#28: The Only Woman in the Room: Boldness and Leadership with Jill Berry, Co-founder at Adatree – The SproutCast
In this episode, we chat to Michael Lebbon, founder of Emmi, about what climate finance is and the important role the financial sector plays in addressing climate change. We also discuss why carbon pricing hasn’t worked so well, carbon risk, and what this means as the world moves towards net zero. Michael also provides his best advice for people wanting to work in this field and finding your why.
Michael founded Emmi four years ago after spending more than a decade in global carbon markets where he realised the financial sector (and its immense capital power) held the key to global decarbonisation, but lacked the toolkit and consistent carbon financial infrastructure to do so.
So to set the scene on carbon and climate change, what exactly is climate finance?
Climate finance is effectively how we can integrate the risks that climate change poses into the financial system, or a better way to think about it is climate change is a risk. It’s effectively a risk and return and climate finance is all about bringing climate risk into the financial system. And so climate finance is all about climate change, risk adjusted returns, for example, if you can prove that you are a lower climate risk, you can potentially get, you know, trying to allow you to get a cheaper cost of capital.
Something that comes up a lot in climate finance is carbon pricing, is that all there is to it?
Around 20 to 30 years ago, we all thought carbon pricing was going to be the main policy lever. The Kyoto Protocol was a global agreement in the early 90s, where we’re going to basically have a globally constraint, we could emit so much carbon emissions. And the way that we’re going to do that is effectively say, the world can emit so many tons of carbon emissions, and we’re going to sit and achieve that we’re going to set a price on carbon. And then the way to achieve these targets is if you price something, it then becomes a marginal benefit. If you’re getting more benefit out of the cost of the carbon – you will emit it, if not – you won’t emit it. But since then, unfortunately, climate change has fallen victim to a bit of political football, the use of a better term, and so we’ve had the Kyoto Protocol, then we’ve had that open Copenhangen Climate Summit, then we’ve had the Paris agreement as the three big ones have all tried to create global climate agreements, which would then hopefully end up in a global carbon price. We do have some carbon prices going around the world. The European systems are a major one, there’s carbon pricing in New Zealand, there is carbon pricing in California, there’s some other in the northeast of the US. Technically, there is a carbon price in Australia. We thought carbon pricing was going to be the ultimate tool but unfortunately, we haven’t quite got there on a global scale.
Why do you think the pricing on carbon hasn’t worked so well?
There’s a few different ideas for this one. Realistically, my view is it’s because of the way our political system is set up. So carbon effectively does affect everything in our world. You know, since the Industrial Revolution, we’ve basically generated our economic welfare off fossil fuel and carbon emissions. So then trying to price something that hasn’t been priced previously. But everybody’s basically grown our economic welfare off is quite a complex task. It’s not simply an idea, this is the rules, and we’re going to set it where there’s a lot of caveats, there’s a lot of self interests and reasons they have to occur. And what we’re relying on is we’re relying on a political system to effectively make the decisions on this. Now, unfortunately, it hasn’t been as simple because we are affected by our political system being left versus right. And the left is using it as a blunt instrument to attack the right. And the right is using it as a blunt instrument to attack the left, they’re not actually trying to achieve the emission reductions that we need to to achieve, and to mitigate and effectively stave off global warming. So the core issue is that politics has got into it.
Where did your interest in climate finance originate?
15 plus years ago I had a role in a big investment bank in Australia and was about to become an investment banker. And whilst I could have done it, and I had the skills and I quite like finance, it’s something I was just missing. So I wanted to go back to university and study diodes, I felt a bit unfulfilled. And what really captivated me was behavioral economics, behavioral finance and asset mispricing. I remember talking to one of the supervisors and they said if you’re really interested in mispricing go and have a look at carbon credits analysis, what’s a carbon credit and that is where the spark really came from. Then the more and more I read, the more and more I was captivated by the fact that the financial system could actually solve global climate change
And what exactly is mispricing?
So let’s say I’m trying to sell a watermelon. A watermelon is worth $5 per kilo. I didn’t even know what a watermelon was worth and bought one for a while. These pricing, based pricing is all about what is the watermelon selling at $2.50? Or the watermelon selling at $10. Like how have we missed the mark of our rational models? Why are we not always getting those numbers? Why does the human experience always seem to drift away from what our models are saying like, are our models so bad? Or are there effectively cognitive biases and other heuristics going on? And that’s what captivated me, there’s this whole idea that our models aren’t perfect.
Do you mind elaborating on your mission and vision?
