Ep95: Mindy Lubber "The Voice of Sustainable Capitalism"

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ML  Before we start, if you're enjoying these conversations, please make sure that you like or subscribe to Cleaning Up, it really helps other people to find us. Cleaning Up is brought to you by Capricorn Investment Group, the Liebreich Foundation and the Gilardini Foundation. Hello, I'm Michael Liebreich, and this is Cleaning Up. My guest today is a longtime leader in the area of the Environment and Sustainable finance. It's Mindy Lubber, who's CEO and President of Ceres. Ceres is a nonprofit focusing on mobilizing investors and large corporates around climate action and other environmental issues. Please join me in welcoming Mindy Lubber to Cleaning Up. So, Mindy, welcome to Cleaning Up.

Mindy Lubber  Delighted to be here with you, Michael.

ML  I think we need to start by you explaining what Ceres is because you and I have worked together over the years; I need the update, but the audience, many of them will need the initial introduction.

Mindy Lubber  I'd love to. So let me quickly say Ceres is largely a US based NGO, with a global reach, meaning we have formal partnerships around the globe. I'll talk about that in a minute. We are an advocacy organization. We work directly with 120 large companies, mainly fortune 500, with 220 investors in North America, and 700 investors globally. The work we do is with what I'll call capital market leaders -large companies and large investment firms - to integrate climate risk or water risk or sustainability metrics into all that they do, because it is part of the business equation. It's part of our economic equation. So, we'll work in training corporate board members on why climate risk is a priority for a company and for every company. The other two things we do is we bring the voice of capital market leaders into the regulatory process in the United States. We just worked with the Securities and Exchange Commission to get a very strong draft rule on disclosing climate risk for all publicly traded companies. Then we also work on public policy, because as we know, Michael, we could do a lot to change the way companies behave on climate, on water, on sustainability issues. We can do a lot with investors. But unless we change the rules of the game, we get rules that are applied to absolutely all players. We can't address climate change in a really systemic fashion. So, those are the four things we do. Some people might say, “are you consultants?” and the answer is no, we push and push hard in a collaborative way. We are an advocacy organization.

ML  Let me ask you about that last one, which was getting the policy changes, for clarity. That's not just around finance, because I associate you a lot with the sustainable finance work that you do, because that's where we've interacted. But you actually work across more than just the SEC or the Treasury, you would be working with Department of Energy, or food and agriculture and people like that.

Mindy Lubber  Absolutely. All of those things weigh heavily on the climate debate or the water debate. Right now, literally, probably while we're talking Michael, history is going to be made. The Supreme Court is going to rule on whether the United States Environmental Protection Agency has jurisdiction to promulgate rules on climate risk. So, the Supreme Court might just say, literally in the next 15 minutes, that the EPA cannot regulate greenhouse gas emissions. In that instance, we were involved in filing a friend of the court brief with companies to say “of course they can and should,” and that is hopefully an argument that the Supreme Court will not make. The EPA needs to regulate carbon emissions. But we work with the Department of Transportation on electric vehicles and electric vehicle infrastructure and transportation rules. And we work with the Department of Commerce on issues related to climate. The climate issue, as you know, goes across every part of the policy spectrum, and we're trying to cover as many bases as we can.

ML  So Mindy, I think we've dived straight into one of the really interesting questions that's going to be at the heart of this conversation. Normally, there's a conversation about the role of private enterprise, investors and corporates and so on, and what's the role of policymakers? But we've opened up a discussion, which is about what is the role of the policymakers in energy, agriculture, communications, whatever it's going to be, versus financial regulation. Sustainable finance has been acting as though what is going to solve the problem is fixing the flows of money, then everything else will work. I'm not sure that's true. What do you think?

Mindy Lubber  It's definitely not true. We are looking at the real economy. We're looking at the real economy, Michael, and it matters what the steel industry does, it matters what the auto industry does. So, we cannot solve this problem company by company, or even by just finance alone. If we're not looking at moving the steel industry to make steel that's less carbon intensive… moving the auto industry. Frankly, the US is trailing Europe in EVs and building out multibillion dollar EV infrastructures; we need to do both. We need every regulatory agency. So, it's not only the Securities and Exchange Commission, who just came out with a very strong draft rule to mandate climate risk disclosure. It's transportation agencies, who can regulate what kind of vehicles are on the market, and what standards those vehicles must meet. So, the Department of Energy in the United States certainly is a huge financier of some of the most interesting and compelling solutions to the energy problem. They also set regulations on trade that relates to the parts that we need for wind and solar. So anybody who thinks we could look at this problem in a narrow way is really not thinking about it. We've got to deal with the financial regulators. And we are; the Federal Reserve, the SEC. But we've got to deal with the Department of Energy and the Department of Commerce, transportation. And the administration itself has to save the billions of dollars of procurement they do for every contract that they put out there. They need to make sure that all of their vendors are coming in with the best proposals as it relates to smart greenhouse gas emissions delivering.

