#176 Green Premium & the Price of No Action, Partner w/ Big Oil?, EV Demand, & More w/ Shaun Abrahamson, Part II (Third Sphere)

Recently, the MCJ Podcast experienced huge backlash for having Big Oil players on the show. This prompted us to bring back a past guest, Shaun Abrahamson from Third Sphere.
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🌎 Want the full PodLetter? Go to our substack to see the written content that supplements the audio interview.
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Shaun last joined us on episode 136 to talk about Navigating the Climate Capital Stack and how to Design for Finance (especially in the context of hardware).

Today we dive into two macro topics.
#1 Partnering with Big Oil --AND-- #2 Repricing Climate Risk

There are several subtopics under these big umbrellas (check topic timestamps). All of these were highly interesting to me, and I think they will be to you as well.

Tune in to get the whole thing today! 🌱🌎

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Links:
**Shaun Abrahamson | Third Sphere
**Episode 136 - Hardware as an AI Moat, Design For Finance with the Climate Capital Stack, & More w/ Shaun Abrahamson (Third Sphere)
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**Somil & Silas on LinkedIn

Transcript

Silas Mähner (00:00)
All right, welcome back to the show, Sean. How's it going? Yeah, absolutely. Super, super excited to have you back on. Obviously, last time was a blast as we were talking before the show. Probably some other topics we could bring you on for as well. It sounds like things we didn't plan to talk about. But let me just set up the conversation. And by the way, for people who haven't, I would definitely recommend going back and listening to the last episode we did with Sean. I think it was 1 .35, I think it was. But...

Shaun Abrahamson | Third Sphere (00:03)
Excellent. Thanks for having me again.

Silas Mähner (00:28)
Let's get into it. So we wanted to talk about one thing in particular, I think what we'll start with, which is there's a bit of a debate kind of re -sparking around the climate community and whether or not you should, effectively, whether or not we should partner with oil and gas companies in innovation, financing, pilots, whatever, right? You had brought up to our attention a post that came up. It's not really about that one organization in particular. It's kind of about the broader community. So...

Let me just kind of tee it up here for you. Give us some of your initial thoughts and we can just get into it.

Shaun Abrahamson | Third Sphere (01:03)
Yeah, I think, yeah, we talked about this. I think it's a messy topic. So I think...

The way that we think about oil and gas in general is the way we think about tech incumbents. When we think about using tech to address climate problems, it's closer to thinking about, okay, what happens with a mobile phone when you've got an incumbent with landlines? Or now what would happen with...

satellite internet versus fixed broadband, or going much further back, horse and carriage versus automotive. And so I think there's some normal things going on with incumbents trying to protect a core business that unfortunately also happens to be the most damaging thing for climate.

So you've got that combination which just makes this worse or harder. And so I think in the history of tech, there is a little bit of collaboration with incumbents, but it's not generally the rule. So that's the...

Silas Mähner (02:28)
What are some of the, because again, I'm a baby at this when it comes to understanding the history of tech. So what are some of the examples that you would share that you recall where, hey, there was this partnership that it worked really well and maybe there's a couple that went really south because what they did is they ate them up and they basically shut down the business. Can you talk a little bit about some of those for us?

Shaun Abrahamson | Third Sphere (02:49)
Yeah, so I think so, you know, to go back to, you know, we have Microsoft because of an IBM collaboration. IBM was the, yeah, definitely the incumbent. In some ways the door for Microsoft was open because they didn't think PCs were real. Right, the counterpoint is obviously Apple, because Apple was, you know, building a completely distinct ecosystem. They did sort of full stack. They weren't interested in selling.

you know, pieces to the incumbents. If you look at the history of Google, you know, before they figured out if they had a business, they were selling search appliances. Like I was a customer way back for a box that Google sold for a time. Yeah. And so they sold them to Yahoo. And in some ways, Yahoo probably made the business, right? Like they learned a lot from that relationship.

Silas Mähner (03:34)
Really?

Shaun Abrahamson | Third Sphere (03:45)
Hard to think of Yahoo as an incumbent because they were maybe a few years ahead of Google. But I guess there are certainly examples. But I think in every area of tech, Apple tried to collaborate, I think, at some point with Nokia. It really was kind of a mess. It was not a great product. It was just too complicated. And I think in some ways what happens is the overhead of trying to manage the relationship.

And then the sort of misalignment of interests, it's not about how good the people are. Most incumbents have perfectly smart, perfectly capable people. It's trying to line up all the interests that tends to break stuff.

Silas Mähner (04:25)
Yeah. I guess the big thing that comes to mind for me initially is that makes sense with traditional tech incumbents where you're not... Maybe some people could bring in a moral argument to it, but in this case, there's actually a moral argument as to what we're trying to achieve as an outcome. We're trying to fix the environment or repair it, whereas the oil and gas companies are basically continuing to damage it. So...

But I do think that in some ways you could also argue that it's even more important to partner with them because they're the ones who need to decarbonize, right? And if you just try to do government sanctions to basically shut them down, you're going to end up with a really bad outcome as well, right? That's just not really a fair situation, but maybe other people would have other opinions on that. So any thoughts on that dynamic?

Shaun Abrahamson | Third Sphere (05:12)
Yeah, so I think...

