Climate risk isn’t a distant threat, it’s a material financial reality. In this episode, Matt Babic, Advisory Manager at Novata, breaks down what today’s investors need to understand about the evolving climate landscape, the data that matters, and how to assess risk and opportunity across portfolios. Whether you’re navigating new regulations or rethinking your investment strategy, this conversation brings clarity to a complex, high-stakes issue. The question is: Are you equipped to see the financial impact before it hits your bottom line?
About Sustainable Intelligence
Novata’s Sustainable Intelligence podcast brings honest, forward-thinking conversations about sustainability in the private markets. From carbon accounting to turning data into impact, each episode explores how investors and business leaders are tackling real challenges, meeting rising regulations, and building long-term value. Join us for expert insights, practical strategies, and authentic dialogue that empower action and progress in the evolving sustainability landscape. Listen to more episodes on Spotify or Apple Podcasts.
Conversation with Matt Babic (Transcript)
Ella Williamson: Welcome to Sustainable Intelligence, where we discuss all things sustainability for the private markets. I’m Ella Williamson and I’m thrilled to be your host. Today we’re joined by Matt Babic, a manager on Novata’s EMEA Advisory team.
Matt’s worked in sustainability and climate consulting for over five years, with a focus on greenhouse gas accounting, climate risk, and decarbonization strategy. He’s based in Bristol and has advised a wide mix of clients from sovereign wealth funds to VCs and big name corporations. We’re diving into why climate risk is still mission critical for private markets today, even as some regulations are being rolled back or challenged.
So Matt, I’d love you to start with why climate risk is still so relevant and a priority today.
Matt Babic: Sure. Thanks Ella. I’d initially say that whether or not we believe in climate regulation, whether or not climate regulation is strong or weak, the fact is that the environment is gonna continue to change. And that creates real world tangible financial impacts for private markets, for businesses all over the place. All organizations are gonna face challenges and opportunities. Many of them already are, and if that creates a tangible financial impact or downline implication for a business, then climate risk is still relevant. So we know that, for instance, this summer’s heat waves in Europe don’t care about the EU Omnibus bill being watered down or being delayed.
And the hurricanes in the US that will come later in the year, they’ve not heard about the big beautiful bill. So whether or not we have strong regulation in place doesn’t really matter from a climate perspective because we’re dealing with physical systems here and that’s what really impacts businesses.
So is climate risk still relevant? Absolutely. Because it exists outside of this world of regulation and disclosure that so much of ESG relates to.
Ella: That’s such a valid point, and I think it’s especially valid this week when we’ve been hitting 32 in the UK. I think it was the hottest Wimbledon ever on record. Now, what macro forces beyond policy are making this a boardroom issue for GPs and LPs alike?
Matt: Yeah, I think going back to the kind of post-COVID restart in the early 2020s, I think there’s a real legacy there around businesses seeking to become more resilient and seeking to become more flexible, more adaptable. And that was, in practical terms during the pandemic, meant that people’s ways of working had to change dramatically and we had to respond very quickly to new normals. I think from a more strategic perspective now, a few years removed from that, we’re really starting to think about supply chains, value chains, future proofing for changes that can come down the line.
That, of course, is relevant to private markets in the sense of LPs now being under a little bit more pressure from a fiduciary duty perspective, if you consider the investment horizon now for a pension fund, it’s probably aligned to a 2050 net-zero timescale if we think we’re 20, 30 years removed from that. That is very commonly the case that a pension fund would take decisions on that timescale or with that timescale in mind as a minimum.
So that LP pressure then filters down to GPs who are maybe a little bit more focused and a little bit more responsive to things like renewable market disruption and clean tech transitions and things like that, which are a little bit more in the here and now, but it’s driven by that alignment of longer term investment horizons for things like pension funds and LPs.
I think there’s a few drivers outside of pure regulation and pure policy, which is just bringing into focus the alignment of hopefully a net-zero future that we can reach in the next 20 to 30 years. And also then being commercially responsible and identifying these disruptive technologies that will help that will help investors reach their returns. So there’s a few different drivers there, I think, beyond policy.
