MIT GCFP 9th Annual Conference - Virtual Fireside Chat with Larry Fink

All right. Well, Deborah, thank you for having me today. It's a real honor. Well, you asked a big question. So, I think we're at the very beginning where finance is truly understanding the magnitude of the problem. And once finance understands the problem, whether the problem is in 10 years or 50 years, we bring that problem forward. That's what's happening today. There's not a conversation that we have today with any of our asset owners worldwide where the question is, where does climate risk fit in? And you could be a climate denier or you could be a hydrocarbon company. We have those dialogues. In fact, I probably have deeper dialogues now with hydrocarbon companies than almost any other form of business. And so, we are seeing this reallocation of capital. We are seeing more and more investors who are saying, 'Hmm, I don't want to be in a traditional liability like an S&P index or an MSCI index. Can you design a portfolio that closely tracks those liabilities, but that may have better characteristics that help us move forward in a decarbonizing world?' And so, that dialogue is happening all the time. And then there's some clients who are saying, 'I don't want to own any hydrocarbons,' which I actually disagree with that view. And I can talk about that later. One of your sister universities announced they're divesting, which I don't believe is a good answer at all. In fact, I think it's a bad answer, but we can talk about that all day long. But so, the capital markets is becoming the real engine of finance. And I need to segue into that for a minute because post-financial crisis, more and more of global economic activity is happening through the global capital markets. And that's where you're seeing this reallocation of capital. You're seeing people who are choosing to move away from one issue or another and are making active decisions in terms of how to invest and where to invest. And this is just the beginning. This is not changing the world fast enough though. So, let me be clear on this. We're seeing preference changes, but do I believe what's going on in the last year is going to be changing the pathway of a more decarbonized world? Probably not. Maybe on the margin, and we all are thrilled on the margin. But if we're going to move forward, we need, and MIT certainly understands this, we need huge investments in finding new technologies to bring down the cost of green. Whether it's green cement or green hydrogen or green steel or green agriculture, it took 30 years to bring down the green premium for wind and solar. So, it's competitive to other hydrocarbons in price. And what we're witnessing in America today and throughout the world, we are seeing rising energy costs. We're seeing inflation that is being created by environmentalism because we are changing supply without changing demand. We actually are witnessing one of the largest increases in hydrocarbon demand in 2021. And so, we're not going to get to this decarbonized world that we wish if we don't invest in new technologies that rapidly bring down the green premium. And so, that's the exciting thing because I do believe there are going to be huge opportunities to invest in technologies and industry that rapidly change our carbonized world to a more decarbonized world. But it's a lot more complex than just having a bunch of investors moving out of some hydrocarbon companies. Because keep in mind, if a foundation or an insurance company or a pension fund says, 'I'm not going to own any hydrocarbons.' Well, somebody else is. So, you're not changing the world. We don't change the world at all. You may feel morally fine. But in my view, it is those pension funds, foundations, endowments that they should have a loud voice with their companies to move forward, with society moving forward. And so, I don't believe divestiture is the right answer, but debate, conversation with the companies as they move forward. But as I said right now, I actually am really worried that as we move into COP26 and more and more governments are moving forward on this, they're not changing the demand curve, they're changing the supply curve, which leads to higher inflation. And my CEO's letters talk about how we must rapidly move to a decarbonized world, but at any movement, it has to be a just transition. And we're doing everything that is not a just transition. There are shortages of coal in India. We're rationing energy now in China. We're seeing the biggest increase in natural gas in years. Oil prices at the highest levels they've been since 2014. This is because policy is about supply, not about science and technology to rapidly substitute hydrocarbons. And that's going to be the answer. How do we create new technologies that will rapidly substitute at equivalent valuation than hydrocarbons. Or we can do a giant carbon tax, but that is pretty unfair and unjust. And so I don't know how you balance this out, but to bring it back to your question, we are seeing a rapidly changing universe of investors who are looking for a durable portfolio that will withstand the whole issues of climate risk and then on the whole transition risk. And so this is just the beginning, but it's going to be delayed in my mind if we have rising inflation like we're experiencing, and that's probably my biggest angst today, not that the capital markets are not moving fast enough. The capital markets are actually moving faster than society. And so there lies my angst right now and my angst is about this whole issue of inflation that is being created by sustainable strategies, but they're sustainable strategies for the short term and we're not focusing on what is the impact on society. What is the impact? And as we all know, Deborah, we're living in a very polarized world. We're living in the most polarizing country probably in our lifetimes and it's very hard for me to see America moving forward in the proper way without having a conversation about how do you create a just transition?