It's helpful to sort of think about oil and gas companies in a couple of different regimes, right? So like, if you are operating in the EU, you have to satisfy all of the stakeholders, right? So you can make your customer argument and your customers will decide based on price, et cetera, et cetera. But you also have to recognize that people are voting.

in a way to reduce the use of fossil fuels at scale. So I would say it matters where a company is located because that determines how responsive and how cooperative they are, whether they want to be or not. And the EU is probably the best example of that. Norway, if you look at the income, like...

Silas Mähner (06:04)
You

Shaun Abrahamson | Third Sphere (06:12)
They fund a lot of funds like no one is saying, I don't want to take money from Norway, but guess what? You know, big chunk of GDP. I think it's like a quarter of GDP, maybe more. And no one blinks about working with Norwegian funded firms or sovereign wealth or anything else. And I think the reason is that it does look like they're making a pretty concerted effort to take income from...

oil and gas operations and directly put that into things like, you know, they have the highest EV adoption in the world, right? It's very clear that they're doing something. So that I would say is sort of the good end and it demonstrates what's possible. If you put everyone up against that as a sort of reference for what do you do with revenues and how do you invest in the future that's low carbon, everyone else looks pretty terrible.

Right? Like, BP and Shell don't look bad. Right? But it feels like they're being dragged into the conversation. And then, you know, you get to the US and it's like, yeah, I think I would say there's a fair amount of disingenuous behavior. Like, oh, let's do, you know, if you look at half of the IRA, it's the, let us pump for another 20 years. Let us pump for another 30 years. It's literally meant to...

give tools, give talking points. I personally don't believe that a lot of the carbon removal stuff that's being paid for with taxpayer money is doing anything except just extending the life of oil and gas assets in the US. A lot of people are going to call that cynical. I just don't see any evidence. The math doesn't work. But it will mean that we can keep using oil and gas. Right? So...

I think that's, I would say the US version of this is sort of the middle road. I would, you know, I understand why people want to engage. I'm generally not that excited. I think it's a pretty cynical industry given how long they've known whatever, but, and again, compare them to Norwegian sovereign wealth and they really look like they're not doing anything in terms of level of investment, right? And then finally, I would say there's a group of folks that are essentially petro -states.

Silas Mähner (08:28)
Yeah.

Shaun Abrahamson | Third Sphere (08:37)
in the sense that close to half of the economy, I mean the economy is oil and gas, right? So Russia, Saudi Arabia, I mean a lot of the Middle East, like they have a real problem, right? Like the people who are in power in those countries, if you took oil and gas away,

they will not be in power anymore. It's the source of power for them. So that feels like another whole set of questions. And I think where things get murky is when there are investors in the US saying, hey, I'm going to go and do my tour of the Middle East and bring in oil money and it's going to be fine. And actually, they're trying and we should give them some credit. And again, I'm like, that's fine. So make it public, put it on your website, right? Say that...

You know, this is your source of funding. And I think folks don't do that because they know that that is probably not going to hold water with most of the founders that are working in the space. It's probably not going to hold water with a lot of the LPs that want to invest. They don't necessarily want the co -investment. But I think the basic test for me is take Norway as your best case. Right. Look at the relative investment that's possible and then ask yourself,

How are folks failing if they're so good and their intentions are so... How are they... They're not even one tenth, in some cases maybe not even one one hundredth of what the Norwegian sort of oil and gas business is doing. So why is that?

Silas Mähner (10:17)
So are you saying that, I guess, perhaps if you were posing this question to more people on the government side of things, like managing the government spend and investment into other funds or just incentives or whatever, that they should be using that as kind of the measure, right? To look at Norway, if we're really going to do this, this is what we have to be doing, so we're actually making ground. Is that generally the principle?

Shaun Abrahamson | Third Sphere (10:40)
I think so. I mean, I think the IRA was an attempt and it got sort of diluted. Right. So you sort of have a choice. You can either have a stalemate and do a small amount of climate and a small amount of, you know, pork, if you like, for oil and gas, or you can do a lot of pork for oil and gas and in return you get and you and then I think what you're doing is you're just saying the market's going to decide. We'll give you both some support. Good luck. And I think that's...

Silas Mähner (10:49)
Yeah.

Yeah.

Shaun Abrahamson | Third Sphere (11:10)
what's going to happen in the U .S. is that in a bunch of areas, I think the oil industry will just lose. There's definitely a backlash on EVs. We can get into how substantive it is, why it is, who's funding the narratives. We can get into that. But it's become a race between Japan, South Korea and China.

Silas Mähner (11:19)
Mm -hmm.

Shaun Abrahamson | Third Sphere (11:37)
You want to bet against those manufacturing economies versus everyone else because they're producing the core components for EVs. So you would have to take the other side of that bet. It's basically, do you think some of the oil and gas companies are going to outperform essentially very focused industrial policy for the best manufacturing in the countries to ever do manufacturing? Right? And so like...

Silas Mähner (12:05)
Yeah, that makes a lot of sense. I think it's kind of interesting to, I guess, look at... You mentioned in the case of the US, it's almost like they're basically giving both people the baton and saying, run with it and see who gets to the end first, right? And I'm always curious about... Maybe it's just kind of related to personal experiences. Where I'm from, if I talk about climate tech, everybody is super skeptical. Like, what are you talking about?

That's nonsense. It's only government subsidies that makes work, blah, blah, blah. And then I'll bring up examples of companies that are doing it better and cheaper, etc. And then they're set to think, but it's the first time they've heard about it. So then they're like, yeah, that just must be a one -off, right? So my question is, to some extent, do you think it's just the eventual outcome is that oil and gas companies who are smart, who are recognizing that there is better technology, they're just going to say,

Holy shit, actually, there's a lot of investment opportunity here. So they're just going to transition. Because I think you could maybe make the argument about Orsted. They were like, hey, we're just going to go full in and transition everything to this renewable thing. So any thoughts there?

