"Geographic arbitrage" in the transition with leading entrepreneur and strategist Parag Khanna
Parag talks about how climate change will impact migration, asset values, real estate, and investing - and where that creates new career opportunities.
“I realized there's an arbitrage at play: if you can predict where people are going to move in the future on the basis of the intersection of many complex interrelated trends — from geopolitics to climate to technological shifts and so forth — you would be able to understand and predict demand dynamics for a range of assets.”
Parag Khanna is Founder & CEO of AlphaGeo, the leading AI-powered geospatial analytics platform. He is the internationally bestselling author of seven books including MOVE: Where People Are Going for a Better Future (2021). Parag was named one of Esquire’s “75 Most Influential People of the 21st Century,” and featured in WIRED magazine’s “Smart List.” He holds a Ph.D. from the London School of Economics, and Bachelors and Masters degrees from the School of Foreign Service at Georgetown University. Born in India and raised in the UAE, New York and Germany, he has traveled to more than 150 countries and is a Young Global Leader of the World Economic Forum.
Transition Leads profiles top entrepreneurs and strategists — like Parag Khanna— as well as scientists, investors, executives, and policymakers in the energy & decarbonization transitions who share their insights, personal stories and career advice for the new generation of leaders.
James Socas
Rob and I are here this morning — and this evening for Parag who's based in Singapore — to talk about Parag’s experiences as a thought leader, entrepreneur, and author on what's happening in the energy and decarbonization transitions and where he sees future opportunity. Parag has a very interesting new company, AlphaGeo, that has taken some of his thinking about these changes and applied it to investing on the “defense” or risk side and the “offense” or returns side. And with that, we'll jump into the interview.
Parag, we like to start by asking people how they got to be who they are, and how they decided to focus on the particular area that they're in.
Parag Khanna
Happy to do that and thanks for having me on. It’s a lovely thematic that you guys have put together, and I’m looking forward to the conversation.
Well if ever there were a case of lacking a grand design, it’s me. If there's a common thread in my life and career, it's most definitely travel. My “cartesian-ism” is: “I travel, therefore I am.”
I was born in India, grew up in the Middle East in the UAE, then New York and Germany. A rather peripatetic childhood. I knew what I wanted to study from the time I was about 12 years old when the Berlin Wall fell and my parents took us to Berlin on a holiday. I knew then that international relations, diplomacy, geopolitics, were my thing, and that hasn't changed.
I studied geography and diplomacy at Georgetown and did my PhD at the London School of Economics. In between, I worked for a number of prominent think tanks like the Council on Foreign Relations, World Economic Forum, and did a stint at the Pentagon. My interests ranged from history and politics to economics, philosophy and climate science. And, in a way, my companies — starting with my consulting firm, and now AlphaGeo — have tried to tie it all together.
To me geography is a fundamental underpinning, and over my career I've been moving towards a more rigorous, scientific approach to geography and its broad impact. I call it “programmable geography" — the optimization of our relationship to the planet. It’s how we utilize Earth’s resources, divide and organize its spaces, and reconcile diverse geographical layers, which I think of as natural geography, human geography, political geography, and economic geography. The idea behind AlphaGeo came out of that thinking and work I've done over the last couple of decades.
James
That is a great intro, and since you teed up the question let me ask what was the specific observation that led to AlphaGeo? You have had a similar theme in your books — your views on how the world is changing due to climate.
Parag
Yes, the idea did start with my books. In Move I write about how a recurring feature of human civilization has been mobility due to the constant search for resources and stability. Mobility could be driven by many factors — war, new technologies, or new discoveries.
The big new factor we are now facing is climate change. As it progresses, I argue that we're entering a new age of mass migrations with questions to be answered about where people go, what changes that will bring politically as they move, and who will be the winners and losers.
As I was writing the book, I realized there's an arbitrage at play: if you can predict where people are going to move in the future, on the basis of the intersection of many complex interrelated trends, from geopolitics to climate to technological shifts and so forth, you would be able to understand and predict demand dynamics for a range of assets.
Anyone who studies complex systems understands in very simple terms that the past is a poor guide to the future. But in many cases we are still using the past — and specifically past climate patterns and weather patterns — to continue to make major resource decisions. And therefore it occurred to me that what if you can use complex systems approaches and interdisciplinary research to do very accurate demand forecasting given these new factors? That struck me as very valuable.
And so when the book was completed, I decided to build a company based on geospatial data science, advanced analytics, and AI to pursue the opportunity. And the rest is history in the sense of putting together a business plan, budget, team, and raising capital. We were fortunate to have clients from day one. And here we are.
James
That’s a great founder’s story. With AlphaGeo you use the tagline of “resilient investing” and “spatial finance” — very interesting terms. And you also referred to a sort of geographic arbitrage. Can you touch on what you mean?
