Pension Fund, are utilizing these solutions in their products.

Dan Carreno, Change Finance:
Excellent. Well, you've mentioned scenario analysis a few times. For the mere mortals out there that don't understand that well, like me, could you go over exactly what you're referring to and how climate data and modeling are translated into usable financial data? 

Dr. Pooja Khosla, Entelligent:
Definitely. So these climate models, integrated resource assessment models, having data from NASA, from the UN, from The World Bank, consolidate as many as 140,000 variables. They use differential equations and causality to find how the prices of fossil fuels will look under high carbon taxes, electrification in the building and transport sectors, and increased energy efficiency. They give us the ability to test how a company, like Tesla or GM, is going to react to these policies today and in the future. These models allow us to test whether these companies are exposed to these policy changes, which can immediately turn around the business, or if the companies are resilient to these changes. 

Dan Carreno, Change Finance:
I'm really glad you mentioned that. I think that's been a bit of a frustration for us at Change Finance, as well as many others that we speak to, is that so much of the carbon data that we consider is backward looking. Carbon intensity is a measure of how a company has been utilizing carbon to generate revenues up until the day you look at that number, but that number is not telling you what things are going to look like over the next three to five years. It sounds like this scenario analysis is allowing investors to have more forward-looking data on these companies. Is that accurate? 

Dr. Pooja Kholsa, Entelligent:
That is accurate, but in scenario analysis, there are two kinds of data providers. One kind of data provider looks into broad sectors and regions and then tells you what to do in 2,100 or 2050. Everybody is providing the final destination. We all know that we have to divest from coal, gas, nuclear, but nobody is giving you a GPS. What you should today to achieve those alignments. Everybody is giving a divestment approach. Very few are providing a short-term, soft divestment approach, where they provide you the ability to choose leaders that can maximize carbon reductions. And yes, in order to maximize carbon deduction, we may have to look into the dirtiest sectors because they have the most scope to reduce carbon emissions. 

Dan Carreno, Change Finance:
I know that there are a few different ways that financial professionals can utilize the data from Entelligent. Can you give a brief overview of the different services that you provide? And if folks want more information about those services, where can they go to get more information? 

Dr. Pooja Khosla, Entelligent:
Entelligent has a lot of solutions for banks, institutional investors, pension funds, portfolio managers, and asset managers. So we provide a subscription where this data can be utilized in internal dashboards to formulate investment strategies that are TCFD compliant and that accelerate carbon reductions in the portfolio. Our data is available through a direct subscription or through FactSet. Our second offering from Entelligent is for climate-resilient index and product development. Our partners, like UBS and Société Générale, are developing indexes and index-based products, such as annuities, ETFs, or mutual funds with us, which are using Entelligent IP. These indexes are not only climate-resilient, but back tests show that they are outperforming their relative benchmarks, as well as outperforming the carbon standards of the benchmarks. We also offer carbon evaluation and portfolio optimization services to their clients who do not have the internal capacity and analytical ability to align their portfolios with net-zero emissions. For further information, you can reach out to me. My email address is pkhosla@entelligent.com. Or contact info@entelligent.com.

Dan Carreno, Change Finance:
Thank you again, and we will wrap it up there. Anyone who is listening who wants to find the articles or resources that we discussed during the podcast, you can find those in the transcript of the podcast, which will be on our website, www.change-finance.com, under the INSIGHTS tab. And of course, if you have any feedback for us or additional questions, you can always get in touch with us through our website. Thank you to those that tuned in. Thank you, Dr. Kholsa, and we will be back soon with another episode of The ESG Update.