Brian Deese on What’s Driving ESG Investing

now working in black Rock. Uh, this is really a fascinating conversation about what is driving sustainable investing, how we can think about climate change and e s G investing not so much as a value play but as a form of risk analysis. Uh. 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 Black Rocks Brian Diese. This is Masters in Business

with Barry Ridholtz on Boomberg Radio. My special guest this week is Brian Diese. He is the global head of sustainable Investing at black Rock, where he focuses on identifying drivers of long term returns associated with E s G 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 Diese, Welcome to Bloomberg. Thank you, happy beer. 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. Well, you know, the joke about people who work in policy is if you don't have the attention span to go get a PhD, then you get a law school. That's fair, but well, look, I I might most of my background professional focus has been on economics and economic policy. Uh, the legal training and the law degree have 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. 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 fifty of us are not practicing laws something like that. Pretty pretty realistic number. So let's talk a little bit about the Obama White House. You were Senior adviser for Climate and Energy policy. What's it like working

on those issues in the White House. Well, it's um complicated, scary, thrilling, fun, frustrating, all of those things. Everything you would amend. 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 worked in the post crisis era, worked on housing, finance, the Dot 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 on 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, 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 had. 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 posts oh nine? It had to be crazy. Yeah, 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 two eight, what went from economic policy in a campaign context got devastatingly serious, very quickly, with the cascading failures of a g and putting Famion Fedding conservatorship, and then you know, the 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 we're 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 back stop them? Should we? And three? If the answer to both of those was yes, then how could we actually

execute and get this done? So I have a pet theory that if the UM Treasury Secretary is an industrialist, they're very happy to bail out industry and let finance banks and stuff go the restructuring route and vice versa. There a financi air, then the industries can go through bankruptcy, but they bail out banks as 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? Well, there's actually surprising consistency between the end of the Bush administration our view on they need to do something to backstop these companies because of the second and third order effects.

I think the you know, the conservative estimates were a million plus jobs on the line, because it wasn't really about the specific direct employees of GM and CHRISTI, although there were tens of thousands of them, but the suppliers, the dealers that the the auto industry touches UM a

lot of communities and a lot of jobs. So we were pretty focused in the depth of such a economic downturn, if we could do something that was targeted UH and effective and that did require 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 these is behind it. But we did ultimately decide that the way to actually get the level of um 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. It was a harrowing and lots of respects, but in hindsight, I believe it's one of the most effective economic policy interventions at the height of our recession, and I think we

saved more than a million jobs. At the end of the day, we got back more money than the obadministration invested, and as a whole, in the government, UH, the entire effort cost about ten billion dollars, and so if you look at the jobs in the economic impact that we were able to protect and solve, I feel like it was a an effective and reasonable use of tax payer resources. 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? Well, you know, in some ways, uh both large complicated organizations that have a global reach and that uh so in some ways less difference than you might think between the complexity of the executive branch and

the complexity of a big, uh complicated organization. But on the other hand, you know, 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 of low carbon economy. There's what we think about at black Rock, but with a very different lens, the lens being how do we actually deliver for our clients, for our the end h end investors, most of whom are uh you know, our our our pensioners and who have a long term orientation and are trying to save for long term goals. So, you know, 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 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. Well, look, I think it's in the the economic and national security interest of every country to be finding a coordinate solution

to this issue. You know, I think the impacts both the physical impacts that we're seeing that you know, we were seeing with our own eyes. Californians are seeing at people in the Midwestern seeing Australia and you know, up and down the East coast of the United States. Uh, 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 is missing from this conversation. Sometimes 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 was like a soccer match, developed countries on the one hand, developing countries and the others fighting about who

was in charge of having to solve this problem. What Paris did was changed that from 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 of the twenty one century. Who's going to actually capture the economic opportunity, the enormous economic opportunity that's going to colm from this transition in 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. So I saw a chart yesterday from Torsten Slock of Deutsche Bank basically showing the US gets only about ten percent of our energy supply from renewables, and I remember that more

or less correctly, that's from wind and solar. If you look at zero carbon including nuclear and hydro, the number is the numbers closer before you, right, But oh, really that much because we've had pretty robust nuclear and hydro, not as much as France has on the nuclear side or hydro, so dependent on the local geology. But we've had that for decades. And so what has been the marginal increase in low carbon or zero carbon energy sources

over the past decade or so? Well, So, the two big things that you've seen happen in the U S energy mix are one, the rapid increase of renewables bringing onto the grid and the the rate of change and adoption of renewables is very fast, even though we're still you know, we're still moving up at a relatively low base.

