The transcript from this week’s MiB: Brian Deese, Blackrock’s Global Head of Sustainable Investing, is below.
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VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, BLOOMBERG RADIO: This week on the podcast, I have an extra special guest. His name is Brian Deese. He is head of Sustainable Investing at BlackRock, which now manages somewhat over $7 trillion. Brian has a fascinating background both in the White House in Washington, D.C. all where he helped draft the Paris climate accord as well as worked on the bailouts of GM and Chrysler for the Obama administration and now working in BlackRock.
This is really a fascinating conversation about what is driving sustainable investing, how we can think about climate change and ESG investing, not so much as a value play but as a form of risk analysis. It really just — this conversation went to places you probably wouldn’t expect it would and I found it to be absolutely fascinating and I think you will, too.
So, with no further ado, my conversation with BlackRock’s Brian Deese.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is Brian Deese. He is the Global Head of Sustainable Investing at BlackRock where he focuses on identifying drivers of long-term returns associated with ESG issues. Previously, he was President Obama’s senior advisor for climate and energy policy where he helped to work on the Paris climate accord. He also was one of the key architects of the resurgence of the auto industry participating in the design of the bailout of General Motors and Chrysler.
He has been Deputy Director at the National Economic Council as well as at the Office of Management and Budget. Brian Deese, welcome to Bloomberg.
BRIAN DEESE, GLOBAL HEAD, SUSTAINABLE INVESTING, BLACKROCK: Thank you. Happy to be here.
RITHOLTZ: So, Brian, let’s jump right in. I’m kind of intrigued by your background. Your J.D. is from Yale. How does a legal background help someone in the field of sustainable investing?
DEESE: Well, the joke about people who work in policy is if you don’t have the attention span to go get a PhD then you go to law school.
RITHOLTZ: That’s fair.
DEESE: Well, look, I — most of my background professional focus has been on economics and economic policy. The legal training in the law degree had been extremely helpful for me in helping have a framework to how to think about issues and break them down and put them back together. But I am one of those people who’s got a law degree but is not deploying it directly in the practice of law.
RITHOLTZ: I want to say the stats. So, I, too, have a law degree that I do not deploy. But I want to say it’s — after seven years, it’s something like 50 percent of us are not practicing law, something like that.
RITHOLTZ: Pretty realistic number. So, let’s talk a little about the Obama White House. You were senior advisor for climate and energy policy. What’s it like working on those issues in the White House?
DEESE: Well, it’s complicated, scary, thrilling, fun, frustrating, all of those things …
RITHOLTZ: Everything you would imagine.
DEESE: I worked all eight years in the — during the Obama administration. Most of that time, I was part of his economic team in a variety of different roles and really came at issues. So, I worked in a post-crisis era, worked on housing finance, Dodd-Frank and the restructuring after the financial crisis.
And through it all, I had a focus on energy and climate issues but from an economic perspective. The last couple of years, the President came and said, I really want to make this a central focus of my second term. We’re not moving fast enough. How do we bring all of the different agencies of government together to try to orient internationally and also domestically to do as much as we can?
That was — my role involved a lot of coordination, a lot of work internationally and a lot of work with regulated industries domestically as well to try to chart a path forward given the tools that we have.
RITHOLTZ: So, before we delve deeper into sustainable investing and climate change, I have to roll back and ask about the bailouts of GM and Chrysler, sort of antithetical in some ways to sustainable investing or maybe not. What did you do in that space and how insane were those years post ’09? It had to be crazy.
DEESE: Yes. It was a pretty insane period. I was helping to run then candidate Obama’s economic policy during the campaign and around end of August early September 2008, what went from economic policy in a campaign context got devastatingly serious very quickly …
DEESE: … with the cascading failures of AIG and putting Fannie and Freddie conservatorships and then we’re in at the escalating series of failures over the course of the fall. And when we came in even during the transition, this question of what to do about the auto industry generally and GM and Chrysler that were quickly running out of cash was front and center.
So, I was part of a small team that was tasked with trying to figure out what to do, number one, did we have a way to step in and backstop them should we, and three, if the answer to both of those was yes, then how could we actually execute and get this done?
RITHOLTZ: So, I have a pet theory that if the treasury secretary is an industrialist, they’re very happy to bailout industry and let finance, banks and stuff go the restructuring route and vice versa or if they are financier, then the industries can go through the bankruptcy. But the bailout banks says, too big to fail.
So, you guys ended up inheriting the Bush bailouts of the banks and then doing your own industrial policy bailout. Ten years later, how did it turn out?
DEESE: Well, there is actually surprising consistency between the end of the Bush administration, our view on the need to do something to backstop these companies because of the second and third order effects. I think the conservative estimates were a million plus jobs on the line because …
RITHOLTZ: It’s a lot.
