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Nov 12, 2019
Ashby Monk is an institutional investment Guru, helping the likes of multi-billion/trillion dollar pension funds and sovereign wealth funds rethink the way they view risk. In this episode we dive deep into the wonky side of finance and climate risk.
This week in Agriculture Adapts:
Borna (ClimateAi) 0:03
This is Agriculture Adapts by ClimateAi. Every week we speak with industry leading executives farmers and, academics to get a 360 view of how the agriculture sector is innovating to stay ahead of a changing climate. I’m your host Borna Poursheikhani. And I am your cohost, Himanshu Gupta. We’re a team of climate scientists and agriculture entrepreneurs trying to make farming more resilient, profitable and equitable as we transition to a new age of agriculture. This podcast is our journey as we explore the hurdles and opportunities that lie ahead for the industry that feeds the world.
Okay, hello, hello. Hello. We have a very exciting episode today with Ashby Monk, the executive and research director of the Stanford global project Center and the chairman of long game Ashby. Thank you for joining us today.
Ashby Monk 0:46
Thank you so much for having me.
Borna (ClimateAi) 0:48
So I knew you were one of our investors, but Himanshu told me on the way here that you would actually one of the very first investors the backed ClimateAi when we’re just too bright eyed, bushy tailed Stanford students, just an idea. So what is The story behind that I’m trying to embarrass Himanshu as much as possible on this podcast
Ashby Monk 1:04
is not possible, he’s such a badass. First of all, it’s awesome to be here. Thanks. And I’m flattered to be a part of your, your podcast journey. For me the journey with Himanshu and Max started, quite literally, I looked it up on my calendar on July 11 2017, they walked into this very office that you’re sitting in and told me about a wacky idea to use some of the the tools they’ve been developing here as graduate students to build a company. And what did I think? And obviously, a month or so later, we we were the first investors in in climate AI and have been on the journey for the past. I guess it’s over two years a month to start a founders never want to admit that that much time has gone by. We normally want to pretend like we got here in two weeks instead of two years. But here we are
Borna (ClimateAi) 1:53
awesome. So I think a good place to start would also be if we can sort of get some background on what you’re doing here. You’re global Project center as well as long game.
Ashby Monk 2:02
You’re sitting at the global project center and Stanford University’s School of Engineering, we focus on system transformation. So how are the biggest industries in the world going to change as a result of technology or climate or any of the other kind of mega trends that you see out there in the world? We call these global projects. So how do we solve climate change? How do we think about urbanization in the built environment? What is the digitization of infrastructure mean for the financing and all the different things that we need to think about when it comes to scaling this planet for you know, 910 billion people. So that’s what we’re doing here at Stanford, the work is to produce research. So our inputs are smart students and talented researchers, and data and our outputs, our papers and books. And I don’t want to tell you too much about the production function because it’s painful but a huge focus of ours is on long term investors. And I think the reason why Manchu showed up at this office a little over two years ago, was because we’re one of the few outfits in academia that’s really thinking about how pension funds and sovereign wealth funds and the big pools of capital in the world are investing. And that’s important in this case, because those are organizations that have decades long time horizons. And if you have a decade’s long time horizon, all of the non financial risks that people talk about today end up just being risks. So climate change, wealth inequality, whatever you want to point to in terms of these non financial risks that often get lumped under ESG or CSR or ESRI or any of the other acronyms, but you go far enough out and they just become risks. So if you’re going to hold agriculture, say for 50 years, you’re going to operate with a different risk profile. than if you’re going to hold that agriculture for a year. And so we were natural aligned with the project that Himanshu and Max were were undertaking,
Himanshu (ClimateAi) 4:08
so Ashby one unique thing about the research that has been produced by the center and by you is how industry oriented that is, of all the influential investors that I’ve met in the personal capacity in the professional capacity around the world. I have not met anyone who doesn’t talk about your research. Tell us a bit more about like, how are you able to conceptualize projects and research which the industry finds very relevant and useful, especially like the long term finance industry?