Parag
Well “spatial finance” is a relatively new subfield. It is the integration of geospatial data into financial decisions. For example, an asset may be more or less valuable depending on very specific information about its location and the characteristics of that location. Likewise, if you think commodities markets are becoming more volatile due to the impact of changing weather patterns and you are a commodities trader, you want to have a more nuanced view when you do your forecasting. So simply put spatial finance is predicting the financial impact of climate events and trends; it’s a very specific niche that requires a specific toolkit. At the macro level, you would call it “climate econometrics.” At the micro level, it’s “spatial finance.”
“Resilient investing” is also a very important term for us because it's really our mantra. We don't want to be just another risk toolkit. There are many people who can tell you the sky is falling and you should sell all your Florida real estate. We are not that company. What we do is, first of all, way more granular, right down to an asset level — a very granular geographic resolution. So rather than say, “sell Florida,” we tell you to sell exactly this coastal strip of Tampa that is poorly adapted to climate risk, and instead start to invest in land and housing and other real estate assets three to five kilometers inland.
We base our thinking on what is happening with climate and recognize some basic anthropological principles which don't necessarily act according to neat boundaries. So, yes, as the climate continues to change people will need to move from low lying areas to higher elevation areas, from coastal areas to inland areas, from hotter areas to cooler areas. But, at the same time, human behavior tells you people will move the shortest possible distance. And that effectively explains almost all human migration over the past 150,000 years.
So that's where the resilient investing part of what we do comes in. We're not just a risk focused tool. We're fundamentally an opportunistic tool. With the changes we are undergoing there are some investments you will want to avoid, but we also want people to invest in resilience — invest in adapting their assets and locations to be more resilient, or making new investments in places that are more resilient.
Rob Griffen
Parag, if you look at the United States or China you still see a lot of investment in places like Miami or Shanghai that I think we could all agree are going to be climate challenged going forward. So while there may be some long term issues, there could be a near term opportunity for resilience because the people who just moved in or invested in real estate in those spots are going to need help. They're going to need things like climate mitigation, seawalls, desalination.
Do you see resilience as an area of opportunity?
Parag
It’s a huge area of opportunity, which is why I'm, quite frankly, long Miami.
First of all, speaking of geographical arbitrage, you only need to be relatively better off. You don't need to have the perfect temperate year-round climate for all seasons in order to be considered an ideal place. My parents happen to live in one such place near Sacramento, California where it's always nice.
One of the reasons I founded the company was the kind of tedious exercise of sorting, filtering, ranking locations to help my parents decide where to live. And my brother and I said to ourselves, “Where's the app for this?” Where's my app to find my parents a place to retire? That was all going on while I was writing Move. So you could also say that it was helping figure out where my parents should retire that also led me to found the company!
When it comes to Miami, you just have to be relatively better off than other places. Miami will be great long into the future, simply because it's better than being in Latin America. As warming continues you're going to have lots of Latin Americans, as you already do, continuing to move to Florida because their kin and their community is there. It's low tax, and it's better than being in, say, São Paulo or Mexico City.
Same thing with the Gulf countries. Every climate model says that the United Arab Emirates will be scorching hot and unlivable, but at the same time they are working on nuclear powered air conditioning. Yemen does not have nuclear powered air conditioning. So again, within your geographical area, are you relatively more resilient? Are you doing the things to be less fragile and to disproportionately benefit from these changes? My friend Nassim Taleb would say the right strategy is to be “antifragile” [put simply, the idea of benefitting from stresses that negatively impact other systems vs. simply being resilient or robust].
So to answer your specific question, Rob, yes, resilience is a huge investment opportunity. Once you've put all this capex into Miami, you're going to want to defend it, because you don't want to have to move having either planted roots there a long time ago or been a recent arrival. So if a sea wall genuinely needs to be built, I'm not worried that either the municipality will finance it or Ken Griffin [the founder and CEO of Miami-based hedge fund Citadel] will finance it, but it's going to happen.
I'm more bullish on Miami right now than I am on Houston, because I don’t see Houston making the same kinds of infrastructure investments as Miami. But Houston also gets hit by hurricanes and floods.
James
Parag, in the US a century ago the advice was “Go West, young man,” because the opportunities were out west with available land, the Gold Rush, and the east was getting more crowded.
If you look at the scenarios for warming, the livable spaces and farmable land shift north. Is “Go North” the right advice for young people today? Is that a phenomenon that you see playing out in terms of industrial locations, population, etc., over the next two decades?
Parag
It is playing out already, and it will play out on a planetary scale.
We've never had as many people moving from South America to North America, from Africa to Europe, from South Asia into Central Asia, or West Asia or Europe. So all of that is already happening. It's not a dream or a vision.
I have the exact data for inter-regional migration patterns of the last 25 years, and it's unlike anything we’ve seen before. It's totally unprecedented in the history of the human species. So let's be clear: there's no dispute about this. This is what is happening.
I've been bullish on Canada for a long time. Climate resilience has become the most obvious reason from a structural standpoint, but Canada also meets a number of attractiveness criteria. To be very specific, when you look at country rankings according to net new full time job creation, rather than just gig economy work, countries like Canada and Japan rank very high. And that's an important statistic that a young person wants to see. People today can research everything from broadband speed, to average rent, to how easily you can get a visa. And as you know, with Canada you can log into a website, upload your college degree and, boom, you can get a visa to move there in five minutes. It's totally streamlined.