DEESE: … it wasn’t really about the specific direct employees of GM and Chrysler although there were tens of thousands of them.
But the suppliers, the dealers that the auto industry touches a lot of communities and a lot of jobs. So, we were pretty focused in the depth of such an economic downturn. If we could do something that was targeted and effective and that did require a sacrifice from all different stakeholders, the stakes were pretty high and so we should give it a shot.
And that was the sort of the core animating thesis by it but we did ultimately decide that the way to actually get the level of sacrifice necessary that the level of changes in these companies was going to require them going through bankruptcy. And so, both companies ended up going through bankruptcy was a harrowing in lots of respects.
But in hindsight, I believe it’s one of the most effective economic policy interventions at the height of a recession. I think we saved more than a million jobs. At the end of the day, we got back more money than the Obama administration invested and as a whole, the government, the entire effort costs about $10 billion.
And so, if you look at the jobs and the economic impact that we were able to protect and solve, I feel like it was an effective and reasonable use of taxpayer resources.
RITHOLTZ: So, then you transition from a government employee effectively, even though you’re on the policy side of it, to one of the biggest investment firms in the world. What is that transition like?
DEESE: Well, in some ways, both large complicated organizations that have a global reach and that — so, in some ways, less difference than you might think between the complexity of the Executive Branch and the complexity of a big complicated organization.
But on the other hand, very different in the sense that the same set of issues that I was thinking about and we were working on from the policy side around how do we create the right conditions for private capital to move into lower carbon solutions and accelerate the transition to lower carbon economy.
That’s what we think about at BlackRock but with a very different lens. The lens being how do we actually deliver for our clients, for the end investors, most of whom are pensioners and who have a long-term orientation or trying to save for long-term goals.
So, similarities but really a different focus on how do you bring the lens of sustainability and sustainable investing to that ultimate goal of delivering financial return ultimately.
RITHOLTZ: Quite fascinating. Let’s talk a little bit about climate change and what we’re doing in response to it. You helped to actually draft the Paris climate agreement. What was your reaction to seeing the current administration withdraw from that and how dangerous is it for the United States to not be a part of that?
DEESE: Well, look, I think it’s in the economic and national security interest of every country to be finding a coordinate solution to this issue. Yes. I think the impacts, both the physical impacts that we’re seeing that we were seeing with our own eyes, Californians are seeing it, people in the Midwest are seeing it.
DEESE: Australia and up and down the East Coast of the United States, we’re seeing that everywhere and we’re also seeing the risks from a financial perspective of what it means to actually move toward a low-carbon economy.
Pressure on fossil-intensive business models. More economic opportunity for low carbon solutions and I think that’s the piece that is missing from this conversation sometime is you think about Paris and you think about a global effort.
What Paris really did was climate change internationally used to be this big debate between two teams. It’s like a soccer match. Developed countries on the one hand, developing countries on the other fighting about who was in charge of having to solve this problem.
What Paris did was change that from a head-to-head fight into a race. We’re all working together and now, the question is which countries can actually get ahead in being the clean energy superpowers for the 21st century, who’s going to actually capture the economic opportunity, the enormous economic opportunity that’s going to come from this transition and these new industries. And so, at the end of the day, every country should want to be part of that race because of the economic dividends that it creates.
RITHOLTZ: So, I saw a chart yesterday from Torsten Slok of Deutsche Bank basically showing the U.S. gets only about 10 percent of our energy supply from renewables, am I remembering that more or less correctly?
DEESE: That’s from wind and solar. If you look at zero carbon including nuclear and hydro, the number is closer to 40 percent.
RITHOLTZ: Right. Really? That much? Because we’ve had pretty robust nuclear and hydro, not as much (inaudible) on the nuclear side or hydro, so dependent on the local geology. But we’ve had that for decades.
DEESE: Yes. Yes. Yes.
RITHOLTZ: And so, what has been the marginal increase in low carbon or zero carbon energy sources over the past decade or so?
DEESE: Well, so, the two big things that you’d seen happen in the U.S. energy mix are, one, the rapid increase of renewables bringing onto the grid and the rate of change and adoption of renewables is very fast even though we’re still moving up at a relatively low base. And the second is the adoption of — and buildout of natural gas as a baseload — cheaper baseload energy source to coal.
RITHOLTZ: Which is primarily manifesting itself in the transition of the big electrical generation plants that used to be mostly coal fired and now have seemed to dramatically move towards gas, is that fair?
DEESE: Correct. So, those are the two — the two big dynamics is gas driving coal out of the energy mix and renewables coming onto the grid rapidly. That’s the story of the last decade.
I think the story of the next decade is really going to be about what happens not the future of utilities but the utilities of the future because we’re going to move increasingly toward a scenario where we are electrifying everything. And so, the grid and the grid applications are going to become less straightforward of you have point source where you generate a bunch of electrons and you figure out transmission and distribution system.