Absolutely. So decarbonisation is one of the biggest financial risks we’re ever going to face and we haven’t really turned our attention to this for the last 30 years, the markets are not set up to be able to understand, let alone manage how we do this transition. So that’s why Emmi exists, to help effectively take the blindfolds off. And it’s not just educating, but providing the tools for the market to be able to understand and manage the decarbonisation process in a very data and objective driven manner.
How does Emmi do that?
So if a company wants to reduce emissions by 30%, but the benchmark is saying 50%, what are you doing differently within your organization that allows you to get to the 30%? How do we reconcile that? Do we really think that’s doable? So we can basically get to the answer quicker. And as I said, that pulls a blindfold off around climate and carbon for the investors in the marketplace, because they don’t need to manage complex climate and carbon systems and data sets. All they need to be able to do is to be financially literate. And then effectively, they have a tool and an ecosystem to do financial analysis around carbon.
There’s so much data involved behind making up this Emmi score. How do you actually collect all this data? And how do you put it all together to form the score?
So what we do is we take financial data, we’ve got commercial data agreements with FactSet and Refinitiv Eikon, where we take the financial information to understand you know, it gives us the financial sort of not blueprint position of companies. And then with regards to the carbon emissions we use ISS as a baseline, it gives us a base of where companies are from a carbon perspective, scope one, scope two and scope three, we also do use Refinitiv Eikon, as a triangulation or cross check. We’re also very heavy on the data science teams to our team then do a whole bunch of effectively outlier analysis, correlation, econometrics.
It sounds like using Emmi, we can have a much better understanding of carbon emission risks. Now, why is that important? Why is it important to consider carbon risks as an investor?
The reason that we do what we do with carbon risk is basically to say – if you don’t consider carbon risk effectively, and you don’t manage it properly, you’ve run a very, very high likelihood of having massive downside performance in your investment portfolios. Now, as we decarbonize as an economy and as a society, those carbon emissions will become scarce, they will either become incredibly expensive to emit via some form of carbon pricing, or you simply won’t be able to emit them, because there will be some form of regulation that will stop that. What that means is, if you haven’t managed your carbon risk, all of a sudden, your value creating activities now either can’t happen because you can’t emit the CO2, that you can’t emit the carbon emissions, or they become incredibly expensive. And now all of a sudden your financial value proposition is heavily impacted. And there’s a large amount of financial risk, basically sitting on your balance sheet that hasn’t necessarily been identified in the past.
Is that thee idea of mispricing – the fact that carbon risk is not considered so companies with higher risk are not necessarily expected to have higher returns?
Absolutely 100%. Effectively, the higher your carbon risk is – you need to generate more and more return to effectively offset that risk. Now there will come a point in time where you simply can’t generate enough return to offset the risk that’s occurring. And so that’s where we then start seeing capital move away from these high carbon emitting activities capital will go searching for lower risk activities in the shape of, you know, some form of renewables, electrification of the transport system, hydrogen, all sorts of decarbonizing activities.
That makes sense and that’s why it makes sense that the solution to climate change is interference from the financial systems. Is there anything else you would add to that?
We still obviously need to generate the technology, we need to understand, you know, what the policies need to look like to inform all of that we still need to generate the products and services and people will need to use them. But unless we get the financial system across the line, we simply won’t have that flow. We effectively need to open the floodgates up to allow that flow of capital to happen so we can then start effectively growing the new decarbonized economy.
What kind of advice would you give to someone who’s interested in going into this field?
So it’s a really good question. My advice would be, do a bit of research, talk to some people and actually understand what this market is really about and what is trying to be achieved and how it’s going about being done. Don’t just jump into anything, because you think it’s a good idea. Read about it, educate yourself, talk to people, there are some courses that are now coming out around, see if it’s really interesting. Start with turning those stones over and talking to people.
What has been your biggest sprout and growth moment in your life?
I had some really good advice when I was younger, I got told: do something that you love, and you’ll never work a day in your life. It’s doing something that you’re passionate about, and that you actually enjoy, and it drives you. And if you do that, and you become really good at it, you’ll make enough money, like stop worrying about trying to bring in enough money and start doing stuff that you want to be doing and it drives you and the rest will look after itself.
When did you start realizing why and what you want to do?
I don’t think there’s a light bulb moment, it’s more like when something doesn’t feel right I would always question it. When you’re doing stuff, and it constantly feels like the wrong thing, question it and then go. But it’s that questioning when it doesn’t feel right. And so you sort of in a way have to iterate and find where you’re comfortable. And then you can develop a way, what you want to be doing and why you’re doing it. If you have an open mind and have a curious mind and question things, you will iterate and be open to changing and making something that seemed like hard decisions.