A world in transition

ZACH BUCHWALD: Welcome to the BlackRock Future Forum. I’m Zach Buchwald, and it’s my pleasure to serve as your host today. At the Future Forum, we bring together prominent thought leaders to discuss the biggest topics that shape today’s investment landscape and that, in many respects, define our future.

Since we launched the Future Forum, our news feeds have been dominated by so many different types of crisis: health, racial, political, environmental, the retirement crisis. Through the Future Forum, we explore the investment implications of these issues. We’ve dedicated sessions to the 2020 election, the path to net zero, China’s expansion on the world stage, the ongoing health crisis. The Future Forum is designed to help us as investors make sense of a world that is in constant change.

And change itself is what we’re going to focus on today. We’re not quite in a post-pandemic world, but we’re also not living anything like our pre-COVID routines. More than ever, the pace of change is accelerating as the future unfolds, and as investors, we don’t really have the luxury of taking a wait and see approach.

Every day we see new developments in the pandemic and the recovery, supply chain disruptions, the spending bills in Washington, the debt ceiling crisis, political tensions here in the US and around the globe. The list goes on. Each of these situations has a rippling effect of new risks and new opportunities.

To help us explore these topics, we have assembled some of the foremost thought leaders with us today. In our first segment, Ray Dalio, founder of Bridgewater, and BlackRock’s Rick Rieder, will come together publicly for the very first time to take a close look at the markets, along with BlackRock investor Kate Moore.

Rick and Ray have almost eight decades of investing experience between them, and we’ve ask them to give us both a look backward as well as a look forward, and to explore what’s driving the markets today.

We’ll then hear from Secretary John Kerry, who’s fresh off a world tour leading up the UN Climate Change Conference. We asked Secretary Kerry to preview some of the big action items for Glasgow and to discuss how we’re going to get more out of public/private partnerships. Paul Bodner, BlackRock’s head of sustainable investing will lead that discussion.

Each session will be followed by actionable investment ideas. We’ll have more insights from Kate and Paul, and we’ll also hear from Elizabeth Burton, CIO of Hawaii’s employee retirement system as well as Calvin Yu, head of BlackRock’s client insight unit. 

Now, before we get started, I encourage you to familiarize yourself with the new tech interface that we’re using. We have an interactive agenda, so there’s a place to ask questions, a chat room, and the opportunity to participate in real-time polls. I’ll join you live in the chatroom to discuss the content and to analyze the polling results, and following the conference, you can access replays of all of the sessions on this platform, as well as on the BlackRock website.

Now, to start us off, I’ll pass the mic to Kate Moore. Thanks again for joining us today, and now over to you Kate.

PAUL BODNAR: Thanks Zach. I'm excited to be joined by Secretary Kerry today. I had the pleasure to work under his leadership as we negotiated the Paris Agreement. And, Secretary Kerry, it’s great to see you back in the arena. Thanks so much for joining us.

JOHN KERRY: Thank you, Paul. I'm delighted to be with you.

PAUL BODNAR: So, you’ve been on a world tour recently, including to China, in an effort to drive forward the agenda to lift climate ambition and also the pace of implementation of that ambition. What’s your assessment of the current state of global climate politics? What do you think it’ll take to shift the world from a predominant focus on negotiation to action?

JOHN KERRY: Well, I think that countries all around the world are moving. Fifty-five percent of global GDP is now committed to plans which are real that can hold alive the limit on the rise of temperature to 1.5 degrees and that includes Canada, Japan, the United States, the UK, and the EU. But, unfortunately, that still leaves 45% of global GDP outside of that commitment, and that’s a challenge. 

Many countries, however, within that 45% are stepping up, some of them for the very first time, and there are commitments being made by some of the 20 nations that are the equivalent of 80% of all emissions that are going to raise ambition. So, I anticipate that in Glasgow we will raise ambition more than anybody anticipated. It will be at a high level, but from some countries not yet sufficient to be able to hold the limit to the 1.5 degrees.