We’re going to have increasingly distributed generation. You’re going to have sources of power and sources of storage that are plugged into the grid in different ways, which would create new stresses but also a bunch of new opportunities, different — that will be one of the things that make the next decade different from the last.
RITHOLTZ: So, we converted to natural gas about two or three years ago. Not only do we do that, I ran a backup generator on top of that and I noticed not only am I not burning home heating oil, I’m burning gas, the price is a fraction of what it was.
And if you live anywhere north of the Mason-Dixon line and want to heat a pool, my God, I used to get thousand-dollar oil deliveries it seemed like every other day and now it cost me 200 bucks to keep the pool at 86 degrees into November. It’s so incredibly cheap. Why hasn’t this transition taken place faster or are we going as fast as we can?
DEESE: Well, the good news is that the transition has both economics and physics on its side. And so, the reason why you’re seeing that and the reason why zero carbon renewable energy is increasingly the lowest cost source of generation to add into the grid in places around the world from India to Chile where new solar beats on a levelized cost the buildout of new coal or other sources.
RITHOLTZ: That’s amazing.
DEESE: So, the market is driving that but also the zero carbon energy sources are technology. And so, part of the reason why is you’ve seen this rapid reduction in the cost of wind and solar and battery storage because the technology is just advancing very rapidly.
And so, the zero carbon energy sources have technology at their back as well. That’s the good news. The bad news is that even though this transition is not moving nearly fast enough to put us on a trajectory that would keep the increase in global temperatures to the rate that we identified in the Paris agreement or to the rate of even a more ambitious set of targets that are what the global body of science is telling us you need to avoid the worst impacts.
RITHOLTZ: So, what aren’t we doing that we should be doing and what I mean by that is not just, hey, everybody, go buy a Tesla or GM Volt but what is the government not doing to provide incentives to accelerate what’s already taking place on an economic and market-driven set of functions?
DEESE: Right. Ultimately, what’s going to drive the speed of the transition is government policies that provide long-term stability in prioritizing more sustainable source of energy and more sustainable sources of economic activity.
And around the world, we’re seeing less than a coherent global coordination on policy and so we’re long way from that being the case. But the other thing that’s going to help accelerate, and it gets to the work we’re really doing at BlackRock, is a greater understanding and a greater clarity within financial markets about the magnitude of the risk that actually already exists or is coming.
And our view is as that becomes clear, we’re going to see a big reallocation of capital based on risk and based on financial markets fully reflecting those risks in the market.
RITHOLTZ: So, let’s focus on that for a moment. We’ve seen in the insurance space, more than anywhere else, big increase in rates, big set of changes as to who insurers will cover, and I’m not just talking about residential waterfront property across the board, and then the reinsurers also showing a giant uptick in their premiums.
So, while a big chunk of the marketplace may be dawdling or not paying attention to it, it’s clear in the insurance sector, they are clearly well aware of the risks that are taking place and have already acted on that. How long do you expect it to take to transition from insurance as a frontline recipient of the impact and costs of climate change to the rest of the sectors in the marketplace?
DEESE: Well, look, I would say you’re starting to see that insurance but I think we’re going to see it accelerate much more significantly as well. Most of the financial models and the financial approaches that we’ve taken, our eyes are backward looking or they rely on this assumption of climactic stability that the basic stability we’ve seen around physical impacts and threats will accelerate the way it has in the past and that’s no longer a viable option, which is going to require us to rethink a lot of basic questions about finance.
So, you raised the question of mortgages and waterfront property. Well, 2020 is an important year in most respects but, one, think about the 30-year mortgage. It’s kind of the one of the centerpieces of our modern financial system.
2020 is the first year where if you’re (inaudible) a 30-year mortgage, that’s going to touch 2050, which we’ve always thought of as a sort of long out — long-term mile marker for impacts of climate change. Well, today, we — a 30-year fix touches that.
What are the implications of that? Well, you’re right, we’re starting to see it in insurance but what are the implications when there are big areas of the country where even if you can get a 30-year mortgage, you can’t get mortgage insurance that resets annually.
One of the implications for municipal finance if risks that felt like they were long-term, 24, 30 years out start to get pulled forward and our sense having looked at this is that we’re going to see — one thing the financial markets are good at is pulling forward risks once they can identify and measure it.
And so, what you’re starting to see in isolated areas in insurance and otherwise is likely to move much more quickly as bigger elements of the financial market starts to recognize and identify these risks as real and even if they are five, 10, 15 years forward, that’s going to affect duration.
RITHOLTZ: Quite fascinating. Let’s talk a little bit about sustainable investing. Your boss, Larry Fink, made a pretty big splash with his annual letter on sustainability. What does BlackRock want to accomplish with that sort of communication? What was Larry trying to say?