Well, let's be clear, transparency is transparency. We see all the ugliness and all the beauty. And so I'm a big believer in transparency. And transparency will allow us to better understand how every company moves forward in a transition. We are not dictating how a company goes forward, what we're asking each company to be transparent and tell us your pathway. And every company has your pathway, and through that transparency, I do believe we move faster as a society. And so, yes, we are a big advocate for public disclosure. Right now, we're advocating for TCFD. There is high probabilities that the SEC is going to ask that of public companies. The EU has already said that everybody's going to have to report under TCFD. And so, we're creating a taxonomy that we can agree upon. The implementation and the accounting standards, we have not agreed at all yet. As you know, European accounting standards are very different than the US accounting standards. So, we can't even agree on the mundaneness of accounting. But if we're going to be judging every company, we need to judge every company, whether they're domestic or international, with the same taxonomy, with the same lens to really understand how each company is moving forward. And that's what we're advocating. And I do believe as I said, our governments are going to ask that of every company. But until we have a real certifiable taxonomy, we hope that this disclosure is not going to be... there's going to be a safe harbor for a number of years. Because until we have a proper understanding of a taxonomy, one company may be using some other form of metrics, and another company could be another one. So, it's going to be hard to judge and measure until we have unanimity in terms of how we were going to be judging everybody. But the disclosure right now is voluntary. And but more and more companies are voluntarily disclosing for TCFD or for SASB in the United States. And this is just accelerating it really rapidly. More and more companies are willing to do this, but that again leads me to another aha moment. Once again, where society is asking public companies to do all this disclosure, regulators are asking public companies to do all this disclosure. Now, depending on what disclosure means, if they're asking us to disclose scope one under TCFD, we can all do that. But if they're asking us to disclose scope three, which means we're going to have to disclose all our suppliers, all the top and bottom users, that's going to create real disruption in the world. In fact, it's going to create a real problem between big companies and small companies because the big company will become or the banks or the asset managers are going to become the environmental police. Okay, no company wants to be considered the environmental police. And this is one of the things that I'm worried about, and I have been talking to many heads of state saying, 'It's up to government to regulate. Don't ask the private sector, big large public companies in the private sector, to be the environmental police.' But that's what's going on right now, which is going to lead to some very bad outcomes, too. It's going to lead to an arbitrage, which capital markets does all the time, capitalism does. It's going to lead to this really unusual arbitrage of public companies divesting of assets, and they're just going to private companies. The world doesn't change its carbon footprint. It just goes from public to non-public. And so, once again, our policies that are being created by governments worldwide, in my mind, reek of greenwashing. And this is from the governments because they're only asking public companies to move forward, not the rest of society. And that's going to lead in this very polarizing world, even more polarization, more unrest between big and small, more social unrest. And so, unless we get everybody buying in, it's going to lead to some big social issues. And so, I'm a big believer in disclosure. I want to move forward, but what I can tell you, Deborah, the public firms, the public capital markets, are moving faster than any government and moving faster than all of society. And we just need to be mindful that that could lead to some very bad unintended or intended consequences. Most people would say they're unintended, and I would say, 'Well, you should have known.' But so, that's why I kind of hesitated saying unintended consequences. Because I don't believe they are. And so, these are some of the issues we're living with right now. But let's be clear, BlackRock, we're pushing every company to report as much as they can, so we have better transparency, so we better understand the essence of each company, how they're moving forward. We're not advocating for scope three reporting, by the way. I mean, at least what we're looking for is just scope one. Tell us what you're doing. Tell us how you're moving your pathway for decarbonization. What is your pathway? And we'll see how this all plays, but hopefully we can address many of these issues at the COP26.

