EP 208 – Alex Taylor and Lapman Lee – ITC Asia 2023 ESG Panel – All of These Things Are Fundamentally Interconnected

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Michael Waitze worked in Global Finance for more than 20 years, employed by firms like Citigroup, Morgan Stanley and Goldman Sachs, primarily in Tokyo.  Michael lived and worked in Tokyo from February 1990 until December 2011.  Michael always maintained a particular focus on how technology could be used to make businesses more efficient and to drive P/L growth. Michael is a leader in the digital media space, building one of the biggest and fastest-growing podcast listener bases in the region.  His AsiaTechPodcast.com show has listeners in more than 170 countries and his company, Michael Waitze Media produces some of Asia’s most popular podcasts.

Guest
Lapman Lee

Lapman is a Professor of Practice with a focus on and passion for ESG and FinTech. He is a Board Member of the FinTech Association of Hong Kong, where he founded the InsurTech Committee. Prior to his academic role, he was a Partner at Deloitte advising clients on ESG, FinTech, Governance.

Guest
Alex Taylor

Alex is the technology investment lead for QBE Ventures - defining the direction for new and existing venture investments and portfolio companies, applying an emerging technology lens to inbound propositions to define a way forward. QBE Ventures empowers exceptional founders to scale companies that will re-imagine insurance. QBE Ventures builds alongside early and growth-stage technology companies through partnership and investment.

In partnership with ITC Asia, the Asia Insurtech Podcast discussed ESG (Environmental, Social, and Governance) investing in the context of insurance and insurtechs with the panelists Lapman Lee, Professor of Practice ESG FinTech and Climate Tech, and Alex Taylor, Global Head of Emerging Technology at QBE Ventures.

The panel emphasized the importance of understanding and managing risks associated with climate change, both in the present and the future. This involves helping companies assess and mitigate their exposure to climate events, as well as encouraging sustainable practices. The panelists highlight the need for insurers to go beyond traditional risk assessment and consider long-term impacts and resilience.

The conversation touches on various topics, including the use of technology such as IoT and machine learning to gather data, assess risks, and incentivize behavior change. Examples are given of how analyzing rooftop data prior to hurricanes can lead to proactive repairs, reducing carbon emissions and minimizing business disruptions. The potential of parametric insurance and IoT devices to improve risk assessment and response to climate events is explored.

The discussion also covers the concept of carbon intensity in portfolios, where companies evaluate their carbon impact and transition risks. The panel emphasize the importance of quantifying and addressing these risks, considering different scenarios, and making informed decisions to contribute to a sustainable future.

Find our best effort transcript below.

Michael Waitze  00:05

Hi, this is Michael Waitze and welcome to a very special edition of the Asia inshore tech podcast in partnership with ITC Asia 2023. We are going to discuss ESG environmental, social and governance investing in the context of insurance and insurtechs today. ITC Asia kicks off tomorrow, May 30. And today will be your last day and your last chance to get tickets use the discount code AIP 200 to get $200 off the current ticket price. Now, let me quickly introduce our panelists for today’s conversation. Lapman Lee, Professor of Practice ESG FinTech and climate tech and Willers Towers Watson APAC climate and ESG insurance leader and Alex Taylor, Global Head of emerging technology, QBE ventures at QBE insurance. I just want to say thank you to both of you for coming back on the show. We’ve had both of you on multiple times. Actually, it’s great to have you here. How are you doing today?

Lapman Lee  01:02

Now I’m great. Thanks for having us here. And Michael could not love to talk about my my, my dream topics of ESG, FinTech and governance.

Michael Waitze  01:14

So let’s do this. Let’s just jump right into this right. And let me know, I want to start with you. Can you give us a definition of climate risk? And I’m particularly interested in this fiscal and transition climate risk as well. And then maybe the follow on both of you can talk about some ways emerging ways to measure this transition risk. Please go ahead.