DEESE: Well, we wanted to communicate our view as a fiduciary, as an entity that our principal goal is to try to think forward on behalf of our clients to what will be important to delivering them their long-term financial goals.
And in that context, we wanted to communicate two things. One, our view that climate risk is investment risk and that’s going to have big implications on how we think about a lot of these core questions of how we think about duration assets, how we think about risk going forward.
And the second is that there is a larger societal shift right now toward a focus on sustainability and changing expectations of companies that we believe will escalate, that they’re structural drivers behind that that will escalate across time and therefore, companies that are not thinking forward to what that means for their business model and trying to get ahead of that are going to struggle to deliver long-term profitability because this is going to become an increasingly important part of the financial conversation to look forward.
RITHOLTZ: So, this seems to be an evolution and thought at BlackRock. Fink has written a number of different letters over the years. He’s talked about this as an issue. He sent letters out to various CEOs and other things.
But it seems that this year, 2020, is really a tipping point. The content and the tone of his letter, is urgent the right word, and much more emphatic. In the past, it was almost like mentions as part of it. This time, it was front and center.
DEESE: Yes. And I think that reflects that there are a lot of things in 2019 that we saw escalating come together to really enforce the conviction in this view and the urgency of the view.
One, you saw an escalation in the physical impacts. We talked about Australia …
RITHOLTZ: California, yes, everywhere.
DEESE: … California, otherwise.
RITHOLTZ: World is on fire.
DEESE: Yes. Two, this idea about where regulatory bodies going to really step in, went from the future tense, maybe they will in the future to present tense. You saw the Bank of England begin to actually regulate financial entities requiring stress test. You see pension regulation across the globe.
Obviously, in the United States, it’s an outlier in that respect. But if you’re a global company and you operate in Europe for example, integration of these types of issues into your disclosure in your investment process will become sort of required reading that changed in 2019.
And we saw these sets of issues culminate and spill over into the global geopolitical scale. At the G20, you saw citizen movement of 6 million students grassroots walking out and demanding action. There’s an escalation and focus on this that we assess, again, from an investment perspective, as being durable and actually this being the front of something that is going to be a significant shift in investor preferences over time.
RITHOLTZ: So, let’s talk about another shift. Sustainable investing used to be pitched as, hey, here’s how to align your capital investments with your morals, your ethical beliefs, your values.
Now, it’s really being contextualized as look at how well ESG funds have done over the past few years, this is a source of alpha, this is a source of market beating performance. How do you see this being talked about by BlackRock’s investors?
DEESE: I think one of the most significant things we communicated in the set of communications really this year was this view as a fiduciary. There’s a view of looking at the long-term financial interest of our clients, first and foremost, that we believe that sustainability and integrating sustainability is likely to be the best way to position you for long-term financial return.
And you’re right, that is different. That’s different than the traditional conversation which always came with an implicit assumption that you were trading value for values.
Our view is that that’s in a rearview mirror. Now, the question of how you integrate sustainability and how you do that in ways that actually capture material insights and not noise is hard, it’s complicated like any other area of investing.
But our view increasingly is that you can build a portfolio, integrate sustainability and at least do as well and like position yourself to do better over the long term because of all the structure of elements we’re talking about and that underlies the conviction of everything we’re doing across risk and integration, products and services we’re offering is that underlying core view.
RITHOLTZ: So, here’s the pushback I’ve read, not my view but I’ve read. Hey, ESG has been outperforming because really it’s a closet technology index and if you own a lot of Apple and Google and Microsoft and Netflix, hey, of course, your portfolio is killing it. What’s the response to that claim?
DEESE: First, our conviction around the materiality of these issues is not based principally or solely on limited period of performance over a limited period of time. It’s based on thinking about what are the underlying drivers of these changes, climate change, the physical and the technological risks, the change in investor sentiment that is connected to the largest transfer of wealth in human history from the baby boom to the millennial generation. And so, we don’t principally pin it on that.
The second more specifically though is there’s been a lot of talk about is it sort of a closet tech play, is it just a momentum play that there’s sort of an ESG momentum trade on and the like.
DEESE: And I think our view on this is that elements of that may all be true in the market today but we believe that those structural factors are going to actually sustain this shift for some significant period of time. And so, the traditional view that says, look, these — if these assets or these stocks actually are getting greater demand then you’ll actually have (inaudible) premium and maybe you’ll see some bounce back.
What that misses is if we were on the front end of a long-term structural trend, if you believe that structural trend is fully priced into the market today, then, of course, you wouldn’t see these relative changes in value. There’s a lot of reasons to believe, including from financial literature around other long-term structural trends like demographics, that this is — that the transition itself will be a period where you’ll see this sort of lack of a trade-off persist for some significant period of time.