ML  So, I had a conversation with Larry Fink during COP26 about the route to net-zero for his trillions. And what he was saying was that the problem is that everybody’s telling him what not to do. And this was echoed, by the way in the note to CEOs that he wrote shortly after that. Everybody's telling him what not to do, not to invest in fossil, not to do this, not to do that. But there aren't the opportunities to invest in the good stuff. The reason there aren't the opportunities is surely because we have not properly regulated energy, transportation, industry, agriculture, etc. Do you agree with that?

Mindy Lubber  Well, I agree with it in part. There's no question; he can’t solve the problem alone. We do need to change demand. If everybody in the United States or Europe for that matter is saying “all I want to buy are fuel inefficient SUVs,” then those are the companies that are going to do well and Larry Fink will be compelled to invest in those companies. So, we do need to change demand. You all changed quicker in Europe, you said “we want to buy electric vehicles,” and the market grew there much more quickly than it did here. A lot of the reason the US auto companies are moving as quickly as they are… there are two reasons. One is the United States government started regulating it further, as well as the state of California. And secondly, Europe was demanding electric vehicles and that became a much more highly-needed product for the auto companies to create. So, we've got to change demand, people need to be buying the right things. We've got to change the grid, how we deliver energy, make it easier for renewable energy to be pumped into the grid so you have your home and me at my home, and the rest of us could have better access to renewable energy, which in many places in the country, we don't. It's not only about solar panels on people's homes. It's about where we get our electricity and what we're used to every day. We want to be able to get it from our utility company and see it on our bill. You don't necessarily have to put solar panels on our roof.

ML  We've had a number of guests, a lot of guests by now on Cleaning Up, that have talked about those real economy shifts that are needed and that are happening, and also the policy environment around them. Most recently, for instance, Patrick Graichen, who's the Secretary of State for the economy and climate action in Germany. We also had just last episode but one Simon Morrish, building these huge solar and wind projects in Morocco and bringing it in by cable to the UK. We've had David Turk, who was Deputy Secretary of Energy. So, we've had a lot of people talking about the real economy and the real economy regulation pieces. And I want to then sort of take this conversation towards the finance piece, if that's okay. To dive into the question of what is the role - let's assume that that real economy and their regulators are doing their bit more or less - what is the role of finance in getting to net-zero?

Mindy Lubber  So, there are multiple roles. Let me talk about the role of ownership of an investor, and then I'll talk about dollars moving. So, we work with 700, global investors, small, medium, and large, some of the largest pension funds in the world, on a project we call Climate Action 100 Plus. And with that endeavor, with that initiative, we've looked at the 100 largest emitters of greenhouse gases and have made the determination that if you are a well-managed company, you're managing your greenhouse gas emissions. If you're a well-managed company, you are setting goals, at the board level all the way through to the organization, on greenhouse gas emissions. Well, the 100 largest emitters aren't necessarily doing that, and they are giving us 75% of our greenhouse gas emissions. So, what is the role of investors? Which was your very smart question, Michael. The investors who own those companies want to believe the companies are well-managed. They are starting out by engaging in meeting with, talking with, negotiating, sharing scientific information, sharing legal information. I mean, you're the scientist Michael, I’m the lawyer. But making sure that in every one of the discussions, we have a large emitter, maybe it's Chevron, maybe it's ConocoPhillips, maybe it's an oil company, or something else, and a group of investors who own those companies. Now, those investors don't want to see the companies go bust, they don't want to see the companies be a catastrophic money-loser. I mean, these are investors who are protecting pensioners’ future funds. They want to get it right, they want good returns. They've determined that the highest emitting companies that aren't acting on climate are companies that are not getting it right. So, for investors, we start out with engagement, for lack of a better term, where they're engaging with companies they own. This is not an advocate beating up a company, this is the owner of the company, the largest owners of the companies. And some of the companies are changing based on data based, on negotiations, based on looking at the big picture, and some of them aren't. And the investors have then decided that they're going to bring shareholder resolutions, that they're going to go straight to the board of the companies and say, “we want you as the board members - who have a duty, a fiduciary duty to deal with climate - we want you to act.” And that often changes company practices, but not all the time. So, that's one thing company investors can do. They can engage with every company in their portfolio and build their portfolios with well-managed companies who are addressing climate. The second thing they can do…

ML  Let me just come in there with just a quick question on that, and then I'll let you get back. You're in a magnificent flow there, but I just wanted to come in with a question. Is it your sense that - if you can summarize millions of interactions between investors and companies - that investors are trying to get those companies to speed up? Or are they trying to get them to slow down?