Ashby Monk 4:40
That’s awesome to hear. I didn’t you know, the news to me that we’re having the the impact that we are I got to put this podcast over to the dean of the school. I’ll start with the humble approach, which is to say we’re kind of a medium sized fish in a pond that is too small, like there should be more people studying these organizations. There aren’t because the data isn’t usually in a format to make it very usable to academic researchers. So sovereign wealth funds, endowments, foundations, family offices, these are our targets of analysis, but to find data that allows you to make generalizations about their activities or the behaviors is incredibly hard. I mean, the old saying is if you know one family office, you know, one family office, I promise you that saying is true for sovereign funds, pension funds, endowments. And if you think the traditional kind of methodology of economic research is quantitative based, you know, running regressions trying to draw correlations. This is a very hard place to study, you know, this industry. In an engineering school, we aren’t bound by methodological constraints in the way that normal academic departments are. So as an engineering school, we’re here to solve problems. It’s in our charter, we need to actually take a step beyond just understanding the world we need to try to make the world Better Place, which is a fun constraint. That means we can do case studies, we can do interviews, we can do surveys, we can do anything we need to do to get closer to the solutions. And in our case, those solutions are helping the biggest investors on Earth, invest more sustainably, take into consideration these longer term risks to you know, that are threatening our existence on this planet. And turn those risks into opportunities because that’s the only way you get pension funds to do anything. You have to couch everything that they do as an opportunity to make money because they’re bound by fiduciary duty to only make money.
Borna (ClimateAi) 6:37
So you’re wearing a shirt that reads long game right now. Can you speak a little bit to what long game is and what your role is there.
Ashby Monk 6:43
So Stanford is a bit of a wacky place in that it lets us academics scale up and scale down our time. So I’m 50% time here at Stanford and the rest of my time I’m, I’m building companies. I used to spend my time consulting with pension funds and trying to change their governance and and launch new things. platforms that that demonstrate innovation and creativity in this space that is often lacking in innovation and creativity. But I got frustrated a little bit with running into brick walls and that space. And so I just decided to start building technology companies that could help people achieve the same objectives. And long game is one of those tech companies that is trying to bypass, you know, the work that I’ve done for so long, which is how do we change the governance? How do we change the behavior and instead drive behavioral change through technology. And so with long game, it’s a gamification of personal finance. We have a mobile app is one of the most engaging financial apps I promise you’ll ever use. We have variable rewards. I’d like to describe it as augmented reality in the sense that the more success you have in our games, and in our meta game, where there’s this long game that is part of the long game app, the more success you have in your personal financial life. So we design absolutely every game to link up with your longer term financial goals. So the company He’s going great. I’m chairman of the board, and I co founded with Lindsay and Lindsay Holden is our CEO. I think we’re probably up to about 30 people across the world now.
Borna (ClimateAi) 8:08
So you mentioned you were trying to change the governance, some of these larger funds and bring in innovation. What is the problem that you’re trying to solve there? Are you just trying to make it more efficient?
Ashby Monk 8:18
So efficiency and innovation, they run in opposite directions? So I’m definitely not trying to bring more efficiency to like the most efficient space. When you talk to pension fund boards. That’s what they want. You know, they’re like, Look, how can we do this more efficiently? Like how can we squeeze more out of this organization? And so what there’s in effect saying is, how do we prevent any more innovation from taking place. And unfortunately, these organizations are the base of our capitalist system. So with 100 trillion dollars coming out of these long term investment organizations, that’s the money that powers private equity, venture capital hedge funds, like that’s where they get their money, pension funds, pension funds to the base. And so if you want to change the incentive, To have private equity, you can either go to war with private equity, or you can go to the people who fund private equity and say, Look, you’re paying too much like the risk return here shouldn’t be compensated with a two and 20 fee structure. It’s too much. And so this problem I’m trying to solve is that the slow moving conservative organizations need to change to kind of keep up with the times and reflect the fact that they are the engine of capitalism. We think of them as social welfare institutions. When I say the word pension fund to somebody they think elderly. They think retirement security, and they’re not wrong. These organizations are the base of our social welfare state. Universities function because of the endowments foundations provide grants to fund health care, like all this stuff is now inter linked. Social welfare organizations function because they have giant investment organizations that power capitalism. That’s probably why So shocking, not as many people are studying pension funds and how they make decisions, because they’re incredibly important to earth and everybody on it, but it’s also this opportunity to then say, all right, so we have these socially conscious organizations, by their DNA, they exist to provide pensions to the elderly, 60 years from now. They exist to fund transformative health care treatments. They exist to fund universities and train the next generation of thinkers. That’s why they exist. And so taking some of that DNA and transporting it into the way they think about investing in capitalism, that’s this incredible opportunity. But to do it, we need innovation. And so that’s why 95% of what we do here is think about how do we catalyze and manage innovation in these organizations that were literally designed through prudent person rules, fiduciary duties, not to be innovative. Innovation was a bug Wasn’t a feature.
