Corporate climate disclosures: how do we weed out cheap talkers? | Markus Leippold | TEDxHECParis

I still don't know whether I should actually do that because at some point my students and my colleagues at University will see this but okay I hereby admit that I was terrible in math at High School my teachers they didn't put a lot of faith in my abilities and certainly they didn't think that one day I would become a professor in finance make a living out of writing mathematical papers and do research in artificial intelligence but when I was at University I was attending this lecture called the philosophy and history of mathematics and I learned that mathematics is actually much more than just the collection of formulas it is a universal tool that allows us to solve problems and actually not just theoretical problems but real world problems and at that point mathematics became my passion at the age of 38 I was a professor at Imperial College and it became clear that I would return back to my home country Switzerland with all the beautiful mountains and I did something which I've never done before I bought a pair of climbing shoes and I still remember my first climb and how unrelaxed I felt and I still hear the laughter of my friends it was a lot of fun for them but nevertheless it did not discourage me so actually three years later I was climbing with a different set of friends the eagle North Face which is a very dangerous route in the Alps also known by the name murder wall or modband in German and two years later we were tackling the El Capitan in Yosemite Park and there were moments when I felt that it's impossible but we never gave up and after a couple of days and nights sleeping in an overhanging wall we reached the summit and this feeling standing up there on the mountain it's just indescribable but more importantly what these experiences taught me was that we should never give up we should always face challenges head on and we say open mind and indeed a quote by Mark Twain serves me as an inspiration and he said they did not know it was impossible so they just did it and today me and my research team we Face a huge Challenge and probably the biggest challenge of humanity climate change but then hey why do you think that somebody like me with the background in mathematical Finance should deal with climate change well the fact is when I returned to Switzerland something unexpected happened which could also happen to a rock climber I fell I fell in love with my wife and we founded a family with two wonderful children and besides changing diapers this brings new responsibility into your life and I started contemplating what kind of Legacy would I leave behind for my kids when they grew up would I tell them that I have educated generation after generation of investment bankers or could I tell them something more meaningful more impactful so I had to make a decision and I decided for the letter one but where to start our society faces so many challenges and I chose climate change for one particular reason climate change at its root is an economic problem climate science tells us that climate change is human made but more precisely it is caused by our economic activity and economic activity gets coordinated in financial markets and this is my area of expertise so let's start with textbook economics textbook economics tells you that there is this magic invisible hand that solves everything by attaching the right price tag and allocating Capital where it is most needed so can it solve climate change one necessary prerequisite for this magic hands to work is that we have all information available at all times and for all the stakeholders so that we can make economic decisions unfortunately in the case of climate change companies have been very very active in providing us with the climate relevant information in corporate sustainability reports and so on and so forth and today we also have different climate initiatives like the task force for climate related Financial disclosure the tcfd and by now there are about 4 000 companies that support the tcfd and the tcfd gives companies a framework in which they have to report their climate relevant information to the stakeholders so it seems that it's just a matter of time and eventually the market will solve the problem of climate change do you think so well the truth is that CO2 concentration in the atmosphere is climbing all the time there's no change in the trend and also there's no change in the trend in global temperature rise so something clearly goes wrong here but what exactly is it that goes wrong let me give you two anecdotal examples for my arguments the first anecdote is about a lunch that I had with the chief corporate sustainability officer of a large global company and probably unintendedly he told me how they produce this corporate sustainability reports and he said that well you know I get the first version and then I send it back to the team telling them that you should adopt much more vague language and it does that a couple of times so in the end this report degenerates to some useless piece of a marketing brochure so let me ask you then how can we solve climate change if we do not get the decision useful information from the corporations and the second example is a sustainability conference that I attended last year and there was the CEO of again a global company and he presented by how much they reduced their core emissions over the last year and he said that they reduced it by my by 8.5 percent and of course the crowd applauded great but what went unnoticed is that these were only the core emissions but not the total emissions including scope 3. and the total emissions of that company are 25 times higher than the core emissions and moreover over that last year the total emissions of that company were Rising by eight percent so let me ask you again how can we solve the climate crisis if we are only told a fraction of the truth and not the whole truth and unfortunately these two examples is representative for the whole economy companies they don't walk their talk and when they talk they talk only vaguely but to be fair it's not all the companies that are like this but then the question is how can I separate the walkers from the talkers and here is where our work comes in back in 2019 we started to analyze corporate communication so we wanted to create a transparent and accountable system and of course we are only humans so no human could ever read all this corporate communication and corporate reports annual reports earning calls and so on and so forth so we had to look for an ally and thanks to our mathematical mind we found an ally in artificial intelligence so what we did is we created an algorithm which we christianed climate bird and climate bird is based on the bird algorithm which was published in 2018 and stands for bidirectional encoder representation from Transformers but you don't need to understand the technical details but whenever you use your iPhone and you search something on your preferred search engine you're actually using climate bird uh Bert and Bert works so well because it understands the context of your query what does that mean let's say if I have two sentences or if I say to my wife hey darling I take the kids and I go down to the riverbank or if I say to my wife hey darling I take the kids and I'm gonna rob a bank these are two different meanings for the word bank right and depends on the context so Bert is smart enough to differentiate between the context so then what is climate bird climate bird is an algorithm that we further trained by exposing it to lots of climate related text and by doing so the algorithm started to understand the climate relevant context and we then further fine-tuned the model so that it can identify commitments by companies in earning calls in annual reports and so on and so forth and moreover we trained the model so that it can identify whether a commitment is specific or just pure boilerplate and with this algorithm we then created what we call the CTI because in finance you always have three acronyms and the CTI stands for the cheap talk index and the cheap talk index is basically a measure that tells you how much vague language a company is using in their communication to the stakeholders and we then analyzed about 1 500 companies and found for instance that in 2020 every second company had a cheap talk index above 50 percent what does that mean that means that for these companies at least every second commitment that they make is just pure boilerplate and therefore useless absolutely useless information we then analyze the whole time series and the results that we've got there for even more striking and concerning I'm going to focus on three of them so first we found that cheap talkers they like to support climate initiatives because it gives them a convenient Avenue to improve their Public Image without making tangible commitments to real action the second finding that we found is that cheap talkers have higher emission increase so they use these nice words in the communication to stakeholders to hide their negative environmental impact and third tip talkers have much more negative media attention that is they're much more in the media because to some environmental incidents so therefore cheap talkers have a higher reputation risk which then eventually leads to higher Financial Risk so overall what our work has shown is that words do matter but words can be deceiving and with a tool like climate bird we can actually differentiate the walkers from the talkers and the good news is that we open source this tool on our website chatclimate.ai so that everybody can use it Regulators can use it investors can use it stakeholders can use it and also you you can use it so ladies and gentlemen with the looming threat of climate change we need bold actions and Visionary ideas my own experience with climbing and math taught me the value of persistence in the face of seemingly impossible challenges but of course climate change is a much bigger problem and for that we need to to rewire and exploit the immense potential that artificial intelligence offers and maybe one day somebody of you will give a TED talk with the title how we solved the climate crisis and with the opening line we did not know it was impossible so we just did it thank you [Applause]

Channel: TEDx Talks

Views: 478,767

Keywords: AI, Climate Change, English, Finance, Global Issues, TEDxTalks, [TEDxEID:53643]

Id: kakgucaa_HE

Length: 14min 58sec (898 seconds)

Published: Mon Aug 14 2023