Mindy Lubber  Of course, Michael, it's a great question. It depends. So, if it is a company that's investing in new fossil fuels, they're probably trying to get them to slow down because they think that investment will land with stranded assets, with fuels they may never be able to burn. In most instances, they’re trying to get them to speed up, to set more audacious ambitious goals of acting on climate. And of course, it depends. The steel industry is radically different than the commercial banking industry, which is radically different than every other sector. So, it varies.

ML  The reason I ask is because if you go back 10 years, then what you were hearing from a lot of investors - what I was hearing, maybe not the progressive investors you were dealing with at the time, but a lot of investors - were saying, “well, you know, we want our yield, we'd love to save the planet, and so on, but we can't do it at the expense of our yield or our returns.” And so, when companies were trying to do this stuff, they were actually being told, “put the brakes on.” And so, what you're saying is that now, that dynamic has flipped, and it is actually the owners - maybe because of the work that you've done - that are more progressive in many cases than the corporates themselves.

Mindy Lubber  Michael, that is the case. I mean, think about this. It's not even progressive versus non-progressive. Of the 700 investors we work with, take some of our board members or others; CalPERS, about $500 billion in assets under management; New York State, $480 billion. These aren't small, socially responsible investors. These are investors who literally are working to make sure that pensioners have a revenue stream for the rest of their life; they've got to get good returns; they cannot sacrifice returns. But their belief, based on the economics, much of the thinking you've done, Michael, is that investing in high-emitting companies is not a good bet. It's not a good financial investment. I wish it weren’t overall a political battle, it ought not to be any more than COVID should have been or continues to be… This is an issue of the economy; do we want to be doing well, or do we not? Now, there's always the issue, Michael, of having to show good returns in the next 15 minutes. Wall Street likes to see quarterly earnings and nothing else matters. We've got to take a slightly broader look; we're not going to see all of the returns go up. But the investors who we're working with believe investing in companies that are not acting on climate are not well-managed companies, and not companies that they necessarily want to keep in their portfolios.

ML  Okay, now, we're going to come back to this question of how things might have changed in terms of level playing fields and so on, we’ll start talking about central banks and some other things, but you are in full flow. You're going to say, and then there's another thing….

Mindy Lubber  So the second thing I want to say is: investors are moving extraordinary amounts of capital. So, of the 700 investors involved with our Climate Action 100 initiative, there are $58 trillion. That's a significant part of our overall economy being managed by those investors. They have the ability to find the resources to put more money into the renewable energy future, into smarter grids, into different transportation. They're not going to do it overnight. Right now, it is not a large part of their portfolios. But we've got to move that market, we've got to create greater demand, create more opportunities for the investors to be putting their money in. We need to see more capital flows into renewable energy versus fossil fuels. And we need to see far more capital flows - as we heard, at the recent Glasgow climate conference - going into the developing world, going into the global South. It cannot be solved by you in Europe, or the UK, by us here in the United States. This is a global problem that demands a global response. The final point that I would make, because you asked what is the role of investors, what could they do? And I started out by saying they could push the companies in their portfolios through engagement and shareholder advocacy. They could put more actual dollars into a new grid into renewable energy, so moving money directly. The third thing is standing up on public policy. Gary Gensler, the chairman of the Securities and Exchange Commission said constantly that his job is to protect investors. His job is to make sure investors have the information they need. If he hears from investors, who are saying we need mandatory climate risk disclosure - which he is now calling for - that's the group that matters and the investors we work with were filing comments, calling the chairman and all the other commissioners, meeting with staff to make the case that they can't do their job on analyzing climate risk and knowing what to put in their portfolios or not, unless there's consistent mandatory climate risk disclosure. So, investors have a lot of opportunities and the final one related to regulatory is policy. Michael, you and I know that if we had a price on carbon… I mean, right now, in most places, we don't price carbon. So, if something's free, we know we get a lot more of it. Not a very good economic bet. So, until we put a price on carbon, we've got our hands tied a bit. And right now, there's not the political appetite to do that everywhere. But that debate will be fueled by investors in the United States, making the case that we don't have honest market signals now. We need to price carbon for the real cost it costs to society. That's when capital markets really can trigger and play a greater role.