On the other hand, I think there is a massive movement in the private sector which we’ve been working with very closely. BlackRock has been a leader in that effort and other American banks, the six largest American banks have been key to putting about $4.16 trillion on the table to help affect and speed up, accelerate this transition. So, I think there are going to be many, many great things happening, but Glasgow is going to be the starting line for the decade of decision, between 2020 and 2030, during which we must try to achieve 45% reductions in emissions on a global basis. 

I'm very, very hopeful that we’re going to have an unprecedented level of effort. And then, with the global stock take, which is part of the Paris Agreement, that will take place in 2023, we have this two-year period now where we can work with countries that are not yet achieving what they need to be and push the curve so that this decade becomes what scientists tell us it must be.

PAUL BODNAR: Thank you. So, let’s talk a little bit about the investment picture. As we know, meeting these climate goals that you’ve mentioned requires massively scaling up infrastructure investment on the order of $4 trillion in clean energy investment annually by 2030, which is roughly triple the current rate. How do you think about the respective roles of government in helping to spur change and get technologies to the point where they’re ready to be commercial through investment and research and development and through policies on the one hand and the role of when – of the private sector in stepping in commercialization on the other hand? How do you see that unfolding maybe in different regions and sectors? Where do you think the biggest gaps are right now?

JOHN KERRY: Well, right now we have a massive gap, the finance gap. As the UN report on finance says, you nailed it, somewhere between $2.6 trillion and $4.5 trillion a year every year for the next 30 years, that’s the price tag. No government in the world, none, has the ability to put that kind of money on the table. And so, it is clear to anybody who has thought about this hard that the private sector is going to be the key mover and shaker with respect to this transformation.

It has to be a partnership though. Government is going to have to step in and help to de-risk, help to provide the guideposts and the rules of the road in order to excite that capital and obviously to give that capital the security, the sense of confidence it needs to have in order to make the longer-term investments. And in many cases, a lot of the capital that’s going to be available is, in not many cases, in the vast majority of cases, that capital is not concessional. It’s going to be looking for a sufficient return on investment. It will be pension funds. It will be different kinds of funds. And it’s going to be the imperative of governments around the world to help provide sufficient concessional money that we can help de-risk, help create blended finance, help to accelerate the deployment of those private sector funds.

The money will be there. The challenge will be, can we produce the kind of government response necessary to give confidence to that capital to deploy? I believe that we can and there are many partnerships that we’re now building individually. 

For instance, the United States has a partnership with Prime Minister Modi in India. India has committed to the deployment of 450 gigawatts of renewable energy. It’s critical that we help, however, with the finance and the technology necessary to be able to reach that goal. And to do that, we’re going to have to work with the government of India to make sure that government decisions are being made rapidly enough, that they hold, that they’re deploying, they’re guaranteeing the laying of transmission lines, that they’re guaranteeing the movement of bureaucracy out of the way so that decisions are made for the siting of land, the land availability, the siting availability. All of that has to be on an accelerated basis and you have to make sure you’re collecting the revenue that is necessary to be able to feed that kind of supply chain, so the fiscal supply chain.

So, you’ve got to be able to have a revenue stream that’s supporting a commerciable [sic], bankable deal. That can happen, but it’s going to take a lot of work by the private sector and government hand-in-hand working together to make it happen.

PAUL BODNAR: Well put. And you mentioned India and I know you spend, and your team spends, a lot of time focused on how to mobilize capital into emerging markets in particular. And we all know that emerging markets pose a special challenge, because that’s where the growth in emissions is projected to be and because climate risk will be unmanageable everywhere unless we make a rapid transition everywhere.

But capital, private capital in particular, traditionally has a harder time flowing into these markets. So, given the urgency of action and the time that it takes to get, rewire big institutions like public development banks or, indeed, to cause changes in the enabling environments of these countries, speed is of the essence, right, as you’ve noted. So, how can public capital do a better job of tapping into private capital markets fast as opposed to waiting for some of these longer-term processes to unfold?

