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  • Frank Cooper: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm Frank Cooper, BlackRock's Chief Marketing Officer and the host of today's episode. We're continuing our mini-series on sustainability. And to remind those just joining this conversation, we're talking about sustainability in a way that it's not limited just to the environment. It includes climate action, but also speaks to the choices we make today in regard to social and economic resources and how those choices affect our collective future.

    On our last episode, we put the spotlight on how our transition to the digital age will shape the future of work and corporate culture. Today we want to focus on another aspect of the social and economic dimension of sustainability: diversity, equity, and inclusion. Our goal is to have a conversation about DEI in a way that, no matter your background, no matter your current circumstances, it has the capacity to make us all better; to make us better leaders and a more fulfilled and energized workforce.

    And we're very fortunate to have a special guest with us today: Carla Harris. Carla is a Vice Chairman of Wealth Management and Senior Client Advisor at Morgan Stanley. She's the host of a podcast called Access and Opportunity with Carla Harris, she's a gospel recording artist, and she's the author of two books, and I believe she's working on a third.

    In 2013, Carla was appointed by President Barack Obama to chair the National Women's Business Council. And she was also named to Fortune magazine's list of the 50 Most Powerful Black Executives in Corporate America, among many, many other achievements.

    So Carla, thank you for joining us and welcome to The Bid.

    Well, thank you, Frank, for having me on The Bid.

    Frank Cooper: It’s so good to see you, and we have a wide range of topics to cover. So, let's just jump right in.

    Carla Harris: Let's do it.

    Frank Cooper: And look, I want to start on the personal side. And I could be wrong, but when I think about all the things that you're doing, the energy and commitment and authenticity that you put into it, for me, I sense that it comes from somewhere deep within. And I'm curious, is it a personal sense of purpose? Is it a calling? Or is this, like, serendipity that you just happen to be doing all these things and love it?

    Carla Harris: Well, I have to tell you, some of the things that I'm doing now, Frank, are things that crossed my path and it turns out that I fell in love with them. Others are things that I figured out earlier in my life that I wanted to do, like financial services. I was 19 years old when I had my first internship on Wall Street. But the singing that I do, for example, I've been doing that ever since I was 9 years old. So, many of the things that I'm doing now were things that I had aspirations around once I learned about them. But then there are other things, Frank, like being an author. These are things that I learned along the way. And wanting to share the experiences that I've had on Wall Street were the things that provoked the book. So if I hadn't had the experience, if it hadn't been so tough, then who knows if I would have gotten the pearls, as I like to call them, that I've acquired that have been useful to other people, not only in financial services but in other industries. So, the one thing I will tell you is that the desire for excellence, I have to give credit to my parents for that. They always made me feel that no matter what I did, I should give it my all. I'd say my parents and my maternal grandmother.

    Frank Cooper: But you know, how do you know when you found it? Because what I'm seeing when I interview people, when I'm having conversations, increasingly, people are saying, you know what, I want three things. I want money, I want status, but I want the sense that I'm contributing to something bigger than myself and that energizes me. How do you know when you've found it? Because you can apply your discipline and your sense of excellence to anything and you will do well. But there's something that happens that kind of speaks inside of you when you've found the thing that you feel ultra motivated to pursue. Have you experienced that or not?

    Carla Harris: You know, the best analogy I'm going to give you right now is think about that first ride you went on at either an amusement park or Disney World or the state fair. And you said to your parents, can we go again? That's how you feel when you know you've done something that makes you feel good and it’s normally something that you have done on behalf of somebody else. I'll give you an example. Carla the public speaker -- again, my mother used to always kid me that I like to talk. But I never would have thought that my voice as a speaker would be more powerful and important than my voice as a singer. But it turns out that I love it. So how do you know? You get that feeling inside that, boy, this feels great. Can I do it again?

    Frank Cooper: I love that, serving others and getting a lot out of that yourself. Look, you mentioned earlier that you came into financial services early in life. I'm a latecomer, you know, I'm very recent, fairly unaware about financial services through undergrad and law school. But you've been in financial services for 30 years. You've seen a lot. But how did you get connected so early on? Because this is, I think, unusual when you look at women and then women of color in particular, Black women, it's unusual to have that kind of passion so early. So, can you just give us a little bit of context of how that happened?

    Carla Harris: Absolutely. The SEO program -- it was then called Sponsors for Educational Opportunity, it's now called Seize Every Opportunity -- it was started by Mike Osheowitz and a few of his colleagues. And it was designed to get talented kids of color and put them in summer internships on Wall Street. And the objective or the hope was that these firms on Wall Street who had not had kids of color before then would say, wow, look at this talent. And so, Mike Osheowitz, in his brilliance, said, ah, maybe we have a shot of changing the face of Wall Street by getting these kids in on this two-year analyst program so when they graduate, they can then start and then hopefully they can go and make careers in finance. Well, my colleagues who were freshmen with me at the time, they did the program in the summer of '81. They came back in the fall of '81, at the beginning of our sophomore year, ranting and raving about how great this program was, but how difficult it was, how it was stress interviews, blah blah blah. And Frank, if you don't know this about me, I'll tell you, I am negatively motivated. So, when you tell me I can't do something or something is hard, I'm all over it. And so I decided I would go for it. And I had never been to New York. Didn't have any idea what I was going into. And then I came to New York and worked with one of the banks that had just joined the program and loved it. And again, going back to the negative motivation, let's talk about the aha. Like you, I wanted to be a lawyer. And as I said to people, if you grew up Black in the South in the '60s, '70s, or '80s and you were smart, people put you into three categories: You should be a teacher, you should be a nurse or doctor, or you should be a lawyer. And so, I was in the lawyer track. And all of a sudden, that summer, I realized that the things that attracted me to the law were actually found in business. Number one, I wanted to have a lot of responsibility very early on. Number two, I wanted to call the shots. And that was the summer I realized that the lawyers don't call the shots, the business people call the shots. But the lawyers help you get it done within the context of the law. And number three, I did want to make a lot of money. And here was the marginal thing that pushed me over the edge: I did not see a lot of women and I did not see a lot of people of color. And I kept asking myself the question, why? Why? This is not that hard. And so that made it even more attractive. Again, that negative motivation. Why not? And so, I was on my way after that.

    Frank Cooper: Thanks for sharing that. I've listened to a lot of your speeches and your podcast. And at least in my view, a lot of what you talk about, it can apply to women and it can apply to women of color, but they're really lessons for everyone. And one of the lessons that I found intriguing was about career development and the ability to influence people no matter what level you may exist at within a company. I was wondering if you could share with us a little bit of your advice to someone about how to think about navigating the corporation and the labyrinthian path that many of us have to go through to succeed. But how can you exercise influence along the way at every level?

    Carla Harris: Absolutely. So, exercising influence really is about the relationships that you have, Frank. Because when you're early on in your career, you may not, quote, have the juice in order to get things done on your own word. But those who are senior to you that do respect you, that do listen to you, they can get it done. And very often, senior people are not as connected throughout the organization as they would like to think and frankly, as they would like to be. So, as a junior person, you actually have a lot of leverage and a lot of power if you can be articulate about what's going on throughout the rest of the organization and offer information to senior people that they might not easily be able to acquire. And that can build the trust as well as you are talking about what you see from the level that you sit at. And as you build those relationships, if you want to get something done on your behalf or you think something would be great for the organization, now you have someplace to go and have that conversation. And then you would be able to get it done, not necessarily by your own hand -- because you don't have the power to execute -- but by your argument and your influence and your conversation. So it boils down to two words that I talk about a lot, Frank. It boils down to your relationship currency: Your ability to get heard in an organization and to affect any outcome, execute any outcome, is about the relationships that you have around you. Because even when you're senior, unless you're the CEO, it's really just your word that will get it done. You still need other partners that are going to be in your amen corner or that might offer you resources in order to be able to get something done. So it's about investing in those relationships early is how you can actually start to build and drive your influence.

    Frank Cooper: So, let's spend some time on that, then. And this may be the perfect time to shift a little bit toward the idea of diversity, equity and inclusion. So, relationship currency requires some kind of mutuality, some reciprocal connection. And I hear people talk about this idea of bringing your whole self to work, which is kind of an interesting thing. I'm not sure you want anyone to bring their whole self to work, you know? But let's bring as much of yourself to work as possible. But how do you do that as someone who others may not have a full understanding of their history and their background and motivations, or may have a perception of them that's limited? How do you cross that chasm from being someone that is relatively unknown, not only as an individual but as a type of person. There may not be many women in the organization, or Latinx, or Black. How do you cross that chasm and start to build a relationship with someone who may not have that deep understanding?

    Carla Harris: Okay, thank you so much for this question. I love talking about this question, Frank. I am the authenticity lady. Because it was a big aha for me that your authenticity is your distinct competitive advantage; nobody can be you the way that you can be you. And the day that you joined the organization, somebody else didn't get the job because you were the best person for the job. So contrary to our actions, the last thing we should ever do is to submerge that which is uniquely you. But normally what happens, Frank, when you walk into an organization, especially in those early days, if you, A, don't see a lot of people that look like you, B, you're doing something that you've never done before, and C, ugh, you make a mistake in those early days, immediately your reaction is to think that, uh oh, maybe I should speak like so-and-so, walk like so-and-so, dress like so-and-so, present in this way. And you completely abandon your edge. And here's another interesting thought that I really want your listeners to think about. This past year, when we were in the shelter-in-place protocol, authenticity was front and center in terms of what leaders needed to do in order to be able to engage with their people when so much uncertainty was around us; uncertainty around the pandemic itself, uncertainty around when we would get some kind of antidote, uncertainty around what was going on in the streets with respect to social unrest on the back of racial inequities in this country. There was so much uncertainty. And you needed people to trust you in order for them to buy your empathy. You needed people to trust you in order to be able to follow you into unknown territory. You needed people to trust you in order to lean in and produce anyway when they were in a context, i.e. the home, where we're not used to producing. But people don't trust you if they don't believe that it's the real you, that you're being authentic. And so many people who are sitting in leadership seats today have never really been who they are. They have followed a different script. So, I kept scratching my head wondering why my phone was ringing off the hook from C-suite leaders across all industries and asking questions like, how do I lead in this moment? How do I keep my people motivated and inspired? How do I make sure that we stay on track with what we've been trying to do with diversity and inclusion and not get derailed by this pandemic? And I realized that part of the struggle was they had never had that level of authentic engagement before. And now they were being called to do it. And it was like, where do I start? So here's how you bring all of you into any environment. Number one, know who you are. And I don't say that lightly, Frank. Because let's face it, before this shelter-in-place protocol, we were all running around so much that we failed to say, who am I today relative to who I was in 2012 or 2014? And we should all be asking the question, who am I today relative to when we started this shelter-in-place protocol. Because consciously or unconsciously, we have all been changed. So number one, know who you are. Number two, understand that we're all multifaceted. There is an intellectual you, there's a funny you, there's a pensive you, there's an argumentative you, there's a discerning you. So, understand that we're all multifaceted, and embrace that. And then the third key to bringing all of you into any environment is now you relax. Now you relax, and walk into any environment, and you will be able to feel the energy in the moment and decide, in that moment, which facet of you will authentically connect with the other person on the other side of that conversation or the 14 people in that boardroom or the 1,000 people that are there to hear you speak that day. You will feel that energy. And the mistake that people make is that they think in order to be authentic, I have to show you all of the facets. I got to show you all of who Carla Harris is. Otherwise, I'm not being authentic. And that is not true. You want to present that part of you that authentically connects wherever that other person is, which means you must be free to figure out where they are and meet them right where they are. And from there, you can start to grow an authentic relationship. That's how you show up every day.

    Frank Cooper: Oh, I love that. I’ve got to write that one down. In fact, I did write it down; I'm going to keep that. But the thing that I struggle with on this, though, is there's a certain vulnerability in being authentic. And the way you're describing it, you have to basically open up a bit, even if you're not showing all the facets of it yourself. What I hear you saying is that it requires a little bit of courage. If you want the proximity that's necessary to build true relationships, you have to have the courage of being authentic. Is that a correct interpretation?

    Carla Harris: That is a correct interpretation. And you know what's funny, every time someone says, oh, it requires a measure of vulnerability, I sit there and I go, uh, so? So what? You know what, because we're vulnerable, anytime, anyway, Frank. You don't know what could transpire in your life at any moment. So, by definition, you're vulnerable. So, if you think you are protecting yourself, protecting something, protecting what? Because in reality, we're all vulnerable in any moment. I mean, just look at what has transpired around you in the world with people walking down the sidewalk or somebody being in a building. We're all vulnerable. So what is this fear around vulnerability?

    Frank Cooper: Yeah, I agree with you. And what I love about the structure of what you're saying too, it's this whole inner journey of knowing yourself, which is a tough journey. People think it's a one-off thing. It's a tough journey but worthwhile. But the outcome of being relaxed and free, that, to me, is a gift, the fact that you can actually feel free and relaxed and comfortable in your own skin. And that's not just for diverse employees. This is something that applies for everyone. And so, I love it. So, you have some individuals who are going to come into a work environment, a diverse executive comes in, and they're going to find barriers. It's just inevitable. There's no industry and no company that has transcended all the issues of racial inequity. And there are going to be barriers in the way. And so I'm curious, how have you advised diverse executives who you know will face that struggle? So be authentic -- great. But now you're facing someone or you're facing a system or a systematic process that's clearly a roadblock. What's your advice to them?

    Carla Harris: The good news is, if it's a person, now you just remind yourself, there's not a person born that you cannot get around. And if you are feeling constrained by one person, then that should be your red flag that you have failed to invest in other relationships so that you can actually have some mobility around that person. You can engage in a little demand push and a little demand pull, to use some marketing terminology, right? You start leveraging your other relationships so that that person is not the only voice about you in the room. So that somebody may say, hey, why don't you come and work on this team? Or why don't you do X, Y, and Z? And what you really want to do is to make that person who might be the impediment or the person that is creating the negative noise about you in the marketplace, you want to make them the outlier. Because you want a lot more voices saying, no, Frank is great. Oh, that guy's amazing. So, that one person now, who's usually an insecure person, who's usually a person that doesn't have a whole lot of power, that's trying to stand in your way, now this person is feeling, oh, well, maybe I can't say too many negative things about Frank. But you endeavor to make sure that your success team is strong and vibrant and vocal so that that one person that's in your way can quickly be muted or will end up having their power taken away.

    Frank Cooper: That's fantastic. One thing that I've also been thinking about is that we've been having this conversation about diversity for a long time. It's moved from diversity to diversity and inclusion to diversity, equity, and inclusion. I mean, you yourself talked about SEO back when you first started thinking about financial services. And don't get me wrong, we've made progress. We are definitely moving forward. But the pace seems very slow when I look at the stats, when I look at the data. Whether you want to look at the representation of women on boards or in positions as CEO. I think there may be four or five Black CEOs in Fortune 500 companies. When you look at the pipeline of executives, particularly in growth areas, when I look at tech, for example, I'm very worried about that. And financial services has its own opportunities. So have things really changed? Or is this another blip caused by the racial equity issues that rose up in June of last year with the George Floyd murder and the Black Lives Matter protests? Is this a blip in the data? Or are things really different this time?

    Carla Harris: Yes. So, before I answer this question, let me just give you a little disclaimer. I am a "glass half full" kind of girl. So I am always going to see the positive. And I do not think this is just a blip. And as I said many times last year, I definitely thought that this was a movement and not a moment. And let me tell you why. The first is the power of the millennials and the Z'ers. If you look at who was really out there on those streets every single night, day after day, month after month, the largest population were millennials and Z'ers. Frank, they have a very different definition of what excellence looks like in a work environment, what excellence looks like, frankly, in the world. And it is multicultural and it is multi-gender. When I walked out of Harvard Business School 34 years ago, excellence in corporate America looked like six white men at the top. There was nothing strange about that. You pick the company -- IBM, Goldman Sachs, Ford Motor Company, Morgan Stanley, Procter & Gamble, HP. Pick the company -- six white men at the top. So, I knew that, as a woman and a woman of color, if I wanted to play, I had to be comfortable being the first and the only. And again, that was nothing strange or scary either; that's just how it was. But for millennials and Z'ers, they've grown up in a very different world. They have seen women lead; they might have a mother who's in the C-suite. They have also gone to very elite schools where there's a smart Black kid on the left, smart Asian kid on the right, smart Hispanic kid sitting in front them, smart Indian kid sitting behind them. That is what excellence looks like. So, when they are looking to join organizations, they're looking for their definition of excellence. And if they don't see it, they don't go. And if they go, they don't stay. And I don't care who you are as a company, in what industry, you will now be compromised in your aspiration to be the employer of choice in that industry. So, you're going to have to think about how you can create the kind of culture that is going to attract the best talent today. And millennials and Z'ers are the dominant population in the workforce. The second reason why I don't think that it is a blip is that there's never been a time in my professional life where we have had such a broad, education-oriented conversation. Our conversations with each other in a corporate context have not just been about what's going on. We've been asking the second-order derivative question of why? What's happening? What was the history? Why is it systemic? Why can't we get past it? And then the third thing is I think we have finally shifted from this idea of diversity, equity, and inclusion and belonging being something that's right to do or moral to do or nice to do. I think we're finally exploring the conversation that it is the commercial thing to do, that it is of strategic importance, either from a workforce or consumer perspective. There's more data in the marketplace than ever about the buying power of Black people, the buying power of brown people alone -- almost $4 trillion if you put that together, not to mention other constituents. So, I think people are now starting to think about it with the right framework. And I would argue we have been talking about it and looking at it through the wrong lens for the last 30 years, which is why we are not further along, Frank. Because what strategic imperative do you know of that any company works at for 30 years?

    Frank Cooper: Right, exactly. Doesn't happen. And by the way, when it's a firmwide priority, you see a different level of energy. But you know, I wanted to stick with something here. Because I've been amazed at Gen Z in particular. And I see it with trailing millennials; they walk the talk. And I don't want to say anything bad about boomers or Gen X; I love everybody, you're all good. But what I will say is that I think there was a lot of talk before. And when the moment of truth came, people would say, I’ve got to suck it up. I'll push through it. But Gen Xers and millennials are walking. And so, now you're the CEO of a Fortune 100 company. And you say, okay, I just heard someone say, you know what, these Gen Z'ers and millennials, you won't be able to attract them and you certainly won't be able to retain them if you don't have a diverse and equitable and inclusive work environment. The communities in which you operate won't welcome you. And you know what, we've been a little slow down down this path, but I want to get it right. What's the one thing you've got to get right in order to create the momentum within the whole organization so that you're heading down that path?

