Litterman (2017)
Litterman, Robert. “Pricing of Climate Risk and the Effect on Portfolio Construction.” Speech to 21st Annual Portfolio Management Conference, UHLENBRUCH GmbH, June 2017.
From the description: “The Risk Management Pioneer and Co-Developer of the Black Litterman Model, Robert (Bob) Litterman, gave the participants of the 20th Uhlenbruch Annual Meeting Portfolio Management a speech entitled "Pricing of Climate Risk and the Impact on Portfolio Construction" on June 20 and 21, Delivering a startling contribution to the future of our planet in 2017 and explaining how the financial industry can make a positive contribution.”
LK comment: Litterman, former head of risk for Goldman Sachs, clearly and urgently explaines the importance of carbon risk in portfolio management.
Selected quotes:
◆ “What I’m talking about is catastrophic risk - a permanent and significant lowering of the wellbeing of all future generations…. There’s some capacity of the atmosphere to absorb [carbon] emissions where that won’t happen, and and there’s some level where that will happen. And we won’t know, for a long time, what that is. It may be too late, in fact. So that’s the nature of this uncertainty.”
◆ “Think of the atmosphere as a reservoir, and we’re filling it up. We don’t know what the capacity is. Whatever the remaining capacity is, is a scarce resource... We know how to allocate scarce resources: we price it.”
◆ “Risk management requires that you consider worst-case scenarios. That’s what risk management is all about. It’s the most important thing when you’re a risk manager, is that you think about worst-case scenarios. Now, if a scientist gets up and talks about worst-case scenarios, they’re often criticized for being alarmist. Now, if you’re a risk manager, that’s your job.”