And the second is the adoption of and build out of natural gas as a baseload, cheaper baseload energy source to coal, which is primarily manifesting itself in the transition of the big electrical generation plans that used to be mostly coal fired and now have seemed to dramatically move towards gas. Is that fair 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 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 gonna 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 a point source where you generate a bunch of electrons and then you figure out

a transmission and distribution system. We're going to have increasingly distributed generation. You're gonna have sources, you know, sources of power and sources of storage that are plugging into the grid in different ways, which will 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. 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 on 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, Oh my god. I used to get thousand dollar oil deliveries, it seemed every other day, And now it costs me two bucks to keep the pool at eighty six 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? 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 build out of new coral

or other sources. That's amazing. 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, it's 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. So what aren't

we doing that we should be doing? And what I mean by that is not just hey, everybody go by a tesla or a GM vault, 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. 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 you know, around the world we're seeing less than a coherent global coordination policy, and so we're a long way from that being the case. But the other thing that's gonna help accelerating it gets to the work we're really doing. A black rock is a greater understanding and a greater clarity within financial markets about the magnitude that of the risk that actually already exists or is coming.

And our view is as that becomes clearer, 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. 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 insures will cover, and I'm not just talking about residential waterfront property across the board. And then the reinsures

also showing a giant uptick in their premiums. So while a big chunk of the marketplace maybe 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. 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 are either 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, you know, an important year in lots of respects, but

one think about the thirty year mortgage. It's kind of the you know, one of the centerpieces of our modern financial system is the first year where if you're issuing a thirty year mortgage, that's going to touch which we've always thought of as a sort of long out, long term area mile marker for impacts of climate change. Well, today we a thirty year, you know, a thirty year

fixed touches that. What are the implications of that? 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 thirty year mortgage. You can't get mortgage insurance that that that resets annually. What are the implications for municipal finance If risks that felt like they were long term twenty thirty years, I'll

start to get pulled forward. And our you know, our our sense having looked at this, is that we're gonna see. One thing the financial markets are good at is pulling

forward risk 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, you know, bigger elements of the financial market starts to recognize and identify these risks as real, and even if they are fifteen years forward, that's going to affect duration 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, 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 their 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. So this seems to be an evolution and thought at black Rock. I think 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 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 mentioned as part of it. This time it was front and center, and I think that reflects that there were a lot of things in twenty nineteen that we saw escalating come together to really enforce the conviction in this view and the urgency of the view one.

You saw, you know, an escalation in the physical impacts. We talked about un worlds on fire. To this idea about where regulatory body is going to really step in went from the future tense maybe they will in the future to the present tense. You saw the Bank of England begin to actually regulate financial entities, requiring stress tests.

You see pension regulation across the globe. Obviously in the United States as an outlier in that respect, but if you're a global company and you're operating Europe, for example, integration of these types of issues into your disclosure and your investment process will become in a sort of required reading. That changed in twenty and we saw these sets of issues culminate and spill over into the global geopolitical scale.

At the g twenty you saw a citizen movement of six million in a student's grassroots um walking out in demanding action. There's an escalation and focus on this that we assess again from an investment perspective, as being durable and and actually this being the front of something that is going to be a significant shift in investor preferences

over time. 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 E s G 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 Black Rocks investors. I think one of the most significant things we communicated in the set of communications earlier this year was this view as a fiducier, as a view of looking at the long term financial interests 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 finitial 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 the rear view mirror. Now the question of how you integrate sustainability and how you do that in ways that actually capture material insights and and not noise. It's 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 likely position yourself to do better over the long term because of all the structural elements we're talking about, and that underlies the conviction of everything we're doing across risk and integration products and services were offering. Is that underlying

core view? So here's the pushback. I've read not my view, but I've read, Hey, you know, e s G has been out performing 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? First, our conviction around the materiality these issues is not based principally or solely on limited period of performance over 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 and investor sentiment that is connected to you know, the largest transfer of wealth and 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 you know, 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 a sort of an E S G momentum trade on and the like. 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 true sational view that says, look, um uh, these you know, uh, if these if these, if these assets, are these stocks actually are getting greater demand than you'll actually have a sin strock premium and maybe you'll see some bounce back. What that misses is if we're 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 um uh, 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 tradeoff persist for some significant period. 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 through out Black Rocks investment processes, and creating solutions for a 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

s G portfolios. You are looking at E s G as a potential risk factor across the full portfolio, whether it's E s G or not. Well, I was a mouthful, but I'm glad you picked up on that, because that's exactly how we are thinking about it. Fundamentally, we 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 of financial risks. 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 risk. 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 price imposed at certain different levels.