    Carla Harris: Yes, creating equity in your organization, equity around representation, equity around compensation, equity around processes, meaning you give people equal access with respect to development and opportunities to continue to ascend. That's the first thing you've got to get right. Because all of that has a multiplier effect, not only today, with everybody in the organization, but it has a multiplier effect two years from now, five years from now, 10 years from now, long after your tenure. So those are the things that you need to figure out, how do I create equity in my organization so that everyone has equal opportunity to be developed, every leader feels like they have an ambidextrous team. I don't have to pick Frank over Jamie, because Frank and Jamie are both great. If you hire them all, pari passu, at the same time, why is there a skill inequity when you get two years out, five years out? If you go back and look at who's been exposed to what opportunities and transactions, you will find the problem. That's not the candidates' issue, that's the house issue. Let's make sure that people are getting paid for the job that they're doing and that there's equity across there. Because there's nothing more powerful that people talk about than pay. Although every organization talks about that that's confidential information, everybody talks about it. And you need the representation right. Every organization would like to feel like they can grow their own. But it takes 10 years to grow senior executives from right out of college or right out of graduate school all the way to a senior role in the organization. You no longer have 10 years of time. The rate of innovation now is 12 months. And some would argue that it's less. And within that period of time, you're going to have at least two economic cycles and every time we go into a different cycle, you lose people. Or your competition comes to take your lunch money, take your best people. So, if you don't have that representation today, create it. If you don't have enough people of color or women on your operating team, can you add a seat? Can you add a seat on your ELT or your executive leadership council, on your team? What's the issue with adding a seat? But you need the representation. Because here's where millennials and Z'ers are different than boomers. Millennials and Z'ers really need to see it in order to believe that they have a shot. Those of us who are boomers, we were willing to go into unknown territory. Being the first, that was table stakes for us. They don't like it and they don't trust it. They want to know somebody has plowed the territory and there's a clear path with a strategy and a goal. All I got to do is do these eight things and I'll get there.

    Frank Cooper: Absolutely. I want to turn the lens on DEI for a second. So we've been talking about talent and internal culture. When I look at investment management and asset management and the allocation of capital, whether that's venture capital or private equity or even money coming through diverse managers and broker-dealers, clearly we have a gap between the distribution and allocation of capital to undercapitalized communities, mostly communities of color. But at the same time -- and I've heard you speak to this before -- it seems like there's an enormous opportunity there that we're overlooking. Why do you think we have this gap in terms of Black, Latinx, women-owned businesses and the allocation of capital?

    Carla Harris: Yes, there are three reasons, in my view. And let me just say this. I'm going to put aside one of the reasons that people could say, well, it's just straight racism, Carla. It's just straight discrimination. Let me put that over there to the side. And I'm not going to debate that, because there's a measure of that, no question. But let's talk about the other reasons as well. The first one is lack of diversity at the investing table. If you have not been exposed to different markets and different consumers and there's nobody at your table that can talk about that, then chances are you're going to miss those opportunities that might serve the African-American community or might serve the Latino community or that might serve the Asian community or the American Indian. If you have nobody that has any experience around any of those markets, you're going to miss those opportunities. And they are huge. Number two, I would argue that because companies think about expansion risk differently -- so what I mean by that, almost every venture capital fund has anywhere from 10% to 20% of their portfolio that they dedicate to expansion risk. That means investing in areas that they don't know about. So for example, 20 years ago, that might have been the cloud. It might have been driverless cars. It might have been software as a service, things that were new and on the horizon and cutting-edge, frontier kind of stuff. Well, we've made the argument, VCs, why don't you think about investing in entrepreneurs of color as part of your expansion risk. You haven't done it before, so go and learn about it. Because when you invest in that space, some partner or partners are dedicated to learning about that space so they can come back and educate the rest of the investment committee and they can start being a bigger player in that space should it warrant that thing. And then the third impediment, I'm going to argue, is that, historically, investors have gone with those things that are familiar, the schools that I'm familiar with, the people that I'm familiar with, the circles. Because a lot of deals, let's face it, are referred. So again, if folks of color and women aren't in those referral groups, they're never going to get to that table. And then traditionally, VCs or other type of early-stage investors have not been forthcoming with what I'm going to call critical and productive feedback. And if you go into a pitch and you've done something wrong and no one really tells you what you did wrong, how do you improve for the next conversation? But to your earlier point, it is a huge opportunity, which is why we, as a firm, are playing in it every way that we possibly can. Not only do we have the Morgan Stanley Multicultural Innovation Lab, we just made the announcement that we are partnering with three other major corporations to put together a next-level fund that will invest in those companies that are at that series A, that series B level. Because what we found in playing in this ecosystem for the last half dozen years is that not only is there a Death Valley at the seed and the pre-seed level -- because most multicultural entrepreneurs and even women entrepreneurs don't necessarily have those family and friends that they can do that pre-seed and that seed round with. So there's one Death Valley. But there's another Death Valley, if you can get over that hump, right at the series A. There's not enough series A investors that also are patient investors. So what we've tried to do with this fund is to say, hey, look, marketplace, if large companies can come together and lock arms and not only write the check but also contribute those resources that they are exceptionally good at in the industry -- because these are all leaders in their own spaces. Now, if we can not only write the check but we can also contribute our expertise, now think about how fast these companies are going to be able to advance.

    Frank Cooper: That is exciting. And so happy to see you guys pursuing that, by the way, Carla. I want to close where we started; and that's back on the personal front. I’ve got to tell you, I'm fascinated by the fact that you're a gospel recording artist, played at Carnegie Hall, played at the Apollo. And I spent some time in the music industry. And what I've learned is that you always have these interesting lessons that people who've never been in the music industry think only apply to the music industry. But I think they're transferable. I think they can be translated. And I'm curious, as a recording artist, as a musical artist, what lessons -- or a single lesson -- have you carried into the business world?

    Carla Harris: Yes, there are so many. But I'm going to give you one that I hope will be very useful to your listeners. I was getting ready for one of my Carnegie Hall concerts. And I was singing a song, and I was really worried about whether or not I was going to be flat on this song. And I was like, oh my gosh, you can't be flat. Everybody knows this song. Everybody will know if I messed up. And my voice teacher said something to me that again changed the way I think about it. And I'm saying this because, so often, professionals are worried about whether or not they're going to be enough. And she said to me, Carla, your audience is pulling for you. Everybody wants you to do well. Nobody spends $100 a ticket to come and hear you mess up. They want you to sing well. They want you to blow that song out. So, you go out there and you do what you do best. That's it. Because they're pulling for you. So, whenever I encounter a professional who's feeling a little insecure about something, I say, listen, your audience is pulling for you. They know that you deliver excellence. Go do it. And so that definitely has been transferable to me. When I have met a new client, when it's been an important pitch, when something is really riding on this decision or I want a client to trust my judgment, I go in and I just deliver my excellence because the audience is pulling for me.

    Frank Cooper: I love it. I love it. Carla, it's been an honor interviewing you today. And it's been really a joy having this conversation. Thank you so much for joining us. It's a pleasure having you.

    Carla Harris: It was my honor and my pleasure, Frank. Thank you guys very much for letting me be on The Bid.

    Frank Cooper: On our next episode of The Bid, we'll finish our sustainability mini-series with Paul Bodnar, BlackRock's new Global Head of Sustainable Investing. Paul will provide his perspective from decades of working in sustainability, including our outlook for the remainder of the year. We'll see you next time.

  • Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm your host, Oscar Pulido.

    We're continuing our mini-series on sustainability. On our last episode, we spoke about climate technology. Today, we're going beyond climate to talk about a different area of sustainability: corporate culture.

    COVID-19 required corporations to do some rethinking; not just around how to operate a business in the midst of a global pandemic and economic recession, but also around how to build culture when the usual ways of working are disrupted. An organization's culture is how it leads, how it manages talent, how it's organized and how it interacts with its employees. And according to Bain & Company, companies that exhibit a strong sense of culture and inspire their employees are nearly four times more likely to be business performance leaders.

    Today, Erica Dhawan joins us to talk about how companies can rebuild culture and connectivity. Erica is an author, an award-winning keynote speaker, and an expert in human innovation and collaboration. Her most recent book, Digital Body Language, was just released, and it talks about how to build trust and relationships, no matter the distance. We'll talk about which social and cultural factors companies should focus on most, how to stay connected in a digital world, and what will change and stay the same as we return to the office.

    Then, in the second half, Eric Van Nostrand, BlackRock's Head of Research for Sustainable Investments, will discuss how, through data and research, we can translate corporate culture into investment insights.

    Erica, thank you so much for joining us on The Bid today.

    Erica Dhawan: It's so great to be here.

    Oscar Pulido: So, Erica, you're an expert in digital communication and collaboration. You work with companies on helping them improve their corporate culture. Among your many accomplishments, you've written two books on the subject. So, let me start with, what caused you to study and become an expert in this field?

    Erica Dhawan: Growing up as an Indian immigrant in the United States, I struggled to find my voice as a kid. I remember growing up and at home, my parents spoke Hindi, which meant at school, I had accented English. In every report card from Kindergarten through 12th grade, my teachers often said I was very studious, but every teacher had the same feedback: I wish Erica spoke up more in class. One of the things that I was able to really build because I was so observant is the ability to decipher other people's body language. I would watch the popular girls with their heads high, the cool kids slouching during school assemblies, and it helped me to really understand that it's not about what we say; it's about how we say it. Fast forward, I became an expert on body language and communication. I ended up getting three Ivy League degrees, working on Wall Street at Lehman Brothers. And about four or five years ago, I started to realize that many companies were struggling with the same challenges: Why is there so much misunderstanding at work? How do we better connect with different ages and working styles? And what I found was that similar to the way that I was an immigrant to body language as a kid, today, we're all immigrants to how we connect through the body of our language in a digital, hybrid and global world. And so, my research on connectional intelligence and collaboration really stems from the fact that, in today's world, the quality of networks matters much more than the quantity of networks. Having a lot of relationships, having LinkedIn followers, having a lot of emails in our inbox doesn't necessarily lead to measurable change. The key is the leadership skill of how we leverage and harness the power of our relationships that makes or breaks businesses today. Just like emotional intelligence was critical in the '90s, today, connectional intelligence will allow businesses to break silos, to unlock new and unrealized value, and really create new sources of wealth generation in the future.

    Oscar Pulido: Erica, you mentioned that connectional intelligence is like what emotional intelligence was in the 1990s. So, can you just elaborate on what you mean when you say connectional intelligence?

    Erica Dhawan: Well, let's start with what emotional intelligence means. It's really the ability to read others’ cues and adapt in a way that bridges empathy and trust. Now, a lot of the ways that we built emotional intelligence was by reading body language: the head nod, the smile, the lean in. But in a digital or hybrid world, most of the time, we can't read those body cues. Connectional intelligence is applying emotional intelligence in a digital age. It's about remembering that what was implicit in our traditional body language must be explicit in our digital body language. Reading messages carefully is the new listening and writing clearly is the new empathy.

    Oscar Pulido: Well, it's interesting, the transformation of communication to more digital sources. That was definitely there before the pandemic, but it certainly was accelerated by COVID-19. But when we talk about sustainability, we talk about environmental, social, governance factors, and how companies have to think about these. A lot of our discussion recently has been around climate change and how companies have to adapt. But talk to us a little bit more about the social factors. What are some of the social factors and areas of corporate culture that companies are focused on today?

    Erica Dhawan: In today's era, it is no longer just about the individual and it's no longer just about the organization; it's about the collective. And when it comes to social factors, businesses have an opportunity to supercharge the interconnectivity of different stakeholders to really unlock new environmental and social value. Let me give you an example. Ben Thompson is a surfer, and he's also an engineer. And one of the things that Ben Thompson realized is, when he would surf out on the waves, he hated the sludge in the water and he thought to himself, what could I do to really help be involved in climate change solutions? So, one of the things he did is he created a sensor that surfers put under surfboards that track the salinity, acidity, and temperature of water. Now, this is actually being used by climate change researchers to develop and identify data that they weren't collecting in the past just off the shore of oceans. So, here's an example of the interconnectivity of the climate change community and the surfing community in ways we may have never imagined before. Businesses have the same opportunity. They can reimagine collaboration across stakeholders they may have never interacted with before. They can bridge connections between different communities, public, private, and government, in ways that will allow us to all elevate together.

    Oscar Pulido: So, Erica, you make a compelling case for the importance of collaboration, and you said this term, “the collective.” Has our ability to collaborate gotten better or worse since the pandemic started in 2020?

    Erica Dhawan: Well, Oscar, in the last year, we have seen more disruption in how we work, yet more innovation than in, perhaps, the last 10 years. What I have seen across organizations is poor behaviors pre-pandemic got amplified; they're more noticeable. Terrible meetings, bad emails. And good behaviors also got amplified. I believe that this is a moment, now many months into our digital shift, to not simply adapt to the new normal, but more importantly, create a better normal. This is a moment to ask ourselves, what has actually been more creative, more inclusive, more transformative in how we've worked since our digital shift, and what are the lessons that we want to make sure to include from our digital shift as we go back to hybrid work? I'll give you an example. I'll never forget, pre-pandemic, I was on a conference call. Three of us were remote and three people were in the office. It wasn't until the 26th minute of a 30-minute meeting that someone in the office said, does anyone on the phone have something to share? We had been excluded the entire time. So, the last year has actually taught us, maybe we can be more geographically inclusive, less visually biased, if we use the power of connectivity in smarter and better ways.

    Oscar Pulido: And this kind of brings up the point that employees at companies are really demanding more of the companies they work at. They want more inclusive work environments. They want more flexibility. They're asking companies to be more involved in the communities that they operate in. So, what else are you seeing in terms of some of these shifts that employees are asking from their companies?

    Erica Dhawan: We're seeing a massive shift in new opportunities in how we work, and how we choose how to work, and how flexible work is, and also who can be included in work. Before, I think we often thought of the traditional notion of balance sheet talent. Who's in the room, who's in the office is who can contribute. And now I think the question is much more, what is the problem we're trying to solve and how can we engage anyone anywhere to be part of the solution. I'll give you an example. A few years ago, at a leading toothpaste company, Colgate-Palmolive, there was a scientific issue. A group of chemists were trying to figure out how to mix a new fluoride into their toothpaste, but there was a mechanical flow problem. The fluoride was getting stuck in equipment. All the best chemists were trying to figure it out and no one could solve it. Finally, one teammate said, why don't we ask a different network? They posted it on an online scientific community. A physicist on the platform solved the problem within 48 hours. Now, the team of chemists at Colgate learned a few things from this experience. The first thing they learned is that they hadn't even asked the physicists at their own company how to solve the problem because they labeled it as a chemistry problem. The second thing they realized is that the physicist that solved the problem would have never been hired by Colgate. He didn't have the traditional resume; he didn't want to work at a large company. But in today's age, they could access and engage expertise far beyond traditional business silos in ways that generate the best solutions. So, in today's world, I think the biggest opportunity that I'm seeing businesses have is this opportunity to reimagine work, not only traditional talent in a room, but who can contribute anytime, anywhere. And the more businesses are able to identify solutions to enable individuals to contribute across silos, beyond their job descriptions, beyond even their businesses to other nontraditional networks, the faster, the more innovative, the more creative we'll be as we stay relevant in the future.

    Oscar Pulido: Erica, that's a powerful example that you mentioned there. How much is it relying on senior management to send the message to collaborate more and reach across to parts of the organization that you may not be thinking about, and how much of it is bottoms up, grassroots, which, it sounds like, in this example, it very much was these individuals who took it upon themselves? When you talk to companies, what's really driving that collaboration, more the top down or more the grassroots?

    Erica Dhawan: For collaboration to be sustained over time, it needs to come from all ways. Top down, bottom up, and even sideways collaboration. I truly believe collaboration often gets caught up with, okay, this means more emails and more meetings. But collaboration is actually about reducing dysfunctional meetings, ending endless reply all emails. It's about identifying places and spaces across silos where people can come together to all benefit versus one group. And most importantly, it has to be role modeled at a senior leader level to generate long term solutions. And I'll sum it up with one other example. One leading law firm based in New York City noticed something a few years ago. They noticed that their youngest associates were billing less hours than ever before. And when they dug into it, they were first a bit concerned because law firms bill by the hour. But when they researched and identified what was going on, they realized it was because these associates had created their own peer-to-peer virtual network to help each other solve cases faster. Outside of clunky reply all emails and endless calls, they were sharing information in real time like a SWAT team across silos and practices. Now, the senior leaders could have said, this is actually hurting our billing hours, stop doing this. But they actually asked themselves, what can we learn from the youngest employees in our organization. And they created peer-to-peer virtual networks at every level of the company. Today, one of the most powerful peer-to-peer networks is a senior higher network of leaders who have come in from competitors that are now a digital knowledge network of competitive intelligence for the entire company. So just as it's important for all of us to role model these skills and not just make it top down, it's also critical that senior leaders are listening across their organization to those unusual suspects, not just those with the traditional job descriptions, around new work practices that will benefit the business, customers, and clients moving forward.

    Oscar Pulido: I'm reminded of the saying, work smarter, not harder when you talk about the example at the law firm. So, this feels like a good time, Erica, to ask you about your latest book, titled Digital Body Language. So, tell us a little bit more about it. How did this title come about and what's the synopsis?

    Erica Dhawan: Research shows that 60% to 80% of our face-to-face communication is our nonverbal body language: pacing, pauses, gestures, tone. But body language hasn't disappeared in a digital or hybrid world; it has just transformed. And just like I shared earlier, I was an immigrant to traditional body language as a kid. I realized that today, we are all immigrants to digital body language. That was really the impetus to write my new book, Digital Body Language. And I will sum it up with one client story that I think will remind us all how important this skill is. I was coaching a senior executive at a Fortune 500 company; we'll call her Kelsey. And Kelsey came to me because she got some feedback from her team through a 360 that her empathy was weak. Now, I started to first look at all the traditional markers of subpar empathy: poor listening skills, a lack of eye contact, a lack of engaging with her colleagues. And I realized that Kelsey was actually brilliant at all of these things. She asked thoughtful questions, she leaned in, she had good body language in a room. But while her traditional body language was excellent, her digital body language was abysmal. She would send brief, low-context emails, causing her team to feel anxious, not knowing what they needed to do. She would take other calls during existing calls, multitasking, making her team not feel valued, visibly, in their work. Most importantly, she would often in conference calls give individuals high level feedback, but with the lack of body cues, they didn't know exactly what to do next. What we realized, then, is, in today's world, everyone needs a rulebook. They can't rely on body language as the clutch. We need to master digital body language to create cultures of empathy, trust, and collaboration no matter the distance.

    Oscar Pulido: That's fascinating. Are there examples of the opposite where somebody is actually better at digital body language than they are at in-person body language?

    Erica Dhawan: One of the most powerful things that I've heard from clients, especially in the last year from our digital shift, is how much more bosses are hearing from introverts on a team in digital mediums versus face-to-face mediums, and I've heard the same thing from introverts. Now, what I think has been so exciting about the digital ways we are communicating is how much more inclusive we can be of different styles. So, I'll hear introverts who have told me, in an office, I would fight for airtime. It was hard because I would have to manage my traditional body language. But in a virtual medium, I can share in the chat. I don't have to turn take. And I’m able to find my voice in a way that I was never able to find it in the office. Another example are simple things like the lack of body cues that are enabling certain individuals to find their voice even more in meetings. I'll give you an example. I know one team lead who has a very deep accent, he's from Buenos Aires, and English is not his native language. But when he works with all his New York colleagues, they're talking very fast and it's difficult. He's found that Zoom closed captioning has allowed him with a transcript of what individuals are saying in real time to stay in the know of what everyone's saying and to be able to engage much faster than what was available in the past. So, in many ways, digital body language is minimizing many of the traditional body language biases that often allow extroverts to get a voice more than introverts, that often allow those with cultural barriers to not be as heard as much. And lastly, it is also minimizing gender biases. Instead of being reliant on body language cues of a gender of who is the majority in the room, or who's taller, or who has a deep voice pitch, we are focusing more on the quality and substance of content. And I think that that is something that is so powerful as we move back to hybrid work and how we can create more inclusive workplaces.