Shaun Abrahamson | Third Sphere (13:13)
I think so. I mean, the thing is that like, I think the energy, the oil and gas business has...

hasn't really faced tech disruption, right? They're used to other types of, they like political instability. Do you know what I mean? Like, like is the wrong word, but I think they have ways to manage interests. And I think part of what worries me from a sort of, do you want to actually engage with these people is they have private military, right? Like if you go into,

a lot of parts of the world and you look at who has private security at a very large scale, like at a state actor scale, it's probably oil and gas. And the argument is, yeah, we need this, but if you go and look at bribery and corruption, if you go and look at destabilizing, influencing foreign election, those folks show up over and over again. And I think that's the sort of, okay, that's who you're up against. You wanna...

Silas Mähner (14:01)
Mm -hmm.

Shaun Abrahamson | Third Sphere (14:20)
you know, engage with these folks. I think the other thing is like...

Tech generally isn't kind to incumbents, right? Like incumbents reflexively have at this point, under invested in product development, right? Like in a classic, like have a portfolio of things to hedge so you have something else to sell. They're not really doing that. They are at the phase of their business where they're massively trying to exploit influence with government. They're trying to exploit pricing power. They're trying to exploit...

monopolies and distribution. It's all about exploitation. They're not really investing in exploration outside of their core product. They're not really exploring. I mean, they're making some moves, I think, to appease people. But like, again, if you think about when there's a rapid transition within a few decades for an incumbent that's been around for 120 years,

They don't really have the ability, they have money and money usually hasn't been enough.

Silas Mähner (15:26)
Yeah. I guess it makes a lot of sense, but one of the biggest thoughts that comes to me as you're mentioning these items is if we want to decarbonize what they're doing and transition away from them, because it's not just energy, right? There's so many things that come from the oil and gas industry that fuel is not intended to be a pun, that fuel the rest of the economy, but you need innovation in all of these areas. And my question is, you can't actually innovate unless you have

projects to innovate on or to test around with. So it's almost impossible if you genuinely care about decarbonizing over time or transitioning everything to a clean economy, you must partner with them. It's just a matter of, I guess, choosing who you partner with.

Shaun Abrahamson | Third Sphere (16:11)
I'm not sure, again, you can go through sort of climate portfolios and look at how much money do you actually need. I mean, outside of a few areas where they're vested interests, we don't need the money, right? Like stuff is getting funded. There are other pools of capital. There are other interested investors who want to return. So then maybe they're strategics.

Silas Mähner (16:20)
Mm -hmm.

Shaun Abrahamson | Third Sphere (16:39)
and they have some expertise and I think that generally is true. But again, I'm not sure, like, if you're gonna decarbonize trucking.

Where's the oil and gas role?

Right? I mean, did they help Tesla?

Silas Mähner (16:58)
I'm not sure.

No, I mean, not to my knowledge.

Shaun Abrahamson | Third Sphere (17:04)
Right. I mean, you know, so if, if you go like, I think if you go through, like, let's pick the top 20 most valuable tech companies and you look at where their money came from, the incumbents are, they're a few incumbents, but they're not the main story. And so I think it's hard to sort of think that this massive part of the economy is going to just go away. Um, but that's how tech works. Right. It takes 20 years, but it's maybe 30 years, but it's inevitable.

Silas Mähner (17:19)
Mm -hmm.

Shaun Abrahamson | Third Sphere (17:34)
And I think the problem is that maybe a thought experiment is the following. Let's say that like about, I think 70%, 75 % of oil revenue is from transportation.

China just went through peak oil this year. That's like an unbelievable scale of change, right? Because that should have been an enormous market for oil and gas. But it's going to EVs and it's going pretty quickly. So that market's declining, right? The next major market is probably Europe. And then the US is going to be trailing behind, right?

Silas Mähner (18:10)
Mm -hmm.

Shaun Abrahamson | Third Sphere (18:19)
India is going to have to make some decisions, assuming that's the next fast growing economy. But it's not difficult to see that within 10 years, the influence of oil and gas is dramatically decreased because their core revenue in transportation is really impacted. It starts to impact their scale. And once the economics change, there's sort of a death spiral, right?

Silas Mähner (18:46)
Mm.

Shaun Abrahamson | Third Sphere (18:46)
they're going to have to increase prices which are going to make them less competitive exactly at the moment the battery prices are coming down. And so I think people forget that like, yeah, they have a position. But when you change the economics a little bit, right, if you reduce demand by 10 to 15%, it's kind of like in e -commerce, when you look at the traditional retailers didn't need to lose 50 % market share. At 5 % to 10 % loss, they're struggling. Right?

Silas Mähner (18:53)
Mm.

Shaun Abrahamson | Third Sphere (19:15)
They're struggling to get capital, they're struggling, and then you're in a death spiral. So I think it's hard to imagine. But again, if you look at tech and what happens to incumbents, we don't need 50 % drop in oil demand. You need China to flip to majority TVs, and you need EU to flip to majority TVs, and then we're having a completely different conversation. I think at that point, you really don't want the oil majors as a partner. They have their own problems to deal with.