RITHOLTZ: That is absolutely fascinating. Let’s talk about a quote that I really like from your team, quote, “the sustainable investing team is focused on identifying drivers of long-term return associated with environmental, social and governance issues integrating them throughout BlackRock’s investment processes and creating solutions for our clients to achieve sustainable investment return.”
What I’m reading between the lines there or maybe it’s more explicit, this isn’t just about the ESG portfolios, you are looking at ESG as a potential risk factor across the full portfolio whether it’s ESG or not.
DEESE: Well, that’s a mouthful but I’m glad you picked up on that because that’s exactly how we are thinking about it. Fundamentally, if we come at this from the perspective of risk, then our view is we need to integrate this in our core risk processes the same way that we think about any other core element to financial risk.
So, what that means is if we identify that ,for example, the physical risks of climate change that you can pinpoint to an asset or you can pinpoint to a company based on the geographic footprint are measurable and real, we want to integrate that into how all of our active investors are thinking about building their portfolios, which doesn’t mean that the end output of a particular strategy has a dedicated sustainable focus but it does mean that this is risk. And so, like any other element of risks.
So, let me give you a concrete example. We built a tool internally that allows us to stress test all of our portfolios for different carbon price scenarios. What happens in the future if you see a carbon pricing post at certain different levels?
We run the stress test scenarios on all of our portfolios not because all of our portfolios have us dedicated sustainable objective but because that’s a risk factor that all of our portfolio manager should think about and have the tools and data in front of them to know, is there risk of my portfolio that I might not see if I’m not using this lens.
RITHOLTZ: So, we’re focusing lot on the E.
RITHOLTZ: Let’s move forward and talk about the S and the G for a moment. I’ve had people who are not sustainable investors. I’ve had portfolio managers who are not ESG investors tell me they still focus on the governance aspect because according to them it’s a risk factor. If you have a diverse board of directors and pretty close to gender parity both in pay and executive hiring, you’re much less likely to have a me-too scenario or any other governance risk that seems to have affected a number of companies, both tech startups and more seasoned traditional companies.
DEESE: Yes. Look, part of the way I think about this is I don’t start with ESG. We start at risk and we start at where can we develop conviction that sustainability-related factors are material.
And if you do that, then you can build out and well, the way I think about ESG is just a way of bucketing those risks. So, the conversations that I think are actually the least helpful are, well, is that a G risk or an E risk, right?
If your board has effective management — risk management practices that include climate, was that a G or an E? It doesn’t matter. If it’s risk and you believe it’s material, you want to understand if a company is thinking about that.
Similar to your example, if we know that diverse groups of people make better decisions across time that may take a little longer to make them but they make better decisions across time, we want to understand how a company is structured in terms of their governance and in terms of their employment practices to actually encourage more diversity of thought across their company and management.
We come at it and say, that’s sustainability-related risk and then ultimately, ESG is, in some ways, it’s kind of about naming convention to try to identify these and bucket them in ways that helps people understand what they are.
RITHOLTZ: So, let’s talk about that naming convention. One of the pushbacks I’ve heard is who gets to decide what the E and the S and the G is, they all mean different things to different people, how do you operate in that sort of nebulous area, what definitions matter, what are you looking at when you’re looking at let’s say S for social or G for governance?
DEESE: Sure. It’s definitely the case that there are too many frameworks out there and we will all benefit from bringing greater coordination consolidation into as we get better at measuring and identifying these issues.
On the other hand, I think that it’s also important to put in perspective, it took 80 years to get GAAP to be like completely right and we can’t let the enemy — the perfect be the enemy of the good.
DEESE: With the disclosure that is out there and the data that is out there, we can measure a lot about how companies are managing material sustainability risks and that, as a fiduciary, as an (ph) investor, that’s our responsibility.
When we think about these issues, we talk a lot about E when we talk about S. A lot of this really is about effective management of — the way what we think about effective management of your internal stakeholders, your external stakeholders. Who are your internal stakeholders? Mostly your employees.
So, diversity, inclusion, pay, flexible workplace practices, those are places where we know that contributes to employee retention and employee engagement. Those are connected to drivers of return.
External stakeholder is about the communities you operated and about the stakeholders that you are your customers, right? And that — that is principally about how you manage your supply chain and how you manage the impact of your operations in communities.
So, that’s really how we think about the S, distilled down, obviously. There’s very specific metrics under each of us.
RITHOLTZ: So, technology, obviously plays a big role in clean air, clean water, dealing with recyclables as — and of course, energy. As an investor, how do you look at the role of tech impacting sustainable investing?
DEESE: Well, one of the most interesting things about the issue of the decarbonization of the economy is that we you — when you talk about that issue, the energy transition, people’s minds principally go to windmills, solar panels …
RITHOLTZ: Electric cars?