    Oscar Pulido: Erica, we've talked a lot about the shift to a more digital world, more digital communication. So, how are companies having to adapt to this to ensure that employee satisfaction remains high?

    Erica Dhawan: In my research in my work consulting clients to build cultures of sustained collaboration, one of the most common questions I got was, why is there so much misunderstanding at work? I've seen many companies create directories, or descriptions, or subject matter expertise networks so that different team members can break silos within the organization when they're not at the office water cooler anymore. The second challenge that leaders have had to adapt to is drops in productivity. And one of the things that I've seen that leaders have done to manage satisfaction is to truly measure in success, not in hours or face time, and measure outputs, not just inputs, to work. The third key factor is decreased innovation and creativity. And what I have seen here that has worked really well is reimagining how we design virtual meetings. I like to say, in today's world, team members need to think less like office meeting hosts and more like TV show hosts, where we have to bring people in at different parts of a discussion and also create effective innovation and asynchronous engagement. That could mean having virtual whiteboards, using the chat tools so that everyone can share in a discussion, and then calling on people that have different or diverse perspectives. There's a few more challenges that leaders have had to adapt to and manage in these times for employee satisfaction. One of them is work/life balance. Leaders need to set and communicate expectations and enable that culture of trust and accountability and what that looks like. Another one is Zoom fatigue or virtual meeting fatigue. Identifying and clarifying explicitly, what are the right collaboration tools to minimize fatigue. And setting some boundaries around work/life, when it's appropriate to respond urgently to an email, and when people can actually wait and have meeting free boundaries. And last but not least, the imbalance of career progression based on location, based on whether your boss really prefers remote versus in person, is a big challenge as we move forward. And so, many leaders really need to set up performance management expectations to avoid bias of those that are remote and that won't be face-to-face moving forward. And when it comes to satisfaction, I think it really is about three things. One is valuing your teams visibly now, valuing their time, their inboxes, and their schedules. Secondly, it's about communicating carefully about expectations and norms moving forward. And third, it's about creating that culture of competence through effective role modeling and setting up performance expectations that allows everyone to contribute in a way that they're valued for their work, not just for their face time.

    Oscar Pulido: Everything you've described is corporate culture, right? It is what it feels like to be an employee at a particular firm. And before the pandemic, corporate cultures were largely created in an office, and now they're being created or maintained in a more digital world. So, I'm just curious, can corporate culture survive or thrive in a purely digital format, or does it really mean that people have to go back to an office for the corporate culture to stay strong?

    Erica Dhawan: I would challenge, Oscar, that corporate culture is built in an office. It is not built in an office; it is built by the leaders in the culture. It's how they show empathy, trust, engagement, accountability, and how they truly say what they do and do what they say. And it's also the rituals and boundaries that define how we engage with one another. So, I think a lot of our default mechanism was things that we did in the office showcased who we were. Our badges, the quick office water cooler chats, the meetups in the cafeteria and how we said hello, the happy hour discussions. What we actually have to do now is reimagine the rituals, the boundaries, the definitive language and norms that showcase our digital culture. For example, I've seen teams that set up simple things like meeting free Wednesday mornings. We create strategic time to focus on thoughtfulness versus constant meeting culture. We've seen other companies create simple things like audio call Fridays, no video, almost like the new casual Fridays. We've seen other teams do things like set some rituals at the beginning of meetings, having everyone share what's one win of the week, what's one challenge of the week, to create that level of psychological safety that often happened by reading body language, but can happen when we are explicit, when we don't assume others are okay and when they can share effectively.

    Oscar Pulido: All these adaptations that you talk about, I have to imagine there are some companies that believe, look, this period shall pass. That 2020 was an aberration. We're going back to the office, so let's get back to the way it was. Do you see companies doing that, and what's the risk if they don't adapt?

    Erica Dhawan: What I would say is important is that we all need to take the lessons of the last year and really ask ourselves, what has worked better because of the pandemic. I'm not promoting remote anywhere, anytime at all. I think that there are places and spaces where we really need to come together for intentional work in a room together. I actually think the last year will enable us to be more intentional about how face-to-face office work is important and how we'll use it to be even more thoughtful. So, I remember, especially as someone who was an investment banker, the traditional office culture was, we would all get in, we would be back-to-back on meetings. We weren't always thoughtful about the agendas in the meetings. They would start seven minutes late. Oftentimes there was no notetaker summarizing the meeting at the end. In the next meeting, we were talking about what was discussed in the last meeting. My goal is that we won't revert back to terrible behaviors when it comes to collaboration of the past simply because we liked seeing each other face-to-face. Instead, my hope is that, in the future, because of the lessons of the last year, we will reimagine how will we really use that face-to-face interaction more intentionally. Another thing that I truly recommend now is to have a live meeting host of a meeting and a remote team host. So remote team members actually lead parts of the meeting to avoid that visual bias. And most importantly, I think that this time of change will hopefully allow us to be more geographically inclusive of individuals in a way that will actually change the perspective or the strategy moving forward. I don't believe that high performing organizations are all face to face all the time or high performing organizations are all remote all the time. This is a moment to define the new norms focused on what will best serve the business. And one other thing I'll say is, I know many clients who work in the financial services industry, where their clients are preferring virtual-only relationships. They don't want to commit to try to meet. They would really prefer regular video calls once a month instead of quarterly meetings. And so, this is an opportunity to lead the way with your clients and actually adapt to their digital body language preferences just as much as your own.

    Oscar Pulido: We've talked a lot about companies and those that you consult with, and you've given some great examples. I'd like to bring this back to you. How are you staying connected to the people around you and what did you learn from writing Digital Body Language that you're applying now?

    Erica Dhawan: I started working on my new book Digital Body Language four years ago, well before the pandemic. And this was a time when video calls were the exception, not the norm. When, really, the primary format of how we communicated digitally was emails and conference calls. We were still communicating digitally about 70% of the time in workplace communication, especially even on the same floor, in the same office. Today, that's just shot up to 100%. What I have learned is that in today's world, especially with the digital shift of the last year, our digital body language is now reshaping our physical body language. I didn't expect that, but we've spent a year online. We are more likely to want to get to the point quickly, to have prompt meetings that start on time and end on time, to want to hear the bullet point summary from someone instead of having a long, robust, 40-page deck. We've been reading emails for a year, so we want people to get to the point. So, to really sum it up, what I've learned is that this is the moment to not go back, but to go forward. And it requires us not to default to behaviors or revert back to what worked pre-pandemic, but to ask ourselves, what will allow us to transform, stay relevant and competitive moving forward.

    Oscar Pulido: Erica, thank you so much for your thoughts today. It's been nice talking to you digitally. I hope one day we get to meet in person as well. Thanks for joining us on The Bid.

    Erica Dhawan: Thank you so much.

    Oscar Pulido: That was Erica Dhawan, author and keynote speaker. Next, we'll talk to Eric Van Nostrand, BlackRock's Head of Research for Sustainable Investments. He'll talk about how corporate culture translates to stronger outcomes for businesses and investors through the lens of our own research on the topic.

    Oscar Pulido: Eric, thanks so much for joining us today.

    Eric Van Nostrand: Great to be with you, Oscar.

    Oscar Pulido: So, Eric, we just spoke with Erica Dhawan about the importance of corporate culture and how the pandemic has made areas like employee satisfaction, digital connectivity, really important things for companies to consider. But corporate culture is harder to quantify, I think, from an investment perspective or how you make investment decisions based off of it. So, tell us a little bit about how you're using big data and technology to try and really zero in on, I guess, it's the S in ESG.

    Eric Van Nostrand: That's a great question, Oscar. And it's really a specific manifestation of a general phenomenon and problem in sustainable investing right now, which is that I don't think the non-climate elements of sustainable investing have gotten quite as much attention in the market discourse as they deserve. There's been a lot of focus on the data and analytics around climate and E-related investing, as you put it. But sustainable investing has to be about a lot more than that. And this element, in my view, this S element, the social element of ESG, is really the next frontier for sustainable investing. It's harder to do, I would say, overall, than climate-based investing, because the data is not nearly in the same place as we see on the environmental side, but I think that presents a tremendous opportunity for investors who are willing to do the hard work of using the big data, analytics, and various quantitative strategies to really parse what data we do have and start deriving insights about the social elements of the way companies operate. That's really unexplored territory right now.

    Oscar Pulido: And, when you say the data is not in the same place, does that mean there's not as much of it, or there is a lot of it, but it's not as robust and harder to draw conclusions?

    Eric Van Nostrand: All of the above. There's less data, there's less standardization of data, and there's less confidence in the investment research community over how those data are going to affect financial returns in the years to come. But, again, that's not a reason to move away from social investing. That's a reason to move into it and seize the opportunity to start answering those questions more clearly.

    Oscar Pulido: So, it seems intuitive that companies that have higher levels of employee satisfaction are going to have better company performance. And Erica talked about how, right now, companies have an opportunity to really turbo charge employee satisfaction. And there's numerous ways. There is, for example, the way companies interact with their communities; that could be a way to have employees be more engaged and more satisfied. But, when you think about this social aspect, corporate culture, employee satisfaction, are there certain factors that you look at a little bit more closely?

    Eric Van Nostrand: You zeroed in on one of the most important transmission mechanisms in S investing, which is that we think companies that engage better with their employees, that have happier employees, will tend to outperform, not randomly, but because those employees display higher labor productivity. They produce more per unit of effort they're putting in. And that creates more cohesion to the firm and more long-lasting value creation. We've been working on a number of investment strategies that try to really quantify that phenomenon and zero in on it. In one particular context, we look at employee reviews that are placed online on various websites and run natural language processing on those reviews and get a sense of the sentiment, tone, and specific topics that employees like to talk about when talking about their employers. And we find a robust relationship between companies that have happier employees, according to those reviews, and companies that generate their own higher labor productivity. We think the market eventually rewards that. So, we're starting to use that alternative data source, scraping this text online, to help us figure out who's going to outperform by having more engaged employees.

    Oscar Pulido: Right, and, just on that last point, when you're saying outperform, you think employee satisfaction leads to better company performance, meaning investment performance. If I'm an investor and I identify companies that have done this better, the S part of it better, things that you've isolated, it leads to better investment returns.

    Eric Van Nostrand: Yeah, it's a two-step, like you say. It's the immediate S phenomenon, which is that the employees that are happier drive better near-term financial results for the company. The company is being more productive with happier employees; the employees are producing more. And then, as the markets come to realize that, they reward them for the better financial performance. By looking at who has happier employees today, we can get ahead a little bit of the better performance companies are going to have in the long term. And that's what we're trying to execute on.

    Oscar Pulido: So, what's a more specific example of how this comes to life in an investment process?

    Eric Van Nostrand: Yeah, so, sometimes, Oscar, I think the S in ESG, which we normally define as social, might actually be better defined as stakeholder. Because what it's really all about when we do S investing, is we're looking at the broader set of stakeholders – not just shareholders, not just other investors – that a company interacts with and how a company's relationship with those stakeholders is going to affect their eventual financial performance. The employee reviews I mentioned are one specific example of that, but there are others. We're also focused on a company's relationships with its community. And this is a little harder to do on the data front, but, again, we're using alternative data sources involving text and photographs and such to get a sense of the impact that various companies are having in the communities around them because we think that companies with healthier relationships with their communities are also poised to outperform better because they can deliver better for those communities. It isn't always apparent when we look at historical returns over the past couple of decades. And it's important for us to be forward-looking in terms of how we flesh out some of these relationships, but that's really where the action is, I suppose you could say, on stakeholder investing today.

    Oscar Pulido: And are there other social factors out there that we don't fully have a grasp on yet?

    Eric Van Nostrand: Yeah, so I think this is an area that is really ripe for an explosion of data and an explosion of data standardization to go back to where we started the conversation, Oscar, because that is what's going to allow investors to get a more holistic picture of a lot of these newer elements to the sustainable investing conversation. We're going to be able to use traditional investing tools, as well as newer tools like various ways of processing alternative data, to help us identify those impulses. And that explosion of data is what we think is really going to bring the market to this sort of work.

    Oscar Pulido: So, you described an environment where the ability to do the S investing, as you talked about it – you said the S stands for stakeholder – is evolving. The data is getting better; it'll only get better in time. And so, the ability to draw investment insights will get better. Climate must have been that at some point as well –

    Eric Van Nostrand: That's right.

    Oscar Pulido: – where it was a bit in its infancy. And the ability to now do more climate-oriented investing is better. What's next? What's in the future when you think about this area of sustainable investing?

    Eric Van Nostrand: Yeah, that observation, Oscar, I think really speaks to what's special about sustainable investing and what differentiates it from traditional work. In some sense, we're not solving for anything new with sustainable investing. We're still trying to use the data we have to identify strategies that will produce satisfactory risks and returns for our clients' needs. But what's really special about sustainable investing is that we don't have the historical basis for a lot of the investment theses we're deploying today. That's true in climate; it's true in social; it's true in governance. We have a forward-looking thesis that as the carbon transition and greater social awareness and a more acute focus on corporate governance come into play over the decades to come, these companies that are doing well in these metrics are going to start to outperform more. You're right that climate is ahead of social by a couple of years in this regard. And what climate has shown us with the explosion of data in that field over recent years, it's provided a bit of a blueprint for how we expect social to evolve. But I think what's really next is we're going to move beyond just thinking of S as one thing into a much more multifaceted set of investment hypotheses and specific transmission mechanisms that matter for investments. We're going to be focused on corporate culture and what that means for investor outperformance. We're going to be focused on diversity, equity, and inclusion and how that relates to a company's ability to serve its broad constituencies. And, as I mentioned up front, we're going to be focused on a company's engagements with all sorts of stakeholders from its customers to its employees to the communities in which it operates. That holistic vision of sustainable investing is what's really going to move the needle in the years to come.

    Oscar Pulido: Eric, thanks so much for joining us on The Bid.

    Eric Van Nostrand: Fantastic to be with you, Oscar.

    Oscar Pulido: On our next episode of The Bid, we'll talk about diversity, equity and inclusion with Carla Harris, Vice Chairman of Wealth Management and Senior Client Advisor at Morgan Stanley. We'll see you next time.

  • STEVE HOWARD: When you can align purpose, technology, product, people, business model and capital, you can change the world.

    OSCAR PULIDO: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm your host, Oscar Pulido. We're kicking off a new mini-series on sustainability, where we'll touch on topics like new technologies to decarbonize our economy, corporate culture and creating an inclusive workplace, and racial equity.

    Today, we're talking about the future of climate technology. When we think about climate tech, wind and solar power are usually top of mind. But there's a new generation of technology in areas like battery storage, autonomous driving, and power grids. How will these new technologies help us solve the climate crisis?

    We're joined by Steve Howard, Chief Sustainability Officer at Temasek. Temasek is an investment company owned by the government of Singapore, and recently, BlackRock and Temasek announced a joint venture called Decarbonization Partners to invest in next-generation private companies that are paving the way towards a net zero economy. We'll talk about what new technologies are emerging, the opportunity in areas like autonomous vehicles and new fuel sources, and how we can ensure the energy transition is a just transition.

    Steve, thank you so much for joining us today on The Bid.

    STEVE HOWARD: Oscar, it's great to be with you.

    OSCAR PULIDO: So, Steve, you're the Chief Sustainability Officer at Temasek, which is an investment company owned by the government of Singapore. So, tell us a little bit more about Temasek and specifically what you do.

    STEVE HOWARD: Well, Temasek's an investment company headquartered in Singapore, and it's a long-term, very diversified investor with assets all around the world. And a lot of companies that are long term, where we may have quite a significant stake in them, we call them the Temasek portfolio companies. They can be airlines or power companies or retailers, and we're regularly making new investments, mostly into private companies. The firm itself has got offices from Singapore to Europe to India to China to the U.S. with about 800 very diverse international employees.

    OSCAR PULIDO: And I must confess I went on Temasek's website. And one of the terms that caught my attention is that you describe Temasek as a generational investor, which I think speaks to perhaps the long-term nature of the investments that you make.

    STEVE HOWARD: Yeah. Temasek's about 50 years old or so in its history and is investing for the future of the citizens of Singapore. And from that point of view, it's taking a true long-term perspective when you think a lot of the investment world has gone into quarterly cycles or even less; sometimes days, hours, minutes, seconds. We really are thinking long term.

    OSCAR PULIDO: And, Steve, what does it mean to be the Chief Sustainability Officer at Temasek?

    STEVE HOWARD: The firm's made a genuine effort to embed sustainability at its core. So, to really look at it, how do we work with our portfolio companies? How do we shape our future investments? How do we think about climate change, environmental impact, social equity issues, and how do we unlock positive impact? And my role is really to work with the teams, with people across the firm to look at how do we put strategies in place? How do we deliver to that? I'm a lifelong sustainability guy, so when you've got that fantastic diversity and 800 colleagues on the sustainability team, it's great to have that challenge.

    OSCAR PULIDO: So, when you think about embedding sustainability at the core of Temasek’s investment process, where do you start? 

    STEVE HOWARD: Maybe it's worth just taking a step back and looking at climate as a challenge. And you think, so, we produce about a billion tons a week of CO2 emissions, which is the main heat-trapping gas. And we've got about – well, it's less than 400 weeks left before we've used up all the carbon, put it all into the atmosphere to blow the carbon budget to stay under 1- and 1/2-degrees centigrade warming, which is the sort of safe limit that came out of the Paris climate change agreement. You could say the clock is ticking. We need to halve emissions this decade. And then we need to get to zero emissions or net zero emissions around about mid-century at the same time as we have very significant economic growth, urbanization, more people joining the global middle classes. So, it's an incredible challenge, and it means we've got to have root-and-branch transformation of our energy systems and mobility, of the built environment, of food and agriculture, and of the materials we use. This is going to be the race of our lives as we look at how do we reinvent everything.

    OSCAR PULIDO: Certainly, the transition to a low-carbon economy is front and center on many people's minds. But I don't think that the way we achieve a lower carbon economy is just by installing more solar panels or driving more electric vehicles. I think that helps, but perhaps you can talk about what are some of the other sources of innovation that represent the next generation of climate solutions?