Silas Mähner (19:42)
As a partner. Yeah, okay. So your point generally to try to summarize is even just a small... It's not actually as large of a difference globally that needs to be made in terms of demand for those products, for things to really get out of whack for them. And as a result, then there's really no draw whatsoever to take money from those folks.

Shaun Abrahamson | Third Sphere (20:06)
I think it can quickly become a distraction. It's one thing to have a rapidly growing partner. It's another thing to have a partner who's waking up in the morning and trying to figure out how to fight another fire. And so I just think that I don't want to overvalue. Again, I think that there are some good actors who are trying to make a transition and who believe and want to take a lot of the revenue, a lot of the cash that they generate today.

Silas Mähner (20:10)
Thank you.

Yeah.

Shaun Abrahamson | Third Sphere (20:35)
and redeployed into next generation assets, but it's a relatively small minority. The sort of broad middle, I think, is trying to buy 20 more euros. So they're doing fun games with carbon removal and whatever. I think it's very cynical. But again, that is what incumbents are supposed to do. It's what they've always done, is just try and buy more time. And they don't need it to work, by the way.

Silas Mähner (20:40)
Mm -hmm.

Mmm.

Yeah.

Shaun Abrahamson | Third Sphere (21:04)
people who are, they're just trying to keep the story going for long enough to get a payday and leave the current management teams. So that's the other thing is like.

Silas Mähner (21:12)
Yeah, it's true. Yeah, because their incentives aren't necessarily properly aligned in a long -term method that it makes any much difference.

Shaun Abrahamson | Third Sphere (21:18)
No. I don't think you want to be around in 10 years to deal with litigation while your business is shrinking in the major economies in the world. Who wants that job?

Silas Mähner (21:32)
Not me. Yeah.

Shaun Abrahamson | Third Sphere (21:33)
Yeah, so it's going to suck and we're probably going to have to cut a deal with people who are going to manage those businesses into a final decline because it's going to be, we need, they still have to operate, right? Like you're not going to be able to turn them off. But yeah, it's a tough, I think, you know, our choice is we work with folks in natural gas because it's

Silas Mähner (21:42)
Hmm.

Shaun Abrahamson | Third Sphere (22:02)
It's really unclear how you can quickly move off natural gas. For heating applications and some grid applications, we kind of need them to be around for a little bit longer. And I think some of them are at least trying to invest in adjacent, again, there's plenty of bad actors, but I think in general, that's what we found. But I think oil is tricky because I think especially once you get into Petro states,

Silas Mähner (22:21)
Mm -hmm.

Yeah.

Shaun Abrahamson | Third Sphere (22:34)
It's really messy. It's really messy.

Silas Mähner (22:36)
Yeah. Yeah. Well, one thing I guess that I'll just make my two cents here on this is that a lot of people do talk, at least in the space I fall in, because I work in talent. They talk about the value of finding talent from oil and gas because there's a lot of different kinds of engineers that aren't typically found, especially when you look at green chemicals, right? Like you can't necessarily find those people elsewhere. But I mean, if I think honestly about it, the argument for it would be, okay, we need to partner with them so we can have their talent. But...

If you're getting enough funding and there's probably enough people who see the writing on the wall or who got into oil and gas because it was cool at the time and now they want out, you can actually probably have an okay time recruiting people out of those companies. Take on more for you.

Shaun Abrahamson | Third Sphere (23:18)
100%. I mean, I think that's the, I mean, we see that in our portfolio, right? Like, you know, I joke with people like, someone came up with natural gas, right? A branding person. We normally think about chemists and other people, but like someone did that branding work. We suck. Like climate has heat pumps. Like we really, you know, so like there's talent.

Silas Mähner (23:36)
Yeah. Yeah.

I'm sorry.

Shaun Abrahamson | Third Sphere (23:44)
Like in places often we don't think about, like policy people, like there's plenty of really talented people. The thing is, I think talking, people are not legal entities. Do you know what I mean? Like the companies don't need to exist. I don't have any sympathy. Like the shareholders, everyone's made money. Great. Like if you're managing it into decline and no one makes more money, I will not lose a wink of sleep. But I would like the talented people to go and find better jobs and help build the new economy. That's a whole different thing.

Silas Mähner (23:54)
Mm -hmm.

jobs.

Yeah.

Shaun Abrahamson | Third Sphere (24:14)
And I think that's happening.

Silas Mähner (24:17)
Yeah, I definitely think it is. I think some people have tried to convince me to go help oil and gas companies find talent right now. It's probably a good business for recruiters, but not that exciting for me. Let's go to another macro topic you have. This one I'm really not super familiar with. This is going to be you teaching me a lot. You have this idea generally around repricing climate risk. Can you just give a high -level summary of what you mean by that and then go into some of the nuances of that?

Shaun Abrahamson | Third Sphere (24:48)
Yeah, so one way to think about this is when someone says, we're going to miss 1 .5C and we're probably on track for two or maybe more, what does that mean to you? Like, what's the implication of the different temperature, average temperatures?

Silas Mähner (25:10)
Probably more bad stuff, right?

Shaun Abrahamson | Third Sphere (25:12)
Right. Like.

Silas Mähner (25:18)
I mean, all kinds of natural disasters, like it's going to cause a lot of damage. It's just going to be, it's going to be a pretty negative, negative outcome for a lot of parties, especially probably the developing countries, at least from my understanding of the, of the data.

