Remarks to the CFTC Market Risk Advisory Committee

Bob Litterman, Climate-Related Market Risk Subcommittee Chairman

Founding Partner and Risk Committee Chairman, Kepos Capital

December 11, 2019

Let me start my remarks by expressing my deep appreciation to Commissioner 

Behnam, the CFTC’s Market Risk Advisory Committee, and the Commission for 

creating the Climate-related market risk subcommittee and asking me to chair it. I hope, 

and expect, that the proposed June 2020 report from the subcommittee can play an 

important role in guiding the climate response of the U.S. financial community, and I am 

honored and excited to chair this very esteemed group. For me it was an unexpected, 

but timely opportunity to help work with an incredibly talented group of risk management 

experts in the financial markets on a topic, climate risk, that I have been focused on for 

the past decade.

Having spent a 23-year career in risk management and investing roles at Goldman 

Sachs I have deep respect for the critical role that the financial markets have in 

facilitating the efficient allocation of capital in our market economy, and the importance 

of appropriate regulation and oversight.

I have an unusually eclectic background that I think makes this assignment an excellent 

fit. I grew up in Phoenix, Arizona, and did my undergraduate studies at Stanford where 

I majored in Human Biology with a concentration in psychology. I initially thought I was 

going to be a journalist, and my first job was as a general assignment reporter for the 

San Diego Union. After a year, though, I decided to go back to school and got a Ph.D. 

in economics from the University of Minnesota. I taught economics at MIT for two 

years, followed by five years in the Federal Reserve Bank of Minneapolis working as a 
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staff economist in charge of economic forecasting. In 1986 Goldman Sachs made me 

an offer I couldn’t refuse, and I began my career on Wall Street as one of its early 

quants. I started in fixed income research, followed by a promotion to Partner in 1994 

when I became the first firmwide head of risk management. In 1998 I moved to the 

asset management division and headed the quantitative group. In 2009 I left Goldman 

and helped to create Kepos Capital, a New York based investment management firm 

where I am currently a partner and Chairman of the risk committee.

I am well known in the financial community as the co-developer, along with Fischer 

Black, of the Black-Litterman asset allocation model, which we created 30 years ago 

and which is still widely used in the investment industry to build portfolios that optimally 

balance risk and return.

My focus on climate risk began when I left Goldman and joined the board of the World 

Wildlife Fund. Like many people I was concerned that society is not adequately 

addressing the risks created by climate change. The increase in greenhouse gases that 

humans have put into the atmosphere is the root cause of climate change, and thus as 

an economist and risk professional it was obvious to me that the risks created by 

climate change must be addressed. There is tremendous uncertainty about the precise 

levers and tools to appropriately mitigate climate risk, and we have to proceed with 

caution, but today the incentives around the world go in the wrong direction, and this 

has to change. 

I currently spend much of my time trying to focus attention on the risks created by 

climate change. This year I have two publications in scientific journals on this subject. 

In March I and a group of other scientists published, “Natural Solutions are Not 
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Enough,” in the journal Science, and just this past October, two colleagues and I 

published an article in the Proceedings of the National Academy of Sciences with the 

title, “Declining CO2 Price Paths.” In this article we focus on how quickly the risk of 

climate change is increasing, and extremely high costs of delay in addressing it. Rather 

than a slow approach to taking action, we find that when you appropriately take risk into 

account the optimal policy is to act as swiftly as possible so that we can be confident 

that society will avoid potential worst case outcomes.

Recently many investors and other financial professionals have recognized these risks 

and are trying to understand how best to incorporate them into their decision-making 

processes. Thus, the climate risk subcommittee is a timely regulatory response. 

Moreover, the experts who make up this committee are a diverse and exceptionally 

talented group. They come from financial, energy and agricultural markets, the banking 

and insurance sectors, data and intelligence service providers, the public interest sector 

and academia. We are extremely fortunate that they have volunteered to serve.

Our assignment is to write a report by June of 2020 that focuses on climate-related 

financial and market risks and makes recommendations to the Commission. We have 

an appropriately broad mandate including assessing and managing these risks. We will 

focus on ways in which market participants can improve the integration of scenario 

analysis and climate stress testing into their risk management function and financial 

reporting. 

We will address both the short-term financial risks that may be associated with the 

transition to a low-carbon economy, as well as the current and future market and 

financial risks associated with the physical risks that will arise from a warming climate. 
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Those latter risks include more frequent or extreme weather events such as floods, 

droughts, heat waves, and hurricanes; as well as other direct impacts such as 

increasing wildfires, sea-level rise, and ecosystem degradation; and indirect impacts, for 

example on human health and national security. 

I anticipate that the heart of the report will be a section on the implications for market 

oversight policies, including disclosures, governance, strategy, risk management, and 

conduct. We will also try to identify and make recommendations with respect to the 

types of scenarios and stress tests, as well as data and analytics that need to be 

developed and used.

We intend to recommend additional market and derivatives products that may improve 

the identification and hedging of climate related financial risks, and recommend policies 

designed to facilitate capital flows required to finance the transition to a low-carbon 

economy. 

I hope that our report can provide a high-level consensus from the financial community 

about where and how we need to focus our efforts to address climate related financial 

market risk. 

The committee met for the first time in November, and what impressed me was that as 

we went around the table and heard from the members there seemed to be a strong 

consensus that the appropriate role of the public sector is to not to direct investments, 

but rather to provide incentives and the appropriate regulatory framework, and let the 

market freely allocate capital. 
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We will meet again this Friday and plan to further discuss the matters I have mentioned 

to you this morning and consider others related topic areas before finalizing an outline 

and developing work streams. We anticipate members to volunteer to lead the various 

topics this week, and we will continue to hold monthly conference calls throughout the 

next six months as we do our work. 

Again, I want to thank the Commission for giving us the opportunity to take on this 

important assignment and I would be happy to take questions.