    STEVE HOWARD: Fortunately, lots of those things are underway now. And some of the exciting ones, maybe starting with energy. So, solar is super exciting. You said it's not just about solar, but I think this is really a solar century. We're installing more than 100,000 solar panels an hour around the world now; an incredible pace. And if you could look by the end of the decade, solar is already the cheapest form of new energy in many parts of the world, and it's going to get breathtakingly cheap. The same with wind. But like you said, Oscar, it's not enough. We've got to have really good energy storage. So, how do we store that energy? Because the sun doesn't shine in the middle of the night, and the wind doesn't blow year-round. And you can see real development with all sorts of different types of energy storage. How do we have a super smart grid as well in the way we do things? And then how are we really energy efficient? And energy efficiency is everything from LED light bulbs through to really efficient ways of cooling buildings. The 20th century was really about fossil fuels; it was about coal and oil and gas. And this century, it's about renewables; it's about the sun and the wind and the energy systems. And it means we can go from having very large coal-fired power stations to every rooftop being a power station, and we can decentralize and democratize energy production. That's super exciting. And this shift to renewables and the electrification of most things is the base of it, and that connects to mobility because one of perhaps the greatest inventions that transformed the 20th century was the automobile and the internal combustion engine. At the same time, actually, there were electric cars then with lead-acid batteries. They were sort of the dominant form of the early auto. Now you can see 120 years later, we're coming back, and electric vehicles are taking over. And we can see this is happening really fast because with these technologies, as you get to scale, things get cheaper every year. So solar has become almost 20% cheaper every year for the last decade. Electric batteries in cars are the same; they can store more, the energy density increases, and they get cheaper. So, they get longer range for less money. And we can see the crossover point coming now where the purchase price of an EV is cheaper than the purchase price of an internal combustion engine. I'm a geek for these things, but the internal combustion engine is known as ICE, the Internal Combustion Engine, if you think of the acronym. So, you could say the end of the ICE Age is within the next decade or so, so we'll see late this decade we'll see a wholesale switch towards electric vehicles. And then, you can plug them in at home; you can plug them in at work; you never have to go to a gas station again. It's a real transformation. But because they're simpler vehicles, electric vehicles, it also unlocks things like the autonomous vehicles that we've heard about. We made a recent investment in a trucking company based in Sweden, and they're exciting because they're looking at autonomous trucking; but it's kind of trucking as a service. So rather than having to own trucks if you want to ship stuff, whether that's foodstuffs or Coke bottles, whatever you want to ship, they'll plan your logistics for you. They'll look at the flow of goods you need, and then you'll have autonomous electric trucks with no tailpipes, no pollution will take you from A to B. We're in the middle of a pandemic now, but actually, every year we lose about 10 million people to air pollution around the world, and that's coming from industrial emissions, from power stations, from fossil fuel, and from the tailpipes of the vehicles in the world. We'll see this sort of clean air revolution alongside the rollout of mobility and electric vehicles.

    OSCAR PULIDO: I love your analogy about the ICE Age and the internal combustion engine. I don't know anybody that lived in the Ice Age, but I suspect that in the future we might be sitting around reminiscing about what the internal combustion engine was.

    STEVE HOWARD: I know lots of my friends would describe themselves – I'm from the UK, so they describe themselves as petrol heads. They get deep, passionate pleasure from driving internal combustion engine vehicles. Once people have tried an EV – and I tried one years ago, I was taken on a test track, and I was driving very carefully in this prototype EV. And the founder of the company said to me, Steve, just have a go. And I'm not really a boy racer, but the performance was fantastic. So, there's no compromise in these solutions, which is really exciting for people around them.

    OSCAR PULIDO: Steve, as you describe these technologies and some of the newer technologies that are coming on board – well, actually, are they new? Have they been around for a while, or are these innovations that have come about more recently?

    STEVE HOWARD: Some things you could say have been around for a very long time. Solar's half a century old, but it's become more and more efficient and cheaper and cheaper and cheaper. And so, I just renewed the solar power station on my roof here in the Netherlands – not the sunniest part of the world. And the previous panels, they were eight, nine years old. And I've almost doubled the capacity of my roof to produce power by swapping them out. Some other things are really breakthrough innovations. If you look at something like food and ag, we can see a revolution in plant-based foods where we’re really looking at taking food from something that's weather dependent that you grow in the field with chemical inputs to something that's more of a thoughtful manufacturing process that uses sort of a life sciences and biotech behind it. So, something like the Impossible Burger. I confess to having been veggie for a long time, so I was very excited when I had my first Impossible Burger. I was almost teary eyed, actually, because I didn't stop eating meat because I didn't like the taste of it. But they've got something that is an incredibly good analog of a burger because they've had 20, 30 PhDs in a lab looking at how do you create plant-based heme? And heme is the iron molecule that gives it the red-y color and the taste that you're used to associating with a burger. They're using science to develop something that's radically more sustainable. It's about 90% on everything – 90% less water, 90% less greenhouse gas emissions, 90% less land used to produce the same amount of calories and protein with less saturated fats. So, this is where we're using the best of science, and this is what excites me. Where I really like the innovations – they excite me around the things that surprise you that you wouldn't normally look at. There's a really interesting alternative materials company looking at how do you use science and how do you use nature as a platform rather than using, say, fossil fuels as a platform? They were actually looking at the threads for materials because cotton's very impactful on the natural environment, polyester is. But they looked at spider silk as an inspiration, and then they used biological production, sort of nature's engine to make proteins that simulate the sort of spider silk. So, you can spin and weave new materials that are incredibly high performing but have a tiny fraction of the impact. And then they've harnessed the power of mushrooms. And maybe we'd never thought the world would be saved by mushrooms, but mushrooms are really interesting organisms. And I'm an ecologist by original background. I may have more interest in mushrooms than most and not just as a culinary item. But the world's biggest organism is a super mushroom, they think, in the Pacific Northwest. It's sort of a square mile or two of fungal hyphae, all one organism, all underground. The mushrooms are just the fruiting bodies. So, mycelium grows a thick skin. And if you grow it in the right conditions, it produces something that is natural leather. Stella McCartney's got a new collaboration to do high-fashion mushroom leather. It's not just about hard tech innovation on the next generation of solar panels. It's really looking across everything from food to agriculture to mobility to the built environment.

    OSCAR PULIDO: I definitely did not know there was a linkage or could be a linkage in the future between mushrooms and leather. I suspect most people didn't realize that either. But you talk about these innovations. Temasek obviously has a big presence in Asia, but you invest around the world. Are there certain regions or countries that you feel are making more progress when it comes to climate tech solutions?

    STEVE HOWARD: I think there can be a link. Obviously, you look at the innovation ecosystem. So, Silicon Valley and the region still plays a part in this, but there are areas. Southern Sweden and Denmark is a bit of a hub. Israel's a bit of a hub. But you can see – I just think of plant-based food just because we've been talking about it. We've invested in companies that are producing a chicken without an egg, or producing an egg without a chicken both in Singapore. We've done Australian plant-based food companies. We've done U.S. plant-based food companies. So, this is really a global phenomenon now, and you can see today's young entrepreneurs are excited about this challenge.

    OSCAR PULIDO: It's great to hear this is a global initiative. And so, maybe this is a good segue to talk a little bit about the partnership that BlackRock and Temasek have undertaken here, a partnership called Decarbonization Partners. Now, BlackRock and Temasek have known each other for many years, but recently, it was announced that Decarbonization Partners would invest in the next generation of private companies that are helping accelerate the transition to net zero. So, tell us more about this venture and why it was started.

    STEVE HOWARD: I think as we came together as two partners and two firms, we were looking and saying, we know the innovation ecosystem is exciting and that there's lots of technologies and business models out there. And we've got plenty of things except time, so we need to drive to scale. And so, we looked at the combined capabilities of the two firms, really: BlackRock's extensive reach, fantastic data analytics, really strong alternative investment platform. And then on Temasek, the fact that we've been focusing on really early-stage companies from sustainability, but we've also got a portfolio ecosystem of companies that are looking to transition through the energy transition or the food transition or the mobility transition. And it comes back to the issue of we have to halve emissions by the end of the decade. So, we've really got to look at how do we help companies commercialize and commercialize at a real pace? You could say this is a dual objective approach that we're taking here, with a new fund manager that Temasek and BlackRock will co-lead between them. And we're looking at really the maximum impact we can have on decarbonization. We look to invest in those companies and then really, really invest and help them grow. We're in an area that requires radical collaboration. If we're going to tackle what is one of the few existential challenges, a challenge to our existence with climate if we don't tackle it, we need to team up. We need to make the best of our collective collaboration. We need to really build sort of new ecosystems where partners come together to drive scale fast.

    OSCAR PULIDO: I really like how you described making the best of collective collaboration and helping these companies scale faster. So, what sorts of qualities are you looking for in the companies you’re investing in?

    STEVE HOWARD: I'm thinking of any of the entrepreneurs that I've met and spent time with. They are driven by two objectives. I've had some investors in the past saying if you're dual objective or you have two objectives, then that's a bad thing, because you should just be focused on financial returns. But when you spend time with entrepreneurs or investors like us, actually, where you're trying to solve other problems, that's incredibly motivating. So, there's a great alternative dairy company. They're actually focused on how do you produce milk proteins using bioreactors, actually using tiny fungae to make milk protein? So, it's basically milk with no cow, and that's the problem they're trying to solve. They have a fantastic, scalable business. We use 850 billion liters of milk product a year and growing. And dairy is 3% of greenhouse gas emissions. So, they can produce lactose-free ice cream. I'm really looking forward to cheese at some point because I'm a big cheese lover. Or milk products with no cow. You can absolutely measure it because you know you've got a 95% reduction in greenhouse gas emissions, and you can look at the milk products you displace. When we're looking at things, whether we're rolling out energy storage or carbon-capturing storage in Decarbonization Partners, we can count that, too. We need to measure how we're impacting climate. And we know what the carbon budget is for the world. We know what we need to do, and it's to create the road maps to really take us towards that net zero trajectory. And you can pick any of the entrepreneurs, and they're trying to solve for a problem like that. When you can align purpose, technology, product, people, business model and capital, you can change the world.

    OSCAR PULIDO: Steve, you touched on this a little bit, but perhaps go back to the role that capital plays in this. The companies that are at the forefront of this innovation require investments. Why is it important that those investments have patient investors?

    STEVE HOWARD: If you look at a lot of these technologies, they need new facilities. They need to get to economies of scale. And they may have proven technologies, but they're still commercializing. And that's a passage of time, so you need long-term capital behind them. You also need partners that are going to help companies navigate through sometimes maybe even a hostile industrial ecosystem. How do you find the right partners, the right channels to market? And I think on some of these, we're going to need the transitions to go so fast. We also need policymakers to lean in and look at how do they clear pathways. Just my favorite topic of plant-based food. But if you go back in Singapore, the regulators actually permitted the use of some novel food technologies quickly to get out of the way and facilitate the pathway for a plant-based food company to roll out new technology. So, public-private partnership, patient capital, and strategic scaling partners are all part of the mix.

    OSCAR PULIDO: Steve, when we talk about climate change, we should acknowledge that it tends to disproportionately impact low-income communities, the reason being that when climate disasters happen, it's the low-income communities that get hit and that don't have the resources to rebuild back as quickly. So, how do we ensure that this energy transition that you're talking about is a just and fair transition?

    STEVE HOWARD: I think it's a really important question around a just transition. It's not just in the developing world that vulnerable communities are hit most by climate change, but it can be the same in the developed world as well. You're on low incomes, you may not have access to insurance. They will have less access to energy-efficient technology, they'll have a higher proportion of energy bills. There'll be a whole host of reasons. The other thing is there's a jobs element to this as well. So overall, most of these transitions are net job creators; if you go back a couple of years, there were 11 million jobs already in renewable energy. So, it's a real job creator relative to traditional technologies. But if you lose your job as a coal miner, then you don't really care if somebody else gets a job somewhere else or five other people do. It's about your job and your community. And I think because this transition's being driven partially by policy as well as technology, we've really got to look at the communities that are going to be impacted not just by climate, but by these big transitions where there'll be a shift of jobs. And we've got to look at how do we invest in those communities, and how do we make sure that people get access to the skills they need and to a share of that new economy? And lastly, really as we think of the poorer, most vulnerable communities in the world, if we do not aggressively tackle climate change, then this will absolutely stifle development opportunities for hundreds of millions, potentially billions of people. And I think we really need something akin to the Marshall Plan for parts of the developing world, actually, where we really lean in and look at how do we create energy access, skills, food security, climate resilience? Otherwise, it will be a disaster for those people, and we will see refugees on a scale we cannot imagine today.

    OSCAR PULIDO: Steve, let's talk a little bit more about your career. You obviously have a wealth of knowledge about the topic of sustainability. It turns out you were also the Chief Sustainability Officer at IKEA. You've been an advisor to a variety of organizations, including the World Economic Forum. So, how have you seen sustainability evolve over your career?

    STEVE HOWARD: Early in my career, Oscar, I remember being at a dinner party and somebody asking me if I got paid for what I did. And now you see sustainability has gone from people thinking about pandas – pandas are important – but people thinking it's a pandas and polar bear issue to realizing it's about our collective future. It's on every board room. It's, I would say, the topic that people are focusing on increasingly in capital markets, and it's gone completely mainstream. And people with any sort of experience in this professionally are in super high demand. So, it's been a complete and utter transformation. But that's been driven by external factors. We failed to react collectively to climate change. We've more than halved nature. We have plastic pollution from the poles to the equator to the deepest marine trenches. So, we have a challenge to solve this problem, and that's why I think we've seen sustainability mainstreamed.

    OSCAR PULIDO: You've also, as part of your career, co-founded the We Mean Business Coalition. You founded the Climate Group in 2004. So, just continuing along this topic, what lessons have we learned? What progress have we made?

    STEVE HOWARD: Yeah. I think when we put our minds to things, we can transform the status quo, and the status quo is actually an illusion; there is no status quo. I'll give you an example of that. When I was in the Climate Group, I met with the Chief Strategist and a Chief Technology Officer of a well-known European auto company. And I said to the CTO, surely the future is electric vehicles. And he slapped the table and said, never while I am CTO will we produce an electric vehicle. And he's absolutely right, because he's no longer CTO, but they're producing lots of electric vehicles. Sometimes it's easy to look at the present and think, of course, this is the way it is. We feed the world with beef and dairy, or we produce energy from coal and gas, or we power cars by petrol and oil. That's not necessarily the case, and the future is the one we choose. And staying on that subject, you looked at projections of the future. So, I looked at this sequentially on renewable energy when I was in the Climate Group, and we looked at projections for renewables. And there was the International Energy Agency, the World Bank, various financial institutions. Everybody massively undershot just how fast renewable energy took off, except, amazingly enough, for Greenpeace, who got it right. So, the most ambitious projections for renewable energy were the right ones. So, when these things start to scale, when it's a truly an exponential curve, they really, really take off. We can see that now playing out with energy storage technology. You can see it playing out into the development of alternative materials, et cetera, so there's economies of scale. The importance of policy in this; policy risk is significant. But when you look at, say, solar, it was initially German government feed-in tariffs creating incentives for solar power. About $0.60 per kilowatt hour, which is not an insignificant stimulus, so that helped build the early solar industry. And then we've seen various U.S. states, the Chinese government, and elsewhere create incentives to scale solar. And when we're getting to economies of scale, those government policies incentives are critical. We need government innovation and policy making alongside business innovation and investment. And the last thing, I think really focusing on bold targets. I gave a TED Talk a few years ago when I was at IKEA, and I said 100% targets are the ones to aim for because if you have a 90% target, more than 10% of your business wants to be in the 10%. If you have a 50% target, everybody's confused; are you backing the future, or are you backing the past? So, when you go for 100% targets, like 100% electric vehicles, 100% renewable energy, 100% decarbonization, you create marvelous clarity and about what the future looks like. And we've seen that now. One of the We Mean Business Coalition initiatives run by the Climate Group is 100% renewable energy focused. It's called RE100, and there's now nearly 300 companies there. And that's really driven tremendous adoption of things like power purchase agreements and helped accelerate the adoption of renewable energy. That will unlock clarity, innovation, and you will really go for it. So, stretch targets work.

    OSCAR PULIDO: Steve, as the world goes back to normalization, which is a process that is unfolding differently in different parts of the world, but as we're starting to kind of crawl out of the worst of the COVID-19 pandemic, what's your view on individuals realizing the urgency of the climate crisis and that they won't just go back to the status quo but that they will recognize all the things that you've mentioned? You touched on government policy being a key ingredient, but what gets the individual living on planet Earth to change the way they do things?

    STEVE HOWARD: I think you ask most people now and people know extreme weather's the new normal. And as we see that, whether it's devastating forest fires in California or increased typhoons across Southeast Asia, people know that this is really consequential now already, and there's a very high level of concern. And we've actually seen that during the pandemic, there's been no backing off of concern. People expect businesses to deal with climate. People expect governments to deal with climate now. And so, I think that's firmly embedded, and it's not going to go away at all. And that gives me sort of cause for some hope for the future really.

    OSCAR PULIDO:  Steve, you've given a great message to all our listeners about the importance of climate change and innovation and how we're trying to address that. What's the message to the investment community that you would give?

    STEVE HOWARD: I think the investment community can sometimes look backwards to look forwards, and now we can see, actually, change is happening fast. And climate change in particular is going to reshape the business landscape. This is a $50 trillion investment opportunity. So, we have to lean in and look to the future we want to invest into. And the future of investing in new low-carbon, zero-carbon technologies and businesses is inherently massively lower risk than staying invested in the carbon economy of the last century. There's a friend of mine, Sharan Burrow, who leads the union movement, and her quote is, "There's no jobs on a dead planet." You could say there's no financial returns on a dead planet as well, so this requires our best efforts.

    OSCAR PULIDO: I've heard another one along those lines, that there is no planet B, which I think is just maybe another way to think about it.

    STEVE HOWARD: Yeah. There is no planet B.

    OSCAR PULIDO: And so, on that, what is your biggest hope as we move forward towards a net-zero economy?

    STEVE HOWARD: If we just think of the things that we're starting to access now, with solar, there's no peak sun; we have 5 billion years of sun reserves that we've only just began to access. Actually, if we switch to a more plant-based diet, we can have hundreds of millions of acres and hectares come back into production, into natural forestry, into grasslands. If we can end air pollution on our watch, we can create energy access for the 800 million people who don't have access to electricity today. We can enable the third of the world's population, amazingly, that's still cooking on wood and charcoal to have clean cooking and end indoor air pollution. So, we can create a world of abundance where we have abundant energy, abundant food, where we can thrive, where we reverse the decline in nature, and we end global warming. That is absolutely in our capability to do that, and it has to be our organizing principle for the rest of our lives.

    OSCAR PULIDO: Well, they say never waste a good crisis, and it certainly feels like we're in the midst of one now. And you've highlighted a lot of great innovation and hope for the future. So, Steve, thank you for your time, and thank you for joining us on The Bid today.

    STEVE HOWARD: Thanks, Oscar.

  • Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm your host, Oscar Pulido. Today, we're wrapping up our mini-series on megatrends.

    On our last four episodes, we've covered megatrends across a wide spectrum: how advancements in health care and genomics have helped us fight the COVID-19 pandemic; the transition to a lower carbon economy; how China has become a global superpower; and the growth of autonomous and electric vehicles. On today's episode, we'll talk about what we missed and what's next for megatrends with Jeff Spiegel, BlackRock's U.S. Head of Megatrends and International ETFs.

    Jeff, thank you so much for joining us today on The Bid.

    Jeff Spiegel: Thanks so much for having me back, Oscar. And, actually, I think this is Bid podcast appearance number three for me. So, out of curiosity, does that mean I now have the record for most regular guest on The Bid podcast?

    Oscar Pulido: Well, you're right. This is definitely not the first time we've spoken, and I don't have the rankings in front of me. I'm going to say you're maybe our second most regular guest.

    Jeff Spiegel: OK. Well, number two, still proud of that. I think Alec Baldwin is number two in most episodes of SNL hosted right behind Steve Martin, and I'm actually pretty good, I think, with being The Bid's Alec Baldwin.