Shaun Abrahamson | Third Sphere (25:31)
Yeah, so the challenge that you and I have right now is...

probably the best we can do is say some bad stuff. Right? Which again, it's like heat pumps. It's just horrible narrative. It's horrible communication. It doesn't help people actually understand. And so we stuck with this framework where for the insider people in climate, right? We can go and look at some data and say, okay,

Silas Mähner (25:44)
Okay, I see your point.

Shaun Abrahamson | Third Sphere (26:06)
I can run a simulation, I can look at how much more rainfall there is. Here's the implication of warmer atmosphere's ability to retain water. Here's the implication in terms of like amount of flooding. Great, so more wildfires, flooding, storms. Okay, so what?

Silas Mähner (26:26)
We still don't know what that means to us.

Shaun Abrahamson | Third Sphere (26:26)
Right, so the challenge that we've had is, I think in the 10 years that we've been at this is,

we can make it a sort of high level connection between temperature, average temperature, and more bad things happening. But what we expected was if more bad things are happening, insurance companies must be losing money or they must be repricing. Right. And I think what it took a while, but what we've seen in the last 12 to 24 months is that reinsurance, which sort of underpins the pricing for physical risk.

has said, oh yeah, we have been losing money, time to reprice, right? So then you get these interesting conversations where you have an insurance company in California saying, we're leaving, can't make money, right? State won't let us charge or our prices are out of whack and the market is just saying no. And what's interesting about that is the whole financial system from, at least from a mortgage perspective,

You can't have a mortgage without insurance. So if insurance prices go up by a factor of two or three, a lot of things have to get repriced. But the thing that's interesting to us is you and I don't have to have a discussion anymore about bad things will happen. We can actually point to a price change and say, oh, this is the insurance industry now is putting a price on this. They are saying because it's more likely that you have a damaging event, you have to pay more.

Silas Mähner (28:05)
I think it's interesting, just one quick comment is that, I mean, anybody who knows insurance companies, they do not lose money. Like they're very, very smart operators, right? So if they are repricing, you know, there's no argument about bad things happening, like you said. So I think it's like a good indicator.

Shaun Abrahamson | Third Sphere (28:22)
Yeah, so I think that's exactly right. I think that is we can have a lot of debates about how bad, but I think the challenge has been, you know, do I make a, when I buy a house, do I factor in climate and how do I do it? And now for the first time, at least in the last 12 months, you will go and check your insurance price in a

in Florida, in California, I think even in Texas. And what you'll see is that the numbers that are two, 300 % increases, which should at least give you pause to say, hold on a second, do we reach the reprice or is this going to happen every year or how much do I need to budget for insurance? Do I actually want to make this purchase decision? And I think that's what we mean by repricing. Like that signal has been absent completely from the

Silas Mähner (28:53)
Hmm.

Thank you.

Shaun Abrahamson | Third Sphere (29:20)
physical asset markets, especially real estate, right? Which is a massive part of the economy. And so that's the repricing.

The problem is that as good as the insurance companies are, their framework for how to model the risk is still insufficient.

So the current insurance models sort of look at things like, what's the risk to your property? Right? Like, am I going to have to replace the roof? What's the probability increase of replacing the roof? Is your structure at risk from a wildfire, you know, an ember that catch, you know, that lands from 25 miles away? Like we try to model, and that actually I think is pretty well done. I'm not going to argue with the folks building those models.

What gets really wild is one of our portfolios, one concern, does something called revenue loss estimates. And revenue loss is basically taking a location and going one step further and saying, okay, your location didn't burn down. It's not even really that much at risk of burning down. And it also seems to be in a location where it's not going to flood. So you're fine. Or maybe not.

Depending on what you do at the location, you may still have risk. So if you are doing a podcast at home and someone says, hey, you need to evacuate, you could still run your business from wherever you evacuate to. You don't have actually a location dependency. If you had a bakery and I said you have to evacuate, you're losing money every day that you evacuate it. You can't produce revenue.

And that's a thing that's just starting to get modeled, which is there's an economic impact every time roads get closed for whatever reason, fire, flood, whatever. There's an economic impact every time we lose power.

And the trick, the reason it's been so difficult is I need to know every location. I need a model of that location. And then I need to know what people do there in some pretty specific ways. And so you can imagine that like in some ways, when you look at IPCC reports and you look at like, oh, how do we decarbonize and the readiness of different things, mitigation actually is a relatively simple model. Okay. I don't want to say it's easy, but it's relatively simple compared to having someone understand.

Silas Mähner (31:45)
Yeah, that's very difficult.

Shaun Abrahamson | Third Sphere (32:06)
temperature to a climate model, climate model versus physical infrastructure and location, and then physical infrastructure and location versus revenue models for a specific type of business activity.

Silas Mähner (32:20)
I don't know if this is the right place to interject on this, but my biggest question when we get to this part of the discussion is, are there mechanisms, because I've heard people talk a little bit about this and I don't know, again, I'm not a finance guy, so it's hard for me to understand sometimes, but this principle that we could price in this risk, this actual dollar amount into everything so that when you consider that,

this idea of there being a green premium is no longer a green premium because you start to realize if we don't do this, in fact, we're going to pay more in the end or like on a maybe on a state level, we have to look at these things as a holistic thing and how can we either apply kind of like the same principle as a carbon tax. How can we apply these extra fees to then realize, to help people realize that we're not just charging this fee just because we want to make more revenue. We're charging this because if you don't choose the other option, we're all screwed.