Ella: Yeah, so it’s that balance between being a responsible business that is ultimately resilient, but also setting those targets for a more sustainable future.
You work with investors on a day-to-day basis, what tools are they using for scenario analysis to stress test their portfolios?
Matt: Scenario analysis really serves to pinpoint the materiality of different types of climate risk in a particular geography or in a particular market. We might, for instance, explore the impact of extreme heat at a given location that is material to an organization at some point in the future. So it’s a useful way to assess potential futures if you like. It’s not crystal ball analysis or anything like that. It’s not forecasting in quite that sense. But it does allow us to say relatively, okay, this is more likely to happen than this and this is likely to become more material in the future if things continue in a certain way. And I do subscribe to that adage that “all models are wrong, but some are useful.” And in terms of the actual application of that analysis we see investors use it in a bunch of different ways. Chiefly just to touch on two briefly, the due diligence stage of a pre-investment. So using scenario analysis as a screening tool to identify hotspots in a particular organization’s risk profile can be a useful kind of dimension to benchmark the risk appetite for an investor or for an investment strategy. So that’s one piece there certainly with DD. And then also during the hold period if you consider that an investor wants to future proof the valuation of its portfolio at exit, one way to do that is to safeguard an organization from a climate risk perspective.
So making sure that during the hold period we’re using scenario analysis, perhaps as an engagement tool to say, do you have the skills, the budget, the policies in place that can really help us when it comes to exit? So I think during the hold period is where we see that engagement with portfolio companies with respect to scenario analysis that’s carried out by their investor.
Ella: Interesting. And for those who maybe aren’t fully aware of what scenario analysis is, would you mind just giving a really brief overview, in layman’s terms?
Matt: Absolutely, there’s a lot of analysis and data that’s published by the Intergovernmental Panel on Climate Change. They assess different climate science variables, indicators that describe how the climate might change in the future based on a certain set of broad inputs.
So we might have, say, a business as usual case where current levels of investment in fossil fuels persist into the future. Or we might have a scenario which is very optimistic in respect of the amount of investment that’s funneled towards renewables and low carbon solutions. So there’s a kind of a different set of inputs and assumptions that you would make there. And then that’s balanced against a set of climate indicators for different regions. So it allows us to say, okay, in the future we’ll have a more or less optimistic view on how extreme heat might impact a given area or how flooding might impact a given area based on some of these assumptions that we can use as inputs. Sorry, I dunno if that was layman’s terms enough.
Ella: That was brilliant. I understood it. So I’m hoping everyone listening would at least get a better idea. So thank you for that. And in your experience working with different funds, are they leaning more into disclosure or are you seeing them scale back in that area?
Matt: Yeah, it’s a good question because I think the appetite around climate risk exists, massively so, for the reasons that I’ve mentioned in terms of resiliency and so on. But what is often off-putting for many people is the kind of the challenge around data visibility. Data access becomes a bit difficult and that can hold a lot of people back when it comes to knowing where to start or also not wanting to appear at the back of the pack when it comes to disclosure amongst their peers or amongst their sector. But what keeps it relevant is that, ultimately, this is something which is very closely tied to financial impacts and financial implications. So that keeps our clients engaged with this, keeps it a high priority for them. And yeah, keeps it on the agenda whenever we’re in conversation with them about what’s next for them in regards to their reporting journey.
Ella: Absolutely, and whenever you can link it back to the ROI and those financial impacts, it’s very powerful and really proves how valuable it is. Now, a lot of these scenario analysis tools, they are predictions for the future and there are various data gaps that need to be filled. What innovations are out there that are helping fill those voids and fill those data gaps?
Matt: Yeah, I there’s a few kind of emergent trends in recent years. Some of them are what I would call low tech. Some of them are a little bit more software and data related. So the maturity of the tech solutions that can help you prepare scenario analysis and benchmark your financial impacts from different climate risks, the maturity of that market has really gone from strength to strength in recent years.
The kind of the trade off of the amount of input data you need to put into a model and the level of insight you can get out, that relationship has really improved. I think recently where models are getting more detailed, more granular, give you more information with the same or less input data essentially.
