Are extreme weather events causing farmers to lose access to credit? Are they causing global enterprises to move business locations to dodge physical and economic catastrophes? Will a sudden turn in investment trends away from carbon industries cause a major financial crisis? These questions are guiding the research professor Galina Hale, Ph.D., is exploring along with her Ph.D. students. They are also driving contemplative discussions in her undergraduate and graduate classes in the Department of Economics, which has been ranked sixth in the world among academic departments in international finance.
“The worlds of economics and climate change science are colliding,” says Hale, who spent 14 years as an economist with the Federal Reserve Bank of San Francisco and held teaching positions at Yale, Stanford, and UC Berkeley. She began her career in Russia as a consultant for the Russian Ministry of Finance. She joined the UC Santa Cruz faculty in 2020.
Her interest in work that intersects climate change and economics was inspired a few years ago by her presence at the second Network for Green Financial Systems (NGFS) conference, where she was the sole representative from the Federal Reserve System.
“I was just impressed by how people were able to think about climate-related risks in the context of monetary and financial policy and bank supervision,” said Hale, whose published research up to that moment focused on understanding patterns of international capital flows and international financial crises, international banking, and stability of financial networks. After the NGFS conference, she was trying to find a way to connect her research with her passion for the protection of the environment.
“I love being outdoors, and I’m passionate about the environment. My husband and I are looking for ways we can help reduce the use of animals for human food consumption, a major contributor to climate change” said Hale, who also serves as a board member for Animal Charity Evaluators and is a cofounder of Food System Innovations, a group of experts who volunteer to help organizations working to make the world's food system more environmentally sustainable, compassionate, and health-promoting.
Tapping into these interests and her desire to help solve global issues, Hale turned her attention to identifying opportunities for the financial system to mitigate climate risks and to determining ways in which economists can inform policymakers on how to make the food system more sustainable.
Through her research, in which she invites undergraduate and graduate students to participate, she is searching for an answer to whether financial markets are prepared for climate risks. She is investigating whether economic agents—financial markets specifically—realize the risks, and if they are placing sufficient probability on those things happening.
Mitigating climate risk is an existential necessity. But, Hale says, if some changes are unexpected, they can pose a significant risk to global markets. The United Kingdom’s pledge to reduce coal, and the commitment by the United States to remove high-emission-producing cars, are two examples of such transition risks that could potentially cause rapid and detrimental economic consequences. She is exploring sustainable investing (ESG or Environmental, Social, and Governance), how markets are reacting to or preparing for enterprises that are moving toward greener methods of production and the manufacturing of environmentally friendly products.
“There is a serious risk of asset prices changing rapidly once it dawns on people that they can’t have coal or that cars that don’t run on electricity are of little value,” explains Hale. “If financial markets aren’t prepared for that rapid drop in some asset values, it could have a catastrophic ripple effect on the markets locally and globally.”
Hale has also brought to light the multi-billion-dollar impact climate change is having on all areas of the economy. As she explains in a recent study, "What are the Financial Risks from Climate Change?" (Econofact, January 21, 2020), “Agriculture, infrastructure, human health and productivity, tourism, businesses, and financial markets are already affected by extreme weather events becoming more frequent.” The recent PG&E bankruptcy filing in the aftermath of devastating wildfires in California is one example she uses to make her point.
Hale incorporates her research into her courses, which have spurred multiple climate-related research theses from her students. She is the director of the Master’s Applied Economics and Finance program, which is unique in that it provides more training in economics, statistics, and econometrics than most traditional M.B.A. programs.
“Silicon Valley companies rely on big data analysis, AI, and machine learning, but they also need talent who can ask the right questions, who are trained to understand the fundamentals of economic systems and can program statistical models," Hale said. "Most M.B.A. programs don’t get as technical as we do with econometrics and data science.”
Hale and her colleagues are working on research that is dispersed by the university’s Center for Analytical Finance (CAFIN), which engages in cutting-edge analysis intended to solve real-world problems of finance in a globalized financial system. The motivation for CAFIN came from the 2008 financial crisis, and its main themes of understanding systemic risks, the impacts of technological innovation in finance, and the challenges of promoting greater financial inclusion, all had their roots in that global shock. Hale is co-directing the center with Professor of Economics Nirvikar Singh.
“As founding director of the Center for Analytical Finance (CAFIN) at UC Santa Cruz, I was delighted when, in 2020, Galina accepted the invitation to serve as co-director of the center,” says Singh. “Galina has played a lead intellectual and organizational role in turning CAFIN’s attention to the importance of finance in the area of environment, sustainability, and governance (ESG): for example, understanding the risks of climate change and ways of funding prevention and mitigation will be central to making progress in the face of the looming threat. With Galina’s leadership, CAFIN will be on the frontier of the two most important aspects of global finance—Fintech and ESG—for the coming decades.”UC Investments, which manages University of California investment funds and provides fiduciary oversight, also values the contributions of CAFIN.“More than seven years ago, UC Investments created a sustainable investment framework for the University of California that has helped guide our thinking about the challenges, and opportunities, of our era and beyond. Our collaboration with CAFIN has helped us keep current on the latest research and innovations that pertain not only to investing, but to how we assess our changing world,” says Jagdeep Bachher, chief investment officer and vice president of investments for UC Investments.
This March, CAFIN is collaborating with local universities and financial institutions to present The Fintech: Innovation, Inclusion and Risks Conference 2022 that will take place at San Francisco State University (SFSU) and will bring together academicians, financial economists, and policy and compliance experts. The conference is co-organized by CAFIN, SFSU, and Federal Reserve Bank of San Francisco.
“Universities need to be at the table in order to understand the big-picture needs of financial institutions and policymakers, so they can engage their faculty and students in work that will address relevant unsolved problems,” said Hale, who has a vision for growing the center and the master’s program in ways that can connect students with alumni and more Silicon Valley enterprises.
“At UC Santa Cruz, we want the academic ideas to come to the surface and have an impact on what’s happening in Silicon Valley," she said. "We’d love to have graduate students attending international conferences and organizing presentations and events at local conferences. We’d like to engage alumni and policymakers and focus on the needs of our community in finance, education, achieving Environmental, Social, and Governance (ESG) sustainability—issues that generally are not the focus of academic financial centers. There is so much potential for us to connect and engage, which would benefit the students, faculty, alumni, and the community.”
