Judson Berkey: We need to get the framing around climate and nature transition right

Over successive generations we have sought out ways to improve our living standards. Over two centuries, this led us to move from primarily agrarian societies via the industrial revolution, to the information revolution—also known as the fourth industrial revolution. Now we need to work out how to live a good life today while, hopefully, preserving a good life for tomorrow’s generation.

I have kids and I think a lot about the challenges we face today, trying to understand what we need to do to secure a safer future and how this needs to be integrated into markets and models, as well as our personal economic calculus.

Put simply sustainability can be defined as trying to satisfy today’s needs while not inhibiting the needs of future generations.

I grew up with an interest in food and agriculture. My mother came from a 10th generation farm in upstate New York. After the 2007-2008 global financial crisis, I started to use the food and agriculture sector to better understand the challenges around climate, environment, economic development, and other issues on which I might have a blind spot. It was a useful way to widen my perspective.

This also helped me find ways around the firm. At the time there were concerns about food price spikes and commodity shortages and I was asked to conduct a firmwide review, considering this from a regulatory angle. With some colleagues we also developed an employee program to support sustainable farming in Switzerland and an investment club to support sustainable cheesemakers. Finally, I started to do some of my own impact investing.

There has sometimes been an excessive focus on using the financial industry as a leverage point to achieve sustainability outcomes.

There seems to be a view that if the financial sector gets it right, this will roll out to everyone else.

The urge is understandable; almost everything involves money, so there’s a view that it’s quicker and easier to regulate the financial sector alone as opposed to doing so for multiple sectors, which could take years. But the financial sector cannot by itself re-engineer the power sector or retrofit buildings and transport infrastructure. At the end of the day, these sectors need to decide what to do on their own and that often depends on the right policy frameworks and incentives for long term investments.

The other challenge is that when the drive towards global sustainability got going in the late 2010s, the then-US administration wasn’t inclined to engage with the international environment. So, policies and regulations were driven bottom-up rather than following globally agreed standards and frameworks. Only over the past few years have we seen a rebalancing with examples such as the global sustainability reporting rules from the International Sustainability Standards Board (ISSB).

Over the last two years I’ve represented UBS as one of 40 global corporates in the Taskforce for Nature-related Financial Disclosures (TNFD). On 18 September we released a final set of recommendations about how corporates and financial institutions can understand and disclose their impacts and dependencies on nature, and the risks and opportunities attached to those.

In the financial sector TNFD will affect our thinking about the companies we should invest in or lend to based on understanding their potential value under different future scenarios.

This could include physical risks and opportunities if nature gets further degraded, or the impact of government actions which drives transition risks and opportunities.

We hope these recommendations will be broadly taken up. While pure disclosure cannot alone drive out harmful activities, it certainly can help us better map out our interdependencies and risk.

Nature is location-dependent which requires more granular data and makes it harder to package in an easily accessible way. We first need to get the raw information from companies around areas like water use, land use, pollution, and then try to essentially translate this into monetarized values that can be used as a basis to make comparisons and economic decisions through understanding the link to natural capital.

The idea is that we will eventually gain consistent, comparable consolidated data that can be used when making capital decisions. This will be useful for risk management, but it can also be used to spot opportunities, such as identifying companies best placed to go through transformations related to climate and nature.

As a financial institution, we can be a key partner in that journey: as we understand both the changes to nature and the policies to protect it, we can help to identify the winners of the future and to protect clients’ assets and revenue streams.

Just look at the amount of energy going into the topic, and the omnipresent debates. There is a lot of discussion around carbon markets and greenwashing, but this can be viewed positively. These discussions are increasing scrutiny, which will hopefully lead to better outcomes. If we talk about increased standards, it shows a commitment to getting the right structures in place.

The ISSB was taken up very fast, with over 10 countries committing to adopt the standards. And the US’s Inflation Reduction Act is offering a set of policies focused on jobs and business creation that can help drive the energy transition in the US. If we have the right framing for these ideas, things can get done.

The challenges are great; currently we are not on a maximum-1.5-degrees-Celsius-warming-pathway, and we continue to degrade natural capital so we need to help people see the necessary change as a positive and not just a negative; that it can lead to business creation and new jobs and create the future of our societies. I think we should try to see the glass as being half-full, while being realistic about the challenges ahead.

Towards the end of last year, I phased out our internal combustion engine car and went electric. And I am starting to do energy improvements around the house. However, these can be big investments that you can only do at certain points. That’s why governments need to account for the pace of the transition and why the public needs education about the benefits of doing them and assistance to make them.

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