Shaun Abrahamson | Third Sphere (33:18)
So exactly right. So let's take car insurance, right? I'm trying to figure out ways to reduce your premium. So let's assume you can't change how much you need to drive, et cetera, et cetera. Now we get into the world of, okay, can you put the tracking system like a theft deterrent? Can you put anti -theft on your car? Can you get airbags, right? So now your risk of injury compared to a car with no airbags is different. But you, but.

car insurance has been through this. It's basically like if you want a lower cost, we've done the math, you need to do these things and then you pay less. We're just starting to have that conversation in climate. So let's say you need wildfire protection. What do you do? How do you reduce wildfire risk? Well, I can do some things on my location. There's people who will install an outdoor sprinkler system. We have indoor sprinklers. That's how...

most cities, you can't get insurance for commercial buildings in most cities, is you need a fire code to have sprinklers. The fire code literally lets you get insurance. Like that's, that was a community level agreement on a standard. So that essentially fire and insurance agree, here's the minimum requirement for you to get coverage. So we know how to do this. Like we've done it for other things. The problem is like, if I have a bunch of people living at the urban

you know, wildlife interface where wildfires now higher risk. I'm trying to figure out how much more risk is wildfire next year versus 10 years versus 20 years. And then I'm trying to figure out like, what's the right intervention? Is the right intervention more sort of air tankers, like water tankers? Am I just building bigger fleets of things to drop water on fire? Like, what am I doing?

And that's where things get interesting. And I think there will be this sort of incremental, like what I do to the location than what I do for the community. But eventually you're going to ask the question, isn't it cheaper to just stop burning fossil fuels?

Silas Mähner (35:26)
Exactly.

Shaun Abrahamson | Third Sphere (35:28)
Because that's the ultimate intervention at some point you just want to lock in and say I don't want to have to keep Resolving this thing every few years because the fire risk went out What I want to do is actually go to the source of the risk now. I Don't know if we're gonna be able to do that because we in other places you could say yeah, they're interventions that would reduce car theft Right, but like we don't typically go and say oh actually we should invest in education and jobs

so that people have other, you know what I mean? It's like, it's that kind of, it gets further and further away. So I do think like eventually the thing that will drive carbon markets is probably a recognition that we don't really have that many more things we can do to intervene in physical risk. It will get people back to the table. And I just think that may take another 20 years.

Silas Mähner (35:59)
to not steal, yeah.

Mmm.

Yeah, because their first reaction is going to be to just stop the outcome, and then they're going to eventually realize, we just keep raising the prices of fixing this outcome from stop, like preventing this outcome. So let's just go to the source, right? But that's not going to be realized initially.

Shaun Abrahamson | Third Sphere (36:33)
Yeah. And by the way, yeah, we seem like, I'm going to just pick fire because it's an easy example, but like, you can see the innovation coming to that market because the people who own real estate are sort of stuck with an asset. So their first reflex is going to be my insurance premiums have changed. I can negotiate maybe a higher deductible, but if I'm going to

have a higher deductible, I'm going to have to do some work myself to just reduce the risk. And so the market, that's what the market's currently doing, right? If you go to Malibu, the people in Malibu getting, you know, sprinkler systems for the roof of their homes to reduce the chance that they, you know, have an ember that sets the roof alight. And there's more stuff coming that looks like that, but that's going to be the first response is, is we're going to give superpowers to...

firefighters, right? And then insurance can at least stabilize or even come down.

Silas Mähner (37:32)
Yeah.

So, I mean, the thing I want to ask, there's probably a lot of things you could ask here, but from your perspective as an investor, like where do you, you want to rattle off a few examples of opportunities to fix this, to build companies to solve these problems?

Shaun Abrahamson | Third Sphere (37:55)
Yeah, so maybe there's two ways to think about this, right? There's one which is the direct, kind of, you know insurance is gonna get more expensive in a big category like real estate. There's enough money to pay for other stuff. So yeah, we should find, whatever, flood, fire, go through the physical risks, figure out who can do something about it. That's one. The other thing is, there's some weird,

links between mitigation and adaptation. So if you talk to folks who have spent a lot of time with the grid and are thinking about how do you decarbonize the grid, you land up with this interesting discussion about levelized cost. Levelized cost is this attempt to just say nuclear

Here's the range of estimated cost of electrons, coal, coal with carbon capture, et cetera, et cetera. But it lets you basically do a comparison and you can sort of model out who's likely to win, right? Because coal is great, but like adding carbon capture to coal, you know, you're probably losing to solar and storage, even long duration storage, you still gonna lose. Which is, I think, the memo that the coal industry got, which is basically.

Silas Mähner (39:18)
Yeah.

Shaun Abrahamson | Third Sphere (39:20)
Everyone did that math and they're like, yeah, you guys are losing, right? And eventually that will happen in natural gas. It's just the economics of natural gas are better. But there is an important assumption in that math, which is if you get your electrons to the grid, you're good. But what happens if the grid isn't reliable anymore? And so one of the things that we've tried to look at is to say when someone comes to us and says, oh, I'm doing distributed

Silas Mähner (39:39)
but if you don't.

Shaun Abrahamson | Third Sphere (39:49)
energy, I'm doing virtual power plants, I'm doing all these things that are like on the edge of the grid.

Those things look much more interesting in a world where the failure mode for most revenue risk is loss of power.

Silas Mähner (40:09)
So focusing first on local energy instead of the utility.

