The Bid podcast

JONATHAN POSEN: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm Jon Posen, your host for this episode. During our sustainability miniseries, we've covered sustainability in and beyond climate. We've talked about new technologies propelling us towards the energy transition, corporate culture, diversity, equity, and inclusion, and how to find belonging in the workplace.

Today, we're wrapping up with Paul Bodnar, BlackRock's new Global Head of Sustainable Investing. Before joining BlackRock a few months ago, Paul has had a long and distinguished career in sustainability. He's worked in environmental finance in emerging markets. He was the chief strategy at the Rocky Mountain Institute, and he also served on the National Security Council during the Obama administration, where he helped negotiate the Paris Agreement, and at the US Department of State.

On today's episode Paul will share the most pressing issues he's thinking about when it comes to climate and sustainability.

Paul, thanks so much for joining us today.

PAUL BODNAR: Thanks, Jon. It's great to be here.

JONATHAN POSEN: So, you recently joined BlackRock as our Global Head of Sustainable Investing, but you've spent much of your career in sustainability. Was there a moment where you knew that that was where you wanted to focus your work?

PAUL BODNAR: So, when I was in college, I studied international relations and arms control. I was interested in the hardest problems to solve on a global level, and I thought that controlling nuclear weapons might be it. But once you see the data on climate science, you can't really unsee it, and so I decided that that's where I should focus my efforts; at the intersection between solving this global environmental problem and the difficulty of doing so in the context of international relations. So, that's how I got started, and I've had a fun journey through the financial sector and government and nonprofits along the way. But every moment has been interesting.

JONATHAN POSEN: So, Paul, what's changed over the last two decades that you've been working in this area? What's surprised you?

PAUL BODNAR: So, when the world started working on the problem of climate change and really began to understand it and figure out what to do about it, it was really understood as a problem for governments, which makes sense. As societies, we look to our governments to solve collective action problems, and what is a bigger collective action problem than climate change, which spans across borders and actually also across generations? What we learned, though, along the way is that action by governments is not enough. And so, even though we spent the first 25 years of international problem solving on climate change negotiating a global Climate Agreement among governments, what we've learned is that you've got to think about how the global economy actually works if you want to decarbonize that economy. Greenhouse gas emissions arise from every kind of human activity, from power plants, from driving cars, from agriculture, from heating our homes, and so it's an enormously complicated problem. And having governments sit together and negotiate targets is a good step. It kind of gets everyone on the same page about where we're trying to get to, what generally needs to be done to accomplish that, how we can all move in lockstep along the way. But when it really comes to thinking about how as opposed to the why of getting a net-zero global economy, that's where you need to harness market forces. Because the global economy is not divided into 195 jurisdictions of the United Nations; it's truly global. We need to think and act like the economy we're trying to decarbonize. You have global supply chains, global markets, shared technology trends within sectors, and so if you look at the global economy from the lens of climate change, it actually is more logical to see it as a series of industries or sectors or segments of the global economy, not your political map of the world. And so, it's taken a while, especially since the Paris Agreement was concluded in 2015, for the world to understand that job is not done, that that's simply concluding that agreement wasn't enough. But rather, now we need to problem solve along this other dimension of how economies are connected across borders.

JONATHAN POSEN: Since leaving government, you've continued your work on these difficult questions, first in the nonprofit sector, and now you've returned to the private sector. What brought you to BlackRock?

PAUL BODNAR: Well, if you're like me and your question is what is the biggest impact that you can have, then you kind of probably shift from place to place as different stages of a problem solving progresses, right? So, I mentioned that there was a time when governments were in the spotlight, and then we did the Paris Agreement. After the Paris Agreement was done and people began thinking more specifically about how we were going to shift from coal, oil, and gas to renewable energy or from internal combustion vehicles to electric vehicles or from carbon intensive forms of making steel and cement and chemicals into zero-carbon versions of that or how we are going to move goods across the global economy on zero-carbon ships or shift away from traditional jet fuels to biofuels, answering those challenges is different than negotiating a global climate agreement. I think the thing that I learned after leaving government was the positive power of markets to catalyze change. So, there wasn't any ride share in San Francisco 15 years ago. Now there is in Ulaanbaatar, Mongolia. Why is that? It's not because government policies made it so. It's because private sector innovation, business model innovation, and technology made it possible. And so, although sometimes, the picture on climate looks bleak when we consider how far we need to go in how little time, the good news is that we haven't necessarily activated all of the forces for good that we can to get us there, and that's what I've been focused on both at RMI and now at BlackRock.