ML  What mystifies me though is how that gets translated into actual asset managers, portfolio managers placing different bets. Because I agree with everything you've said, but then what I see is this alphabet soup of different initiatives. You’ve talked about the Climate Action 100. I've pulled together a list, just at the global level, of about 60 different initiatives that are all intended to make that happen. But how is that all supposed to fit together? Now, the people who are listening on the podcast won't be able to benefit from this, but I'm going to show the chart that I use with all of the different organizations - can you see that there? It's just extraordinary. And it is the alphabet soup. Normally, I have my acronym klaxon, and I would use it if you mentioned, but you know, you just have got these – SASB, NGFS, SBTI, TCFD, PRI, IIGCC, TPI, IFRS, and it just goes on and on and on. And you've got your 65 trillion. And then Mark Carney who was on this show has got his 100 and 30 trillion, which may or may not be the same, there may be overlaps. Isn't it just overwhelmingly complex? Isn't everybody as confused as me?

Mindy Lubber  Well, looking at your chart does give me a headache, and I don't get headaches easily. What the Paris Agreement was profoundly most useful at is coming up with a global roadmap. This is a global problem without any question, and we don't have that many of them; I guess the pandemic was a global problem. What happened in China influenced Colombia and the United States and the UK and everywhere else. Climate change is a global problem and the reality is fixing it piecemeal is anything but ideal. The Paris Agreement gave us a structure. What do we need to do globally, and how do we try and march forward as much together internationally where we can and at least country by country? It would be ideal if we could get it all done globally. There is no political infrastructure on policy, beyond the Paris Agreement, or what comes next from it, that allows us to do it. But we're trying on disclosure, just a start, which is a floor, a bare minimum. We're saying companies need to disclose their climate risks so investors can make smart financial decisions. There's work going on right now around the world, some of it voluntary, some of it mandatory, lots of different words, an unlimited number of initials, of terms. We need to get rid of that. We really need to be as aligned as possible. That's why we - despite believing in voluntary standards, as we do it Ceres - we push very hard for the SEC to come up with a standard that incorporates a lot of the voluntary work. It incorporates a lot of the great thinking in the UK and Europe. But at least it applies to everybody in the United States. And it's mandatory, so, we don't have companies saying “which system should I use, which methodology?”

ML  This is on disclosure?

Mindy Lubber  Correct. And then we need to go further, of course, because disclosure will drive different decisions. But that's only the bare platform, the minimum that we need to build off of. Really, what companies and investors need to do, is change what they do. Every company that we work with now needs to… Many of them have set broad greenhouse gas emission reduction goals: “I'm going to be net-zero by 2040 or 2050,” many of them proclaim. The goal now for the next two years is taking every one of those grand commitments and grounding them in specificity. That's great that you're going to do something in 2040. But if you start in 2039, A you won't accomplish anything and B the problem will have gotten worse. So we're asking every financial player and every company and certainly those who have made commitments to now ground in, show us what you're going to do in 2025 and 2030, and make it public.

ML  But let me come back to those 100 biggest emitters - and you immediately jumped to talking about, you know, Exxon and Chevron - they're not emitters. I mean, they emit something in their refineries or in their processes. But what they actually do is produce fuel. The emitter surely is United Airlines, or it's some transit agency, or it's you and me heating our homes. Why are they the emitters? And what can they do about it? I mean they’re selling a fuel that other people are emitting…