Shaun Abrahamson | Third Sphere (40:14)
Yeah, so let's go back to the example. You're doing a podcast, you don't care because your power went out, you just move or you just go on vacation. Your friend who has a bakery...

What's an investment that they could make? Well, if you want to do the payback on rooftop solar or community solar with storage, today we keep asking questions about, oh, what's the wholesale price and can I do the math and can I sell electrons into the grid? Please, Mr. Utility. Like, why are we... It's irrelevant. Like if I'm trying to do the math on avoided revenue loss because the grid is actually less reliable, guess what? My battery is an insurance policy.

Silas Mähner (40:51)
Ah, okay.

Mm -hmm.

Shaun Abrahamson | Third Sphere (40:59)
And now I've got another whole framework as a customer to think about why am I buying a battery as an electricity? That's not the question. The better question is, can I buy a battery so that I, for the week when the total number of weeks per year or days per year when I would have lost power, I'm open. All right, my customers don't know the difference. And that's interesting, right? Like that intersection of, I'm trying to decarbonize.

Silas Mähner (41:21)
Mmm.

Shaun Abrahamson | Third Sphere (41:29)
But my resilience actually is subsidized. It's not a green premium because I'm actually, I'm getting another benefit that's not just decarbonization.

Silas Mähner (41:40)
And do you think that this is going to, in this particular example, that this type of outcome is going to be mostly led by businesses recognizing this or insurance companies saying, hey, we can probably prevent ourselves from losing money by offering this, going out to our clients and offering this as a solution and partnering with somebody?

Shaun Abrahamson | Third Sphere (42:01)
I think the insurance companies that are already going down, that see this opportunity as a, it just, it lets them stay in the market. It lets them find new, I mean, in some cases this will be a new product, but I think there's a category of products which have to do with, you know, translating climate risk into revenue or lost revenue.

Silas Mähner (42:27)
Mmm.

Shaun Abrahamson | Third Sphere (42:30)
or inconvenience. So like if you say to someone 20 years ago, what's the cost of being disconnected from the internet? What's it worth to you? People insure their phones because you don't want to be without your phone. So for your home, what's the benefit of having uninterruptible power, at least for core things?

Right. It's the same thing. It's like the thing that's going to keep you online, the thing that's going to allow you to stay where you are and not be inconvenienced. The insurance industry, I think is going to figure out how to handle that. If he has a subsidy, we'll give you reduced renters insurance if you have a battery, for example. I think it's going to be interesting. But the thing that we've been looking for over a few years is,

Silas Mähner (43:08)
Hmm.

Mm -hmm. Yeah.

Shaun Abrahamson | Third Sphere (43:25)
Whenever we look at the straight decarbonizing value, we try to see if there's an additional likely benefit from adaptation and resilience. And that's usually the thing that seems to drive things like, yeah, rooftop and storage doesn't make sense versus utility scale storage and rooftop. But guess what? Like the grid, the utilities also aren't out there telling us that they are getting less reliable.

It's actually quite hard to find that data, but that's exactly what's happening. Right? So they, they are out trying to fight against, you know, rooftop because it's taking revenue away. They have to pay for that. And now they have this additional problem coming, which is, Oh, actually you aren't that reliable anyway. So you keep trying to force me to do the math on wholesale energy prices. And actually that's not the interesting question. The interesting question is, am I willing to pay?

Silas Mähner (43:57)
Yeah.

You

Shaun Abrahamson | Third Sphere (44:23)
to never be offline. And if that's true, yeah, a lot more people are gonna get moved up somewhere.

Silas Mähner (44:25)
Mm -hmm.

Yeah. I just think it's the difficulty now. I mean, we've seen this with one of our past guests. We had Haven Energy on at one point, and they brought this up too, was that in the middle of nowhere where they started, the main things that they were seeing were people didn't really care about per se the environmental impact. They wanted the reliability, right? But those people had a real problem. And I would say at least where I'm from in the middle of nowhere in Wisconsin, that's not typically a problem. So...

If you can demonstrate the trajectory of the problem and say, hey, listen, like get ahead of this and solve it as an issue. It's all about the pitch, right? Once you pitch it in a certain way, then you've basically opened in some ways, like a new, not a new market, but you know, like a new market segment at least, right?

Shaun Abrahamson | Third Sphere (45:10)
Yeah, and look, I think what's interesting is...

These are potentially new insurance products. So to have large, sophisticated players who stand to make more money by having new products, I think you just get more brainpower. You get more resources looking at, okay, how do we solve this? And I think in that discussion, you're going to get some decarb discussion as well, right? So like,

Silas Mähner (45:15)
Mm -hmm.

Mm -hmm.

Mm -hmm.

Shaun Abrahamson | Third Sphere (45:42)
There are interesting intersections between grid reliability and gas stations, right? Turns out you need electricity for the pumps at the gas station. Otherwise you're not getting gas. So there's some interesting issues of, you know, if you are in Latin America where grid reliability is even lower, there is a point at which, you know, you have, you know, decent, decent solar production.

batteries are cheap enough. There's a bunch of cascading effects where local solar production plus batteries would also incentivize you to have electric vehicles because it really is more resilient. There's security, there's revenue, there's a bunch of other factors. It's just we're at the beginning of that, but I think this comes back to sort of we haven't had a pricing signal, which means...

Silas Mähner (46:25)
Mm -hmm.

Shaun Abrahamson | Third Sphere (46:39)
Insurance hasn't sort of got to the point where they can say, okay, we know what this is worth. And also by the way, we have new products to sell you. And that's interesting.