JOHN KERRY: The key to that is really leadership. It’s a readiness of corporate leaders, private sector leaders, to step up and be at the table with government leaders who are prepared to join hands with other countries in order to affect behavior. For instance, we are talking with a number of players, international, EU, Middle East, and possibly even China, for how we can, together, leverage different behavior from those emerging nations. 

In many cases, what will be needed are changes, in some cases, of the law in some of those countries or at least sufficient levels of guarantees from the leadership and the government that they’re going to provide the kind of transparency, the accountability, the decision-making process. The one-stop-shop would be wonderful. But breaking through the bureaucracy of these countries. 

All of these things, you know, we have to accomplish this deployment at a pace that is not easily and normally found within emerging markets. And I think we, governments, particularly the United States and Europe and others, have an ability in many places in the world to leverage better behavior, different behavior and to actually galvanize people’s activities around the urgency of this climate crisis and it is urgent.

We don’t have a lot of time. The scientists tell us we have ten years within which we have to reduce emissions by about a minimum of 40% and that’s why I say 55% is committed, US 50 to 52% reduction. And President Biden set a goal that by 2035 we’re going to have a power sector that will be carbon free. 

So, we’re moving down a very new road and we have to pull these emerging countries along with us in a way that gives adequate level of confidence to particularly, you know, certain kinds of funds. I mean asset managers have to still have a fiduciary responsibility that they live up to and clients are not going to want their money thrown away. They’re going to want it put in something where there’s a sufficient buildup of that confidence level.

It’s doable, but it requires a coordination between government and private sector that heretofore has not been the hallmark of activities internationally but must become a central feature of what we’re doing. We also need a sufficient level regarding the concessional money that’s necessary to de-risk, to take first loss, to do what’s necessary to give the confidence I just talked about. We clearly are going to have to have a solid pot of concessional money that can be the leverage that helps us to be able to catalyze the private sector deployment. It’s in the tens of billions, hundred billion or so, and we have put up at the federal level $11.4 billion that President Biden has committed for this task of helping bring less developed countries along. 

But we still have a lot of work to do to mobilize those tens of billions of concessional funds, and I think that’s the key. I think without it certain funds, certain monies are going to be extremely hard to deploy because the level of confidence is just not going to be there. So, we have to work hand-in-hand with the developing nations far more than we have. We are determined to do that. We’re determined. We’ve deployed teams. 

We've been to South Africa. We’ve been working with Indonesia. We’re working with Vietnam. I'm going to Mexico in a few days. We’re going to be working in Saudi Arabia. We have been several times to Saudi Arabia, and I’ll be going there again in a week or so. They’ll be announcing major programs.

So, there’s a lot of churning, a lot of activity taking place which now means – needs to find that element of security in the deployment of the capital that’s available. And if we do that fast enough and we do it well enough, this transformation is going to be stunning, and it will make a lot of people a lot of money. We have a lot of energy being expended by different corporations and different initiatives. Mark Carney is working to bring asset managers together in order to make commitments about Paris alignment. As that takes place, the market will gain greater confidence. There’ll be certainty.

We have an enterprise called the First Mover Coalition, which we’re putting together with the World Economic Forum. Major corporations are stepping up to make commitments ahead of time about the green products that they will buy, the amount of green product, the type, whether it’s aluminum or steel or sustainable aviation fuel or cement. And some of the largest companies of the world are stepping in and saying we’re going to be part of this; we’re prepared to make those commitments.

That will accelerate confidence about the creation of some of these markets. So, I think we’re on the road to uncharted new possibilities and we need everybody’s help. We need the brilliant finance minds of the world and others to come to the table and help us figure out how we can leverage more effectively and get this moving faster.