Lapman Lee  01:31

No, no, it sounds sounds good. I mean, maybe for the audience very good to get started with most of the listed companies are required to follow the recommendations of the SoCal tcfd task force for climate related financial disclosures. And one of their one of their four pillars of reporting relates to risk management. I think if you look at climate risk, there are really three parts to it, there is departs called fiscal climate risk, which is basically you have acute and you have chronic climate fiscal climate was chronic meaning your did your rising temperatures, sea level rises, how does it impact your assets and liabilities, and you also have your acute your natural catastrophes due to extreme weather events, floods, typhoons, wildfires. So fiscal was really about direct damage to your assets or your property. If we then move on to transition risk, it is that is more related to the financial risks that your are, as a company are exposed to due to social, economical, political, technological risk from moving to a low carbon economy. So could for example, if you have, I’m going to talk with an insurer and the investor tomorrow anyway. What are your assets and liabilities today, for example, you invest in oral companies, what is that worth? After regulation, of course, is a big question mark, how that will develop. And then lastly, what tcfd also stipulates is something called liability risk, which is basically potential of stakeholder litigation or regulatory enforcement of not meeting regulatory requirements. So physical risk, transmission risk and liability risk, are the three main pillars of climate risk. Got it? Alex, maybe

Michael Waitze  03:20

you want to talk about emerging ways to measure this risk and some of the data categories around this as well?

Alex Taylor  03:26

Yeah, absolutely. And, you know, just leading on from what Lachman said there, it’s it’s interesting to reflect on the interconnectedness of all of the components that he’s just mentioned. So when you look at the the acute risk and the cost of a major natural catastrophes, and also both the the opportunity cost of both participating in transition components, particularly around limiting carbon emissions and other emissions from organizations, but, but also the cost or our economy of migrating away from those things. So you know, it all acts in concert. But to your point, the challenge that we’re seeing at the moment is that measurement piece, and there’s some really interesting things that are starting to pop up in this space, particularly around the challenge when we’ve got many millions of organizations globally, and all of them are reporting in different ways that they’re not structured into any defined format. You know, the use of technology, like large language models, for example, is a key example of this where we can start to look at reading entire company reports almost instantaneously and extracting standardized structured information around carbon emissions, methane emissions, and so on. So this is an area that’s pushing forward very rapidly. But, you know, frankly, I think it’s one the world’s going to have to get a lot better at because it’s very difficult to actually understand where you’re going unless you understand where you are. Now, how important

Michael Waitze  04:51

is this reporting standardization or you might you do make a really good point you can take an LLM. You can read through these company reports, but they’re all written and structured in a complete The different way, how important is it to standardize this? And maybe both of you can talk about this a little bit as well, because then you can compare apples to apples as opposed to apples to fish, right?

Alex Taylor  05:10

Yeah, look incredibly important. And I mean, obviously, Lachman, you can jump in here. But this is a big area of your study. But the one challenge I think we’ve got globally is not just the standardization of reporting, but also the fact that there’s not really an incentive in some cases to report clearly, it depends on the economy and the climate, but making sure that we are comparing apples to apples is a fundamental component of transmission risk itself.