Mindy Lubber  Well, they're emitters, or they're creating the fuel that is creating either the problematic emissions or the less problematic emissions. It's not an easy question, Michael. You and I have talked about this a lot over the years. Going into ExxonMobil and saying, “hey, by the way, you've been one of the most successful companies in the world, you're bigger than most countries economically, why don't you shut down because we don't like the product you make?” That's a silly proposition. And it's not going to happen, let's be grownups, let's be realistic and think about how do we really solve a problem, which you have been doing mightily for decades, and thank you. But they have to start looking at the future. They should have started 20 or 30 years ago, because the oil companies do better scenario planning, 10, 20, 50 years out, than almost any industry sector. So they've got to be looking at what other fuels they could create, instead of investing more and more and more in a fuel that is choking off our economy and our ability to build a future for our kids. I know it's not convenient for them to change. On the other hand, they absolutely must change that. So, they've got to be looking at what other energy… And again, I've been told by oil and gas companies “telling us to become a renewable energy company is the same as telling us to become a women's underwear company.” We don't know about renewable energy, and we don't know about women's underwear. We've got patents, we've got expertise, we have millions of customers and 1000s of employees or hundreds of 1000s, who know how to drill. That does have to start changing. Either they've got to find a way for those energy sources to be less problematic, or they've got to start shifting. We're seeing that not fast enough. There’s much more activity by the European oil and gas companies, both the smaller Totals and the bigger BPs and Shells. They are not there, but they've gone from maybe 5% to 17% of renewables. We need to see more and more of that. And they push back and say this is not easy. It's not convenient. Michael, I couldn't agree with them more, it is not easy.

ML  I worry because society is sending this tremendous mixed message. On the one hand, sending a very clear message through activism, through the political system, declaring climate emergencies, through the financial system… Like in my conversation with Larry Fink: “don't invest in this stuff, stop investing this stuff.” And that signal is now going to those companies saying you need to be out of that business. And yet - it comes back to this question of the real economy - what we're not doing is - I don't want to say suppressing demand - but doing the things on the demand side that would remove the demand for those products. We’re not innovating efficiency solutions on the demand side that would actually choke off the demand for that product. So, you're almost asking somebody to go out of business when there is still perfectly legal demand for their product. That feels to me irresolvable. And of course, at the moment, it's particularly concerning because we've got this price spike. We have pushed down investment in coal, oil gas, without really substantially increasing the investment in the clean staff. What you end up with, even before Mr. Putin decided to invade Ukraine, you've got this huge price spike. You also work on the transition, don't you? And how do you do that?

Mindy Lubber  My gosh, I wish there were… If this were easy, you and I would be out of business. And the fact that we both been at this for 40 years or so suggests that this is complicated … really complicated. The backdrop that I use, and I will then answer your question more specifically is: it will be far more complicated if the climate really continues to spiral. We don't know exactly what that will look like, but there's enough science there. If we see more forest fires, more tsunamis, more droughts, more multibillion dollar hits to our system. Literally every month now around the world, and certainly, in some places, even more than that… Climate change has the ability to be extremely inconvenient, expensive, dramatically change the course of our kids’ future. So, this is a hard problem and the solutions aren't easy. Some people like to say “wind and solar are here, they're doing great, they're price competitive, problem solved.” And of course, it's so much more complicated. But we need to look at, if, in fact, demand will go up and down. And we've got to change demand, as you say, for products like oil and gas, we ought not to keep drilling, but there's a lot of oil and gas out there. There's a lot that's been drilled that's sitting waiting to be used. But continuing to drill new wells, or new coal mines, frankly, when those energy sources are not likely to be welcome 10 years from now or 5 years from now, is not a good bet for our energy economy, or for the particular financial bottom-line long term of these companies. And oil and gas companies and coal companies are not in a great position. On the other hand, those that are being smart, and planning for the future, and starting to transition, and looking at how to capture the carbon… There some companies that just say, “we're going to emit it, but we will find a way to capture that carbon.” To not be doing that as irresponsible, is an absolutely economic catastrophe waiting to happen.

ML  We're sort of circling around a discussion that can get very technical around scopes. We've got scope one, scope two, the audience probably knows and can remember immediately what those are. Scope one is when you burn something. Scope two is when you buy, let's say electricity, or some energy supply, where somebody else has burned it, but you are using the resulting energy. And then there's this thing called scope three, which is when United buys jet fuel, and uses it, from Exxon or Chevron. And that's really at the heart of some of the methodological problems here. I haven't asked you these questions because I think they're easy or because you'll have the answer. But it does get codified in this thing called scope three. Where is the Climate Action 100 Plus, on scope three? Do the members to those who sign up to that have to disclose? Do they have to do anything about it? Where are they on scope three?