    Oscar Pulido: Well, we'll try to move you up those rankings, Jeff, but let's talk about megatrends. Throughout this miniseries, we've covered aspects of all five megatrends. And as a reminder, we've talked about demographics through the lens of genomics and COVID-19 vaccines, we've talked about climate change and the move to a net zero economy, emerging global wealth and rapid urbanization in China particularly, and we've also talked about technological breakthrough via electric and autonomous vehicles. So, give us a quick sum up. What are the areas within these five megatrends that are most in focus today?

    Jeff Spiegel: Well, it's always really tough to choose, and I think at the moment particularly so, because really, during a crisis, we most forcefully see the impact of creative destruction. So, for example, if you look at the share prices of a lot of today's megacap technology firms, the ones that rose to prominence really off of the last 20 years of megatrend themes – things like social media, e-commerce, the smartphone – their leap forward really came on the heels of the Great Recession, right? The past crisis, after which capital was really reallocated at large by investors. And as we faced the COVID-19 crisis, we've actually seen a similar phenomenon as investors again look to the future. And as we heard from so many of the amazing guests in episodes one through four of the series – and I should note I'm humbled to be following them today – we heard about the many areas where those future-seeking investors are going. But I won't totally dodge the question, so I'll take it megatrend by megatrend and see if I can give you a real answer here. So, we'll start with tech breakthroughs. Cybersecurity is the main area of focus here. In fact, cyberattacks have actually increased 400% during COVID-19, which makes sense with everyone moving really to an online lifestyle, and cyber criminals have shifted more recently to targeting critical infrastructure, supply chains, and that's been in focus with the colonial pipeline attack, disrupting oil transmission, the JBS hack wreaking havoc on livestock markets. In demographics, and really given how many Americans have already experienced the benefits of genomics and immunology in the form of a jab, I'll leave this one at two words – and those words are “mRNA vaccines.” I think enough said on that one. For urbanization and climate change, I'll kind of lump those together. Whether it was the record breaking almost $800 billion into traditional and renewable infrastructure passed by the EU last year or the current debate in the U.S. that's already seen Republicans and Democrats agree that our own infrastructure in the U.S. needs $1 trillion of spending, government efforts to build out infrastructure – from bridges, to tunnels, to EV charging stations – and connected cities are really top of mind. And then, of course, in emerging global wealth, here we've seen some short-term challenges as emerging markets have been less able to scale up vaccinations versus developed ones. But we continue to see record levels of inflows, actually, into emerging markets as an asset class in countries like India and Brazil as investors look past today to the seemingly unstoppable rise of middle-class consumers in these markets over the mid to long term.

    Oscar Pulido: So, Jeff, I want to go back to some of the areas that we didn't cover in these megatrends. Let's start with rapid urbanization. With the COVID-19 pandemic, we saw a big move out of cities. In fact, you and I live in cities and maybe there was a part of the pandemic where we wondered why people were leaving us. But has this dented this megatrend at all, or do we still see this urbanization theme being one that you consider to be long term?

    Jeff Spiegel: I love that this is where we're starting, because it actually gives us a chance to do a little bit of myth busting right off the bat. And so, here are some of the facts. In our nation's largest city by far, New York, also my hometown, younger millennials, Gen Z-ers, have actually been taking advantage of falling rents driven from the pandemic and moving in large numbers into the city. Actually, more people moved into New York City than have left since the start of the COVID-19 pandemic – which is not to say that there hasn't been some migration. As work from home has enabled people to leave some of the larger cities like San Francisco, the top areas people are moving to are actually just other cities – mid-sized cities like Austin, and Phoenix, and Nashville – so still urban. Still supporting that trend towards urbanization, which, of course, is actually driven primarily from emerging markets. Eight out of the 10 largest cities in the world are in developing countries, and a lot of these cities' population growth is really driven by a desire of citizens in these markets to pursue better economic opportunities, education, healthcare, meaning that drive to urbanize isn't being deterred even by the magnitude of the COVID-19 crisis. Throughout history, there have been major events, such as the flu of 1918, such as 9/11, which led a lot of people to forecast the demise of cities. But time and again, cities have overcome. There's that famous New York Post headline when New York City was at its nadir in 1975: “Ford to city – drop dead.” But each time, people have returned to pursue economic opportunities, maintain proximity to networks of capital innovation and culture in great cities like New York.

    Oscar Pulido: There's no question that New York is exhibiting a lot of resilience. We're seeing some of the activity pick up now, so it's interesting to hear you talk about the people actually moving into New York being in greater numbers than those that have left since the pandemic. But as cities grow and develop, one thing that comes to mind is the need for infrastructure. Infrastructure has been a hot topic politically. So, what are the latest developments here?

    Jeff Spiegel: So, infrastructure revitalization in the U.S. is like that old joke about the weather. Everyone talks about it; no one ever seems to do anything about it. The United States is the wealthiest nation in the world, but it ranks 13th in infrastructure and that poor status has persisted for some time. That said, even in this totally unprecedented political gridlock where it seems like there's nothing Democrats and Republicans actually agree on, both are calling for over $1 trillion of infrastructure spending right now. Specifically, if you look at President Biden's plan, he's focused on modernizing 20,000 miles of highways, roads and streets, fixing the 10 most economically significant bridges in the nation, repairing the worst 10,000 smaller bridges, providing critical linkages to communities, replacing thousands of buses and rail cars, hundreds of train stations, renewing airports, modernizing seaports, expanding transit and rail into new communities. That's a mouthful and that's just on the traditional infrastructure component. Most of these sorts of items are the kind that both Democrats and Republicans are actually supporting together right now.

    Oscar Pulido: Well, and when we think about infrastructure, you might remember we spoke with Will Araujo of Cruise and the developments going on around electric and autonomous vehicles. We talked about how these vehicles could help with ride sharing and change the way that people commute. So, how will cities adapt and become smarter to support the needs of these technological advancements? I'm thinking, for example, about the charging stations that you need for these electric vehicles.

    Jeff Spiegel: Yes. So, unfortunately, everything's not always totally rosy in Washington, and so this gets into some of the components of the Biden Build Back Better plan that are less aligned across Democrats and Republicans. So, for example, President Biden's proposal involves spending $174 billion, building 500,000 charging stations by 2030. And as with anything political, it's hard to say whether this provision will make it into a final bill, but – and you heard this from Will really clearly – the electric vehicle future appears to be coming either way. There are – pardon this pun – too many speed bumps for EVs today, with only 26% of rural citizens having an EV charging station within five miles of their home, and even densely populated areas having only about 65% of their people that close to a charging station. So, whether or not in the U.S. the federal government is going to be the driving force, these issues are being addressed in America and around the world. Over 65 million EVs are predicted to be sold by 2040. A lot of progress is actually going to come out of local government regulation; in California, we'll see the banning of sales of traditional combustion engines as soon as 2035. And it's a truism in the car industry that so goes California, so goes the world. The world's 100 most populous cities emit one fifth of global carbon emissions and EVs are being seen by many of them as a way to curb those emissions impacts. And again, many of those cities are in the emerging world, where countries like China have ambitions to achieve carbon neutrality by 2060, a goal which absolutely depends on advances in energy-related technologies, and certainly, that includes electric vehicles.

    Oscar Pulido: Jeff, obviously the examples that you cite around electric and autonomous vehicles are a great example of technological breakthrough, which is one of the megatrends. But what other examples within tech can we think about that are progressing?

    Jeff Spiegel: So, in our upfront, I noted that cybersecurity is really the most in-focus area within the technological breakthrough megatrend right now. So, I think it probably makes sense to start there. In 2011, there were two cyber criminals on the FBI's most wanted list, and today, there are actually over 100. In fact, those folks and others are hacking a new computer roughly every 39 seconds. In response to that, corporate spending on cybersecurity to counter the threat is rising quickly. Worldwide spending on information security and risk management tech and services is actually forecast to top $150 billion this year, up 12% from last year and a staggering 50% from four years ago. Of course, the need to advance here is constant as cybercrime advances just as fast as cyber defenses, which means renewed investment is constantly required. But the work actually also goes beyond the private sector. In May, President Biden signed an executive order to improve the nation's cybersecurity and that will create a standardized playbook and a set of definitions for federal responses to cyber incidents. And in his latest budget proposal, he's included significant spending to modernize the federal government's IT infrastructure specifically to be more resilient in this area. Of course, there's more to tech breakthrough than just cybersecurity, and other areas are accelerating now, so many of them, we can't possibly cover them all in detail today. But whether it's cloud and 5G enabling everything from AVs to surgical robots, artificial intelligence supercharging really an increasingly remote economy and one that will remain more remote than ever, even post-pandemic, or the number of industrial robots doubling by 2025 in response to supply chain disruptions, there's no end to the accelerations that we're seeing this year and going forward in the areas of technological breakthrough.

    Oscar Pulido: I always like that FBI statistic; so just to be clear, there’s been an over 50-fold increase in the number of cybercriminals on the Most Wanted List over the last 10 years. You’re always chock full of statistics; I just did some math based on what you were saying. When you talk about technology, Jeff, how much of the technological breakthroughs are really genuinely new technologies versus they’re just evolutions of an existing technology?

    Jeff Spiegel: Will made a point that I really liked about the beginnings of self-driving.  He called out the advent of cruise control as the start of it.  I might go even a little further back and point to the automatic transmission as the first instance of the car starting to take responsibility from the driver.  We take these innovations for granted as they are longstanding, and we look at self-driving as something completely new.  But I couldn’t agree with Will more that today’s self-driving technologies are just quantum leaps forward on a long journey. But in many ways, it’s advances in ancillary technologies, sometimes longstanding ones, that make breakthroughs possible in a virtuous cycle.  I always think of The Jetsons, and as a kid, I couldn’t figure out why we didn’t have the ability to talk to each other via video like Mr. Spacely does when he’s yelling at George.  I mean, we had phones and movies and TVs; why not video phones?  The baseline technology was there, but all the ancillary components weren’t.  Zoom, WebEx, they all rely on many other technologies – like broadband and the smartphone – as well as evolving consumer habits, to work rather than being strictly new ideas. So, let’s take the internet of things – of which self-driving cars are a part – and which is my favorite example of this loop.  So, let’s go back to that rapid fire list of in-focus tech innovations I rattled off to your last question and see how they come together.  Autonomous cars are hardware (the car, the sensors) enabled by software (effectively hyper-advanced MapQuest) that rely on artificial intelligence (which helps the car anticipate and react), and that in turn uses 5G to reach the cloud and keep learning.  Then of course, all of this needs to be protected by cybersecurity. Okay, that was a mouthful but hopefully it illustrates this point that old technology is constantly advancing – even where we leap forward so far that an innovation feels brand new – and it’s all enabled by other gradually advancing technologies that make those big leaps possible.

    Oscar Pulido: I am laughing when you say MapQuest and wondering if people still know what that is when we used to print directions out and have them next to us on the passenger seat in the car when we were driving somewhere. So, clearly, we’ve made a lot of advancements. Jeff, as part of the mini-series, we talked to BlackRock’s Salim Ramji and Chris Ailman, who’s the Chief Investment Officer for CaLSTRS, and the topic was the transition to a low carbon economy. So, talk to us a little bit about how technology is helping fight the climate crisis. What developments are we seeing here?


    Jeff Spiegel: So, worth a quick reminder here and I’ve mentioned this in previous Bid episodes.  While we position technological breakthrough as its own megatrend, tech really infuses all 5 of our megatrends and a lot of innovation in a variety of areas today.  From the technology platforms that enable mRNA to connected cities, the areas where EM consumers are leading the way in tech adoption, like digital payments, and of course, to the technology that makes climate solutions more efficient and effective. Again here, COVID-19 has been a catalyst.  Renewable energy demand actually grew 7% in 2020 while traditional energy demand fell by 5% during the pandemic.[1]  Much of this is enabled by rapidly advancing technology in energy capture, storage and transmission that will enable 50% of the world’s energy to come from solar and wind alone by 2050. As ever, necessity is the mother of invention.  In April, the U.S. committed to halving emissions by 2030, a feat only possible via expanding our production and consumption of clean energy.[2]  We already talked about China’s net neutrality target and countries in Europe out to Japan have all made similar announcements.  What that means is that the public and private sectors will have no choice but to keep investing and developing technologies to reach these critical targets.

    Oscar Pulido: So, let's switch gears and let's talk about demographics and social change. On the first episode of the mini-series, we focused on genomics research with Stephane Bancel, the CEO of Moderna, and we also talked to Dr. Samarth Kulkarni, the CEO of CRISPR Therapeutics. And Jeff, you've alluded to this, the advancements in medicine, how they've allowed us to develop vaccines for things like COVID-19 in record time. So, what other developments in healthcare are we seeing?

    Jeff Spiegel: Before answering that, can we just reflect on a moment on Samarth's comment that children born today are likely to have a life expectancy of 120 years driven by advances in cell and organ regeneration that actually make 150 years not out of the question? That's kind of blowing my mind. Because if you look at even the past decade or so, global life expectancy has been rising super rapidly, but it's still only reached about 73 years so far. Actually, from 2015 to 2025, the number of people worldwide over 60 is going to have doubled from 1 billion people to 2 billion people. And we kind of have two phenomena going on here. So, first, that people are living longer, and second, that fewer people are being born, meaning a greater percentage of the world's population is therefore older. That aging population and associated increases in healthcare expenditures globally, that's what's driving an amazing amount of spending and therefore innovation and breakthroughs in medicine that are going to make the potential for that prediction of that 120-year life expectancy to come true. Let's look at some of the examples. There are new approaches in immunotherapy to leverage or manipulate a patient's own immune system to fight rheumatoid arthritis, gastric cancer, and a variety of other cancers. Gene editing is allowing us to, for the first time, this year, begin releasing genetically modified mosquitoes that can cull the broader mosquito population and prevent the transmission of some of the world's worst killers, like malaria and dengue fever, in addition to more emerging threats like Zika. And before we even get to that fully organic organ replication that you guys were talking about, scientists believe they can actually first get to a point where they can 3D print functioning organisms that are custom made for each patient, and that's estimated to save millions of lives each year. But actually, all of that just covers what we think of as traditional medical breakthroughs where technology plays a role. But in the more traditional sense of technology beyond medicines and vaccines, there's a really important virtual angle at play here. So, since the onset of the COVID-19 pandemic, the Mayo Clinic has actually conducted more telehealth visits per day than all visits in health combined in 2019. COVID has changed the game here, with countless millions of people, frankly, forced to get comfortable with telemedicine over the last year. And this is really critical in supporting that aging population, because it means that technology is enabling the application of medicine at scale. It's estimated that a single medical practice can save its patients about $3 million in total and reduce travel by about four hours per year per patient by offering telemedicine, right? And again, with this larger population, particularly older population, not only is that more convenient, but it's more efficient and it's more cost effective for the individual seeking care as well as for society that's paying for a lot of that care.

    Oscar Pulido: It is really interesting when you think about the advancements in healthcare. And when you talk about a life expectancy of 120 or even 150, it seems hard to believe. But I guess there was a time when you lived on planet Earth that living to the age of 73 also seemed kind of impossible, so don't bet against human innovation. Jeff, you might remember we also talked to BlackRock's Molly Rosenman. We talked to her about the trend of emerging global wealth. Molly is now on her second career stint in China. In China, there has been a One Child Policy for many years. That has resulted in a population that has aged and where we have a lot of people really over the age of 60. That percentage of people is only going to continue to grow. Just recently, they’ve announced a Three Child Policy. So, there’s been an evolution in how Chinese government officials think about demographic challenges. So, how does this trend of emerging global wealth play out in economies like China and India versus how it plays out in economies like the U.S. and Japan?

    Jeff Spiegel: Actually, as an aside, and I don't know if you know this, Oscar, I'm really personally grateful to Molly as she's the person who brought me into BlackRock years ago and she's been a mentor to me ever since. And I thought it was awesome to get a take from Molly, a professional who's lived and worked in the Asia-PAC region on two sides of a roughly 20-year span. So, for some time now, China has been the world's most populous country, but we're now at an inflection point where India will actually overtake it as both reach about 1.5 billion people in the next five years. So, China's older population is growing rapidly, but its younger population is in decline by the numbers. Let's compare that: India's population growth is largely fueled by a younger demographic, meaning that there are more young workers able to replace older workers as they exit the workforce. That's a pretty fundamental difference in the societal burden of an aging population between the two countries. Let's take Japan and Europe: Here, we actually also have low birth rates, meaning the situation demographically is more akin to China's. But the difference is the social safety net. These places are already largely urbanized, which means you haven't seen the older population sort of left behind geographically and more on its own as younger folks move to cities. And these places also have more established healthcare and pension schemes for the elderly, so that social safety net is really important. At the end of the day, what that's telling us is that China is actually facing a fairly unique challenge here in being an emerging market country with such low birth rates and also having a large elderly population without that social safety net in place. That said, China is also the most exciting emerging market country when it comes to innovation. The top seven EM economies will be bigger than the top seven DM economies by 2036, and China is, by far, the first among them. I should say, by EM, I mean emerging markets and by DM, I mean developed markets. So, by 2030, as much as 60% of energy is going to come from renewables. Over the next 10 years, Shanghai is going to add about seven million new citizens. China's already number one in the installation of 5G infrastructure and develop a homegrown semiconductor. It's the leader in mobile payments and has the world's largest online population. So, investors have to balance some of the demographic headwinds we just talked about, not to mention some of the social and governance challenges in China that we heard from Molly about, with those amazing tailwinds that China has going for it as it moves forward so rapidly in areas like climate and technology.

    Oscar Pulido: Jeff, I really liked what you said; megatrend investing is about investing in human innovation. So, really, from an investment perspective, how should we think about where the best opportunities are?

    Jeff Spiegel: Yeah, we're building on each other's ideas just like great technology is building out this ecosystem in a virtuous cycle. So, virtuous cycles everywhere. And I think there's also a virtuous cycle to the way that we talk about investing in megatrends, three items that are self-reinforcing and really critical: one, to weight for tomorrow, two, to focus across value chains, and three, to think beyond borders. And I think the reasons, as I go through them, will be fairly clear from what we've talked about throughout the episode. So, of course, when I say weight for tomorrow, I don't mean W-A-I-T. I actually mean quite the opposite. So, the FAANG-M cohort of stocks, those technology firms, make up about 22% of the S&P 500, but they only represent about 3% of global patent applications. Now, most investors, just by holding the S&P 500 in their portfolio, are therefore very exposed to these firms. So, in our solutions for investors looking to expand their allocation to innovation, we focus on the mid and small cap firms that are low weights and existing benchmarks and that have the potential to ride the next 10 years of megatrends to become those megacap leaders of tomorrow. So, one, weight for tomorrow. Two, as far as value chains, I talked about this in that virtuous cycle around autonomous vehicles. Investors looking to access this trend have to think beyond car makers. Today's innovation is really multifaceted even for discrete themes, and so investors need to consider the range of firms that enable and benefit from a trend rather than just the most obviously involved companies. And lastly, these value chains and opportunities have to be thought of globally. I think Molly mentioned one of my favorite stats: China and India alone have over 1 billion people who have yet to access the internet. That's a billion people who have never made a mobile payment, never tweeted, never liked, never streamed anything. And as you think about the amazing returns of U.S. equities over the last 10 years, so much of that has actually been driven by exactly those activities proliferating across the United States. Now, they're coming to the rest of the world and they're doing it rapidly at a time when, actually, U.S. investors by and large are underweight global equities. So, I'd encourage our listeners to challenge traditional home country bias and remember that the rest of the world is an essential ingredient in any great megatrend portfolio. So, weight for tomorrow, connect the value chain, and think beyond borders.