JONATHAN POSEN: Paul, I'd love to dig a little deeper into one of those sectors. You mentioned getting goods across the world through ships and how we can decarbonize that industry. What are some of the ways that an industry can specifically decarbonize itself?

PAUL BODNAR: Yeah, so you think of a sector like shipping, I think 90% of world trade occurs through shipping. Ships burn oil, diesel. They're pretty heavily polluting. It's like having 50,000 floating power plants all around the world, not necessarily within the borders of particular nations. How do you get from that state to a state where you can still support global trade and actually expand global trade, but moving the goods on ships that don't emit any carbon? And the way that this has progressed in the shipping industry, I think, is a really interesting model for the future and other sectors of the global economy. So first, what you had is the governments of the world and industry. So, the ship owners and manufacturers of ship technology got together in the context of the International Maritime Organization of the United Nations and negotiated a target to reduce emissions from shipping by 2050 initially by 50%, so a 50% cut by 2050. They all agreed that by consensus. And because they were able to quantify what an average ship should look like in terms of the -- to get really specific about it -- the grams of CO2 per ton nautical mile, which is moving a unit of goods a unit of distance across the open water, how much carbon should be emitted per unit of service that the shipping industry provides to the global economy, that certainty was then used by banks to set themselves targets for what kind of ships they would finance going forward. It was then adopted by the customers of the shipping industry built into their procurement standards, so they could say, hey, we're not going to ship our goods on ships that are not compliant with this evolving standard. And what happened was that you had a whole ecosystem around an industry -- the corporates that own the assets that do the emitting as well as the customers of that industry, the capital providers to that industry, the regulators of that industry, all converging on a single vision for how you get from here to a future decarbonized end state. And by the way, that target of 50% cut by 2050 is not compliant with what the world has said it wants to do by 2050, which is to get to net zero. But it was a really important confidence-building measure where you got all the key stakeholders of an industry together, getting going, and then they can go back to the table and say, all right, now we have more confidence that we can actually do this. That same approach can be applied to other key sectors of the global economy -- steel, cement, aluminum, chemicals, other forms of heavy transport. We've moved into a more collaborative model, which ultimately probably has a much greater chance of success in getting us down this really hard road we need to go.

JONATHAN POSEN: Let's talk about that hard road. You mentioned 2050. How fast do we need to get there, and why is it important to get there quickly?

PAUL BODNAR: Right, so the math of speed is pretty daunting when it comes to carbon. The world has basically aligned on the goal of trying to limit global warming to well below 2 degrees, and the new standard that most governments have adopted and also a lot of companies and financial institutions is to actually try to limit it to 1.5 degrees. That is a very challenging thing, considering we're already at 1.1 degrees, and there's been some very stark scientific research showing that even the difference between 1.5 and 2 degrees as an outcome is dramatic in terms of the impact on GDP, on human life, on ecosystem balance, and so on. Now, how do we achieve 1.5 degrees? Well, the math is pretty simple in that we have to limit the total amount of carbon that humans emit into the atmosphere as to avoid a certain concentration of greenhouse gases that causes the greenhouse effect and global warming. We need to limit total carbon emissions going forward to roughly 500 billion tons between now and indefinite, and we're emitting carbon at a rate of about -- call it 50 billion tons. So that's 10 years or a little less than 10 years of runway at the current rate. And when you think about those absolute numbers, the longer we wait before starting to cut the carbon that's associated with economic activity, actually, the steeper cuts we need to make because of the compounding effect of delay. So, it's a very daunting picture, and it's why this is going to be the greatest economic challenge probably the world has ever faced, to get us from here to there. What I will say is that the benefits of doing this are also very clear. Whether you care about health or productivity or jobs or GDP or any other major indicator, it is desirable to do this and to succeed. And yes, the adjustment is hard. There are risks associated with going through this process. But that set of risks, which is called transition risk, those are manageable, and they are temporary, whereas the risks that we are left with if we don't do this of a hothouse Earth, those are much greater. And they're permanent. So those are the stakes, Jon.

JONATHAN POSEN: This is clearly going to be a really difficult project, and it's going to mean totally transforming the economy from electric vehicles to new decarbonization technology. And what happens to all the other technology that's on the road, the internal combustion vehicles, the power plants that have been set up for a 30-year timeline?