DEESE: Electric cars. But also a lot about energy production, the energy production system. The — actually, the lowest cost and most significant opportunities for decarbonization today operate in the broad space of efficiency. And in inefficiency, it’s technology plays that have the greatest opportunity for scale.
So, think about how do we make the buildings we live and work in more energy efficient? How do we reduce the efficiency of the materials we use whether it’s in industrial processes or consumer processes?
RITHOLTZ: Literally, there was a giant article, I want say it was out at UCLA about cement production is a huge producer of CO2 and a new technology came up with a way to turn cement into a carbon sink and that sort of stuff is kind of fascinating. We don’t think about cements, the concrete you walk on the sidewalk as it took a lot of CO2 to produce this.
DEESE: Right. So, if you think about technology and efficiency coming together and the opportunities both for emissions reductions but also breakthroughs that can improve the — improve the efficiency of industrial processes, make you money.
DEESE: That can reduce the energy consumption of a business which is an input cost in a number of businesses that is a meaningful …
RITHOLTZ: Pretty much everybody.
DEESE: … on the balance sheet.
DEESE: Right? The ways in which technology can be disruptive are really — are really exciting and that’s also why this question of how the economy moves toward more carbon efficient activity touches every element of our economy. This is not just about oil companies and utilities. This is about if you — if you run a business like Bloomberg, right, and how are you thinking about how technology can help make your business more efficient, make you operate with lower carbon footprint, I help you save money, help you — help you engage your employees, those are all things that sort of every business should be thinking about.
RITHOLTZ: It seems pretty — pretty universal. Let me — let me switch up on you a little bit. You’ve been lecturing at the Kennedy School about sustainable investing and you been providing advice to institutions. When you’re speaking to an institution or your speaking to a bunch of young, fresh-scrubbed grad students, do you get the same questions? Do you get the pushback? How did those wildly disparate groups look similar and how are they so different?
DEESE: That’s interesting. I still — look, a lot of the conversations in kind of — in more traditional financial circles among our clients and otherwise do start from a presumption of skepticism because there has been this dominant overhang in finance that has assumed that as soon as you hear the word sustainability, we’re talking about that trade-off, the trade-off between valuing values.
I think a lot of that skepticism is healthy because it forces this space this space to be very rigorous about where do you actually see real meaningful material impact as opposed to just noise. But that skepticism is often kind of overhangs a lot of conversations in those types of for.
Among younger people and students, I think, that there — you — what you hear is a degree of urgency and bordering on panic on the set of issues that is forcing — that forces a kind of questioning of a lot of basic assumptions of how finance works, about how institutions work. And I think that that’s — yes, it’s a different perspective but it’s also relevant to this conversation because society tends to shape institutions as opposed to the other way around. And so, I think we all would do well to pay attention to that and that impulse because it’s likely to get louder rather than softer.
RITHOLTZ: Quite fascinating.
We have been speaking with Brian Deese. He is the Head of Sustainable Investing at BlackRock. If you enjoy this conversation, well, be sure and stick around for the podcast extras where we keep the tape rolling and continue discussing all things ESG related. You can find that at iTunes, Google Podcast, Stitcher, Spotify, wherever your finer podcast are found.
We love your comments, feedback, and suggestions. Write to us at firstname.lastname@example.org. Check out my weekly column on bloomberg.com. Follow me on twitter @ritholtz. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.
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RITHOLTZ: Welcome to the podcast. Brian, thank you so much for doing this. I’ve been looking forward to this conversation for a while and I was saying off mic, I thought a decade ago, we should have done a Manhattan project-like approach to the fundamental sciences of alternative energy, how do we make solar panels more efficient? How do we make battery storage more effective?
We’re doing these really incremental improvements and the ironic thing about that is a decade later, hey, one percent here, two percent there, do that for 15, 20 years, it really compounds and becomes a significant change and you already see it in the cost of solar. Like you could put solar panels on a roof and have them be very cash flow positive in most of the country.
I mean, if you’re in the northern most parts, it may or may not pay for itself quickly. But most of the country, it’s now pretty reasonable, isn’t it?
DEESE: Well, I would say two things, the first is part of the reason why solar and wind have gotten so cheap is we did a version of what she said. Coming out of the financial crisis, in 2009-2010, the U.S. — with U.S. in the lead, we made and extraordinary, almost $90 billion investment in basic and applied R&D into clean energy sources.
The biggest mistake is we did it once and we didn’t — and didn’t sustain it …
RITHOLTZ: Didn’t continue. Right.
DEESE: … over a decade or more. But we know that, actually, effectively, allocating dollars into the basic R&D space in this area does pay dividends. You can draw a line between these types of basic research efforts and innovations that then flow through.
And we’re going to need — it’s going to take continuing to double down and double down on that because one of the points that you’re making is as the installed solar gets cheaper, as you get more intermittent sources of power on the grid, we’re going to need more and more innovation in storage and in distributed structures of energy delivery to get over twer going to have to come down the cost curve sort of again and again to get that right.