Silas Mähner (46:49)
So really the catalyst being the fact that the insurance companies are putting a dollar sign on what was previously unknown essentially.

Shaun Abrahamson | Third Sphere (46:56)
Yeah, I mean, it's basically helping us go beyond, you know, 1 .5 is better than 2 and 2 is better than 2 .5 and actually saying, well, actually, increasingly, we can put value on that. And even more importantly, we can make it directly relevant to you as a consumer or as a business, because here are the choices, right? You want to have a real estate portfolio? There's some places that are better than others.

Silas Mähner (47:17)
Mm -hmm.

Mm -hmm.

Shaun Abrahamson | Third Sphere (47:23)
Or if you want to be here, here's some things you can do to be more resilient. And again, it's the first time in 10 years that that's happened. And it's going to change the conversation. And some of the change is going to be just, instead of doing a very narrow kind of let's decarbonize, you're going to start to ask the question of, okay, what happens if I get some more resilience and I decarbonize? Would you do different things? And we think the answer is yes.

Silas Mähner (47:26)
Mm -hmm.

Mm -hmm. Yeah.

Yeah. Yeah, I think this is the call for all the actuaries who are, generally speaking, highly risk tolerant people to go start businesses because this is actually before I even got into climate. I've met some entrepreneurs who come from the actuary space. These people are usually just freaking smart because if you can demonstrate the value, the dollar value of something that nobody talks about,

And the example I'm thinking of in my head was it was more related to healthcare and employee health coverage. And they just demonstrated that, hey, we can provide you these services much cheaper than an insurance policy, so let's do this way. And there's so much opportunity there. So not that actuaries listen to this podcast per se, but hopefully somebody shares it with your friend who works at an insurance company because so many opportunities.

Shaun Abrahamson | Third Sphere (48:35)
But it's definitely to your point, there are another group of, well, the other groups of very smart people who maybe are looking at some of the mitigation opportunities and saying either they're not interesting or I don't think they're gonna work. And now we have another universe of things where I think...

financial opportunity, but it's also going to drag along some of the climate benefits, which is just fine.

Silas Mähner (49:04)
Yeah. Yeah, I think a lot of the successful companies in the space so far that I've seen, like the most successful, I should say, not to say that the other ones aren't, but they're the ones who have co -benefits to whatever they do. It's not just solving one specific issue, it's usually solving an existing issue plus with the climate thing to it. And I think that that should be the objective in the end. At the end of the day, there isn't supposed to be a climate economy, it's just supposed to be the whole economy. Every pitch deck you probably see, well,

especially you, but anybody that they see a pitch deck that doesn't have the word AI in it right now is like, okay, this person is clearly not ahead of the time. So AI is just part of a company now. There's no AI companies or there shouldn't be just any quote unquote AI companies. It should be companies and they use new technology, right? And the same thing should be true of all companies in the future is that we're just climate aligned, right? Obviously, sometimes challenging to navigate when you're offering your services as a headhunter, how to pitch that. But the point being, that's the objective, right?

Shaun Abrahamson | Third Sphere (50:04)
Yeah. And I think to your point, like the co -benefits piece, what's interesting about pricing physical risk is now you have a new category of benefits. So you can start to stack things and say, okay, this is more comfortable. This is cheaper. It's faster. Now you've got like, oh, actually I'm getting insurance. I'm getting additional benefits. So, um,

Silas Mähner (50:29)
Yeah, absolutely. Well, this is, we went a little longer than we I think we anticipated, but we got through two of the big topics we had. We'll have to do another one in a couple of months. But for anybody who didn't listen last time, where should they reach you?

Shaun Abrahamson | Third Sphere (50:42)
Just first name Sean at third sphere .com. It's probably the best way to get me I do some social media things, but I mean if you if you're working on something interesting, I think the If a few people have told you that it is crazy. Those are the perfect things for us to look at I think the the we had we had a moment where

Yeah, I think a lot of the most interesting stuff sounds like science fiction. You know, like fire is a perfect example. Some of the stuff we're looking at in the sort of wildfire response space really feels like sci -fi. So just looking for more things like that.

Silas Mähner (51:13)
Yeah.

That's awesome. That's a techie's dream, man. This is the sole purpose of the podcast. The main thing before anything, when I got interested in climate, it was like, I was just blown away by the innovation, right? And that's specifically why I just really love being close to these early stage companies, because it is so cool what is happening in innovation.

Shaun Abrahamson | Third Sphere (51:43)
Yeah, I think what is, you know, just coming back to the, you know, do you need the incumbents? I think there's a lot of benefit to just say, you know, if you started from the beginning, what would you do differently? You know, that I think there's some really interesting companies that come from sort of clean sheet. Let me do the Excel and sort of figure out, okay, here are my assumptions. Yeah, here's how we do this 10X cheaper.

Silas Mähner (51:59)
Mm.

Yeah.

Shaun Abrahamson | Third Sphere (52:12)
Right? Like, um, so yeah, that's the best way to reach me is, you know, my favorite thing in the world is getting a deck about something that seems like it may not be true because, you know, because, because it, you know, it, it, it reads a bit like sci -fi and yeah, happy to do the work to figure out if it's real or not.

Silas Mähner (52:34)
Very nice. Awesome. Well, thanks for coming on again, Sean. This is a pleasure as always.

Shaun Abrahamson | Third Sphere (52:38)
Awesome, great to see you.