Rob
Along the same lines of areas of opportunity: how large do you see the market for climate analytics and intelligence tools and services, such as AlphaGeo — data analytics, predictive models and all the rest?
Parag
Well, there has already been a climate tech 1.0 when it comes to geospatial analytics and climate modeling. It goes back quite some ways, actually, to RMS and other firms that have since been acquired by Moody's and MSCI and BlackRock and others. But again, it's all risk focused.
We call that “defense,” and at AlphaGeo we like to say that we're better at defense than everyone, but we also have “offense,” and no one else has offense. We're the company whose tagline is “invest in resilience.” Our tagline is not “know your future risk.”
We think that climate risk is pretty obvious. It's table stakes. Scientists know with very good accuracy where it's going to get hot, where groundwater is going to run low, where you will have more flood risk, where you will get stronger hurricanes. You don’t really need to pay money, quite frankly, for that information.
But the arbitrage aspect of future investing — what we think of offense — is way more complicated, because you have to take into account greenfield corporate investment, job creation, tax rates, infrastructure spending, crime, migration, human behavior and a whole lot of other things. So you have to blend the stationary and non stationary variables, climate and socio-economic and market factors, and that's where, again, you're doing very complex economic forecasting, plus all the hardcore climate science. We think we are the only company in the offensive investing space, and we also do the defense quite well too.
James
Thanks. To go back to your point on the role of geopolitics, there have been lots of reports on the latest climate data which show very little progress. Yet you have some countries, including the one Rob and I are in, who are stepping back for political reasons. What are you seeing from your vantage point in Singapore and internationally?
Parag
It’s clear that globally the emergency that we are in requires ever more efforts towards mitigation and decarbonization before Net Zero emissions will be realized. And, yes, in America there's been a retreat from executing on earlier commitments to that goal. But that’s not the case in many other places.
However, because climate is a collective action problem with common resources, it means that any slowdown — whatever is the cause — has shared consequences. So the worse things get in terms of not meeting our mitigation goals, the more we all have to focus on adaptation. We have to walk and chew gum.
Adaptation is going to require as much emphasis as mitigation. To date the balance of capital flow has been towards mitigation, and even there, it hasn't been effective enough. Therefore, I'm advocating for ambitious “Manhattan Projects” both on the mitigation side and the adaptation side. We are going to need a few very large scale successes.
AlphaGeo is also focused on adaptation, which is why we reference Darwin on the front page of our website. “It is not the strongest or most intelligent of the species that survives, but the most adaptable to change.”
James
Parag, you obviously have the benefit of a lot of native intelligence and creativity, but was there also some advice that you were given that helped point you in the right direction or keys to success that you've observed in other people that you'd want to share?
Parag
I think that I'm living proof of something that's also an incredibly well documented economic fact, which is that the surest path to economic and social mobility is physical mobility.
So the advice I give to young people, most generically, is be ready to move. Mobility is a skill, and I think that's never been more true than today, when you don't know where your next job is going to be or where the new area of opportunity is. Being able to be where you're needed, desired, remunerated, is itself a skill. I think that I intuitively lived by that rule, and now there's lots of data to back it up. And I think it's going to be even more relevant than ever for the world's young people in the coming years.
Rob
And to follow up on good advice, is there a book or an author or thinker who you found particularly influential, or who you would recommend to people early in their careers who are thinking about where to go or what to do? And of course, your books would be fabulous.
Parag
I'm lucky to have had a lot of mentors, or quasi mentors and not necessarily the most formal institutional kind, although I've had those too.
When it comes to authors, my career and reading list is pretty eclectic. It's more geopolitics and military than say financial markets and investing. I am also lucky that the people who have inspired me the most are also people who I have gotten to know personally and have given me professional advice.
One is Alvin Toffler, the greatest futurist of the 20th century, and his wife, Heidi. My father was a huge admirer of theirs, and I grew up seeing their books — Future Shock, Third Wave, War and Anti-War — on our living room bookshelf and then reading them as I grew older. I had a chance to meet them before they passed away. So I'll start with the Tofflers for nostalgia.
I mentioned Nassim Taleb earlier in the context of anti-fragility. He's another person who is most certainly a hero of mine, and we've shared an editor and some common friends. I think his work is absolutely scintillating, electrifyingly brilliant in many, many ways. And his theses are very rigorous and very often borne out.
And I'll throw in one more because, again, I'm a traveler at heart. I grew up reading Robert Kaplan, who is still to this day the greatest war correspondent alive. I got to know him in my very early 20s, and he’s like a father figure to me. He's written at least 20 books of geopolitical narratives, travelogues that have made a huge imprint on everything that I have thought and written, even where we disagree.
James
Those are great recommendations and a terrific note to end on. Thank you, Parag, that was a fascinating discussion. We’ll look forward to seeing you in DC, New York, or Abu Dhabi soon.
Parag
Thanks for the talk Rob and James.