I really like that term engines of capitalism, take it and run with it.
Himanshu (ClimateAi) 11:06
That is not how we amateurs tend to know about pension funds. And we tend to associate them with more about like socially conscious DNA that you talked about. And just talking about innovations and its diffusion within the big pension systems and organizations. I would like to highlight one of the research that you did, which was on impacts of investing in a socially or carbon efficient portfolio. And in that research that you did with Soo Young, you talked about how carbon efficient portfolios can generate abnormal returns over not so carbonization portfolios. Would you like to talk a bit more about that?
Ashby Monk 11:41
For me that’s like one of those milestone papers in my career, because, first of all, it was made possible because there was this data that true cost put together which allowed us to assess the carbon intensity of companies, not only their primary production, but their secondary and tertiary production. So everything that’s Going through into the production of services and goods could be captured and in the true cost carbon intensity data, which then gave us an opportunity to create a whole bunch of models around investments and performance and multifactor kind of type approaches. And ultimately, what we found is what you mentioned for the midsize and large companies, those that are efficient with their use of carbon in the same industry versus those that are any efficient dramatically outperform and we controlled for all kinds of things like manager quality and all this. And we still found that it was the climate issue, specifically the carbon intensity issue that seemed to be an indicator of performance. That’s a paper that we’re still in the process of reviewing. It’s going through peer review right now, and we hope it’s going to get through and published in the next six months or so. But if the findings hold true, which we think they will, you can now make money by taking climate change into consideration and The power there is that for so long for those that don’t know, the pension industry, the opposite case was often used to justify not thinking about climate change. The traditional financial models would tell you that if you reduce your market, so if you take the bad climate actors and cut them out of your market of investable opportunities, then you’re going to generate lower return risk adjusted, that’s capital asset pricing model being applied to this notion of climate change. And so now what we can do is go back to those investors that were saying, look, we can’t think about climate change because it’ll reduce our returns, we can say, look, thinking about the impacts on climate change can accelerate returns, and now that we can show that it becomes their fiduciary duty to consider climate risks and their investing. The aim of fiduciary bound investors is probably over 100 trillion. So if we can use papers like that to change $100 trillion worth of behavior, you save Earth from catastrophic effects of climate change. That’s like why that paper, you’re right to point out that it was kind of a seminal moment, we still have work to do. I mean, you know, people are still giving us cool feedback on the paper. But that’s the value of papers like that.
Borna (ClimateAi) 14:18
So what do you think is the reason why some of these big funds are failing to incorporate climate change or climate risk, or carbon efficiency into their existing portfolios? Is it like disbelief? Is it a lack of tools? Is it too much uncertainty with how it’s going to map out moving forward?
Ashby Monk 14:35
It’s a mix of just status quo bias in these organizations like, this is how you do finance and why would we do it differently? You know, we had a meeting, probably less than a year ago, where we had a bunch of C suite pension executives in a single room and they’re still complaining about it, about having to think about climate risk and investment decision making and saying, what are you doing to placate stakeholders rather than What are you doing to integrate it into your decision making? It’s a very big difference. You know, if you’re just placating stakeholders, then, you know, you may as well not even be doing it right, like until you can integrate it and have it affect your investments, they won’t have the consequential impacts that we’re looking for. So they’re status quo bias. You know, there’s kind of the norms of finance, which we’re still dealing with, and then there’s a lack of data. So a big part of this will be bringing a price to this kind of long term risk that allows a short term investor and I know pension funds. We don’t think of the short term but even the people in those organizations, their compensation structures are four years. Right. And so they’ve got benchmarks that they’re trying to beat over four year hurdles. Well, they’re not worried about climate change over four years, but they are worried about their hurdle. So don’t tell me to limit my investable universe. When I need to Make a four year return. So then the reason I raised that is it then leads to the next issue, which is it’s not just the norms and the status quo. It’s actually we have baked into these organization compensation models that make it really hard to raise climate risk to the attention of the people actually deploying the capital. Right now. It’s kind of like a CIO issue. Maybe it’s an asset allocation issue. And then it’s an ESG issue, which is another way of saying it’s a due diligence check point. It isn’t yet a core deal making issue. And eventually the data will emerge that allows us to understand this deal. How is it going to be affected by climate change? 20 years from now, is this Timberland going to be producing or yielding the same amount of timber? Is this real estate building going to be underwater? Will this port be vulnerable to storms because of flooding? I don’t know what it’s going to be. But what we’re missing is the data to drive those deal by deal analyses and Then we can begin to like show the leadership of these organizations how climate change will affect the value of the assets they’re holding.