PAUL BODNAR: Yeah, so that's a great question. I think the simplest way to really wrap your head around what net zero means in practice, getting from here to there, is you look around you, and you think about all the things that emit carbon today. Whether they're power plants or cars or commercial buildings or container ships or cement factories -- these things all produce essential services for the modern economy. We want those services. We want hot showers and cold beer. We want all the things that these assets enable us to do, and in fact, we want to expand access to those services to more and more people as economies develop. The problem we have is we need to scrub the carbon out, so we need assets that are providing those services that don't emit carbon. And because we need to move to net zero quite quickly, we're not just talking about minor adjustments. This is why we talk about electric vehicles and not just marginal improvements in fuel economy. This is why we talk about net-zero buildings and not just buildings that use a little bit less energy or slightly more energy-efficient ships. We're talking about major turnover of capital stock in the global economy, and that has two parts to it. One is we obviously need to develop the technologies of the future, some of which are here today, right? Electric vehicles are not a dream. They're here, and within a small number of years, electric vehicles will be on a cost parity with internal combustion vehicles. But on the other hand, as you mentioned, we also have a lot of stuff already, whether it's internal combustion cars or coal-fired, gas-fired power plants, traditional ways of making steel and cement. What do we do with those? And the challenge of decarbonization is that it's not enough to build a green economy on top of a dirty one. We need to actually pull out of service the things that are causing emissions today to make room for the clean alternatives of tomorrow. And that's the tough part, right? What do you do with power plants that were designed to operate for 40 years if climate science tells you you need to shut them down in 10? How do you persuade consumers who have a car that they were planning on keeping to trade that in for an electric vehicle they weren't planning to buy? So the challenge of accelerated retirement of high-carbon assets in the economy, that's where policy really needs to play a role because people will not make these decisions by themselves. And the provocative way of saying it, Jon, is building a wind turbine doesn't reduce greenhouse gas emissions. Shutting down a coal-fired power plant does. So, if you're interested in reducing carbon, you need to think about, how do you shut down a coal-fired plant? How do you do that in a way that takes account of the workers who work there? How do you do that in a way that takes account of the community that depends on that plant or even the owner of that plant that paid money to build it? So, these are the tough questions that we'll need to solve, I think the toughest questions, in the coming years.

JONATHAN POSEN: Now, Paul, the Paris Agreement was COP 21, the Conference of Parties, and this fall in November, we're going to see COP 26 in Glasgow. Do you think that question of accelerated retirement is something that is going to be a focus of COP 26, and what else do you think the parties there should focus on?

PAUL BODNAR: So, it's a little depressing that we're at the 26th annual summit on climate change, and global emissions are still creeping upwards. And that indicates the fact that it's time for a step change in thinking about why we get together every year in this forum and what we're really doing, because as you mentioned, COP 21 in 2015 is where we did the Paris Agreement, and that itself was the culmination of 21 years of trial and error to try to get nations to figure out how to agree on where they want to go with climate and how they're going to get there. We're still, however, stuck, I would say, in a mentality where governments get together every year at these summits, and they think they're negotiating something. We're not negotiating something anymore. We've already agreed to do something, and the question is how we're going to get there. So going forward, I think success at these summits involves converting them not into a set of bureaucratic negotiating sessions among 200 countries but a check-in on how the world is doing in making progress on this very complex problem across a very complex number of sectors and recognizing that this is an unprecedented project in human history. It's about action, action, action, not about negotiating and talking and giving speeches. So, it's hard to make a pivot like that, and we'll see how the UK government does. I know that they have taken a really serious approach to this action focus. You're going to probably see an unprecedented mobilization of private sector and financial sector actors showing up. But over time, what you want to see is evidence: evidence that we're bending the curve of emissions downward, evidence that we're building a cleaner economy that benefits more people, evidence that we're addressing head on the issues of transition for communities that depend on high-carbon assets or high-carbon manufacturing. That's the real standard for progress that we need to see.

JONATHAN POSEN: Paul, this is clearly a very scary picture you paint. What gives you optimism?