    Oscar Pulido: Well, I think I've said this in the past when you've joined us on The Bid, so I guess I'll just say it again, which is you have a treasure trove of interesting statistics to share at cocktail parties, and actually, maybe, maybe we're heading towards an environment where we can have those cocktail parties in person and not over Zoom. So, Jeff, thank you for joining us today on The Bid. It was a pleasure having you.

    Jeff Spiegel: So, if you need any zinger stats before you get to your next cocktail party, Oscar, give me a call. Always at your disposal to provide a few. I'm also looking forward to coming back soon so I can keep pushing up my guest count. Because, yes, I am honored to be The Bid’s Alec Baldwin, but I’m hoping to one day be its Steve Martin.

    Oscar Pulido:  Well, I said it at the beginning, Jeff, we're going to look to move you up that list. Thanks again.

    That wraps up our mini-series on megatrends. Our next mini-series dives into sustainability. We’ll talk about innovations in climate technology, how Covid-19 has increased the focus on social factors like corporate culture and employee satisfaction, and the importance of diversity and inclusion in the workplace. We’ll see you next time.

  • Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm your host, Oscar Pulido. We're continuing our mini-series on megatrends, the long-term forces shaping our future. On our last episode, we talked about emerging global wealth, particularly in China. Today, we're covering technological breakthroughs through the lens of electric and self-driving vehicles.

    The way we're hitting the road is changing. Sales of electric vehicles hit a record high in 2020. And right now, there are about 1,400 self-driving cars in the U.S. with over 80 companies testing their potential. The usage of both electric and autonomous vehicles is expected to grow exponentially over the next few decades.

    So, today, we're talking to a company that's spearheading this growth: Cruise, a self-driving car company founded in 2013. We'll speak to Will Araujo, Director of Autonomous Vehicle Development at Cruise, about the transformation of autonomous and electric vehicles over the past decade, how cities and technology have shifted as a result, and how long he believes it will be until we all have our hands off the wheel.

    Will, thank you so much for joining us today on The Bid.

    Will Araujo:  Thanks, Oscar. Excited to be here today.

    Oscar Pulido: So, Will, why don't we start with a little bit of background on Cruise? Tell us about what the company does, and what is your role at Cruise?

    Will Araujo: Yeah, definitely. So, Cruise is a self-driving company. We're based in San Francisco. And we're building an all-electric, self-driving rideshare and delivery service. We're backed by General Motors, Honda, Microsoft, Walmart, SoftBank, and others. And our mission is to deliver a safer, cleaner, more efficient transportation alternative. And we believe that self-driving cars, when deployed at scale, have the potential to save millions of lives, to reduce emissions, and to reshape our physical environment. And also, to give people billions of hours back and to restore freedom of movement. But right now, at Cruise, we're focused on rapidly developing the technology. And I support that goal by leading the autonomous vehicle development organization – we call ourselves AVDEV – within Cruise's hardware department. And my organization is responsible for managing some of our new vehicle builds and integrating new technologies into our fleet. We are also designing custom hardware for calibrating our sensors across Cruise's growing vehicle portfolio. So, that includes the Cruise Origin, which is a purpose-built, electric, autonomous vehicle. And we also work in collaboration with GM; my teams lead vehicle testing programs. We conduct technical deep dives, and we do root cause analysis to ensure safety and reliability across Cruise's fleets. So, we work both across the company and with our external partners to achieve Cruise's vision.

    Oscar Pulido: So, how has the autonomous vehicle market evolved over the past decade since Cruise was founded? And maybe tell us a little bit about the technological advancements that have gotten us here.

    Will Araujo: Right now, we're actually at a really interesting inflection point as the AV industry really shifts from R&D and towards commercialization. We've always said at Cruise that it'll take three things to emerge as a leader in this industry. Number one is billions of dollars in capital; number two is engineering talent; and number three is deep integration with an automaker, or two in our case. And very few AV companies have these resources and attributes, which is leading to some inevitable consolidation in the market as a few leaders start emerging ahead of the rest. This past year was especially critical as the pandemic showed us firsthand the urgency of our mission. Roads were cleared of traffic when shelter in place went into effect. In San Francisco, the roads really cleared out around here. But human drivers got faster and more reckless. And despite the temporary reprieve from the smog that typically blankets our skylines, the West Coast was gripped by the worst wildfires in recent history, and hurricanes racked the East Coast. And in a year when drivers got worse, Cruise actually got closer to achieving our superhuman performance. Last November, we actually began fully driverless testing in San Francisco as a small but very significant step toward our all-electric, shared, self-driving vision.

    Oscar Pulido: So, you've touched on the public automakers now a couple of times. That seems like an important partner to have on your side. But should we be surprised that they're embracing this transition to electric and autonomous vehicles?

    Will Araujo: Yeah, that's a great question. And we're seeing it across the entire industry right now. It seems like every other week an automaker is coming out and talking about their vision for the electric future. But I know that from the beginning, GM has embraced this very early on. There is the EV1 way back, and then more recently, the Chevy Bolt EV. And so, we actually built Cruise's first production AV off of that Chevy Bolt. So, it's actually a modified electric vehicle that's on the road now that we’re using and we're testing with. So, I think we're just going to see more and more of this. Automakers are going to continue to embrace an electric future and a vision for that. And we're going to see autonomous come more and more into play as well at different levels within those automakers and within some of their products. But that's a very, very different product than what Cruise is focusing on. We're focusing on a ground-up purpose-built vehicle. Very different from some of the advancements we're seeing with some of the automakers.

    Oscar Pulido: And so, it's important to note, Cruise vehicles are electric vehicles and autonomous vehicles at the same time. Now, I know I can go buy an electric vehicle. I don't think I can actually go and buy a self-driving vehicle, at least not yet. But Will, tell us about how the technology for autonomous vehicles is actually already in the existing car fleet.

    Will Araujo: I'll take a quick step back and share my perspective on this. And I think about one of the older vehicles that I had early on. I think about my old 2000 Hyundai Elantra that had just basic cruise control. And what that enabled me to do in that vehicle was stay at a constant speed. And so, I'd stay, maybe, right under the speed limit, or maybe a couple of notches over. And set the vehicle to that and it would maintain that speed, right, and if you hit the brake, the cruise control would disengage. And so, what we see with automakers is they've incrementally advanced that technology over time. GM has, I think, one of the best versions of that technology out there right now in GM Super Cruise. So, in addition to that just maintaining the constant speed, it now has radar-based cruise control, or distance-based cruise control. So, based on the speed of the vehicle in front of you, your vehicle will adjust based on that, right. And so, they're adding more and more features that are incremental improvements on that cruise control type of technology. Now, what Cruise is doing, we're doing something that's completely different. What we're doing is we're building a ground-up purpose-built vehicle that is 100% focused on being autonomous. And why that's different is we're assuming from the very beginning, from the initial steps of our design, that there is not going to be a human in the loop. So, you don't need to do things like monitor for the human in the vehicle. So, the GM technology and the way that works is that they're actually monitoring your eye gaze and ensuring that you're paying attention to the road. In Cruise vehicles, we're not expecting anyone to ever be behind the wheel. And in fact, the Origin is designed without the wheel to begin with.

    Oscar Pulido: And so, I can think about a couple of benefits of having an autonomous vehicle. Presumably, there's less accidents on the road. I'd probably have more time in the vehicle itself to do other things if I'm not driving it. And then if I think about, there's people who maybe don't know how to drive or don't have a car and so a Cruise vehicle would get them places they need to go. What are some of the other benefits that we're not thinking about that autonomous vehicles can bring?

    Will Araujo: I think it's going to be a real game-changer for society. And I think that's one of the things that's most exciting for everybody working at Cruise and working in this industry, in general. We're living, currently, with an unacceptable reality where there are over 40,000 road fatalities every year in the U.S. alone. Air pollution in cities is, I think, in some cases as bad for you as smoking 20 cigarettes a day, according to a recent study from the University of Washington. And the average person in San Francisco actually spends more time in traffic these days every year than on vacation. And so, all-electric AVs are really going to rewrite this reality. But the best part of that impact is already happening, actually. The industry, we tend to focus on a future state, but with fleets already testing on the road, every AV company has the potential to make an impact in their communities now. Cruise has joined the Pledge 1% commitment, and we've actually already delivered over a million meals in San Francisco here. And so, in addition to the fact that our fleet is all-electric, we're actually reducing the carbon footprint and cleaning up our environment.

    Oscar Pulido: Well, I definitely want to spend less time in traffic, more time on vacation. You touched on air pollution and that one of the positive benefits, presumably, of a move towards electric and autonomous vehicles is less of that. So, I have to ask you, climate change; it's a topic that we're talking about every day. How do electric and autonomous vehicles help tackle the climate crisis?

    Will Araujo: Yeah, so this is super exciting for me, especially, because I spent a lot of time early in my career working in environmental policy. And reducing, and ultimately reversing, the impacts of climate change is why Cruise has chosen, from day one, to operate an all-electric fleet. Transportation is responsible for over 40% of greenhouse gas emissions. And rough calculations show that the AV industry in California alone drove about 1.99 million miles in 2020. So, this is according to the California DMV stats that recently came out. And half of these miles were driven by hybrid or gas-powered AVs. In Cruise's case, actually, we're proud that the 770,049 autonomous miles that Cruise drove in California last year in 2020 were powered by 100% renewable energy. And we feel if the whole industry made these sorts of commitments, we could really have a meaningful reduction in the collective carbon footprint right now in just the test miles that we're driving. Obviously, in the future, this is going to expand exponentially. I think safer, cleaner, more affordable transportation means that more people can travel within a city, there's more access to transportation. It opens up new economic possibilities, better connecting people with the jobs and resources they need, alleviating congestion that gridlocks a city and ties up a lot of people's time. And then all the while, like we said, offsetting the CO2 emissions that we're breathing in every day. So, we believe that by making zero-emission rides available and affordable for everyone, we can help San Francisco, California, and our country meet their ambitious climate goals.

    Oscar Pulido: Will, I'm picturing one of these autonomous vehicles. It's basically a big supercomputer. And that raises the question, are there any cybersecurity risks? Is there actually a risk that the car takes you somewhere where you didn't want to go?

    Will Araujo: Yeah, it's a really good question, Oscar. AVs are one of the foremost examples of IoT, and I think our approach to security is much like overall attack. It should always be improving; it's not just a box you check. And for us, the best way to have a really good and safe system is to have a good offense. And security is integrated into our entire stack; it's not a bolt-on afterthought here where you build the car and then make it secure. And one of the fun things, actually, you might be aware of this, Oscar, that a few years ago, there was a famous hack where a couple of hackers, they hacked into a Jeep, and they were able to control it remotely. And that was a super scary moment for the industry, to think about that. And at Cruise, we obviously, we’re aware that that happened. And we went out and we actually hired those hackers, Charlie and Chris. And they've been working with us for many years now. And they're the ones who are attempting to hack into Cruise's systems and finding the vulnerabilities. And so, we're constantly improving. And we have some of the best talent in the world that's doing that.

    Oscar Pulido: That's a very intelligent recruiting strategy that I think will, hopefully, yield you some good results. Let me ask you about another question with respect to maybe potential vulnerabilities, which is having recently almost run out of gas driving around town and feeling that terrible feeling of anxiety, is there not a challenge of having enough infrastructure to support the charging of electric vehicles?

    Will Araujo: That's a great question, Oscar. And studies show right now that 88 out of the top 100 U.S. cities have less than half the necessary charging infrastructure needed to handle electrification of scale. So, we believe we can do better, and we believe we can lead by example. And starting right here in our hometown of San Francisco. And by doing this, we're helping move the market here and using the adoption for industry as a whole. What we're doing, back in February, Cruise actually filed a project application to build a facility that will serve as a research and development center for us, and commercial operation center. It's going to be one of the largest electric vehicle charging stations in North America. And so, it's going to help power our all-electric, shared, and zero-emissions future. And importantly, too, this facility will include two charging ports free for public use, which will help further extend access to EVs. So, we think that by continuing to invest and make these large infrastructure investments in charging, helping be a leader in that space, this is something we can tackle together. But it's going to be a challenge, for sure.

    Oscar Pulido: And when we think about the electric vehicle and autonomous vehicle space, I mean, you've mentioned San Francisco, but part of that is that's obviously where Cruise was founded. It's sort of your home market, but I think this is a global industry, right?

    Will Araujo: Yeah, so San Francisco remains our first launch destination overall for AV deployment. In addition to that, though, Cruise certainly has global ambitions. And last year, we acquired a radar company based in Munich, and we've been integrating their technology and their team into Cruise. So, it's been really exciting working with that team. We have a partnership with Honda. And most recently, we announced some of our plans to go international and specifically, into Dubai. Dubai shares our vision for the future of transportation and sees the innovative solutions that self-driving technology can unlock for safety, mobility, and congestion in cities. And Dubai is leading the way in developing a forward-thinking regulatory framework that will allow for safe deployment of vehicles like the Cruise Origin. And this agreement is actually the first of its kind in the world between a government entity and a developer of self-driving vehicle technology. It's a major step forward in Dubai's self-driving transport strategy, which is aimed at converting 25% of total trips in Dubai into self-driving transport trips across different modes of transportation by 2030. So, the Roads and Transport Authority there will work with Cruise to develop a framework for safely launching the Origin. Again, that's Cruise's purpose-built, all-electric, self-driving, shared vehicle which we unveiled last year in San Francisco. And we plan to begin operations in Dubai in 2023 with a goal of scaling up as many as 4,000 Origin vehicles by the end of the decade. So, it's super exciting in terms of getting our product out there internationally.

    Oscar Pulido: So, you've painted a great picture about the efficiencies that autonomous vehicles bring, the use of renewable energy. But what are some of the misconceptions that people still have to overcome? I have to imagine that you're talking about decades’ worth of people driving their own cars using a steering wheel. I think you said that Cruise vehicles don't have a steering wheel. So, what are still some of those hills that you're trying to overcome with skeptics?

    Will Araujo: Yeah, I mean, look, the industry has experienced a fair share of hype. But it's important to remember that this is an incredible technical challenge, and a safety-critical one at that, but a solvable one. And with breakthroughs across AI, across hardware, across robotics, and beyond, the promise of AVs is coming now. I think there's been a longstanding debate on city testing versus suburban testing. And the reality is that all miles are not created equal. City testing, where Cruise focuses a majority of our work and where we have historically as well, it's a critical strategy in solving the AV challenge and achieving a superhuman performance. We test every day in the complex urban environment of San Francisco. And this gives us a dramatic increase in the rate of learning that we have with autonomous vehicles. In fact, we've run a large fleet in the city almost 24/7 every day. And what really matters is the complexity that we experience when we're driving those miles. So, for example, we see construction areas and emergency vehicles up to 40 times more frequently in San Francisco, compared to our testing in the Phoenix area. So, we gain just tremendous value from these types of city miles. And so, by solving these hardest problems first, we're able to not only build an EV that can handle both the mundane and unpredictable elements of self-driving, but we're also able to scale faster. And I think that's going to give us, ultimately, a really strong advantage when we're ready to scale.

    Oscar Pulido: And Will, oftentimes when we see technological breakthroughs like autonomous vehicles, there are sort of a reverberating impact on other industries, meaning it changes the business model of other sectors. Is that the case here with the innovation that we're seeing in autonomous vehicles?

    Will Araujo: I think you're going to see all sorts of interesting products and services that are layered on top, or come out of, AVs being introduced into society. AV is as close to artificial general intelligence as it gets in many ways, which is why we call this the tech challenge of our generation. Robotics and machine learning are also converging really rapidly right now. That’s not only accelerating AV development but also pushing the boundaries of the robotics field as it becomes one of the next frontiers for artificial intelligence. So, with this, I think we're going to see a new kind of relationship between humans and machines, which I think is going to be super interesting for all of us going forward.

    Oscar Pulido: And what do you think's next for autonomous vehicles? Am I going to summon a rideshare and get picked up in one in the near future? Am I going to be able to buy one for myself? Or is it going to be more of a kind of government piece of property that I ride, like public transportation?

    Will Araujo: Yeah, that's a great question. Actually, I think one of the most frequent questions I get these days from family and friends is, hey, when can I buy one of these things? And our ultimate goal at Cruise, actually, is to make personal car ownership obsolete at the end of the day. We're far away from that right now, but today, cars still sit parked 95% of the time and have a limited lifespan. Not to mention the disproportionate space we dedicate to them in our cities with big parking structures. So, we're focused on rideshare as a better, more efficient, and affordable transportation experience. And that's really what Cruise's focus is right now.

    Oscar Pulido: I have to admit, I was at the DMV, which for those that don't know, is the Department of Motor Vehicles, the day I turned 17 to get my driver's license. So, I'm excited by what you're saying, but there's a part of me that wonders whether there's going to be folks who still want to drive their own car. How do you think about that for folks who have been so used to driving their own car for so many years?

    Will Araujo: Oh yeah, I mean, look, people love cars. Period. I love cars, a lot of our team does. The way I think about this is that I think about the transition that we made from horses to our first vehicles, right. And I think it's a good parallel that we might see in the future as well, is that as more and more personal vehicles get phased out to some degree, we'll see this being kind of more of a hobby. And people having an opportunity to actually get behind the wheel at some point in terms of some race cars and things like that. They'll be able to get on the track and work on their cars and continue that hobby. But at the same time, we know that once Cruise achieves a level of superhuman performance I think that there's almost an ethical obligation, right. We don't want humans that are inherently flawed, they're going to make mistakes while driving, to be on the road and be able to potentially cause disaster situations when we know and we can demonstrate that autonomous vehicles wouldn't do that in those same scenarios.

    Oscar Pulido: It's funny, listening to your story there. I used to work with a colleague who said exactly that. That in the future, there will be these theme parks or these vast pastures of land where people can go and drive their cars, but the vast majority of us will be using autonomous vehicles. So, Will, I just have one last question for you, which was what was your first experience like in a self-driving car?

    Will Araujo: I was super excited to get into our AV at the beginning when I joined Cruise. I mean, I think that my biggest impression was that it was pretty boring, at the end of the day. And it was very slow-moving. It was cautious. And it felt really safe because of the fact that you're going around so slowly and everything. It just felt like, you mentioned the DMV, it felt kind of like that DMV driver and how they would drive: completely following all the rules, stopping perfectly at every stop sign, things like that. It was just kind of exciting to see that we, humans, could develop technology that could actually create that experience, and do it so early on. It just feels very safe, very, very boring, which is kind of how we want it to be at the end of the day.

    Oscar Pulido: Well, Will, you've shared a lot of great information. Best of luck with all the innovation that is going on at Cruise. And thank you so much for joining us today on The Bid.

    Will Araujo: Thanks so much, Oscar. This was a lot of fun. Thank you.

    Oscar Pulido: On our next episode of The Bid, we'll wrap up our megatrends mini-series with Jeff Spiegel, Head of U.S. Megatrends and International ETFs. We'll bring together all the megatrends we discussed in the first four episodes of our megatrends mini-series and debate what's next in the space. We'll see you next time.