Mindy Lubber  Here's an example of the many dozen investors who filed formal legal comments with the Securities and Exchange Commission on their proposal to mandate the disclosure of climate risks. Almost all of them called to include scope three, in that analysis. Again, not to get too technical and frankly, Michael, you're the smart guy. Lawyers, or at least in my case, are not technical to begin with. But to the extent that I've spent a lot of time thinking about this… We can't regulate, we can't deal with climate change without regulating scope three. And let me be more specific: if you're a large oil company, or if you're Walmart, or you're dealing with 1000s of vendors, 1000s in your supply chain, many of which are small companies who provide you with this widget or with paper towels for your guestrooms, or whatever it is. Those small companies are a big part of the emissions, but they don't have the technical expertise. They don't have the strength. And so, we do expect a Ford Motor Company or a Walmart to say to their 5000 vendors or 10,000 vendors, “we want you all to show us how you're reducing your emissions.” We just can't solve the problem by only going upstream. We've got to go to the full picture of our economy. And if the large companies - who have resources, who have technical capability, who have large climate teams - if they do training, if they provide some resources, we’ll start to see the small companies change how they do things. It is a full picture. We can solve it piecemeal by piecemeal.

ML  For the record, the disclosure stuff I'm totally on board with, I think we've got to have that disclosure. And it frankly has to be mandated and then you need a methodology so that everybody can compare across. When it comes to scope three, I'm a huge fan of the examples you've given: Ford Motor Company, somebody in the health or hospitality industry. Clearly, you need to look across the whole of a value chain. A company like Nike doesn't even make a lot of the things that it sells, it uses contractors, but clearly it's responsible for the emissions in that supply chain. But what about when it comes to investors? Because then it starts to get really complicated with double counting. And so there are some methodologies in that alphabet soup, who say, “well, you've just got to do it anyway.” Then there are some who… It's not a secret that I’m in the camp saying, actually, that is just simply not possible. The double counts and the speed of changes, and when you start using derivatives and all sorts… You simply can't say, what is the scope three of this portfolio? It's an unanswerable question, in my view.

Mindy Lubber  Yeah, I think it's hard to calculate, but I don't think it's unanswerable. Again, I would not suggest this being the case for you, because I think you've done as much to move the climate debate as any single human being. But I do that think that some of the people that are making that case are just turning data into a prohibition rather than an opportunity. There are many places,,, companies are required to show Trade Risk as they file their SEC filings. The companies that filed their trade risk disclosure, two months before or a week before Russia moved into Ukraine, didn't exactly talk about that, because they didn't know it. I mean, there is speculation. We do scenario analysis, we do planning. And no, we do not know exactly … when there's over counting. But smarter people than me, academics, economists, others are doing method methodological analysis for how to measure scope three. It’s not going to be perfect for the first few years. Nor is some of the other risks that are required to be measured. And we cannot make the fact that we don't have all the answers a reason not to move forward and move forward quickly.

ML  I'm going to push you on this because I have to be honest. Those academics working on it, you know, bless them, but they're going to fail, in my view. I wrote a piece on sustainable finance for Bloomberg, a year and a bit ago. I would like to quote from it. It's a slightly lengthy quote, but it does highlight the problem for me. And that is: “Take the example of a sustainability consultant taking a flight as part of a client engagement. The resulting emissions would count as scope one for the airline, which you can count easily, of course, scope three for the provider of jet fuel and the consultant’s employer, which you can count, right; they should also, however, be counted as scope three by her client, and by the company which extracted the crude oil from which the jet fuel was produced, and by the owner of the refinery where it was refined, and the fixed-base operator who delivered the fuel to the plane. The same emissions should also be counted as scope three by the owners of the departure and arrival airports, the leasing company that owns the plane, and the insurance of the oil production platform, the refinery the airport, the aircraft…” and it goes on. All of those are countable, right. But here's where it gets really complicated. And by the way, I think we should disclose that, and you've got the value chain, and we should do all of that. I'm okay with that. Now, a big asset owner or asset manager might conceivably hold shares in every one of those companies, and in addition to equity might own some of their debt, several different maturities. What about derivatives? If you buy a call option on a company's stock are you responsible for some of its emissions? And what about if it's a credit default swap? Or if you borrow the stock, and then sell it short? This stuff is happening at milliseconds, right? At the Bloomberg terminal people are doing this all the time. And so, that's why when somebody says “oh, we should just do scope three, try harder to get a scope three.” Where I think this has to go is that the investors should only be allowed to invest in companies that understand their own scope three. But when you start trying to add it up and saying what is your scope three, as an investor? I work with a lot of VCs. They're putting money into companies, which if they succeed, might change the world and have an enormous impact on emissions in 15 years, for which they get what credit? How on earth can you calculate that?