Himanshu (ClimateAi) 17:08
We’ve been reading, you know, the articles from the pension fund managers where they talk about how they are increasingly investing in agriculture. farmlands as a diversification strategy, because returns from farmlands are not correlated with equities and bond investments. what we think is, there’s one risk, which is common to equities, bonds, and farmlands, which is climate risk. So I’m curious to get your thoughts on using farmlands as a diversification strategy, but not focusing on climate risk.
Ashby Monk 17:39
There are certain risks that are non diversifiable. And climate change is one of them. Where if you go out long enough, just about every asset will be affected by a two degree change in the planet, right. So whether you’re a real estate holder or you’re building FinTech apps, it’s going to be really hard not to manage that. Now is farmland diversifying? Yeah, I mean, in the traditional way of thinking about it, you know, especially if you’re producing goods that people need to eat to survive, it’s like infrastructure in that respect, like, you are tapping into something that is going to carry on independent of the cycles of economic activity people have to eat. But I would also say that a lot of the farmland today is kind of operating at a, at a different level where it’s kind of organic, and it might not be as immune from the cycles, as we expect, or the investors expect. You know, they’re selling into Whole Foods, and maybe people won’t be buying at Whole Foods when they might go to Trader Joe’s, I don’t know. But look that it is right that people are trying to buy into farmland in order to get the diversified exposure. I don’t love that as a reason, you know, I think, who is Warren Buffett that said, you know, diversification is a crutch for people that don’t understand their assets or something. Like that, I don’t know, bad with quotes. But most of the big investors need to dig and understand their assets. And as they dig and understand their assets, that’s where this climate change issue should emerge, using diversification as a reason for getting into real assets. To me, it’s kind of missing the opportunity.
Himanshu (ClimateAi) 19:17
One other thing that you mentioned is is that these pension funds and the long term investors need to look at climate risk, because these are long term risk and their returns are also like focused on long term horizons. What one factor which I guess we normally see in the climate change community is the fact that climate change is not only impacting the long term, let’s say temperature or precipitation trends, but it’s also changing the seasonal to annual variability of extreme events, including floods, hurricanes, you know, right now, while we are talking hurricane Dorian is about to hit the US. So if you are a portfolio manager, or you know, your mandate might not be long term, but what you’re seeing is an increased volatility of your portfolio. Loyalty even for the next three years and four years. Do you have some thoughts around and message around for the portfolio inverters or portfolio managers whose horizon is short term?
Ashby Monk 20:09
There’s a higher level question, which is, can you make a long term strategy out of a bunch of short term investments. And right now, that’s what we’re attempting. So, for the most part, our asset owner investors are still reliant upon asset managers. So those are professional money managers that take the pension capital, do the homework and go find opportunities to invest in those are people that have short time horizons, because they need to demonstrate performance in order to maintain the money, you know, they got to show the pensions that they’re making money for the pensions to leave them with the money or give them more money for another fund. And so it’s very hard for those asset managers to think beyond the short term. And so in order to get those folks thinking about climate risk, we need to bring the climate risk down to a scale or over a time horizon. Where we can show real and meaningful impacts. And that is possible. But then it’s not necessarily the asset managers that you’re trying to discipline. It’s you’re disciplining the asset managers by showing how the things they’re investing in would be harmed by climate change. And so like, as an example, if you’re an investor in real estate, those real estate assets need to be insured. Will the insurance companies raise the cost of insurance for those vulnerable assets? Well, if that’s possible, because you have the right data science tools, which I know you guys are impart building, then you can take this intergenerational risk, which is climate change, and like bust a time machine on it and bring it back to the present day by showing that the insurance on the asset is different today. Because of the The insurance companies price climate change into their insurance products. Whether or not we convinced the asset managers to think about climate change then becomes irrelevant, because I fundamentally think it’s going to be almost impossible for us to get the asset managers to truly care about climate change and not just kind of think of it as a how do we manage our stakeholders? How do we make our asset owner investors go away, rather than truly use climate change as a lens of investment analysis? That’s hard. You need a long time horizon to do that. And so that’s where these insurance products can be very valuable because everybody needs insurance. Nobody wants these catastrophic events like Dorian, which you mentioned to wipe out our assets. So there’s our opportunity helped the insurance companies price these things correctly, price it with a climate lens, make the good actors, cost of capital lower than the bad actors, until we had the FICO scores. You and I could bounce checks all over again. We could overdraft our credit cards, we could do whatever we wanted. But we needed the data of the FICO score to show us that our behavior had consequences. And we went to the bank to get alone, my interest rate would be way worse, because I’m bouncing everything than yours because you’re a badass entrepreneur. Or maybe you’re bouncing checks. I don’t know.