  • OSCAR PULIDO:  Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I'm your host, Oscar Pulido. We're continuing our mini-series on megatrends, the long-term forces shaping our future. On our last episode, we talked about climate change. Today, our next megatrend: emerging global wealth.

    The middle class is growing around the world, and it's changing the global economy. Emerging markets – economies that aren't fully developed yet – are predicted to represent six of the seven largest economies by 2050. Middle-class growth has been especially powerful in China. If China continues to grow at the pace predicted, it could be bigger than the U.S. economy by the late 2020s. So, what's behind China's massive growth?

    Today we’re joined by Molly Rosenman, BlackRock China Chief Operating Officer and Deputy Country Head. We'll talk about how China's economy has continued to grow through the COVID-19 pandemic, the ways its wealth has translated to its people and global businesses, and both the risks and opportunities of investing in China. 

    Molly, thank you so much for joining us today on the Bid.

    MOLLY ROSENMAN: Thank you so much for having me.

    OSCAR PULIDO: So, Molly, you’ve just moved back to China over the last couple of months. You lived in Asia about 15 years ago and supported some of BlackRock’s earlier growth in the region. So, I’m just curious, as you've returned to China in in late 2020, what were your first thoughts and observations? Is it recognizable to what you remember 15 years ago? Or are there things that looked completely different to you?

    MOLLY ROSENMAN: I think we tend to first think of China as part of the emerging global wealth megatrend, and that's very true. But actually, I think what's so exciting about China is that it represents sort of a confluence of megatrends playing out here, from technology to demographics to urbanization and climate change. And while I have certainly visited over the past 15 years and spent some time in the region, for the places that I haven't really seen in 15 years, they are completely transformed today. It's really remarkable and unbelievable, frankly, to see the pace of change particularly in places like Shanghai and Beijing, where city centers are now monopolized by skyscrapers and shopping malls and tall residential buildings. With rapid urbanization, traveling in Mainland China has been made extremely easy and flexible with a high-speed train system and modern airports all across the country. You can also see an incredibly visible and tangible instance of higher standard of living everywhere. With increased purchasing power across the population, you can see people driving higher-end cars, spending more on designer clothes, eating out in restaurants much more than they ever did in in the past. But what's really exciting and fascinating to me is the digital economy in China. So, people now buy virtually all goods and services, truly everything in their lives, digitally. They travel with e-tickets on their phones, they pay utility bills using mobile apps. And in China, this multi-faceted, multi-industries digital ecosystem literally touches every part of consumers’ lives. So, as somebody in finance who is returning to China, I have seen this and I’ve also seen really increased investor sophistication. So, many more financial products and investing styles are available to Chinese investors, and most of them are offered through digital platforms such as Ant Financial and WeChat.

    OSCAR PULIDO: Having been to China myself a couple of times over the last few years, I can definitely relate to the skyscrapers, the shopping malls, all the rapid urbanization that you've talked about. Although I don't have the comparison of 15 years ago, so it sounds like it's been quite a transformation. So, what is the story, then, behind this massive growth that China has experienced? Why has there been this transformation?

    MOLLY ROSENMAN: So, in thinking about this, you really need to go back in history a little bit. This economic acceleration in China really started with China's Reform and Opening Initiative under Deng Xiaoping's leadership. Especially in the 1990s, Deng allowed many radical reforms to be carried out, and these were truly radical across agriculture and light industry, which were largely privatized. And the country really benefited from adopting more market-based reforms and a growing private sector. So, China's GDP has since that time grown 10x to 18% of global share, from just 1.8% in 19781. I think another major milestone for China was when they joined the World Trade Organization in 2001, which really opened the door for China's further market exports and expansion. And by 2006, over 400 U.S. Fortune 500 companies had entered the Chinese market, while at the same time, a considerable number of Chinese companies had begun doing business beyond China. So, globalization has really transformed China. It's brought tremendous business opportunities to China and China has become a global manufacturing hub. But in the past decade, this has begun to shift a little bit. Exports have begun to drop to 10% of GDP as China's growing middle class has begun to fuel its local and, as we said before, digital economy, which now accounts for roughly $5 and a half trillion or 36 trillion yen, which is roughly 36% of GDP2. It’s pretty substantial. China now has many of the world's leading technology firms domestically, which are becoming powerful drivers of the economy.

    OSCAR PULIDO: So, what you're saying is this isn't a story of just the last two or three years, this transformation, this really dates back over a couple of decades with economic reforms. You mentioned the joining of the World Trade Organization. So, over these last three decades is where we've seen this transformation. But let's talk about 2020, which was a seismic year for the world. And the truth is, China actually expanded in 2020; it grew 2.3 percent last year. And perhaps some people would find that surprising. So, what was it that allowed the Chinese economy to continue growing?

    MOLLY ROSENMAN: It's true, if you rewind to a year or so ago, it would have been hard to predict that this is how the Chinese economy would have expanded, and how they would recover. China's economy really rebounded quickly following COVID with manufacturing production activity actually returning to pre-COVID levels by the summer of last year. Many other emerging market countries in the region such as Taiwan and South Korea also experienced faster recovery than other parts of the world given their success in managing low caseloads. And as I mentioned earlier, China's economy is now much more reliant on local consumption, and exports only make up about 10% of the country's GDP. So therefore, we had thought that Covid-related supply chains would have a bigger impact than they did, but the impact actually was pretty limited. And then because of this faster recovery, China's growth has actually been more balanced versus developed economies, and there's more policy space given it has not done as much as its developed market counterparts. So, moderate fiscal spending has been targeted towards sectors such as infrastructure with the aim of shoring up the quality of future growth. And they're really taking this opportunity to invest well in the future of their economic expansion.

    OSCAR PULIDO: So, you've touched on this a couple times, which is this strength of the local consumer, this increasing wealth for the consumer class in China. And as a result of that, less reliance on exports. So, how has that increased consumer wealth in China really translated to its people?

    MOLLY ROSENMAN: Look, over the past several decades, we have witnessed something remarkable as China's economic development has literally lifted hundreds of millions of people out of poverty. At the same time, China's middle class has jumped from just 3% of the population in the year 2000 to over half of the population this year. That’s a truly remarkable statistic. The average annual income per person has increased from just 940 U.S. dollars to $10,000 over the past 20 years3. The higher income and savings have really led to some pretty major changes in China’s consumer spending habits as well. So, for example, Chinese tourism both within China and abroad has seen significant increases. Domestically, Chinese tourists made 5.5 billion trips in 2018, spending more than $770 billion when they did. For comparison's sake, in 2000, China only sent 740 million tourists abroad. Annual spending by Chinese travelers has likewise soared from over $14 billion in 2000 to over $270 billion in 2018. Chinese consumers are also emerging as a force in the luxury goods industry, accounting for nearly a third of luxury spending in 2020. Bain estimated that China will become the world's largest luxury goods consumer by 2025. The wealth transfer in China also manifests itself in the country's rapid urbanization, which we talked about a little bit earlier.  As of 2020, over 60% of the total Chinese population lived in urban areas, which is just a dramatic shift and an increase from roughly 18% in 19784.

    OSCAR PULIDO: Molly, earlier, you touched on the increased investor sophistication that you've noticed in China and Chinese investors using digital platforms to put money to work. So, I'm just curious, how do individuals and families save and invest in China versus, for example, American investors?

    MOLLY ROSENMAN: It's a great question and China is in a very different situation from a savings perspective. So, China has an extremely high savings rate, around 45%. In fact, the main reason for the high trade surplus in China that we were just talking about is that with such a high savings rate, Chinese consumers just simply spend less than their peers across the globe. I would compare, actually, China's property market with America’s equity market, which both saw a pretty continuous valuation boost in the past few decades. In many Chinese cities, housing prices have quadrupled in the past 15 years. So, as a result, Chinese families have long believed in the property market as the safest investment vehicle really compared to the country's stock market, which has historically lagged the housing market in performance. And so, not surprisingly, domestically owning a home rather than renting is often a top priority for households. And nearly 80% of China residents said in a recent survey that couples should buy a home before marriage5. And it's often the case that middle class and affluent parents purchase homes for their children. This is starting to change as a significant focus for the government is on educating to help turn these domestic savers and property investors into retirement investors as well. And it's one of the many aspects I find most fulfilling; this educational role that international firms can help to play in this space.

    OSCAR PULIDO: And perhaps one other add-on question is, we talk a lot at BlackRock about the savings crisis, essentially that individuals are not saving enough for their retirement for the long term. Does that apply in China as well? Specifically with a large aging population which is living increasingly longer and healthier lives.

    MOLLY ROSENMAN: China's demographics present a key challenge for the Chinese from a retirement perspective. The One Child Policy which was implemented in 1979 was instituted so that population growth would not outpace economic development, and also to address looming environmental and resource challenges. This policy lasted until 2015 when it was formally loosened, and now all couples can have two children. But as a result of decades of this earlier One Child Policy, China now faces a pretty pronounced aging population and the policy's recent removal will take years to play out in terms of population growth. In 2020, approximately 17% of China's population is estimated to be over the age of 60, and this number is projected to rise to roughly 35% in 20506. So as a result, China may face significant labor shortages in the future and without a concerted focus on retirement investing, China may face challenges in paying for the retirement of that population. So, this is a significant risk, but it could also bring opportunities in both the healthcare and financial sectors, as people are eager to find ways to ensure that they are securing and better supporting themselves in their later years.

    OSCAR PULIDO: So, let's talk about technology. It feels like no conversation about China is complete without discussing technology. The Chinese economy is in many ways far more digital than the U.S., Europe, Japan or other developed markets. So, Molly, why do you think this is?

    MOLLY ROSENMAN:  China's wealth has really emerged in a post-cash, post-credit card world. So, the economy is really being built digitally to begin with, versus advanced economies that were built on earlier means of transacting and that are still sort of shifting and evolving up that curve more slowly in the west. Also, China benefits from a large domestic market of consumers who are predominantly young and, frankly, eager to embrace digital in all its forms. Most daily usage of digital payments can be done using just one or two super-centralized platforms such as WeChat and Alipay. So, these apps combine many of the frequently used functions such as an e-wallet or e-bank, social media and booking services that we have many different apps for in the west. So, imagine having PayPal, Facebook, YouTube and OpenTable all in one location on one app. China is one of the world's largest investors and adopters of digital technologies, and it's also home to one-third of the world's technology unicorns. The government is actively encouraging digital innovation and entrepreneurship by giving companies room to experiment and offering support as an investor, developer and consumer of new technologies.7

    OSCAR PULIDO: We've spent a lot of time here talking about how China has reformed its own economy, how it's grown over the last 30 plus years, the evolution of the consumer. But Molly, what's the impact of China's massive growth on how it invests in the rest of the world? Maybe you can talk about some of the examples of how they're doing that.

    MOLLY ROSENMAN: Sure, so as the country's wealth grows, China is investing much more abroad and competing with established powers for influence. The Belt and Road Initiative, for example, is a massive infrastructure project that aims to connect its market from east Asia to Europe. In addition to this new silk road, Chinese governments and businesses have invested heavily in emerging market countries in Africa and Latin America, bringing Chinese business models and resources to these developing regions. And China is also bringing their digital technologies to the world. So, for example, China has been a major leader in 5G deployment, and the digitalization of the Chinese yen is a means for the Chinese government to better channel monetary policy and frankly accelerate the internationalization of the country's currency.

    OSCAR PULIDO: And if you live in the U.S. or you live in Europe or let's just say you live outside of China, you're a global investor, how are you starting to think differently about investing in China? Because if I listen to the statistics that you mentioned, the evolution of the tech sector, I have to imagine that this is a region, a country where I am starting to become more interested in perhaps putting some money to work?

    MOLLY ROSENMAN: Well, China has long been a structural underweight in major global equity and bond indexes. But with index inclusions across benchmarks in the last few years, more and more global investors are starting to appreciate that this is an underrepresentation relative to China's economic and technological growth. For example, China represents about 18% of the world's GDP, but it's only 4.8% of MSCI ACWI and just over 7% of the Bloomberg Barclays Global AG. In contrast, Apple and Microsoft together make up roughly 6.6% of ACWI. As a result, we've seen billions of dollars of inflows in the last few years into exchange traded products that focus on Mainland China stocks, mostly referred to by investors as a-shares as well as into yen-dominated bond ETFs. We expect the U.S. and China to become two engines of global economic growth, and the strategic competition between them should lead to supply chain decoupling. So therefore, investors are not only looking to true up their China allocation but also to use China investing as a way to diversify between the globe's two leading competitors.

    OSCAR PULIDO: And you mentioned the MSCI ACWI, so that's the All Country World Index. So basically, a representation of global companies around the world. And so interesting, you mentioned China only represents a little less than 5% of that index, even though it represents 18% of the world's GDP. So, to your point, for investors who are looking to diversify, China is perhaps a new frontier that they'll be looking at.

    MOLLY ROSENMAN: That's exactly right.

    OSCAR PULIDO: What risks are investors considering and balancing against these opportunities?

    MOLLY ROSENMAN: Building on this idea of increased competition between the U.S. and China, geopolitical tension remains a key risk factor and is likely to persist. Besides trade disputes, the two countries are racing for global technological leadership, where concerns can range from national security and economic competitiveness to global standards dominance. And potential bans and tariffs could derail investment opportunities in some sensitive sectors. At the same time, as competition continues to play out, China and the U.S. will continue to be dependent on one another in a variety of ways – and to seek opportunity to partner - as recent discussions around a climate partnership highlight. 

    And this is not just a bilateral trend; increasingly, Europe, Japan, Australia and other developed nations are swept up in this competition and are similarly interconnected with China as major players within the global economy. And as this competition plays out, China and the U.S. will continue to depend on one another. And that links a key area of investing: ESG, or environmental, social and governance issues. Here, China presents both risk and opportunity. Global investors are bringing new focus and scrutiny to social responsibility and corporate governance in Chinese companies. Transparency into how companies are managed is increasingly coming into focus for global investors, and many Chinese companies have work to do in addressing these concerns. And the geopolitical tensions we have just mentioned link directly to this focus on governance, social responsibility and human rights. In many ways, China's access to global capital markets creates not only commercial opportunities, but opportunities for China to improve some of the business transparency and corporate reporting standards. And, in environmental matters, China is emerging as a key voice. China energized international climate ambitions in 2020 by pledging to peak emissions before 2030 and to reach carbon neutrality before 2060, building up upon an earlier EU commitment to do the same by 2050. Addressing long-term sustainability issues really will be critical for all companies and countries to attract global investment capital in the years to come. And this helps to support climate as an emerging partnership area with the U.S. Lastly, China's aging population could present a risk for global investors as well as for China. If population growth continues to decline, China's economy could struggle with labor productivity, pension shortfall and even social strife in the next three decades.

    OSCAR PULIDO:  And as I mentioned earlier, so it is now the second time you're living in the region.  So, Molly, as an American-born and educated executive who spent most of her career in the U.S., what got you so personally excited to take on a new career opportunity in China?

    MOLLY ROSENMAN: A central principle for us at BlackRock and a theme throughout every position I’ve held within the firm and for all of us at the firm is helping more and more people experience financial well-being. And being a part of doing that in a country of over a billion people with a rapidly advancing and evolving asset management industry is incredibly exciting to me. I’ve spent my career thus far at an asset manager serving investors and clients around the world and that has actually taken me across the U.S. as well as globally. And getting to help to translate the depth and breadth of capital markets and asset management solutions that have been developed and tested and refined in the U.S. and other developed markets into a rapidly growing economy and a Chinese context means that our expertise can help to play a role as China seeks to reform and evolve its financial markets, as well as to address its own retirement challenges.

    OSCAR PULIDO: So, Molly, if you're still living in China 15 years from now – and I don't mean to fast forward your life – but what more do you think will have changed and how will China look then as a place to live and invest?

    MOLLY ROSENMAN: Well, the thought of fast forwarding my life is quite alarming; it means I'd go from having a toddler in tow to I guess a teenager towing me around, which is pretty hard to wrap my head around. But I think from a financial markets perspective, with the upcoming and ongoing financial regulatory changes and the entrance of foreign asset managers, I think the Chinese financial market will be a lot more sophisticated and mature compared to today. There'll be much more use of sophisticated financial instruments and investing styles, which should help to improve market liquidity, providing average investors in China a really diverse set of investment options at home and abroad. In daily life, we've talked a lot about how China has already seen rapid urbanization for the past few decades. But the growth potential has far further to go. We could see the urban population rise from 60 to 80% in the next 15 years. And combined with a focus on greener development, this could lead to tremendous business opportunities and infrastructure transformation in many of the third or fourth tier cities in China. The truth is, no one knows what the world or China will look like in the next 15 years, let alone five. And the pace of evolution in China has been truly outstanding. The transformation we've seen over the past 15 years has been remarkable. We've talked about the opportunities this presents. We've talked about the risks that we may face. But I think we should all be excited to have a front row seat for this and watch it unfold.

    OSCAR PULIDO:  Well, Molly, it's great to hear your optimism, and thank you so much again for joining us today on The Bid.

    MOLLY ROSENMAN: Thank you so much for having me, Oscar. I look forward to when we can do this together in China.

    OSCAR PULIDO: I do as well. On our next episode of our megatrends mini-series, we'll talk about technological breakthrough, particularly in the area of electric and self-driving vehicles. We'll see you next time.

  • MARY-CATHERINE LADER: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Mary-Catherine Lader. Today, we’re continuing our mini-series on the long-term forces shaping our future. On our last episode, we talked about genomics and immunology. Today, we’ll talk about climate change and resource scarcity.

    After yet another year of record temperatures and extreme weather events, there’s more and more discussion about how we can fight climate change and get to a net-zero future. That’s a future where don’t put any more emissions into the atmosphere than we take out of it. So, how exactly can we transition to that lower-carbon economy, whether through public policy, new technology or perhaps different investment practices? What does that transition mean for investing, and what does it mean for the companies and management teams who have to change their behavior to make the transition take place?

    Today, we talk to Salim Ramji, Global Head of iShares and Index Investments for BlackRock, and Chris Ailman, Chief Investment Officer of CalSTRS, the California State Teachers’ Retirement System. We’ll talk about why the low-carbon transition presents a potential investment opportunity, how companies will need to pivot their business models and the actions BlackRock and CalSTRS are each taking as this transition accelerates.

    Salim, Chris, thank you so much for joining us today.

    CHRIS AILMAN: Thank you. It's an honor to be here.

    SALIM RAMJI: Thanks, Mary-Catherine. It's nice to be here, too.

    MARY-CATHERINE LADER: So, Chris, I'll start with you. You're the Chief Investment Officer at CalSTRS, or the California State Teachers’ Retirement System, the second-largest public pension in the U.S. And you are responsible for helping teachers in California enjoy and plan for a secure retirement. So, for those who aren't familiar with low-carbon transition investing, can you just explain how sustainability and the transition to a low-carbon economy have become a focus for CalSTRS and what kinds of actions you've taken as a result?