No, not at all. I think the most... I think companies that are focused on all their stakeholders create the most durable long-term profitability. And so, the fiduciary standard that you suggested related to the shareholders are the biggest beneficiaries of that. We are not telling a company how to move in a sustainable world because if we have to tell a company how for them to move forward, then they should not be running the company. We're asking each company to identify and tell us how are they moving forward. We're asking each board, tell us how you are focusing on all your stakeholders. How are you focusing on your, especially in a COVID world, how are you focusing your employees and your employees' health? In a COVID world, how are you connecting better with your clients worldwide? And in this deglobalizing, polarizing world, how are you building your relationships in every community, every community where you work? Whether it's a community within the United States that are very different or how are you building your stakeholder in different countries, whether it's Mexico or in Japan or Italy or China or the United States. How are you building that? So, to me, it's all consistent and the companies that are focused on their stakeholders do produce the highest and most durable profitability so their shareholders are benefited. Related to... you asked me specifically on climate and climate risk, our job is to judge the output of a management team in a company, not for us to be telling them how should they move forward. If we disagree, we may vote against them. But because we believe that if climate risk is investment risk and we believe that this company will be impaired because they're not moving fast enough and/or we're seeing a company in their industries moving faster, then we may be reallocating capital away from that one company and buying more of the other company. So, that's that reallocation of capital that we're talking about. So, I think it's actually very consistent. But let me just step back for a second. In the US, we have the highest standards of fiduciary standard rule of any country in the world. In Europe, you can invest in sustainability because sustainability is a societal demand. So, you don't have to quote-unquote maximize profits in Europe. In the United States, under the fiduciary standard rule that the DOL has created, which in our conversation with the DOL, I believe they're going to be modifying it a little bit. The only fiduciary standard you have is to maximize profit. And you have to justify in the United States and document why you believe, let's say, climate risk is an investment risk. This is why at BlackRock we're spending huge sums of money, huge hiring of talent in this area to build the best analytics and data to understand climate risk as investment risk. And so, our Aladdin system, we hope that one day will be one of the world-class technology systems that help analyze climate risk. And so, we believe we all have the... we may be wrong. I mean, here, as long as you justify you have an investment decision and you're doing it on investments, not on social views. You meet all the standards of the Department of Labor on that. And so our theory that climate risk is investment risk and it will impact each company specifically. And so we have to judge it that way. And we hope through our analytics and satellite imaging that we really show where climate risk is the most impacted. And then obviously we have to work on transition risk at every corporation level and see how company A and B is moving. But I believe that's our whole foundation. We want to have the analytics and data to do that. So we are as good of fiduciaries as we possibly could be in terms of meeting all the standards in the United States.