Borna (ClimateAi) 23:23
How do you think we’re funding the company?
Himanshu (ClimateAi) 23:30
So I feel like you also mentioned socially conscious dnase of these big pension funds. And it seems like one of the missions of long game is also about optimizing the financial health of your customer. Oh, for sure. Yeah. One trend that we’re observing in ag investing is as more and more of these pension funds move into farmland, even if they want to consider climate risk. They want to figure out a way of not mitigating that risk, but transfer that risk to the farmers. A typical example of that would be you know, a big ag read Buying a farm loan and then leasing it out at a consistent rate to the farmers. If you look at the climate risk or risk of drought or a flood on that land, let’s say if you bought land somewhere in North Carolina or Iowa, the grower still has to bear all that risk. And all said and done 60% of world’s population still depends on agriculture. At the time when they only contribute to less than 5% of the world’s GDP. Should the pension funds be including, you know, the well being of the growers as part of their overall broad investment strategy? I mean, look, let’s do the theory. And then we’ll do the practice.
Ashby Monk 24:34
The theory, which I acknowledged rarely does lead to practical outcomes. But but the theory is, if you’re taking a long term view, then you should care about all these actors. This was the point I had earlier, which was whether it’s climate change, or wealth disparity, if you’re thinking 40 years down the road, and you’re trying to deploy capital in a way that maximizes investment return over that time horizon, without trading in and out of assets. Then you should care about the growers, you should care about their sustainability and their ability to build their own business. And frankly, you should love the fact that there’s independence so that you’re not ending up with monopolistic pricing of a single massive seed producer. Not to be named. But, you know, and so that’s the theory. The theory is we’re we need to take that long term time horizon that we’re using to convince them to think about climate risk, and use it to get them to think about all the risks and climate as a wedge issue. So so you know this about me, but but like, I didn’t start to do climate risk. Like I ended up in climate risk, because it was this issue that was super freakin hard to get pensions to pay attention to. But it’s not the only thing I’m passionate about. It’s that time horizon issue and these long term risks, and the fact that these are the engines of capitalism that can either create a better world for us all to live in including the farmers and the growers or they can participate in the, you know, the clear cutting of Timberland. One or the other, you know, do you want the farms burning in Brazil? Or do you want sustainability? It can literally start with the pension funds and sovereign funds. By the way, who was the big vocal critique of the Brazil farms burning? Norway came out the Norwegian sovereign wealth fund. You can read the news in Bloomberg. They’re the ones coming out against this because they probably own the Timberland down there. So does Tia I think BCI. CDP q AP two, I think they all loan Timberland in Brazil. Right. So that’s the first thing. The second thing is this notion. This is the practical part of alignment. So increasingly, the pension community want to understand alignment of interests with the people who are delivering them the ultimate returns. Remember, a pension funds exists to generate returns to pay pension So returns with a goal. And for a long time, they would partner with private equity funds hedge funds, where there was a complete misalignment, the hedge funds would get rich, even if the pension funds lost money. And so the hope here is that this new focus on alignment of interest that is emerging as a result of the egregious behavior of alternative asset managers will permeate into places like farmland, and people will start asking how do we profit with our growers rather than at their expense? So that’s a long winded way of saying I kind of don’t know, but I had some ideas.
Borna (ClimateAi) 27:44
What do you say to the people who would argue that things are working right now? So why fix something that’s not broken? Or would you argue that it is very broken and payment has yet to come?
Ashby Monk 27:55
Holy Cow is it working right now?