We run those stress test scenarios on all of our portfolios. Not because all of our portfolios have us dedicated sustainable injective objective, but because that's a risk factor that all of our portfolio managers should think about and have the tools in data in front of them to know is there risk in my portfolio that I might not see if I'm not using this lens. So we're focusing a lot on the E. Let's 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 were not E s G 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 uh 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 and more season traditional companies. Yeah. Look, part of the way I think about this is I don't start a D S G. We start at risk, and we start at where can we develop confection that sustainability related factors are material? And if you do that, then you can build out. And by the way I think about E S G, it's just a way of bucketing those risks. So um, the conversations that I think are actually the least helpful are, well, is that a

G risk or any risk right? If you're if your board has effective management, risk management practic is that include climate? Was that a G or any 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, they 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 their company and management. We come at it and say that sustainability of related risk and then ultimately you know E, S G is In some ways, it's a kind of a naming convention to try to identify these and bucket

them in ways that you know helps people understand. So 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 two 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. 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 to put in perspective. You know, it took eighty years to get GAP to be like you know, completely right, and we can't let the enemy the perfect be the

enemy of the good. 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 as a as a finuciary and

an investor, that's our responsibility. So you know, when we think about these issues, we talked a lot about EVE, when we talk about S, you know, a lot of this really is about effective management of what we think about effective management of your internal stakeholders, your external stakeholds. Who are your internal stakeholds, mostly your employees, So diversity inclusion, pay, flexible workplace practices, those are places where we know that

contributes to employee retention, employee engagement. Those are connected to drivers of return. External stakeholders, about the communities you operate in, and about the stakeholders that who are your customers, right UM, 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. So technology obviously pays a big role in UM, clean air, clean water, dealing with recyclables as UH, and of course energy. As an investor, how do you look at the role of tech impacting sustainable investment. Well, one of the most interesting things about UH, the the issue of the decarbonization the economy is that when you when you talk about that issue in the energy transition, people's minds principally go to windmills, solar panels, electric electrical ours.

But also you know a lot about UM 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 efficiency. It's technology place 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 the efficiency of the materials we use, whether it's an industrial processes

or consumer processes. Literally, there was a giant article I want to say it was out of U. C. L A about cement production is a huge producer of of CEO two 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 on the sidewalk as oh, it took a lot of CEO to to

produce this. Right, So, if you think about technology and efficiency coming together and the opportunities both for UM emissions reductions but also UM breakthroughs that can improve the improve the efficiency of industrial processes, make you money, that can reduce the energy consumption of a business, which is an input cost in a number of businesses, that is a meaningful UM the balance sheet, right UM. The ways in which technology can be disruptive UM 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 of our economy. This is not just about oil companies and utilities. This is about you know, if you if you run a business like like Bloomberg, right, and uh, how are you thinking about how technology can help make your business more efficient, make you operate with lower carbon footprint, help you save money, help you you know, help you

engage your employees. Those are all things that every business should be thinking. It seems pretty pretty universal. Let let me uh, let me switch up on you a little bit. You've been lecturing at the Kennedy School um about sustainable investing, and you've been providing advice to institutions. When you're speaking to an institution or you're speaking to a bunch of young, fresh scrub grad students, do you get the same questions?

You get the same pushback? How do those two wildly disparate groups look similar and how are they so different? That's interesting. So look, um, a lot of the conversations in kind of trag in more traditional financial circles among our clients and otherwise do start from a presumption of 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 that

that trade off between value and values. I think a lot of that skepticism is healthy because it forces this space to be very rigorous about where do you actually see UM, real meaningful material impact as opposed to just noise. But that skepticism is often kind of UM overhangs a

lot of conversations in those types of UM UH. For a you know, among among younger people and students, I think that they're you what you you know you hear is UM a degree of urgency and bordering on panic on this 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 UM. It's a different perspective UM, but it's also relevant to this conversation because UM, you know, 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 UM and that impulse because it's likely to get louder rather than UH than software. Quite fascinating. We have been speaking with Brian des He is the head of UH Sustainable Investing at black Rock.

If you enjoy this conversation. We'll be trying to stick around for the podcast extras, where we keep the tape rolling and continue discussing all things E. S. G. Related. You can find that at iTunes, Google Podcasts, at your Spotify, wherever your final podcasts are found. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Check out my weekly column on Bloomberg dot com. Follow me on Twitter at rit Halts.