By the way, Janet Yellen and I held a second meeting with all the multi-development banks. They are committing to accelerate their deployment of funds and to be part of that effort to take first risk or to de-risk. So, I think we’re in a, you know, we’re in new territory of possibility and we look forward to working with all of you to try to explore that as rapidly as we can.

PAUL BODNAR: So, I know that a lot of the dialogue about climate finance ends up being about green investment and how you can scale up green dollars. But, of course, we won’t solve climate change by building a green economy on top of a dirty one and there’s more and more discussion about how to make sure that the markets are not just rewarding the companies that are already green but supporting companies that are in transition. And we see traditional energy companies playing a bigger role, making bigger investments in clean energy or carbon capture and storage. And then, of course, for some sectors in heavy industry the technologies are still under development that will be cost-competitive with high carbon alternatives today.

How do you see this process of transition for industries that require big investment in technologies? Do you think that the companies of today that are carbon-intensive can play a big role in the clean energy economy of the future?

JOHN KERRY: Of course they can. They have to. I mean it’s imperative. Heavy industry is about 19% of all the emissions or so, one of the biggest contributors. But at the First Mover Coalition, where I was just the other day, the CEO of one of the largest cement producers in the world was talking about how they moved into his sector for green purposes to figure out how they were going to produce the cement in a green way. But in the greening of it, they found that they were producing a far more superior cement. And so, now people are coming to them, not because they want to buy green; they want to buy the better cement.

So, that’s going to happen. That's going to be replicated I think in many different ways. There hasn’t been enough demand, enough focus, enough push on that particular sector. Most of it has been around transportation or around power production. But industry is now going to get a lot more focused and across the, I mean sector-wide across the economy you’re going to see much more focus.

In addition, national laboratories, venture capitalists, general efforts of university research and private sector research are moving much more rapidly to these potential solutions. Now I was just reading an article today about a company that’s actually got a plant out there working at direct air carbon capture. And there are potential breakthroughs, whether it’s going to be in battery storage or another kind of storage or green hydrogen or direct air capture there are certain, you know, defined technologies, about 46 of them, by the way, that the International Energy Agency has listed, 42 of which have yet to be able to be scalable, to be able to be brought up to commercial level. A lot of money is going into those sectors now, some of it from philanthropy, some from venture capital, and some from responsible corporations that are just saying, look, we’ve got to do our share here and see if we can find some of these new ways of doing things. 

So, I think the – I mean look at solar and wind. There’s been a, you know, tenfold multiple reduction in the cost of those goods. That is going to probably go through another tenfold reduction I'm told in some of the new technology that’s emerging as it deploys more and more and as we learn more and more. 

So, I think you’re going to see if people are serious, and they are now I think, I think there’s been a wakeup call and I think people are responding all around the planet. So, there is now not a race for the bottom. I think there’s much more of a race to the top, and that is going to produce new ways of doing things. And just as we’ve been through other transitions in the economy historically, obviously most recently with the 1990s and the major technology boom and the portable telephones and desktop computers and so forth, this is going to be the new frontier for discovery over these next years. And with artificial intelligence and quantum computing and the capacity to build a smart grid across America, I mean think about it. We go to the moon. We can send a rover around Mars. We invent vaccines. We’re curing diseases. But we can’t send a simple electron from California to New York today in order to produce, you know, energy, heat a home, you know, charge the cars and so forth. That is going to change.

And as we build it out, there’s going to be a massive growth in transmission capacity, in the technologies that are producing the power. I think we’re going to race ahead of this much faster than people think, and in my judgment the accelerators are what are really going to govern the marketplace over the course of the next ten years.

PAUL BODNAR: Absolutely. And we see capital markets responding already, huge flows into sustainable companies that are already opening up a cost of capital advantage for those companies relative to those that are less far along, which definitely the CEOs and CFOs of those companies have taken notice of. So, let me ask you one more question, Secretary Kerry, to close out. 