Lapman Lee  05:37

Sure. So I think if tcfd disaster for climate related financial disclosures is very often used as a basis for reporting requirements. For example, the Hong Kong exchange is work requiring companies to report against tcfd. And what does it mean tcfd As the pillar around governance, basically, they want to, they want an organization to disclose what is your governance and risks around climate, not just risk, actually, also risk and opportunities that you’re getting? Through climate change? They look at strategy, what’s your strategy to address that to take advantage of these opportunities or address a risk? There’s a risk management part where you talk about physical climate risk, transmission risk and liability. And then I think the last part, which is probably useful is metrics and stat and targets that you’re setting. And in that respect, there are a number of studies out there that talk about what are metrics that companies need to, by default, as a standards provide? Maybe I want to introduce a new concept here as well, please, in sustainability reporting, there is this concept of double materiality? And what does double materiality mean is, it’s on the one hand, what’s the impact of climate change on your firm that so outside in but also inside out? What’s the impact of your firm on climate change itself? So obviously, if you look at the impact of climate change on your firm, you need to look at those transition with fiscal risks, liability risk measures, there could be for example, I don’t want to sum all of them up could be what’s your exposure to carbon related assets, by by sector? What’s your impacts from technologies, there are a number of measures out there to stick a little bit with this point of impact of climate change on a firm, there are measures that look at climate Value at Risk that mingle physical and transition risk, which is sometimes maybe a little bit difficult, not too much marketing, my role at Willis Towers Watson, but they do have a measure called Climate transition value at risk, which only looks at climate transition value risk on your bones and your equities, goes without saying I can see it in your minds as well. There are lots is a lot of judgment call, by sector by industry, because we don’t know exactly the path how regulation, how technology will evolve, as well. So the last part moving to depart on the impact that the firm can have on climate change itself. It could be look at your investment portfolio. How do you decarbonize it? How do you mobilize transition finance? How do you currently finance emission? What do you do in the future? So does double materiality and tcfd. Looking at four pillars is a is a good start in my mind to read these reports.

Michael Waitze  08:36

Alex, can I ask you to comment in the context of your investments in your investment theses, where this fits in in the insurance and the inshore tech world? And in particular? I mean, I know that this CT var thing is particular to Willis towers, Watson but the VAR itself Value at Risk is something that markets have been using forever. Right? So as a concept, it’s actually super important. Can you talk about that as well?

Alex Taylor  08:58

Yeah, absolutely. And one thing that we’ve been trying to do a lot of at QB II, as you know, citizens within the insurance industry, is to help the companies that we insure understand their risk, not just today, but in a longitudinal fashion as well. And if you look at some of our recent investments in companies like Jupiter intelligence intensified, and in geo site, a lot of the time the discussions that we find ourselves having is as much about not just the risk, they represented the way that we price a policy now, but what that might look like in 20 years and 25 years, or what happens when the next hurricane or tornado or flooding event hits. We’re even starting to have discussions with some organizations now looking at the decisions that they might make. Should I build a new corporate site at this location? What is my forest fire explosion here? You know, should or should I be doing something fundamentally different? And more importantly, perhaps what’s happened to other customers that I can learn from? And broadly and this is actually the subject of my talk at at ITC. Asia, how can we encourage our industry to be more resilient, so that from a VAR perspective, we drive down the cost of major events because of their exposure to major climate events, and also make better decisions to help decarbonize the economy as well. And to my point before, all of these things are fundamentally interconnected. But the key to all of this is knowing and understanding statistically measurably the impact that we as an industry as an insurance company, as an insurance industry, and our customers and the carbon economy participation that they represent, collectively adds together to make sure that we can actually make sensible decisions together. And fundamentally, this is the thing that things like the NZTA, the net zero insurance Alliance recognize it’s that there will be certain activities and certain locations that fundamentally become uninsurable, our collective responsibility is to make sure that that’s not disruptive, and then everybody’s acting on the same information.

Michael Waitze  11:03

There are so many things to unpack here. Can we talk a little bit more about this connectivity for me? What exactly can an insurance company do to incentivize the companies and the the assets that they’re insuring to become close to this net zero, that the NCI is trying to encourage people to do? Do you know what I mean? In other words, sure, if they don’t insure something, then the hope is that that activity, if it’s not, if it’s bad for the environment, if it’s bad for climate, that they won’t do it, but what other types of things can insurance companies do so that they can still insure things but still encourage people to behave properly?

Alex Taylor  11:37

I think that’s a really important thing that sort of the other way around there. And it’s about the things that could be insured or that in some cases aren’t being at the moment, okay, that act as carbon positive inputs into the economy. So the classic example is the challenge that a lot of renewable energy projects have in attaining insurance, particularly things like offshore wind, large solar panel installations and solar farms, lithium battery projects, a lot of the challenge with any new risk in an insurance context is that from an actuarial perspective, it takes time to evolve decision around what the risk actually is, and how to price for that. The challenge we’re seeing now with a lot of these things are moving so quickly that understanding the particular risk of a particular lithium battery chemistry or the resilience of a particular type of glass and solar panels, or what types of weather effects are going to damage offshore wind turbines, it’s a real challenge. But the cost of not doing these things to our collective economy is actually higher. So what we need to create as an industry, what we are creating as an industry is a way to engage in these projects to make sure that it’s fundamentally practical, but as well as that, that we can incentivize the creation of things that contribute to the NZTA goals.