Mindy Lubber  So, we now have a topic for three more shows and ever so provocative, Michael, but my answer to try and simplify an extraordinarily complex question is that we develop a methodology. It's not going to be perfect, but this is how you count things to try and limit and avoid double counting.

ML  At the corporate level, or at the investor level? I'm just asking for clarification on the methodology you're suggesting,

Mindy Lubber  I'm not sure the methodology has been nailed yet. I think it's got to be both. The SEC could not have been more clear in asking for scope three over time, where it is a material financial risk giving a long runway for “let's figure this out.” So, the answer is, I don't know. You might know, Michael. But no methodology will be perfect. But saying because it is so complicated, we have to throw our hands up and not do it is clearly not the answer. We’ve got to measure it, we've got to act on it. You raised something else: we do have to find the incentives for creating technology, because, in the end, the technological innovation out there for addressing climate change is extraordinary. It's as exciting as everything and anything I've seen. And we've got to find the right incentives. We've got to stop incentivizing fossil fuels, which in the United States, we've done for decades, and we've got to incentivize carbon capture, or renewable energy or upgrading our grids in a way that really drives the new economy.

ML  To your point about incentives for innovation, absolutely. There was a nice shift there from finance back to the real economy, because those incentives are going to be “you cannot continue to heat your home using a gas boiler,” for instance, by 2035, or by 2024, in Germany, for example. So, that will then drive a lot of innovation. I totally agree with that. I guess if the SEC were to ask… they're getting the consultations right now. I wonder if the answer is, as you say, that we need the methodologies and we need the disclosure, the methodologies, at the level of the real economy. I wonder if the science-based targets approach of then saying “this company passes, it has a credible plan, it's got some milestones,” which you raised, sort of before 2040, 2039, or 2049. Therefore, it becomes a kind of blue check company, a green check. Just let the finances disclose what they've got, but not try to pin a particular carbon footprint in analytical terms on a particular investor. Would that work?

Mindy Lubber  That might work. And Michael, the theory that we use is that an investor shouldn't invest in a company that is not managed well, and not exercising their fiduciary duty to analyze risk and acting on it. That is a mandate for corporate board members, for CEOs. That's their job, right? They've got to look at these issues. How are the companies in their portfolios…? Not even on every detail, is the methodological integrity of this particular equation right… But really, do they have goals and do they have systems and structures around setting goals and acting on those goals? So yes, I think there are ways to do this based on the economy. Investors ought not to be investing in companies that - because of policy changes, because of demand changes, or because of the risk - investors should be avoiding those companies that have that high risk.

ML  I like that idea in a sense, of going back to first principles and saying, look, it's about, from the investors’ perspective, risk. It's about understanding it, managing it, that's your responsibility, and then everything else flowing from there. Within that, there's been some discussion on the last show, which was with Roger Pielke Jr. which was spurred by the presentation given by Stuart Kirk, HSBC’s now suspended, possibly former, Head of Responsible Investing around central bank stress tests. I want to ask you, what's your view about central banks? Should they be - A - managing a level playing field and saying “we'll force people to understand risks, we’ll force people to perform their fiduciary and other responsibilities” but if that still allows them to invest in coal and the energy ministry hasn't stopped it, that's not our problem? Or B should the central bank be tilting the playing field through manipulating asset ratios, or changing costs of capital so that money flows down into solutions? So, A or B?

Mindy Lubber  I think the role of the central bank is closer to A. They've got a duty to make sure that the financial sector is stable. They're not about to move slowly over the years into a more unstable position because of their investments and what's going on. The fact of the matter is, the central bank in the UK is doing a good deal. The French Central Bank, in the US, the Federal Reserve has not said to every bank “you need to show us your scenario planning, your risk analysis” and every part of their portfolio and how they are analyzing that risk. If they do that, there will be a shift in how banks behave, because the risk is clear. Any bank that has shown on their balance sheet an enormous amount of investment in coal… and yes, you could say, well, we all know we're getting out of coal, but China's still in coal, and India is still in coal. But there are huge risks around coal. For every bank that's continuing to finance coal, project finance… It's not a good bet anymore. And the Federal Reserve shouldn't be saying to investors “invest in A don't invest in B,” but they should be saying through their regulatory authority “show us that you're stable, show us that your risk is clear over the short, medium and long term and let the investors make the decisions.” And it will shift the way investors put money into different financial institutions.