RITHOLTZ: So, let’s talk about automotive and aviation and trucking. Clearly, companies — I know you don’t want to talk about specific companies. But when I look at the space, it’s not just Tesla. It’s just about every manufacturer either has a hybrid or an all-electric today or plans for it by 2025. Is this argument about electrical cars over were going to be electrified and there isn’t a whole lot of lifespan left in the internal combustion engine or am I overstating that?
DEESE: Well, look, I think the — I think that the — I think that the direction of travel is clear toward electrifying everything. The question of the pace of that is going to be an intersection between technology and the innovation that comes out of companies and also policy including, for example, the — how much foresight is there into investing forward in the infrastructure to enable electric vehicles to become more ubiquitous.
One thing I’ll say that we’re not thinking enough about and that we didn’t — when I was back in policy in the middle of the 2010s, we didn’t think about the policymakers in the 2020s will have to think about is the intersection of electrification and autonomy.
RITHOLTZ: Yes, that’s pretty obviously. I knew you’re going to go there because you have these self-driving cars relying on signs and paint, why aren’t there RF devices implanted across all the highways in United States, think about how much more efficient we’re going to be if autonomous driving cars can safely follow two feet behind and put a bunch of people in a larger vehicle and move it more efficiently.
DEESE: Right. And if — and look, there’s an infrastructure on that and the complexity of autonomy. I wouldn’t understate that. But in particular, when what happens when you bring electrification and autonomy together is you can dramatically reduce the — you dramatically increase the competitiveness of an electric vehicle because an electric autonomous vehicle is a multiple, more cost effective than electric vehicle compared to a — to a conventional-powered vehicle.
And so, my sense is that the path toward the electrification in the transport sector is not going to be straight. They’re going to see some discontinuities when you see those types of technologies come together and potentially disrupt the traditional modes of transport in a more fundamental way.
RITHOLTZ: So, we’re seeing trucking move towards both electric and autonomy. What about aviation? There have been some small — I mean, there almost look like big drones where small personal craft that have been playing with the electrification. Is it — is the technology even imaginable that we can one day fly across the Atlantic in an electric plane or is the physics too imposing?
DEESE: Look, that technology is hard and I think it’s further — it’s further a feel. It doesn’t exist today.
The point that I think is important for context is that today, globally, airline emissions represent two percent of global emission.
RITHOLTZ: So, not a giant …
DEESE: So, technologically, ultimately, that’s something that we’ll need to be solved. It’s not a — it’s not a near-term thing but the technology is pretty complicated.
On the other hand, in terms of looking at the big categories of emissions, it’s not — it’s not something that has to be at the immediate or top of your list to really accelerate the decarbonization.
RITHOLTZ: So, what’s the top three on that list?
DEESE: The top three are efficiency, you got to massively reduce the footprint of our built environment in ways that — to the point you’re making earlier are already in the money.
DEESE: You just got to figure out ways to overcome barriers. Second is you got to decarbonize the electricity production system. The economics are already pushing in that direction, but it was more quickly. And third, electrify everything in transport.
RITHOLTZ: Transport. Quite fascinating.
All right. I want to get to my favorite questions before we have to wrap up. We ask these of all our guests and kind of think of this as our speed round, that’s revealing of who you are.
Tell us what you’re streaming these days. What are you listening to, either Netflix or podcast or whatever?
DEESE: So, I am catching up on “Game of Thrones.” I’m almost done. I know that I’m — I know I’m a little …
RITHOLTZ: I’m way behind you. So, don’t feel that.
DEESE: I’m a little behind the curve. I just finished “Breaking Bad.” So, that gives you a sense that I’ve sort of — my queue is a little dated but I’m working through it.
RITHOLTZ: Right. What — tell us the most important thing people don’t know about Brian Deese?
DEESE: That people don’t know? Well, the most important thing in my life is that I’ve got two kids. I’ve got a 7-year-old and a 4-year-old. And I can measure my kids age by milestones in policy. My daughter right after the reelect in 2012 and my son was born two weeks before we left for Paris to try to negotiate the Paris Agreement.
RITHOLTZ: That’s pretty good. So, who were some of your early mentors? Who influence the course of your career?
DEESE: Well, I was fortunate to have a great professors in college who really brought out me in the way that I thought about things. I am — I had an early mentor, a woman named Nancy Birdsall who’s a great economist who thinks about how developing economies fail and succeed in increasing human potential, who really helped me think in different ways.
And I’ve been — I’ve been blessed across several people who had been at the height of American economic policy from Gene Sperling to Larry Summers to (inaudible) and others. I’ve had a — I’ve had a string of pretty great bosses.
RITHOLTZ: What about on the sustainable investing side? What investors influence how you look at the world through the lens of ESG?