Michael Waitze  12:50

Alex, do you think this is a place where parametric insurance right so where it’s not being indemnified, but where there’s an automatic payout, particularly for offshore wind and for other climate related in whether related stuff? Is that is that a role that parametric insurance can help play where it offsets a little bit of it at first, and then you worry about sort of the indemnity part later. And

Alex Taylor  13:09

that’s the great thing about parametric, of course, is the way you do have a risk that’s difficult to quantize, where there’s this challenge on exposure, that you can understand in advance what your limits might be, and lets you offer an insurance like product in a fundamentally challenging market? And the answer is absolutely yes. And I think we’re starting to see some really interesting parametric projects out there that are doing some very meaningful work or ether risk is a great example of this. And in crop insurance in in weather related impacts on the eastern seaboard of the United States, where we’re starting to see things like this pop up, where there’s an identified gap in the market that some of the traditional players aren’t filling. And as a result, you know, in pure capitalistic tendencies where there’s an opportunity or product appears, which is one of the wonderful things about this space.

Michael Waitze  13:59

And I mean, maybe you can comment on this as well, right? Like, what are some of these initiatives that the insurers even in particular in Hong Kong are taking to encourage this kind of behavior?

Lapman Lee  14:08

Of course, so I think bigger picture definitely, I think the insurance industry is a very important industry, we ride probably more than 6 trillion in premium volume globally. That’s the insurance part, insurers are also investors produce 46 trillion in assets. So think I really like Alex’s part around resilience. So I think as long only institutional investors, insurers definitely have a lot of incentive to divert their capital to climate resilient enterprises. And just also tie back to the part when we spoke about physical and transition risks. Many companies are looking at what is the carbon intensity of their portfolios, but if you think about it, it’s very possible that portfolios that have high transmission risk, no necessarily have a high or low or carbon intensity. So I think people need probably to move beyond only carbon intensity but focus also more on them transition was because it does hurt your wallet at the end of the day. But to go back to your question Waitze avec in Hong Kong that insurers are engaged in companies as part of TDI, I’m also helping out to interview Hong Kong based insurance CEOs, the lifestyle of the AIA, AXA and HSBC. And if you look, in all those interview, one thing that comes back is that they say, Okay, we don’t want to just talk about us as an insurer, we’re an insurer or investor. We are also a responsible, well, employer as well. So they show typically initiative under each of those pillars. And I think the pillar that they didn’t mention is the part where they influence other companies, as Alex was saying, to incentivize new innovation, as well, if I think about debts, these insurance can help to foster climate tech. And climate tech is to me different things, by different industries. And I would probably look at the industries that are emitting a lot transport, agriculture, energy. And I think there are probably classification under each of those sectors. So you have different technologies that can play a role and different companies. So that’s probably by industry. And then the other layer would be around companies that help with ESG reporting. How do that do you do that data, especially if you’re a smaller listed company? How can you make the cost of being compliant or a good citizen easier to think it’s more than to stimulate invest, like QB is doing investing themselves into ventures to show that it is working? I think that that’s well put your money where your mouth walked to talk where your mouth is? Basically, that makes perfect sense.

Michael Waitze  16:53

Alex, did you want to add something?