So we've been very methodical in building on our technology. We've done a couple strategic acquisitions of models and technologies to help us understand that right now we have as good as satellite imaging and then you overlay a model of climate and how much climate change and how that overlay will show whatever it's water table or heat or wet bulb issues related to farming, all the different models and we can determine what, and then you overlay where let's say mortgage-backed securities or commercial real estate or municipal bonds, you can see what asset is going to have the biggest impact from different changes in temperature and what does it mean. And as you suggested, as you get better disclosure by each company we're going to be able to be better judging beyond climate risk but how each company is moving forward on a decarbonized path. And through all that data we're going to be able to better judge, especially industry to industry, judging every company that's in one industry will be able to better measure how each company is moving forward on this and are there stranded costs, stranded losses that we have that are going to be impacted and all that. The one thing I should just pause, close to two-thirds of the money that we manage is on behalf of our clients is retirement. And so the assets that we manage, all nine plus trillion dollars, more than it's retirement, it's long-term. And so these issues like climate risk and the impact out 10 years has significant issues for us and our asset owners. So we're building out this data and analytics. In the next few weeks we're actually going to be rolling out Aladdin Climate to a couple of our large clients. They'll be our beta site to see how they're utilizing it and what to do. We did a couple other acquisitions of teams related to transition risk and try to overlay that and as you said, with more and more disclosure we're going to get a slew of data. And taking that data and analyzing it, we did a minority investment in another company that we have access to their models to overlay transition and transition risk to help us better understand how to move forward. So, our objective is to make Aladdin Climate as a pivotal tool for our clients. A pivotal tool that they can rely on in assessing the impact of climate risk or transition risk.

Well, let's level set first. A deglobalizing trend, onshoring supply chains, the trends for the emerging world are really poor. You add COVID. What COVID has done in terms of the inequalities of what has happened, the degrees in which access to vaccinations in a short period of time, the emerging world is... the dispersion between the developed world and the developing world has widened dramatically. We are seeing greater and greater inequalities worldwide. So, let's just start there. Two, it has been a very rough ride for the private sector to invest in the emerging world. We've seen flip-flops of governments. We've seen big changes. And so, there is less and less capital that is going into the emerging world. Now, let's talk about the IMF and the World Bank. They were created about 80 years ago. They were created under one model, and that model was based on bank balance sheets. Historically, the lenders to the emerging world were banks. As the subordinated lender behind, let's say, the World Bank or the IMF. The financial crisis all but stopped banks lending to the emerging world. Just too costly of capital. And so, to have private capital to invest in the emerging world at a time when it is estimated for the emerging world to transform itself to a more sustainable world, it is estimated we need a trillion dollars a year dedicated to the emerging world over the next 30 years. Right now, it's estimated only 150 billion dollars is flowing into the emerging world. Now, that may sound like a lot of money, but it's not. And then, I would just overlay the private sector's experience on Argentina. About 6 years ago, Argentina was recapitalized by the IMF. The Argentines and the IMF really encouraged the private sector to go in and invest. Private sector invested about 30-40 billion dollars into Argentina. And 5 years hence, new government, and now the Argentines and the IMF asked for the private sector to restructure Argentina at 50 cents on the dollar. And the IMF got 100 cents back or is asking 100 cents back. And as a result of that, there's less and less capital going into the emerging world. So, I needed to level set you how I came up with that process. So, the level setting is we have to just be honest, there's just less capital today going into the emerging world than any time in my 40-plus years of being in finance. So, if we're going to truly be honest that we want a decarbonized world and we want to limit to a 1 and 1/2 degree increase, we have to get the emerging world to be moving forward. Okay, how do you bring a trillion dollars of capital in every year? And it goes back to when I was a young Turk in Wall Street when we started the mortgage-backed securities market. You had somebody taking the first loss piece or the borrower and then you had some government agency in between you and the borrower. So, my statement at the G20 was if we are serious about climate change, if we're serious about helping the emerging world, which I don't know if we are. Let's stop talking about the nice talk. Let's get to the realities. If we're serious about this, then we're going to have to reimagine the IMF and the World Bank. And in reality, I think the first loss should only go to the country where the loan is. But the first loss away from the country, the second loss piece should be the IMF. And then we'd have trillions of dollars of capital. If you have that type of financial protection, depending on the project and all that stuff, you're going to have a lot more capital going after that. And