I'm Barry Riholts. You're listening to Masters and Business on Bloomberg Radio. 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, Mike, 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, they are do that for fifteen twenty 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 northernmost parts, it may or may not pay

for itself quickly. But most of the country it's now pretty reasonable, isn't it. Well. I would say two things. The first is part of the reason why solar and wind have gotten so cheap. As we did a version of what you said coming out of the financial crisis in two the US, with the U S and the lead, we made an extraordinary almost ninety billion dollar investment in in basic and applied R and D into clean energy sources.

The biggest, you know, the biggest mistake because we did it once and we didn't we had didn't sustain it over over over, over a decade or more. But we know that actually effectively allocating dollars into the basic R

and D space in this area does pay dividends. You can draw a line between those types of basic uh UM research efforts and innovations that then flow through and you know, we're gonna it's gonna take continuing to to to double down and double down on that because one of the points that you're making is as as the installed solar gets cheaper, as you get more intermittent UM sources of power on the grid, we're gonna need more and more innovation in storage and in distributed structures of

energy delivery to get over that UM. And we're gonna have to come down the cost curve sort of again and again to get that right. So let's talk about automotive and aviation and trucking UM. 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 is this argument about electrical cars over We're going to be electrified and there isn't a whole lot of UM lifespan left in the internal combustion engine, or am I overstating that? Well? Look, I think the I think that the I think that the that the direction of travel is clear toward electrifying everything.

The question of that the pace of that is gonna be an intersection between technology and the innovation that comes out of companies and also policy, including for example, you know, the how much foresight, is there into austing 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 you know, when I was back in UH in policy in the middle of the tens, we didn't think about the policymakers in theies we'll have to think about is the intersection of electrification and autonomy. Yeah, that's that's pretty obvious. Is I knew you're going to go there? Because you have these self driving cars relying on you know, signs and paint. Why aren't there RF

devices implanted across all the highways United States? Think about how much more efficient we're going to be if autonomous driving cars can can safely follow two feet behind and put a bunch of people in a larger vehicle and move it more efficiently, and if and look, there's there's an infrastructure element and the complexity of autonomy. You know,

I wouldn't I wouldn't. I wouldn't understate that. But in particular, when when what happens when you bring electrification and autonomy together is you can drum ramatically reduce the giobradically increase the competitiveness of an electric vehicle, because an electric autonomous vehicle is a multiple uh more cost effective than electric

vehicle compared to a to a conventional powered vehicle. And so my my, my sense is that the path towards towards electrification in the transport sector is not going to be straight. There. We're going to see some discontinuities when you see those types of technologies come together and you know, potentially disrupt the traditional modes of transport in a more fundamental way. So we're seeing trucking move towards both electric

and autonomy. What about aviation, there have been some small um money they almost look like big drones or small personal craft that have been playing with 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 to imposing look that that technology is hard And I think it's farther. It's it's farther afield, 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 emissions, so not a giant so uh technologically, ultimately that's something that will need to be solved. Um, it's not a it's it's it's not a near term

thing that 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. So so what's the top three on that list? The top three are efficiency. You gotta massively reduce the footprint of our built environment in ways that to the point you're making earlier, are already in the money. You

just gotta figure out ways to overcome barriers. Second is you've got to carbonized the electricity production system. Um, the economics are already pushing in that direction, but it moves more quickly. And Third, electrify everything in transport. Transport quite quite fascinating. All right, I want to get to my favorite questions before we have to wrap up. Um, we ask these of all our guests and kind of think of this as our speed round. That's revealing of who

you are. Uh, tell us what you're streaming these days? What are you what are you listening to, either Netflix or podcast or whatever? So I am I am catching up um on Game of Thrones. I'm almost done. I know that I'm I know I'm a little I'm way behind you, So don't don't feel that I'm a little behind the curve. I just finished breaking bad, so you know that gives you a sense that I've sort of

my queue is a little dated, but I'm working through it. Um, what tell us the most important thing people don't know about? Brian D's uh that people don't know? Well? Uh uh the most important, the most important thing in my life is that I've got two kids. I've got a seven year old uh and a a four year old and uh, I can I can measure my kid's age by um by milestones in policy my my my daughter was born right after the reelect in twelve and my son was born two weeks before we left for Paris to try

to negotiate the paras agram. That's pretty good. So who were, um, some of your early mentors who influenced the course of your career? Uh? Well, I was I was fortunate. I had to have a great professors in college who really brought out me and the way that I thought about things. I UM, I had an early mentor, a woman named Nancy Birdsall is a great economist who thinks about UM, 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 have been at the height of American economic policy, from UH Gene Spurling to Larry Summers to UH near A Tandon and others. I've I've I've had a I've had a string of