So you’re getting a little bit more bang for your book in respect of what the software solutions can provide you. I guess the low-tech innovation is relatively obvious when reflecting on it.
But the fact that there are so many organizations that are now in year three, year four, year five of making their disclosure, of iterating their analysis just means that there’s a lot more work in the public domain, in networks, in organizations that are becoming more experienced in doing this. There’s such a richer vein of almost benchmark data that you can look back at if you’re starting out now, you can compare yourself to half a dozen peers who maybe have been disclosing for two or three years on their climate risk and use that as a really useful, kind of, jumping off point. And it helps to bridge some of those gaps in data visibility. It helps to identify what is important for you to even worry about when it comes to accessing new data or who to go to in your organization to find it. So some, thankfully, high and low tech solutions there, which are helping to close those gaps.
Ella: I think that’s such an important point you made there that disclosures have happened over multiple years now. So the data is out there in the market and is ultimately informing companies who are doing this for the first time.
But for those companies who have been doing this for four to five years, who are classed as sustainability savvy, climate savvy, whatever we wanna call it, how have you seen them using these early insights that they’ve now built over a number of years as a business advantage, strategic advantage, financial advantage?
Matt: Yeah, there’s a lot of applications for this knowledge and understanding. I think I’ve mentioned kind of flexibility and resiliency and value chains. The organizations that have a good grasp of how to assess and measure impact in their organizations that are brought about by climate risks are also then far more well equipped to deal with non-climate risk impacts as well.
So I think that there’s a strong relationship between being organized when it comes to climate risk and being able to handle other types of risk as well, be it other political shocks or other environmental or economic shocks that can come about.
More practically speaking though, I think, there’s a lot of energy and momentum around becoming more sustainable or on capital allocation within organizations. We need to decarbonize our facilities. We need to upskill our workforce. Having an assessment of climate risk can provide a really useful dimension when it comes to allocating that capital. Okay, let’s focus on this area of our business because it’s highest at risk from a given climate impact potentially. Let’s focus our attention there this year because not only do we get the operational benefit of having made this investment, but we’re also future-proofing ourselves and building that resiliency too.
So I think there’s a useful application there internally from a capital allocation perspective. And it recognizes that overlap between future proofing a business and becoming more resource efficient or becoming more energy efficient or attracting better talent. All of these things feed in together. And it comes from that place of having a sense of what your impacts are now and what your impacts might be into the future. It fits into this agenda really nicely.
Ella: Yes. So starting by understanding your impacts and then rather than trying to address all of them at once, start with the one that is most material, or the highest risk, and then going from there. I think that’s a really sound piece of advice. Now, if an investor is looking to start out on their journey, so the other end of the scale, what piece of advice would you give them or tips in terms of how they should start or where they should start?
Matt: I think for an organization starting out now, on this topic, I would suggest adopting the idea that the perfect is the enemy of the good and starting your journey with as little or as much data as you have in iterating over time is really the only way to do this. You can’t wait and wait and improve your data, and improve your data and, wait and see on inputs from this place or that place that could help inform your decision making. I think it’s partly about having a rough sketch in year one where you might say, screen your most material climate risks and opportunities at a very high level, at a qualitative level.
And then the next year you develop that understanding, maybe, your data collection has improved by that point, and you can have better inputs. By year three, you’ve got new people on board, new internal structures that can help develop this as well. So I think iteration and building up this understanding over time is a really critical piece. In terms of practical suggestions there, we’ve already touched on this a little bit, but I wanna say, educate yourself through looking at your peers. It’s pretty likely that what is material to them is material to you. So if you’ve got two or three peers that have been reporting against climate risk for two years, three years, read their reports, see what they’ve got going on because the material areas will be common to you too in likelihood.