Alex Taylor  16:56

Yeah, absolutely. And look, I mean, LePen just touched on it, the the big thing that’s being, I suppose, not ignored, but there’s less focus on is the reporting challenge with smaller entities as well. I mean, we have to remember that the significant percentage that small companies globally represent in terms of total carbon output. The big challenge we have is there a standards in place for listed companies for for major industries like banking and insurance. But when it comes to to local agricultural concerns and production, there’s so little information out there, that the cost of obtaining particularly emissions reporting often outstrips from an insurance context, the value of the premium that you get in the door. So coming up with easier ways for companies to report on emissions, to even discover their own emissions is key. And this is something that I love. I mean, there’s a great company, I think they UK based called geo financial, we have no association with them. But they’re a very interesting company that do space based methane reporting. So for a company being able to understand methane emissions, and of course, methane is actually a much worse climate gas than than co2, that does break down to the atmosphere relatively quickly. But it’s not fantastic. But in many cases, when you show a company that methane emissions, they’re genuinely surprised. And in many cases, it can actually lead to an improvement in efficiency and operations by capturing that and doing something with it, rather than just laying it off gas. So there are these great interconnected moments, again, where you get a net positive because of a discovery of something related to your emissions, but it also benefits your operations directly and your bottom line. And that, you know, frankly, I can’t think of a better example of something where, by looking at admissions and reporting, we can actually drive forward things not just from a capitalist sense, but also from a transition risk perspective to

Michael Waitze  18:46

how do we make this easier for SMEs? I mean, both of you did mention this idea of large companies, right. And they do have the resources to do both the measuring the reporting, and also they have, they do have transition risk, which I want to get back to in a second, because I think it’s kind of important. But how do SMEs handle this? Right? Because they’re hard to it’s hard enough for them just to stay in business. And to keep up, they may not even be aware of how to measure and how to do this. Is there a big opportunity? Do you think for an InsurTech to come in and just say, we’re going to build the full stack for SMEs to be able to then participate in this net zero, right, whether it’s methane or carbon or anything, but just to lower their impact on the on the environment?

Lapman Lee  19:25

Yeah, no, no, definitely. If I may say, I think if there are a number of InsurTech out there that do exactly that they provide, for example, if if I’m SME ABC, they basically ask you, what industry are you in? You can take for example, do I want to comply with Hong Kong changed, or I want to apply with other regulators? They then show you what requirements they ask you what are your material risk and opportunity? And de dem basically provide a template that’s linked to a workflow where you can say, Oh, my risk officer look after this strategy, look out for that. That’s a relatively inexpensive way to way to go about these requirements instead of having a expensive consulting firm look through everything and makes it more standardized as was I think there are definitely solutions out there for SMEs. At the same time. I think there are, I think governments or regulators are also looking at providing more guidance and standardized templates to companies themselves. And when I say that, I’m thinking about climate scenario analysis and stress testing very often people like, what does it mean, for example, the UK, I spoke with the UK inaugural ESG director, Sasha Saddam, he told me that they’re also providing more guidance around how does your transition plan look like? What What are your risk? What are your opportunities? How do you put it together, which makes it easier for the investor as well, if there’s that standardization, again, back to to Apples versus pears idea. So he is one and governments regulators providing more guidance templates, and insurtechs. Helping? Well, companies SMEs, to start to have a start

Alex Taylor  21:05

a practical example, if I could. And this is an area that’s been particularly fascinating to me in recent months, is looking at hurricane Aiden. In Florida as a case study, we’ve been doing some really interesting work with geo site looking at rooftop analytics, particularly where we can using machine learning models identify damage to rooftops prior to them being destroyed in a hurricane. And there’s a really fascinating picture of that, that I showed a customer recently, where there are two properties next to each other one that has a galvanized tin roof. The other one next to it has a classic bitumen tile roof, the title, the bitumen tile roof was completely destroyed in the hurricane, the tin roof has all been fine. And you imagine that when you’ve got hundreds of 1000s of roofs that you’re repairing in Florida are replacing entirely the the net output of carbon emissions as a result of all of that construction work, and the negative effect on the economy. To your point, Michael, the existential threat that organizations face, you know, if the roof is torn off the building, and we had a customer like this, where, you know, they they went out of business as a result of of a leak in a roof that that was, you know, covered to a point but you know, it couldn’t cover their stock and certain other things. So, you know, the impact of making sensible decisions prior to a major event, particularly where you’re exposed to those things, we’re starting to look at the behavioral analytics pieces of this. So if you have a discussion with a customer, and say, Look, you know, your roof is damaged, we can see this already. And here’s someone that could fix this. And this is what might not happen as a result of the next major hurricane, if you replicate that 100,000 200,000 times. And not only are you saving probably millions of tons of carbon from being emitted in the atmosphere as a result of remediation and rectification work. But there are businesses that will be in business that might not have been previously. So everybody benefits from this awareness and the information. But ultimately, it’s up to the individual up to the company to make decisions as to what they might choose to do, frankly, watching them do it is an insight in itself.