I look around and I don’t see, I don’t see a lot work. And we’re facing existential crisis not just in climate change, but in kind of retirement security for our aging population, like, are we ready to have old people dying as homeless people, like we’re 63% of Americans don’t have $400 in a savings account, you know, so we’re in trouble. And like, if you’re lucky enough to have a defined benefit pension plan in this country, which is a small fraction, those plans are themselves vulnerable, because they’re so underfunded. And they’re based on such kind of hopeful logic that those plans are going to continue to make 7% indefinitely. So we’re not taking climate change near serious enough. Our infrastructure is completely dysfunctional in this country, people aren’t saving money. And yet for a very small population, it’s working incredibly well. So financial services industry captures about 40% sent to all after tax corporate profit in America today. And I think that’s egregious. You know, if you want to become a billionaire in the world today, fastest path isn’t to start a tech company Himanshu I’m sorry, my friend, the fastest path is to set up an asset management business and go sell asset management products to pension funds. There’s twice as many billionaires in the asset management space today in the world than there are among technologists. So what does that tell you that tells you that the rent seekers in our economic system are dominating? That’s not a functional capitalist system. We need the producers, the value creators to be put back on top, you know, and so for me, that’s about encouraging long term thinking, changing the way pension funds invest, you know, minimizing their reliance on these intermediaries, challenging their dysfunctional logic which leads them to investing in private markets, all these things that are individually rational from the front perspective of a single plan, but are collectively crazy from the perspective of our, you know, sharing this planet for the rest of time. That’s all the things we need to fix in the political environment. And whether it’s Brexit or whatever, build a wall, like all of that is a function of this capitalist system not functioning as it should. And the thing that I think is funny is like, this was never really a free market. The base of the system is public pension funds. There’s a word public there. So it’s hard to change these organizations because many of them are inherently bureaucratic, a public pension plan, a sovereign wealth fund, a foundation which has status under the US tax code. So foundations exist also thanks to government as do endowments, the only asset owner that can’t point to the government for their Resistance is the family office, depending on where they made their money, and they probably made it in finance off a pension fund. So, so like, it’s it’s not crazy to say that, like, we’re already have not been operating in a free market. So in a way, what we need to do is take these enterprises that have been made dysfunctional by bad decisions by policymakers, and try to make them better. make them more dare I say free to make smart decisions and and think long term and do all the things that when you go talk to pension investors, I encourage anybody to go do this, go talk to pension funds and say, Hey, is there anything you would change about your job about your organization, like, grab a bottle of wine because you’re going to be there for a long time? These people have endless gripes. That’s my world, right? They have endless ideas on how to improve their functioning. Whether it’s CalPERS and calsters, or it’s the Contra Costa County pension Plan, they all the people working there are usually very smart. They’re mission driven. And they know that they’re operating in a constrained environment, and they want to make it better. But they’re bound up in the politics of government usually. And so doing the right thing is hard. And the smart capitalists on Wall Street off and take advantage of that.
Borna (ClimateAi) 32:20
So let’s say these funds decided to take a longer term perspective, specifically with respect to climate change. When we look at agriculture, how would they go about understanding the risk as it pertains to like a farms exposure to the risk versus a farmer sensitivity to the risk or the growers ability to adapt to change? Like how can you sort of start to quantify this nexus of like, very confusing variables?
Ashby Monk 32:48
I think there’s two paths here. One is helping people understand which agriculture assets which are stuck in the ground and probably only have a series of crops they can produce, it’s probably hard. There’s probably high transition costs, you know, to switch crops, which ones are most vulnerable to climate risk? Because the big long term investors that are buying farmland like they’re not buying it with the idea, they’re going to maximize profit over two years, they’re buying it because they want to hold it. And so if you can help them understand which properties are vulnerable, and which aren’t, the idea would be they would avoid the ones that are vulnerable. And they would go after the ones that aren’t. And that would trickle down and change behavior change, planting patterns, crop selection, I don’t know. That’s for you guys to tell me. That’s the like risk management tool. And I think we can probably get quite a few pension funds to begin to think like that. I’m seeing organizations like APG in the Netherlands or UC regions across the bay here thinking about alternative data and thinking about new ways of quantifying climate risk as it pertains to these types of assets. And it does help with asset selection. The next phase would be to say, look, markets aren’t pricing this correctly. I mean, I know because there’s projects I’ve been involved with in the last six months where like we’ve been done these assessments of assets on behalf of pension funds. And and it’s true, like markets still quite aren’t pricing in the effects of climate change, especially in public markets. And so what that means is, you can either ignore climate change or you could see it as an opportunity for outperformance and so that’s the next layer. So the first layer is risk management is a toolkit for understanding farmland and picking and choosing the second one is outperformance. And that’s a word that gets up just about all pension funds eyebrows up in the air because they all have to generate out performance. They all do. If you look into their return assumptions and how they’re going to actually pay pension funds, they need to beat markets. This is a world where everybody expects to be above average. It’s like Lake Wobegon. That’s our planet. And so if you’ve got an inefficient market, a private market Like farmland generally is you can go in and take a long term perspective and back and buy properties that aren’t properly priced price them according to your logic and 10 2030 years from now expect that eventually the markets will price it and you’ll get a nice boost and that’s the outperformance. somebody’s not pricing something that you’re pricing. That’s how you that’s what hedge funds do. And pension funds can do the same thing. They just do it over a much longer time horizon.