And finally, I would just propose as well, making sure that the breadth of your analysis in this area is aligned to reporting standards. So there’s a reason that the Task Force for Climate-related Financial Disclosures, the TCFD, there’s a reason that is so popular and so widely used and forms the basis for so many local or regional climate regulations around the world. It’s because it’s really good. It covers a lot of recommendations and themes that you really have to respond to around internal governance structures on the implications for your business strategy, implications for risk management, implications for metrics and targets that you need to set to respond to climate risk. There’s a reason why it’s so popular. It’s because it covers all the bases. So when you’re starting your journey, assessing yourself against those 11 recommendations, seeing that you might have some strengths to play to in governance or in target setting or, you know, identifying areas of weakness that you need to develop.
So you might not have great risk management processes in place for this right away, but using that framework to benchmark your status, for want of a better term, is a really useful tool, so would recommend that too.
Ella: Very sound advice indeed. So get started now. Don’t wait. Number two, educate yourself from your peers. I think that’s a really great point. There is so much data, so many reports out there so get savvy, and also aligning your reporting to reporting standards, so it’s future proofed. Thank you, Matt. Now we normally finish with a few quick fire questions.
There are no right or wrong answers, just what comes to mind. So number one, what is one underrated use of scenario analysis?
Matt: Gosh. I would have to say the conversations it can start with internal teams. So what I mean by that is if you put some financial values in front of an investment team and say, we’re at risk for X million dollars this year because of this type of climate risk, and we use these assumptions to make that judgment, people love to prove you wrong. And you might really improve your data collection and data visibility the next time you come to do it because that investment team member might say no, hang on, actually, let me improve this assumption, and that’s wrong. So let me cross through that and update it with this.
And inviting that scrutiny, just by having a rough number or a broad number to start that conversation is actually, yeah, quietly, one of the best uses of scenario analysis is to get that kind of conversation going internally. So definitely, yeah, engagement with internal teams is an underrated part of that.
Ella: Brilliant. Number two, what’s one climate metric every fund should track today?
Matt: If I was tracking any climate metric, it would probably be financed emissions. For two reasons, or three reasons. Firstly, it’s gonna be massively material to you if you’re an investor, and it’s often missed by the wayside. A lot of focus is given to emissions from offices and things like that when really financed emissions are where the juicy emissions are at.
Secondly, to make that assessment, you have to have a certain degree of internal dialogue to access the data. So again, going back to that internal engagement piece, it’s quite useful in that area as well. And then thirdly, assessing financed emissions directly overlaps in many ways with assessing and measuring transition risks.
So exposure to carbon pricing or exposure to consumer habits changing. That is very straightforwardly described by your financed emissions profile. So it’s a really useful, versatile metric that can be used in quite a lot of valuable ways, I think. So everybody should be doing financed emissions. But I am biased as a carbon accountant to say that.
Ella: I don’t think that’s biased at all. I think that you gave a very legitimate reason. And if you had to start your climate journey with just one action this quarter, what would it be for you?
Matt: I think it would probably be to get some sort of champion or board representative to promote this agenda. I think climate and broader business strategy have to overlap for this to be successful and for this to stick in the long term. So having some sort of representation at board or senior management level is crucial to that and success of that.
If you’re listening to this and you are on the board, or you are a senior manager within your organization, then I would ask you to consider the time, effort, resources, skills, talent that you currently give over to assessing climate risk, and then consider how much more time, effort, energy, resources you give to assess other types of business or commercial risk, like cybersecurity or data protection, the gap between those two things. You might find that you’ve got a big step down between how you manage your other commercial risks and your climate risks. And then ask yourself, how much work do you need to do to help bring that up to speed? I think that would be a useful exercise as well.
Ella: Thank you Matt. I have certainly learned a lot about climate risk and scenario analysis today, so really appreciate you spending the time and taking us through this. I think the three things that really stand out to me, the world and the climate isn’t aware that regulations are being rolled back. We’re seeing hotter temperatures, we’re seeing more crazy hurricanes, et cetera. We need to take a stance as a business to move forward and start to future proof the world against these things.
Number two, there is more information out there than ever before. Companies have been disclosing this for four, five years. Utilize those reports, utilize those disclosures, utilize that data to benchmark your own company.
And finally, just tying back climate, or tying together, I should say climate and business strategy because that’s ultimately the way that we are really gonna make a difference in this space. So thank you, Matt, for all your insights today.
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