Michael Waitze  23:08

Yeah, can I get your can I get both of your opinions on this idea that I’ve heard. And that is, I was having a conversation a couple of days ago with one of the founders of wind, right, so they installed IoT devices into buildings, new buildings and existing buildings to measure the normal and the abnormal behavior of water, with the idea that water is actually more dangerous than fire, right. And if you can measure all that stuff, then the follow on to the insurance industry is you gather all this data, and then maybe you can write better policies, but you can also encourage better behavior. You just talked about roofs and having 100,000 roofs and hurricane in. And I wonder if there’s a way to distribute the cost, right, in the same way that we talked about with the water and IoT sensors, by installing sensors, you know, opt in on everybody’s roof buildings, homes, you know, commercials and residences and stuff like that, to gather weather data on a regular basis in a distributed fashion. And for people that put that stuff on the top of their building, or inside the building, however you want to do it, you can lower their insurance premiums as a trade off for getting the data, is there a way to do that as well, which then helps on both the parametric and the indemnity side for Netcat events, right, that are directly related to climate change. Does that make sense?

Alex Taylor  24:21

Yeah, absolutely. And, you know, it’s, it’s fascinating when you look at a lot of these endeavors. And look, I love IoT. I’m a technologist and an engineer by heart. The challenge on commercial terms as always, the cost of such an endeavor versus the reward. Yeah, I mean, water leak, classic example. I mean, expensive shutoff valves don’t look that expensive in the individual. But when you look at deploying them to an entire portfolio, you can be talking hundreds of millions or billions of dollars. Having said that, there are recent nascent technology changes that makes certain of these things that weren’t previously possible, suddenly possible. There’s a great example in this so I don’t think a lot of people know this, but you In the iPhone that a lot of people have these days, in fact, in most Android phones, you’ve actually got a pressure sensor, it can very accurately detect the pressure in the air to the point where you move it a couple of feet upwards and downwards. And it can see that it can also see, when the pressure Drummond, the air pressure dramatically drops as a result of a, you know, an upcoming Stormfront. One thing that’s been quite fascinating,

Michael Waitze  25:22

there’s a barometer. Is that what you’re saying? Yeah, go ahead.

Alex Taylor  25:25

Absolutely. It’s actually use the reason it’s there is not just for fun. So that in combination with the pedometer, you can actually see people moving upstairs, and you can see that water with pattern. But using the same technology, and some insurers have embedded using this feature in their app, they can tell their customers, when a hailstorm is coming they can tell them to shut their windows or to to cover their cars or whatever it happens to be, or in some cases get themselves out of personal danger like in you know an oncoming hurricane or tornado, which which translates to fairly rapid drops. But that’s the classic example where the economy itself has incentivized the deployment of a mass IoT fleet that most people don’t even realize is there, the net cost of taking advantage of it is essentially zero. So this is the kind of innovation that I really love, where you get these 10 Gentle effects of decisions that are made by companies like Apple and Google that have real knock on effects to citizen weather gathering, for example.

Michael Waitze  26:23

I love this as an idea. Let me Can we talk a little bit about his carbon intensity in the portfolio as well, unless you wanted to add on to what Alex was just saying, because I want to understand what it is better? Go ahead.