ML  Okay, I like that answer, because it's in line with this first principles, it's about the risk. And then that drives you towards A. Whereas there are people who think… Christine Lagarde - it's the central bank, it's the Euro, not the EU, not France - she is much more activist. Then there's some pushback from Germany and others saying, “no, let's get the risk picture correct.” We're getting short on time. And I’ve got one other area that I want to ask you about. Are you doing any work on offsets? You can tell I've left some of the harder questions towards the end

Mindy Lubber  That's just so we can have another show to do at some point, Michael. Good questions. And yes, they are more complicated than three minutes. Offsets, for people who don't live in this business world with Michael and me - we've tried to talk English, we could easily go off on alphabet soup which we try not to do - are where a company might say “I could bring my greenhouse gas emissions down by 40%, but otherwise, I'm going to plant a bunch of trees and capture carbon and hope that fixes the problem.” It's not that easy. Number one is I believe offsets need to be really well defined, and scientifically proven. That by putting money into them, they really are going to capture carbon, and make a difference, not just randomly plant some trees. That's just one example. I could give 50 examples. What we generally tell companies, Michael is to “if you're committing to net-zero, start with what you could do, we want to get emissions down.” It's not about buying a way to have more emissions. But let's get the emissions down, start with emissions and bring them down. If at the end of the journey, you can't get to 100% greenhouse gas emissions reduction - we say by 2040, not by 2050 - then start looking at offsets where you might do something very responsible. But we're hearing every day from companies and from investors how to look at offsets. I think we've done some new reports for investors on what they ought to be looking at. It can't be seen as an easy exit out, saying “I can't reduce emissions. It's too hard. I'll buy some offsets.”

ML  What do you say to somebody who says… “we've got deforestation still happening, and we need to put money into avoiding that...” You've got these big corporates, oil companies, they're under huge pressure partly because of your activities. So we want to use their money to stop the deforestation. So these deforestation offsets funded by corporates. Is that legitimate or not legitimate?

Mindy Lubber  Like everything else, Michael, if there's a methodology that says scientifically that they're going to work … Not just, you know… we see a new widget, a new gadget, a new idea every third day. If they are proven to work, then I think that is where we put our money. We've got to stop deforestation, we've got to stop ravaging the lungs of the world, by ravaging our forests and biodiversity. That is part of the equation. We can no longer talk about climate change as only about greenhouse gas emission reduction, we will have to capture some of those emissions.

ML  There's no question we have to stop deforestation, 100% agree, and start capturing emissions. But I guess where I'm pushing is, if you have a company that's emitting but then it just helps a forest continue to stay there…. It feels to me like that will never work, because you've got a positive number of emissions and you've got at best, no deforestation. The average will never be net-zero. The math doesn't work, does it?

Mindy Lubber  Well, we've got to find a way to get to net-zero. I don't mean to just wish upon a star. We've got to get emissions down. We've got to stop deforestation, and then we've got to find a way to capture carbon. And they're all different things, but they all can be defined. Right now if a lumber company, if a food company, a huge part of our emissions, if all they're doing is mining and getting their products in a way that ignores indigenous people, ignores what it means when we just chopped down forest without a plan for how to reforest that area… that has to be stopped. Sometimes it's seen as a separate equation; I think there's no way to address climate change if we're not looking at bringing emissions down and stopping deforestation and capturing emissions. We need to do all three of those things.

ML  Very good, Mindy, extremely well said. I've tried to push a little bit on some of the very challenging questions. There are no easy answers. The only way we're going to solve this is by being able to operate 360 degrees. Nobody is better placed and has done more of that than you during your career, and during the years that we've known each other. I did promise to get you out of here before the top of the hour. So, we're going to have to draw close to it there. But thank you so, so much for spending some time with me.

Mindy Lubber  Michael, thank you and thank you for your extraordinary, extraordinary addition and intellectual capital on this debate. You are making a huge difference.

ML  Thank you. You're overly kind but I thank you and have a good day. So, that was Mindy Lubber, President and CEO of Ceres, the nonprofit trying to mobilize the world's largest investors and corporates around climate action, and other sustainability issues. My guest next week on Cleaning Up is Aksel Lund Svindal. Aksel is the most successful Norwegian alpine skier in history, with two overall World Cup wins, two Olympic gold medals and five World Championship golds. He's also the Deputy Chief Investment Officer for Norselab, an impact investor based out of Oslo. Please join me at this time next week for a conversation with Axel Lund Svindal. Cleaning Up is brought to you by Capricorn Investment Group, the Liebreich Foundation and the Gilardini Foundation.