pretty great bosses. What about on the sustainable investing side, what investors influenced how you look at the world through the lens of E. S. G. Well, you know, for me, coming to black Rock and the both the diversity of thought and the diversity of investment approaches at black Rock really is a kind of UM. A is a UM

unmatched privilege to actually just be able to work. You know, if you think about black Rock is often thought of for the scale, the seven trillion and and the large index business, But we have one point eight trillion dollars and active mandates across UH fixed income and equities alternatives uh UM, almost every geography UM and almost every asset

class in investment style. So I have I have learned an enormous amount in this period from just from the the the the the the leaders and the innovators across the board and inside the firm. What are some of your favorite books? What do you like to read? Uh? What are some of your favorite authors? So I I tend to like I have. I have, up until somewhat recently, been more of a nonfiction guy. Most of my guests

seem to say the same. I really like John McPhee. UM, and he's a he's a sort of nature nature writer who's written some incredible histories, including of Alaska and how how transportation works in the US. UM. I'm reading right now though, UM, a book called The Overstory by Richard Power, which is a it's it's dense, but it's an incredible it's a beautiful book. That's that's that's in the fiction category. UM.

Give us a John McPhee book, Uncommon Carriers. It's a set of vignettes from him traveling across the country with people who transport things from barges that go up and down the Mississippi River to UH, chemical tanks, chemical tank trucks that or coal trains. UH. Pretty weedy, but fascinating, but quite interesting. What do you do for fun? What do you do when you are not thinking about sustainable investing? Uh? Mostly spent time with my family. Uh. And we like

to get outside. Uh get get to either to the mountains or the ocean hik ski uh or otherwise does sound like fun? Tell us about a time you failed and what you learned from the experience. Uh. I failed enough this morning to fill up the uh that uh that category. One would imagine policy and politics is just a constant battle of winning and losing. Yeah, you know.

I mean if you think about, um that for every major achievement you know, we uh we had in you know, uh we uh in the same year at the administration past the Affordable Care Acts, something I thought was a great achievement, and at the same time I failed to get 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. Uh. 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 hippocratic oath. You should grab that and take those opportunities, because ultimately, while you have to have a big vision, the world moves in you know, lots of incremental steps along the way. So

here's the most challenging philosophical question. What are you most optimistic about today relative to climate change and sustainable investing

and what has you most pessimistic? So I would say, you know what, what I'm optimistic about the fact that, UM, 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 partly in these areas that we've talked about that are driving UM carbon efficient solutions, we would have consistently underestimated the degree to which human

innovation technological innovation can come together to change things. UM. And I'm also optimistic frankly that UM, we're seeing a degree of UM focus energy, including a lot of fear and a lot of anger, but energy around this set of issues where UM, I think that that's going to drive in a durable way this to the front and

center of conversations and financial markets, in politics as well. UM. The thing that I'm the most worried about, or the most pestimistic is that we've got to you know, we we have a we have a more fundamental or you know, existential challenge right now around whether institutions, whether they be institutions of in uh, in the private sector, or institutions and particularly in government, can actually effectively drive change, particularly

in democracies. And we were facing some some real, you know, existential challenges, not just in you know, not just in any particular country. And I think that those have to do with complicated social and global dynamics. But UM, we're gonna have if we're going to actually get on the right side of this issue. UM, we're gonna have to have a degree of coordinated action with institutions actually working together that Um, it's easy to get a little dark

about that. And our final questions, what sort of advice would you give to a recent college grad who was

interested in sustainable investing. Uh, that's great, it's a growth area. Uh. Study up um, uh and and and the and the The advice I would say is study up with a degree of skepticism and rigor around this set of issues, because what we need is more people who are really invested, really passionate, but also come at it with a dispassion and our final question, what do you know about the world of sustainable investing today that you might have wished

you knew ten fifteen years ago, that uh, that you can you can unlock a lot of progress by just uh putting facts in data out there and being clear about the implications that that ultimately we're gonna need policy solutions to get this done. But there's a lot uh that finance can do by being clear about risk and data and analytics. Quite fascinating. Thank you, Brian. This has really been very, very interesting. We have been speaking with

Brian Deese. He is the global head of sustainable investing at black Rock. If you enjoy this conversation, well, be sure and look up an intro down an Inch on Apple iTunes, where you can see any of our previous three hundred such conversations we've held over the past five years. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Leave us a review on Apple iTunes. Be sure and check out my weekly column on Bloomberg dot com slash Opinion. Follow

me on Twitter at rid Halts. 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 Chivraj is our booker producer. Nick Falco is our engineer. I'm Barry rid Halts. You're listening to Masters in Business on Bloomberg Radio.