Lapman Lee  26:32

Sure. Now, I do want to add some of that is actually a great opportunity for the insurance industry to to improve its image even further. Because there’s a certain image that the insurance industry has in Hong Kong, for example, agents selling insurance, I think people are more and more are realizing also fruit to health and wellness to wearables that insurers can provide advice. If you give them some info, they are willing to provide your rebate in or a discount in insurance. I think this is a good opportunity to provide tools, advice to rebrands, the insurance sector, I mean, a lot of my students, they don’t consider the insurance industry. But but when they understand that, well, one, the money being paid at the top levels of insurance, or what it really is about that a lot of technology, a lot of the latest innovation is actually happening in insurance. I think this is an opportunity to make insurance exciting as well. Climate tech, using IoT, etc. It’s fun. Yeah.

Michael Waitze  27:34

Yeah. I mean, I was just gonna say that was the whole idea that I was talking about earlier. If you believe that a Fitbit and an Apple Watch is going to help you on the insurance side? Well, I was just thinking that the IoT on the roof is just a Fitbit for your house or a Fitbit for your building. And of course, you have to do it at scale. But it’s just the same idea.

Alex Taylor  27:51

It absolutely is. I mean, one place that we’ve seen this particularly strong is in larger commercial building management. So there’s an Australian company called sim CITM. So what they do essentially, is deploy a piece of infrastructure that connects to a thing called BACnet. And BACnet, is essentially the infrastructure control system. That’s almost an industry standard across every major commercial building, it connects to H back and to elevators, and to lighting, and so on and so forth. So this is the system and through platforms like sim you can understand your energy usage. Is it the elevators? Is it the lights? Is it something else that contributing to my emissions to my power use, but also predictive failure? You know, our event in the the elevator going to fail? Is something gonna go wrong with a track? What can I do that might prevent this from happening to do predictive maintenance and predictive failure? But I think we’re going to start seeing a slow migration of this technology into to smaller buildings into homes, that covers not just the electrical components, but other components as well. What do I need to do now, that can prevent some kind of negative outcome in the future? And from the studies that we’ve done, there’s a direct correlation between customers that are willing to engage with the nature of their risk and loss ratio. So that’s quite a profound concept when you think about it, that customers that understand risk, generally have better outcomes and risk. And that’s the whole concept behind resilience.

Michael Waitze  29:16

Let them Did you want to add something because I do want I want to go back to this idea of the carbon intensity in the portfolio just for people that may not understand what that means, what it actually means, and then how you measure that as well. Yeah,

Lapman Lee  29:26

I think you’d be like, look at climate transition value at risk in your portfolio. What do you do that say you have five steps to look at your portfolio? First of all, you look at what look at different scenarios that are out there, whether it is a 1.5 degree limit of temperature rise or different scenarios that are pretty standard that you can look at applying those scenarios into models, look at what is the impact and then then that’s the part where you need to do a lot of judgment calls around how will that impact your demands? Say for example, it differs obviously if you’re an oil company for his word or your electric vehicles manufacturer, how does it impact your demand, not just your, your product itself, but also your raw materials. It could be that right now, it might be very carbon intensive to get to cobalt, nickel, etc. But in the longer term, if you use those in electric vehicle you might save. So you have to look at both short, medium and longer term to see the impact. And the first step of climate transition values at risk. How do you quantify that? How do you quantify those risk on your assets and for insurance also on your liabilities? And then fourthly, And fifthly? Look at your overall portfolio, are you exposed to certain risks? Are you concentrated? Should I be too exposed? In certain industries, areas or technologies? Even? Am I betting too much on one or the other? I mean, if you look at Asia, I think it’s, it’s an interesting region as well, for everyone, home to 60% of the world’s population, obviously a significant contributor to the world’s greenhouse gases. But at the same time, you know, you we it needs to be a just, and fair and inclusive transition given the West Europe, US probably have gone through emitting a lot developing economies, whereas some of the Asian economies are still growing. So I think it can be a cookie cutter approach as well. So I think Asia is key in, in this fight against global climate change. So I think there are different steps to look at your portfolio, though it’s not all, how to say fully transparent, fully standardized, I do recommend companies to look at it at least you know, what you don’t know. And you can start taking informed decisions, which is what your boards are needing, otherwise, you will get the depart around liability risk you get. Yeah, you get litigated? I guess. So, Alex? Yeah, look,

