A model for universal ownership
The problem: the company risk paradigm
Today investors analyse climate risk on an individual company basis. On this view, companies face risks from the physical effects of climate change and from the policy efforts to abate emissions. Investors pressure companies to disclose these risks to price them into their valuations.
But, while valuable, there are serious flaws with this approach. Most significantly, it only tracks the risk climate change poses to companies, not the risk that companies pose to the climate. Investors, however, do stand to lose from the damage that company emissions inflict on the environment. This is because most large investors are so scaled and diversified that they are exposed to a significant cross-section of the world economy. When emissions damage global GDP, many of the entities that will bear that damage will be in their portfolio. But investors have no model or data to understand these risks. In short, investors have a one-sided view of climate risk and are therefore losing money because they cannot understand systemic climate risks.
A model for universal ownership
The application of universal ownership represents an alternative to this paradigm. According to mainstream estimates, companies emitting CO2e will cost the economy $100 per ton. These costs will fall - unevenly - on the global economy.
If financial institutions are globally scaled and diversified, when one company in their portfolio emits, the other companies in their portfolio will feel a significant share of the costs of those emissions. This fact gives diversified investors or ‘universal owners’ a direct financial stake in curtailing high-carbon activities. Crucially, these incentives align with the systemic interests of the economy over and above the delimited interests of individual companies.
Universal ownership has gained a lot of momentum in recent years, as well as the allied concept of ‘systems investing’. But it has been pursued at a high level of generality, which does not proffer real-world guidance for investors.
We want to change that by building a cost-benefit model to answer the following question:
Do the benefits a financial institution derives from CO2e-intensive assets outweigh the costs that its emissions impose on the rest of its portfolio?
We intend to answer this question to produce a decision-relevant ‘net portfolio cost’, showing whether an asset or a company is actually making financial institutions money when viewed in the context of their entire portfolio across time. It would allow investors to re-value assets and companies once their emissions costs have been reinternalised into their portfolio.
We aim to produce the world's first credible and scalable systemic investing metrics. It will allow investors to measure the costs of carbon dioxide equivalent (CO2e) intensive activities and biodiversity loss of company activity to their future portfolios. We will use advanced mathematics and machine learning techniques to integrate databases on ecology, climate science, economics and finance to make causal links between company activities and future financial market-level damage.
The model will deliver a transparent way for powerful investors to see 'net portfolio-level risk' - when certain company activities in the portfolio are harming overall value. For example, financing a coal company that is profitable each year but is, in reality, externalising costs through climate impacts across the investor's portfolio through time. The models insights will help investors minimise financial risk. Also, with the creation and marketing of high-quality climate-aligned funds.
We are open to collaboration on this project.