DEESE: Well, I’d be — for me, coming to BlackRock and the — both the diversity of thought and the diversity of investment approaches at BlackRock really is a kind of — is a unmatched privilege to actually just be able to work.
If you think about BlackRock is often thought of for the scale, the 7 trillion and the large index business but we have $1.8 trillion in active mandates across fixed income and equities, alternatives, almost every geography and almost every asset-class and investment style. So, I have learned an enormous amount in this period from — just from the leaders and the innovators across the board and inside the firm.
RITHOLTZ: What are some of your favorite books? What do you like to read? What are some of your favorite authors?
DEESE: So, I tend to like — I have — up until summer recently been more of a non-fiction guy.
RITHOLTZ: Most of my guests seem to say the same thing.
DEESE: I really liked John McPhee and he’s a sort of nature writer who’s written some incredible histories including of Alaska and how transportation works in the U.S.
I’m reading right now, though, a book called “The Overstory” by Richard Powers which is a — it’s dense but it’s an incredible — it’s a beautiful book. That’s a that’s in the fiction category.
RITHOLTZ: Give us a John McPhee book.
DEESE: “Uncommon Carriers.” It’s a set of vignettes from him travelling across the country with people who transport things from barges that go up and down the Mississippi River to chemical tanks — chemical tank trucks that — or coal trains. Pretty witty but fascinating.
RITHOLTZ: Quite interesting. What do you do for fun? What do you do when you’re not thinking about sustainable investing?
DEESE: Mostly spend time with my family and we’d like to get outside, get to either to the mountains or the ocean. Hike, ski, or otherwise.
RITHOLTZ: Does sound like fun. Tell us about a time you failed and what you learned from the experience.
DEESE: I failed enough this morning to fill up the — that category.
RITHOLTZ: One would imagine policy and politics is just a constant battle of winning and losing.
DEESE: Yes. I mean, if you think about the — for every major achievement we had in — we, in the same year the Obama administration passed the Affordable Care Act, something I thought was a great achievement and at the same time failed a climate and cap and trade legislation done.
And so, you get used to this sort of — this give and take of trying to understand that there’s a bigger picture. You’re not going to get everything. And one of the things I learned there very directly is if you can advance progress incrementally and you can do it in a way that doesn’t violate the hypocritic oath, you should grab that and take those opportunities because ultimately, while you have to have a big vision, the world moves in lots of incremental stuffs along the way.
RITHOLTZ: So, here’s a most challenging philosophical question. What are you most optimistic about today relative to climate change and sustainable investing and what has you most pessimistic?
DEESE: So, I would say, what — I’m optimistic about the fact that if we — if we look back a decade and we had said what do we think the rate of change in technological innovation would be particularly in these areas that we’ve talked about that are driving carbon efficient solutions, we would’ve consistently underestimated the degree to which human innovation, technological innovation can come together to change things.
And I’m also optimistic, frankly, that were seeing a degree of focus energy including a lot of fear and a lot of anger, but energy around these set of issues were, I think that that’s going to drive in a durable way this to the front and center of conversations in financial markets, in politics as well.
The thing that I’m the most worried about or the most pessimistic is that we’ve got a — we have a more fundamental or existential challenge right now around whether institutions — whether they be institutions of — in the private sector or institutions and particularly in government can actually effectively drive change, particularly in democracies, and we’re facing some real existential challenges not just in — not in just in any particular country and I think that those have to do with complicated social and global dynamics, but were going to have — if we’re going to actually get on the right side of this issue, were going to have to have a degree of coordinated action with institutions actually, working together that it’s easy to get a little dark about that.
RITHOLTZ: Sure. And our final questions, what sort of advice would you give to a recent college grad who was interested in sustainable investing?
DEESE: That’s great. It’s a growth area. Study up and the advice I would say is study up with the degree of skepticism and rigor around the set of issues because what we need is more people who are really invested, really passionate, but also come at it with a dispassion.
RITHOLTZ: And our final question, what do you know about the world of sustainable investing today that you might have wished you knew 10, 15 years ago?
DEESE: That you can you can unlock a lot of progress by just putting facts and data out there and being clear about the implications that that ultimately were going to need policy solutions to get this done but there’s a lot that finance can do by being clear about risk and data and analytics.
RITHOLTZ: Quite fascinating.
Thank you, Brian. This has really been very, very interesting. We’ve been speaking with Brian Deese. He is the global head of sustainable investing at BlackRock.
If you enjoy this conversation, well, be sure look up an inch or down an inch on Apple iTunes where you can see any of our previous 300 such conversations we’ve held over the past five years.
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I would be remiss if I did not thank the crack staff that helps put this together with me each week. Michael Batnick is my head of research. Sam Shivraj is our booker/producer. Nick Falco is our engineer. I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.