Borna (ClimateAi) 35:31
So let’s say something comes out tool comes out that is able to tell you where these climate risk prone areas are. How should people go about dealing with, let’s say, a family who’s owned a farm for four generations that is then placed in a deemed climate risk area and their property is heavily devalued? Should they be compensated somehow, for a risk they weren’t aware of they got thrown on them that’s like that could be a family’s generational wealth being tossed to nothing.
Ashby Monk 36:00
is a super hard question. It reminds me of like, the way policymakers talk about manufacturing workers in this era of automation, or what will soon be probably the three of us in the era of AI. Like, are we going to get compensated when robots are better at our jobs? Maybe if the scale of the impacts is wide enough, but I do fear that for those individuals, it’s probably going to be reaction to climate change, rather than, you know, removal and, and kind of rebuild, you know, for talking about the Gulf Coast. You know, I’ve participated in the strategy sessions around how do we move these people off the coast that’s going to go away, cost is going to go away 50 years from now. So what do we do with these people? How do we, how do we think about that not just as like a catastrophe in terms of the environment and the displacement of all those people that have spent again, generations there, but how do we then also think about unlocking capital To rebuild the new coastline or rebuild something that’s backed up off the coast with an opportunity like that, where you have enough people being moved or displaced, you could almost catalyze a new generation of investment to take advantage of the new coast. Right? You could make an investment case to a bunch of investors. If you have a single farm in a single spot that can no longer grow the Pino Newmar grapes that made the Robert Parker 98 point wine. You know, you need an insurance product to cover that risk, you’re not going to get the government stepping in to pay you to move. And that’s where these insurance products are probably going to be sought after. You know if I’m a winemaker. And my terroir is the key component of you know, the way my wine tastes. And for non wine drinkers, terroir is kind of a all encompassing word to mean the geography where you’re growing or you’re one. If that’s all going to change then I probably want insurance product. You know, maybe, maybe if I’m a purveyor of such an insurance product, I should just go to tasting rooms across burgundy. I think that’d be a work trip. And I’m happy to come with you on that.
If you guys want to go and test out that hypothesis,
Himanshu (ClimateAi) 38:16
you know, maybe this could be a part of your new research now, which is not just wines, but like, an offshoot of your research on like how carbon efficient portfolios outperform common inefficient, similar argument could be made for a more climate resilient portfolio farmlands would outperform a less carbon, less climate resilient portfolio of farmlands. Do you think this is a research that your center would like to take and inform pension funds on?
Ashby Monk 38:46
Absolutely. The job of an investor is to maximize the return per unit of risk. So first of all, most investors don’t even know the risk. So step one is to say Hey, did you know that this farmland you’re buying is vulnerable? Most aren’t doing that diligence right now, most want that diligence right now, but they aren’t getting it. They could do a tick box at the end read the ESG stuff to talk a little bit about climate change and, you know, 50 mile blocks. But as it pertains to this piece of property or farmland, I don’t even think they’re aware of the climate risks, forest fire flooding, extreme drought, extreme heat, extreme cold, whatever it is, you know, the endless risks that we’re gonna end up facing. I don’t think most are tracking that. At least that’s in my experience. You know, they’re like, Oh, we got earthquake insurance isn’t for a few hold property here in California and you’re like that it will. What about mudslides? Well, we haven’t even heard mudslide as a risk. It’s like Yeah, well, that’s a real risk. If you have forest fires and then you have an extreme wet winter, guess what happens? mudslides, but it’s like that word You know, I was having a conversation two weeks ago, and that word was like, Huh. And you could see that, like, they hadn’t even thought that through. So step one is like, just awareness. And then step two has to be how you respond to these, how farmers are going to respond. You know, what are the if I’m just as there was an investor that I was talking to, probably six months ago that was buying all these parking garages? And I was like, What? What are you gonna do when the driverless car revolution hits? And they had like, 12 answers. They’re like, Okay, well, we have a thesis. thesis. Number one, driverless cars can park closer together? Okay, maybe that’s true. You can you don’t have to open the doors thesis. Number two, we got the air rights. So if really driverless cars take over, we’ll just build an apartment building. It’s a great spot. So like that’s an investor who’s making plans for the driverless car revolution. And farmland investors will have to take a similar scenario. Aereo type analysis like they’ll look at a farm and they’ll say, okay, we’re growing this crop here. What are the other crops at each, you know, precipitation level and heat level that we could grow here and there’ll be a plan. Maybe you guys could help build such a plan that’s like, what are the pathways to evolving a piece of agriculture over time? If we don’t stop climate change?