so we have to reuse our experience in the like the mortgage-backed securities market of how to really attract a lot of capital that's going into the emerging world. And ultimately the capital markets will balance all that out. So if it's a good value, a lot of money will flow in there. It'll get cheaper and cheaper and that's all good for the emerging world, but we're not going to get there. We have to start with a statement and say, we are not getting there right now if this is where we want to go. And from what I hear this is where the world wants to go. We really want to have a decarbonized world. Okay, we really want to have a decarbonized world. How are you going to address this gap, this 85% gap in funding? How are you going to address it? And so, I had a conversation with a head of state today. And I brought this up again. The reality is if we're serious about this, the equity owners, and America's one of the lead equity owners of the IMF and the World Bank. France is, Great Britain is, China, on and on. The equity owners of these multilateral institutions have to ask themselves how important do they want these agencies to lead this change, this climate change, this climate risk. Are they serious about climate change? Are they serious about they want to tackle it? And the only way we're going to be able to tackle it is two-pronged. One, finding ways of attracting more private capital that we can't do... right now America's really good at deficit spending. That's going to end sometime and we're going to have a day of reckoning with all our deficits and same with a lot of other countries. We're not going to be... countries are not going to be able to do all this deficit spending. And so there's trillions of dollars of private capital ready to be put to work at a risk-adjusted basis. And right now at a risk-adjusted basis it's pretty uninvestable in a lot of parts of the world especially where they need so much attention parts of Africa and all that. The last thing I would just say when you overlay where climate risk is going to be the worst, all the models, all the studies show it is the equatorial part of the world that will have the most severity from climate risk. They'll have rising heat. They'll hit the wet bulb level where humans cannot work outside because the heat and humidity is so high. Higher heat is changing agricultural cycles, is the heat so early that you don't have the monsoons in Southeast Asia. I mean all of this is changing everything. I mean another big question with rising temperatures, if we have rising temperatures, the pollinators may not arrive in time to pollinate. Pollinators generally come around May, June in the northern hemisphere and the opposite in the southern hemisphere. All these issues are very disruptive. I mean here we are talking about energy crises in Europe. Why? Because the rising temperatures have changed the wind patterns of northern Europe and so they have now a gas shortage because they didn't have... they had to use more gas in summer because we didn't have enough wind. I mean I can go on and on and on but back to the emerging world, if we want to be serious about it, instead of just nice talk, we have to be open and honest in talking about how can we get there. And I can just tell you the private capital is not going to go there to the extent that is necessary. And if the world wants to get there, there's going to have to be that multilateralism, which is an absent thought in the world today. And we're going to need to reimagine those agencies that have played a very significant role, but their role has been diminished over the years, and we need to find ways of re-engaging these wonderful historical institutions. And they need to be thought about in a different way to really bring the capital forward.

You know, it's no different than when I have these private conversations with regulators or policy makers or heads of state. If we are serious, let's all move together. Let's get all of society to move forward. If we're serious about this, we have to focus on the net zero platform for the world. As I said, divestiture is not an answer. And in fact, we're urging public companies not to divest anymore. Because I don't want... if we're only doing disclosures for public companies, why do I want all their divestiture to go to a private company where the footprint will be even worse. One last statement on that and then I'll get to my last point. I had a conversation with one of the biggest hydrocarbon companies that is in an emerging world. And they want to get out of it. They want to leave. And the government of that country is begging them to stay because it means that their enterprise is going to be going from a big public company and they would sell to a private entity in that country and they'll be even more polluting. And so this is why this whole concept of divestiture, I want getting back to disclosure. I want transparency, but I want transparency for all. And if government policy is not transparency for all, keep everything in a public company so we can watch how they navigate down, how they move forward and all that. So my comments to everybody who's listening, this cannot be emotional. This cannot be short-term. Focus on policies that really work in the long run and it can't be greenwashing and unfortunately so much of the policies are greenwashing. And as I said, nothing's more greenwashing than divestiture because it doesn't change the footprint of the world. And please everyone focus on how do we create a just transition. And for all those at MIT, I think the next 50 unicorns are going to be technologies that are created but something related to sustainability. The world does not need another unicorn food delivery service.

Good. Thank you, Deborah, and thank you, everybody at MIT. Fantastic place.

Bye-bye.