PAUL BODNAR: Oh, I think what gives me optimism is that we've finally engaged all aspects of society needed to solve the problem. Back when we thought it was just a job for governments, national governments to solve, ministries and departments of national governments getting together to negotiate things, that might have been logical on some level, but it was never destined to help engineer a total transformation of the global economy. But now we have cities. We have states, companies, financial institutions. Probably, the company that makes your breakfast cereal has a net-zero commitment. So, we finally engaged the private sector, civil society, and other aspects of society to really help lock arms and deal with this, and I think if you've got humanity aligned around solving a problem that poses an existential threat, you've got to bet on the fact that we're going to solve it.

JONATHAN POSEN: What you just said describes an integrated picture of how a lot of parties need to come together to solve these issues. Are companies taking a broader view of the problems they need to solve?

PAUL BODNAR: Yes, I think climate is a good testing ground for a broader awakening on why it's important for companies to get engaged in sustainability, not just to shape the operating environment for their success, but also to differentiate themselves versus their competitors, depending on what sector they're in. And of course, that is about more than just dealing with climate change. It's about promoting other environmental goals like biodiversity, water quality, air quality, as well as issues beyond environment that go into the social realm, promoting the opportunity for economic development, reducing income inequality, promoting gender diversity and racial diversity and inclusion. So increasingly, companies understand that their financial performance is promoted by a focus on these things.

JONATHAN POSEN: This hits at the intersection of the various topics of this miniseries: climate, corporate culture, diversity and inclusion. Can these factors tell us anything about a company's ability to deliver for its stakeholders over time?

PAUL BODNAR: Yes, investors are increasingly using more sophisticated methods to investigate how a company's performance on ESG metrics affects its financial performance, and we're finding that, indeed, better performance on ESG metrics is correlated with better financial outcomes as well. For example, it's becoming clear that companies that have a higher percentage of women in management tend to do better from a financial performance perspective. We've also looked at factors like employee satisfaction using data from Glassdoor, where we use unstructured data and natural language processing to really investigate social issues that are critical for the performance of companies, and we have found that a strong employee sentiment about their employer is a forward-looking indicator of higher corporate profitability. So, these sorts of efforts are just the beginning. We and others are strengthening our ability to use a wide variety of sustainability data paired with these sophisticated computational approaches to understand what social factors are most material to investment returns alongside the environmental factors we've been discussing that are already relatively well understood.

JONATHAN POSEN: What areas of sustainability do you think aren't being talked enough about right now?

PAUL BODNAR: So, I think it's easy to talk about global problems like climate change. The harder ones are the ones that manifest more locally, so local pollution, environmental justice issues. These actually have really big economic impacts, and it is harder to get people to pay attention to them at a global level. The same is true for a lot of social issues, that countries and regions don't have the same approach to social issues, so it's hard to roll everything up and have a global conversation about racial injustice, for example, because even though that issue has crystallized very clearly in the U.S. context, it's treated very differently in Europe or in Asia. And then there are problems which are global but are kind of more invisible, and one great example is ocean pollution, right? We don't necessarily see ocean pollution in our day-to-day life, but it is growing at an alarming rate. I think the projection is that there's going to be more plastic in the ocean by 2040 by weight than fish. It's another collective action problem like climate change, but because it doesn't affect people in a uniform way around the world, it's much harder to deal with.

JONATHAN POSEN: Paul, it's been a pleasure having you here today, if a quite sobering discussion. I just want to close by asking, what has been the most meaningful moment in your career in sustainability?

PAUL BODNAR: Well, it is hard to beat the Paris Agreement. It was such an honor to be part of that process and to be in that room in Paris at the moment when the gavel came down. And after 25 years of trying and failing, the global community finally developed a consensus about what we were trying to do here and created a framework for nations, at least, to try to solve that problem. It was a moment of euphoria and emotional release for people who devoted their whole professional careers, in some cases, to trying to solve this problem and had reached certainly not the end of the journey but a major, major milestone that will hopefully be remembered in history as a turning point in dealing with climate change. I also would say that there are some moments that I treasure equally, like the commissioning of a piece of equipment to stop polluting from a chemical factory in China at a micro level; those moments where you work in your career on something even at a small scale. But you definitively solve a particular problem in the area of sustainability, in this case, pollution, and you get to see a polluting smokestack stop emitting carbon. That's also a very rewarding thing. So, I think for people who work in this area, if you have a chance to do something at a global scale and something at a very local scale, that's a really rewarding combination, which I hope to continue in my career.

JONATHAN POSEN: Thank you, Paul. Thanks for being with us today.

PAUL BODNAR: It was a pleasure.

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