Alex Taylor  32:04

I think that’s a really important point there on the maturity of an economy versus the impact on transition risk. And, you know, obviously, a lot of Western economies have had not just a very long time to consider these things, but have a lot of historic wealth, that can be used as part of that transition to perhaps do things a little bit more cleanly a bit sooner. The the challenge we have here is that, you know, Asia is actually the powerhouse of the world that you know, her tremendous percentage of complete global economic output comes from the Asian economy, and is consumed in large part by the West. And we have to understand the relationship between mature economies that can transition particularly into clean energy, and the products they consume and where they’re from, and the impact that this transition is going to have on those economies. So again, that theme of interconnectedness, but very easy to forget, if we don’t consider it in this specific

Michael Waitze  32:57

level. And you brought this up twice, actually, companies and automobile companies. I’m not an f1 fan. But it’s a big business. And one of the biggest sponsors of f1 is Aramco and Aramco, Saudi Aramco is obviously one of the biggest oil companies, if not the biggest oil company in the world. But they’re also doing some interesting work on working with the f1 group to transition all of the engines from, you know, oil based engines to electric. And I’m curious, and that’s at scale, right? It’s a gigantic company that everybody knows. So it’s very public as well. Is this the type of transition that you’re talking about? Because it’s an oil company that could just keep going and die as an oil company? Or move into becoming a technology company and electrical field, be vehicle related company and then own that space on top of it? Is this the type of transition you’re talking about?

Lapman Lee  33:46

Yeah, it is. I mean, also, if you look at one thing that I always tell the regulators as well is, yes, there are green bonds, you can invest in products that are already doing good, but what you need to do to make to transition to a netzero economy is to help industries that are not so green now, but want to get there. So they’re the transition finance part is very important. So yes, definitely it is. If I were an investor, I will look as for example, in this case study, Aramco. How will they How will a a stock a share in them change in the next five or 10 years? I look, I try to look beyond statements PR, what is really happening or I think one good part that a number of exchange are looking at is also don’t just mention qualitative statements, how much money are you going to spend our invest? I think that is probably a good litmus test or a good demonstration of what our company is actually doing. And that will impact our transition. Obviously, the the path to technology innovation, and what technologies differs by industry, oil and gas is a different one. But at some point, you will see different industries probably competing are diverging. It’s a very complex system. But I think we do need to get that started. It’s a complex transition. Otherwise, we will have cops every here, cop 2728. But you will only get statements. But if we don’t move the needle will still end up nowhere. And again, I think insurers have a paramount role to play to foster invest, ensure de risk this journey to a low carbon economy. Alex, I’ll

Michael Waitze  35:30

give you the last word.

Alex Taylor  35:32

Yeah, look, I think that’s a really interesting point you brought up in the investment in industries that might look wasteful. And look, I mean, Formula One might from the outside look quite wasteful. But if you consider the research and innovation that’s gone into reducing drag coefficients for the electric vehicle and the benefits from even the kinetic energy recovery system and Formula One, you know, we can lead to the dynamos that are connected to the wheels and electric vehicles that allow kinetic energy to be recovered from going down hills. This is a great example of the way that traditional industries that might have been quite energy intensive emissions intensive historically, are allowing us to drive forward the world as we go through this carbon transition. And I’d like to say so much more of that. I think there are a lot of very good examples of exactly that. And the places we need to be looking.

Michael Waitze  36:21

Okay, Lapman Lee, Professor of Practice ESG FinTech, climate tech and Willis Towers Watson APAC climate and ESG insurance leader Alex Taylor, Global Head of emerging technology, QBE ventures, QBE insurance. You guys are awesome. Thank you both again very much for joining us.

Lapman Lee  36:38

Great to be here and thanks for being such a great host

Alex Taylor  36:41

pleasure as always

Episode 285
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