It’s great to hear a diplomat speaking the language of the real economy and finance, not just national pledges and policy. Very, very encouraging. The COP, you mentioned the UN Conference on Climate Change, which is happening in Glasgow starting in just a few days, that has traditionally been a meeting of governments, an intragovernmental meeting. And now, as you described, the whole world is alive with energy and problem-solving interest on climate change. Do you think that these annual summits will become less about governments and more a kind of holistic way of checking in on progress globally across private sector, public sector, and various stakeholders?

JOHN KERRY: I have no doubt about it, Paul. I think that is already happening and it’s going to happen. I think there will be an unprecedented level of corporate presence in Glasgow and around Glasgow. 

In Paris, I can tell you that big companies, ranging from, you know, the Googles and Apples and Microsofts and other tech companies of the world, to oil and gas companies and others who were present who made contributions to Paris being able to pass. And similarly, there is a very broad range now of corporate activity that is front and center in leveraging different behavior and will be pushing for a good outcome from Glasgow.

It’s not all going to happen in one year or two years. But if we do what the scientists tell us, which is achieve a 45% reduction in the next 10 years, then we can win this battle. And it takes only one major breakthrough. I mean if you get green hydrogen being produced at scale rapidly, and we have electrolyzers that are out in the marketplace, and that market is opening up very rapidly, that’s an enormous game-changer. If we get a week’s charge in batteries or something even a matter of days, that becomes a game-changer for the balancing of base load and the potential of what can happen with solar and wind and renewables.

Likewise, if Bill Gates and others are successful in their breakthrough enterprise and you get fourth generation nuclear that is safer, doesn’t have the challenges of proliferation today, that you can actually market in a different way to communities and people would be accepting of it because it’s very low enrichment and has greater capacities, if those things breakthrough we win. And I think everybody understands that, that this is winnable still, even though it’s a tough road. 

But it won’t be won, it cannot be won without the deployment of those trillions of dollars of private sector effort. That is for certain. No one country can make this happen by itself. No one company can. So, we’re all in this together. I think there is that realization within the corporate sector much more than at any time previously. And I anticipate profound, you know, changes, massive movements in one direction or another and the marketplace ultimately.

Ultimately, I think it’s the private sector that’s going to find the breakthrough something that’s going to help get us through this. And we’ve been through these transitions historically. This one will be bigger than the Industrial Revolution and it’s coming at us really fast, and I think people will be excited by what happens over the course of these next few years.

PAUL BODNAR: Yeah, indeed. And we know that much is at stake. We say climate risk is investment risk because we know that climate risk will reshape the global economy in the decades to come, actually regardless of whether it’s managed successfully or unsuccessfully due to the combination of the transformations you’ve talked about in getting to a net zero economy and through the physical risk of climate change which we’re seeing more and more.

JOHN KERRY: Could I just mention to everybody, you know, markets love stability, obviously. You know that more than anybody. And they like a certainty and a predictability and so forth. I’ve got to tell you, every day that goes by that we do not address this is a market destabilizer. It’s a threat multiplier. It could wind up with costs to all of us that eclipse anything that we’ve imagined.

We spent $265 billion just cleaning up after three storms a few years ago, $100-and-some last year. I mean that’s pretty insane to just stay on a path where that’s the road we’re going to. Adaptation, resilience, demands, loss and damage are going to grow and all of that is going to be problematic for supply chains and for the future of the global marketplace.

So, I think smart business folks, and you’re all, that’s who we’re talking to here, understand this. And I think getting ahead of the curve is going to produce many winners in the marketplace as we affect this transition. And it’s the largest market the world has ever known, 4.5 to 5 billion users today for energy, going up to 9 to 10 billion in the next 30 years, a billion of whom nearly do not have any electricity today. That's opportunity, and if we do this right, we can manage it.

PAUL BODNAR: Well, with that, we wish you the very best in Glasgow and we appreciate your time today. Thanks so much for being with us.

JOHN KERRY: Thank you.

PAUL BODNAR: Back over to you, Zach.