Borna (ClimateAi) 41:24
Can you speak a little bit to the relationship that exists, if any, between people who are working for these funds and the operators of the actual assets, so in this case, a farmer in relation to a fund manager, what it is and then perhaps what it should be?
Ashby Monk 41:41
Unfortunately, I think the ag space is still a little bit of the Wild West here, like the number of large asset owner investors that operate in the agriculture space. I would on a direct basis, right so like they’re, they’re buying farmland is probably less than 15 globally, and there’s 10,000 of these organizations, you know, I can like quickly rattle off eight. I think we did that the other day amongst you. And so I just assume that my knowledge is 50% full, right? So let’s say this 16 there’s just aren’t many. And so it’s hard to generalize, which is kind of how we started this podcast, which is like, you know, if, you know, one pension fund, you know, one pension funds. So Michigan is very thoughtful about agriculture, but that’s one American plan. I can think of a foundation where the CEO of the foundation is also the chairman of a farming company. In general, the closer these pension funds get to the assets, the longer term, the perspective, and the more sustainable the relationship should be. But the reality is, most of these pension funds and sovereign funds don’t have the internal staff to build like a really badass agriculture, business. You know, they would outsource that. And then you get into the same problems we were talking about before when you had a bunch of layers of intermediaries, your time horizon shrinks, people start maximizing profit over 12 month periods and people forget about these longer term issues. And so that becomes challenging. So finding a way to bring the terminal holders of the asset to the table, so bringing pension funds to the table, and then aligning them with the people that are actually growing the food. That’s the great challenge. I’m guessing that’s the challenge you’ll face and, and trying to help this whole community understand these long term risks.
Borna (ClimateAi) 43:31
One interesting thing that I’ve been thinking about and would love to get your thoughts on is, a lot of times growers are rotating their land. They have leases for anywhere from two to five years. And if the pension funds aren’t really caring about what’s happening to the land long term, and neither are the growers, how can we sort of bring in incentive to make someone care so that the land is taken care of. So we have top soil in 20 years.
Ashby Monk 43:55
This is the time machine that we need to find but the time is exists is usually an insurance product, we need to take these long distant risks and make them real today. And, and so insurance is one way of doing that. governments do it with regulations and taxation and things like that. But you can build an insurance if you have the data and you can actually meaningfully predict climate change effects. And that can allow an insurance company to really underwrite climate risk on an asset by asset parcel by parcel basis, then you can time machine from 2040 to 2020. And say, look, in the bad scenario, this property will not be able to be sold, nobody will buy it. Right. And like if nobody’s gonna buy my asset that’s scary. Or if this is an uninsurable asset, that’s scary. Like these are the types of things that are time machines, but it starts with data. And that’s why I spent so much my time today thinking about the new technologies of finance and the output of those technologies is usually signals and data that investors use to make decisions.
Borna (ClimateAi) 45:11
Okay, Asprey, thank you so much for your time. Really enjoyed having you on the podcast. Thank you
Ashby Monk 45:16
for hosting us. My pleasure and mochi. Welcome back to the office here. We missed you.
Himanshu (ClimateAi) 45:20
Thanks a lot. And I and we miss Stanford as well and in your office and discussions in your office. And you know, anyone listening to this podcast sipping a glass of wine should also think about how would that wine taste that glass of wine taste 20 years from now, 30 years from now, because of climate change, whether this glass of wine would even exist,
Borna (ClimateAi) 45:39
the Bordeaux might be coming from somewhere in Canada.
Ashby Monk 45:45
Alright, thanks, guys.
Borna (ClimateAi) 45:45
Yeah, thank you. Hey, everybody, thanks for listening. If you have any feedback, or you’d like to add your own two cents on the topic discussed today, or if you just got your own ideas about someone that we should discuss in the future, please feel free To shoot me an email at email@example.com. At its core, this podcast is just a way for us to learn and we want to share our learnings as we go. So we’re always open to building on these conversations and hearing new perspectives. Thanks for your support and see you next time.
Executive Director of Stanford’s Global Projects Center