    CHRIS AILMAN: We cover a million teachers throughout the state, as you said. When you think about teachers, they're all about teaching children and preparing for the future. So, it's been a huge emphasis for us from our membership and from our board is thinking forward. Not just looking at today, but what's the world going to be like in 10 years, 20 years, and 30 years. So, of E, S, and G, one issue that's absolutely right at the forefront of that and changing is the E – the environmental issue – recognizing that in the next five years and 10 years, things have to change in order to make a difference on climate change. I mean, the world right now is aiming in the Paris Accord to 1 ½ degrees Celsius, maybe at most 2 degrees. And that means a massive transition away from a carbon-based energy economy and transportation system. And that is going to be an enormous transition for companies and for nations. And we want to reposition that portfolio. So, it's actually integrated into every single investment we do. We're thinking about that future and whether that company or that investment relies on carbon as a way to generate energy or as a tool, or whether they're flexible and can adapt and change going forward.

    MARY-CATHERINE LADER: And of course, bridging that climate transition to actual investment decisions has so many questions embedded in it. And two years ago, our Chairman and CEO, Larry Fink, shared that we view climate risk as an investment risk and think that there's still a lot of work to be done to really integrate it in portfolios. This year, we heightened our emphasis on net zero in particular. So Salim, can you just share what we mean by that? And where you see opportunities and risks for investors in the low-carbon transition?

    SALIM RAMJI: This isn't only about our client's values, which are considerable as it hits on issues like climate, just as Chris said. But it's also about value and long-term opportunity. And you can see the long-term opportunity just if you look even just in the last year. Last year, there was $210 billion of assessed damages related to climate; 22 events in the United States alone that were a billion dollars or more1. When you look at the inherent physical risk in the debt markets, by some estimate, there's about $8.7 trillion of debt or 11% of all rated debt which has climate risks inherent in it1. And I think one of our insights – whether it's in the debt markets, whether it's in finance markets, when you look at utilities or really all facets of the economy – is that a lot of these risks aren't fully priced in. That dislocation is where we think that there's opportunity. Either opportunity to avoid risks by being able to price them in, or opportunities to really look ahead and be able to see things in new areas like clean energy, as being an example.

    CHRIS AILMAN: You know, Salim, I want to jump in on that because it does represent a risk. You know a transition is going to happen, but you don't know the timing. And that's where the opportunity comes in because the market will price things in. But it is often very short-sighted, and it doesn't price things in until six months before they occur. And this is a massive transition. So, I agree that it is not just a risk but it's an opportunity. And it's going to be a heck of a challenge for active investors to figure out how to time that transition and the severity of the transition.

    SALIM RAMJI: Yeah, and I think it becomes an opportunity, in particular, for long-term investors.

    MARY-CATHERINE LADER: Well, predicting the future at all is, of course, challenging and much less that for many more decades as an investor out to 2050. So, Chris, from your perspective as an investor and then, Salim, in terms of our products, it'd be great to hear how exactly we are trying to make those projections, how are we trying to at least project probabilities for the transition risk. So, for example, data and analytics, or rather how to avoid the overly simplistic action of just divesting, for example.

    CHRIS AILMAN: Yeah. And I think you hit it on the head. Right now, most people approach this from a very binary, up and down reaction of divestment or not. Divestment is not a responsible investment. It is not going to bring about change, because the reality is, if you sell a company, that company may adjust and adapt and become something different. It's all about being an investment decision. And it is going to be incredibly difficult because you're talking about not just trying to reach out to the future, but climatology and how governments react to that because this is a global problem. So, for us, we think it's about engaging companies, owning them and engaging them to talk about how to transition, talking to CEOs and corporate boards about adapting and being different. Not sitting and looking at the past, but looking into the future. They pay a lot of attention to how they dispose of their waste – their water waste, their physical waste. And now, they need to pay attention to how they dispose of gaseous waste and where are their resources, where do they get their energy. This is not just a transportation problem or an electrical energy; it's an industrial problem, an agricultural problem, it's going to affect every facet of our life. And that transition of who can adapt to that future is going to be huge. And I think you're going to see that coming out of data from companies. That's why we're so passionate about pushing for better reporting with SASB, TCFD. We need corporations to tell us what they're doing and what they're thinking about so we can then make investor decisions about the risk of that company.

    MARY-CATHERINE LADER: And we're, of course, getting more and more data from companies. So last year alone, the number of companies reporting SASB disclosures increased 3 1/2x2. And that's helpful as we have a better sense of what companies are doing. But as their behaviors change and their readiness for the transition changes, Salim, what are we doing to then make sure that our investment products can respond dynamically given that we're constantly getting more information and also more management teams, frankly, are making different decisions?

    SALIM RAMJI: Look, in our own surveys of clients all over the world, what we've seen is a remarkable shift in desire to shift much more towards sustainable investing. So today, it's about 18% of clients' portfolios globally. They want to move to 37% over the next five years. It's a little bit more muted in the United States. It's 13% today, moving to 20%3. But the trend line and the direction all around the world – in the U.S., in Asia, in Europe – is very, very clear. And I think that's inherent in this tectonic shift of a reallocation of capital. But in terms of what investors can do, I do think Chris's point is well taken that, historically, this has been a little bit binary, right? And we have a series of screened products that meet the needs of clients who either want to screen out certain carbon-intensive investments or certain investments that don't meet their values. We also have thematic investing, which can focus on a particular theme like clean energy. But I think the thing in the middle around transition, where institutions like CalSTRS have been at the forefront, is really about supporting the transition in the economy. And I don't think there's enough that's talked about in that regard, because how do you enable companies – through both positive and negative incentives, through engagement – to really change their model to be less carbon-intensive but still deliver essential things like energy or infrastructure or transport? Because those are still essential goods that people all over the world need; we just need them in a less carbon-intensive way. And I think the really important thing that Chris has said is about how do we support that transition? And if we can get more investors all over the world to really think less in binary terms and more in terms of, how do we start to make this transition towards net zero while still delivering essential goods all over the world, that's really the challenge. And that's where, I think, the investment dialogue needs to shift so that it's not just a pioneering idea, it's more of a mainstream idea over the next few years.

    CHRIS AILMAN: We have coined our phrase “activist stewardship” because we've been active in corporate governance for over 30 years. But now we're stepping up our game. We're actually taking on companies, even pushing people to propose alternative slates to get corporate boards to wake up and to recognize that it is awfully easy to sit back. Change is hard; nobody likes it. But you know what? When you think about 2020, as rough as that year has been, we all adapted to working from home generally very quickly and very fast. But those are changes that were almost seamless, low cost, and had positives. Think about dieting. There's a classic painful change; everybody puts it off. It's tough, but we know we should do it. This is going to be a tough change. Changing from a carbon economy which has fueled this nation for over 120 years to some other energy sources is not going to be free and is not going to be seamless. And we're challenging companies to think more progressively and to do that quickly because changing, at the end, it's kind of like a diet. Doing it a little bit at a time, starting now and over the next two decades, is what's going to make a difference and help companies be more profitable in that new low-carbon, zero-carbon future.

    MARY-CATHERINE LADER: And, Chris, as you're doing that, what are you looking for a management team or company to respond with? So, what does “good” look like in response? Are you looking for a plan? The tenure of a CEO is much shorter than the time horizon of these problems or the actual pace of change. So, what exactly do you want today's leaders to be doing?

    CHRIS AILMAN: Yeah, no, you hit it on the head. The CEO life is usually five years, seven years at most. We're going to own these companies for 20, 30 years. What we're looking for right now is the language, the risk reporting, disclosures – some of the companies that are quickly willing to measure their carbon need and their carbon emissions. What gets measured gets managed. Very soon though, by the time you hit 2025, which really is coming up quick, we're going to want to see actual changes and number metrics improving and reducing the amount of carbon they rely on. But right now, it's got to be about measurement and intention. And there are a lot of CEOs who are very wide awake and who are talking openly about that transition. There are others who have their heads buried in the sand and are refusing or giving lip service. It sticks out, it's very obvious. And we're aggressively engaging the companies that have their head stuck in the ground and supporting and rallying around the companies that are beginning to make that transition and study and recognize it. And I think that's what CEOs are paying attention to, and boards are recognizing they need to make an investment for the long term. And again, it's about long-term thinking. And that does stick out very quickly in our engagements.

    MARY-CATHERINE LADER: So, Salim, Chris mentioned metrics. And we don't really have an agreed upon metric for a company's transition risk. We don't have the equivalent of a Morning Star rating or a calorie count. So, what innovations have we seen? And what are you hoping we will see that you could apply to the business that you lead?

    SALIM RAMJI: This is a really, really exciting time to be in the middle of climate data and data analytics because now, you actually have something to work with. I mean, 10 years ago, it was a lot more intuition and a lot more trying to find things that could work with limited data. There's still a very healthy amount of intuition at work, but there's just a lot more data to work with. And whether that's asset managers like us, asset owners like CalSTRS, academics, or other providers in the broader ecosystem that have an interest in this, I actually think that we're going to be evolving rapidly towards standard setting and towards being able to make transparent all of these decisions With that transparency will come even better data and even better incentives to contribute more data, which just makes the numbers and the analysis and the outcomes even better.

    MARY-CATHERINE LADER: So, we've been talking a lot about how the investment community is leading and bringing some companies along. But policy, obviously, is a huge factor in the transition and the speed at which we're going to transition. We have a new administration, one that has a pretty different position on clean energy in the United States than the previous one. How do each of you sort of think that that might change the investment community's role, or perhaps what kind of changes would you anticipate in the next couple of years that we might have as a result of that different leadership in the U.S.? And Chris, we will start with you.

    CHRIS AILMAN: You know, I think it's fascinating that even with the last administration, companies still kept making steps going forward. They recognize the long-term path regardless of government regulation, and that's important to realize. But you need government regulation to come alongside. And that's the big change: going from a headwind to now being a tailwind and pushing companies to adapt and to change. I think you're going to see an increased effort certainly on the infrastructure side; that looks like that's coming. But in terms of companies being willing to step out and make long-term capital commitments to changing their energy sources or their waste because they realize that the future is coming quickly, and they have to do something now. I hate to go back to my diet analogy. I can personally relate to that, so for the audience who can understand. You put it off for a while, you put it off for four years. Well, then it comes charging right back, and you've got to pick up the speed even more. So thankfully, corporations generally didn't step off the effort. And I think now, we're going to see the government come alongside and increase it even more so that we begin to get some of those transition investments in infrastructure, other things that make it easier. The fact that General Motors announced the end of the internal combustion engine – you've got to stop and soak that in for a minute. General Motors, the creator of the giant SUV, said they're going to stop using internal combustion engines starting in 2030. And I think we're going to see more companies surround that and support that. So, to me, the transition is happening right now.4

    MARY-CATHERINE LADER: So, Salim, Chris mentioned tailwinds. What then do you think is still challenging about, obviously, the actual changes in technology innovation, but in terms of getting more companies on board, getting more investors on board? What are some of the challenges that you are seeing or anticipating?

    SALIM RAMJI: Yeah. At least, look, from an investment point of view and from the seat that I'm in and us as a firm, I'm kind of living this dual set of emotions. One is urgency, and the other one is patience. There's urgency to act because we need all across the entire industry to have ever more engagement, to have ever more focus on standard setting, to have ever more transparency, and ever more customized choices, in terms of pathways that investors can implement these changes in their portfolio. And so, that's where the urgency comes in and the urgency to act. But at the same time, these are often decade-long transitions. And you need the patience to be able to help companies see this transition through. And often by looking at climate reduction with a two-year lens or a three-year lens, you may achieve that goal, but you may miss out on the bigger and more important transition, which comes in 10 years or in 15 years by supporting new technologies or supporting new infrastructure or supporting changes in cement production or steel production or things that require big shifts in the underlying economy. And that's where the patience comes in. And I think that lends itself to long-term investors, like retirement systems that Chris represents, or long-term investors like indexation, right, because our average holding period for large U.S. equities is 25 years. And you kind of need that type of mindset coupled with the urgency to act now, because many of these changes will take many, many years to put into place to build the infrastructure, to make the investments.

    CHRIS AILMAN: Salim, you used a phrase of 25 years. That's going to last through multiple administrations. And so, I think that's why the recognition – you need the government behind it, you need the government creating and investing its capital. And not just the U.S. government, but all the nations of the world. You have over 200 countries who signed the Paris Accord; the governments need to make those strides. But it's companies that have to keep up the constant drumbeat, because 25 years is a marathon. So, it's not the pace per mile. But it's about over time and staying committed and implementing this change in the economy. It's going to be a challenge.

    MARY-CATHERINE LADER: Do you think it's fair to say that sustainable investing is mainstream in 2021?

    SALIM RAMJI: It's certainly on a path. But if we were talking innings, I think it's in the second, not in the fifth or sixth. Because I do think this point about urgency is going to need to persist, like today, next year, the year after, and the year after that, to really make sure that these changes can happen. And I do think many firms are just going to need to be able to have the processing power for all of this new data around the interplay between climate, economies, short-term and long-term risks. And I think that that's going to take some time. So, I wouldn't say it's yet mainstream. I think that even ideas, like the one that Chris had articulated around supporting the transition and not just being binary around divestment or not, that's a really powerful idea; that is not a mainstream idea. I think making that a mainstream idea will serve investors better, will serve the climate better, and will serve economies, not just in California, but all over the world, better if we can do that. But I think that's just inherent in the challenge that there's always a new thing that we need to bring into the mainstream to solve this multi-decade problem.

    CHRIS AILMAN: Two things you said that are interesting. The first is sustainability being mainstream really depends on where you're sitting. I would tell you in Sacramento, California, absolutely. But if I think of my friend, Sam Massouda, in Wyoming – totally different definition. Texas? Totally different definition. But then I look globally, and I look at the Dutch funds, the European funds – it's actually a fiduciary responsibility; it's totally mainstream. And to your question about measuring how are we improving on this transition – a lot of people love the idea of just measuring your carbon footprint. But that's pretty meaningless to a technology company. And so, not only does sustainability depend on where you're sitting, but measuring the impact depends on the type of company it is. And some companies, there are much more meaningful measures about their impact to the climate and to the transition. And then there are some companies, I'll pick on electrical utilities, where it is core to the center of what they're doing and how are they impacting it. So again, it's too simple to say this is a big challenging complex, but it's really complex because it's as varied as the world and as varied as all the industries in the U.S. or the global market.

    MARY-CATHERINE LADER: And so, on that note, one last question for each of you. I'll start with you, Salim. We have talked about how hard this is, what a long journey it will be. What is your hope for what change you would see that might make this transition either more effective or likely to happen?

    SALIM RAMJI: I just come back to these dual themes of urgency and patience. We need urgency to act now, whether it's around ideas like transition. And we need patience to be able to support companies making that transition, which are often 5, 10, 15-year investments. And being able to keep both of those conflicting ideas in our minds and in our actions is how we get to the type of positive version of the proposition that Chris wants to articulate to a new teacher or a new saver or a new investor for a long-term horizon.

    CHRIS AILMAN: And I'm going to jump in and say patience requires a long-term perspective. And that's what we're trying to push, is stop thinking about the next six months, stop thinking about the next nine months and have a 30-year investment horizon. It doesn't do me any good to give a teacher who's starting now, let's say this coming fall, starting teaching. It doesn't do me any good to hand them a retirement check in 35 years or 30 years and have the earth almost unlivable. I'm trying to invest for their future and with their future. And provide that retirement benefit, so I need that return, but into a planet that's livable and where they can afford to live. And again, adapting and changing is very difficult for human beings. But it's going to be absolutely mandatory. Our world is changing, and we need to react and get ahead of it.

    MARY-CATHERINE LADER: Well, thank you. That's a great note on which to end. And thank you both for the time. It's been a pleasure.

    SALIM RAMJI: Thanks, Chris. Thanks, Mary-Catherine.

    CHRIS AILMAN: Thank you, Mary-Catherine. Thank you, Salim. I enjoyed it.

  • MARY-CATHERINE LADER: Welcome to The Bid, where we break down what’s happening in the markets, and explore the forces changing investing.  I’m your host, Mary-Catherine Lader.  We’re starting our next miniseries on megatrends: the long-term forces shaping our future. 

    JEFF SPIEGEL: We’ve had our eye on five megatrends in particular over the past few years, and we believe that they’ll be playing out for decades to come. 

    MARY-CATHERINE LADER: That’s Jeff Spiegel, BlackRock’s U.S. Head of Megatrends and International ETFs. 

    JEFF SPIEGEL: Those megatrends are demographics, technological breakthroughs, climate change, rapid urbanization, and emerging global wealth.  Since the COVID-19 pandemic began a year ago, demographics and social change has been particularly front and center, specifically because of innovations in genomics and immunology.  A year ago, no one would’ve imagined that a COVID vaccine would be available in nine months.  Genomics made that possible through the world’s first mRNA vaccines. The innovation of the mRNA vaccine is a game-changer for fighting countless diseases beyond COVID.  These and more innovations, such as truly personalized medicine mapped to an individual’s DNA and immunotherapy breakthroughs fighting cancer, are trends that both as human beings and as investors we should pay close attention to for the opportunities they present today and will continue to present for many years to come.

    MARY-CATHERINE LADER: As Jeff mentioned, the COVID-19 pandemic has put genomics and immunology front and center.  So today, we’re deep diving on this megatrend with two companies who’ve been on the frontlines: Moderna and CRISPR Therapeutics.  First, I talk with Moderna’s CEO, Stéphane Bancel, on how Moderna innovated to produce a COVID-19 vaccine in record time. Then, I talk with CRISPR Therapeutics CEO, Dr. Samarth Kulkarni, on how the medical breakthroughs involved in fighting the pandemic will impact our approach to other crises in years to come.

    MARY-CATHERINE LADER: Thanks so much for joining us, Stéphane.

    STÉPHANE BANCEL: Thank you for having me.

    MARY-CATHERINE LADER: Moderna, the company where you’re CEO, has become a household name thanks to your innovation and leadership in the COVID-19 vaccine. But many people might not know much about the company itself. Before we dive in, can you just share a little bit, who is Moderna?

    STÉPHANE BANCEL: So, it’s a company in Cambridge, a block away in front of MIT, that has been for now ten years trying to invent totally new technology to make medicines in your body.

    MARY-CATHERINE LADER: It sounds simple. For a long time, you all were really secretive. You raised tons and tons of capital and it wasn’t well known to the world what you were doing, what you were innovating on. Why that approach and what was the impact of that?

    STÉPHANE BANCEL:  I had the chance to work at a large pharmaceutical company, and if you think about the pharmaceutical industry, you see basically two technologies to make medicines that you guys and your families take when they need it. One is small molecules, small chemicals; 150-year-old pharmaceutical technology like Lipitor and Prozac and Viagra, some of the brands that you know are made with that technology. The other technology that has been used is what is called recombinant technology, making proteins like for insulin or growth hormone or some cancer treatment like Keytruda, which is maybe 50 years old now. And so, when we started the company, there were some new scientific insights using genomics information to basically use a molecule called messenger RNA, that now everybody knows, that basically is a piece of code. In each of your cells, you have thousands of messenger RNA at every moment. And you have now trillions of cells in your body, so you have a lot of mRNA in you right now. And those molecules, what do they do in your body, they carry instructions on how to make protein inside of your cells. What we have worked very hard on for the last ten years is to figure out how to make that mRNA in a factory in a very high-purity manner, and how to apply it to get it into the right cells in your body to make whatever protein we need to either cure you, or in the case of vaccines, to protect you.

    MARY-CATHERINE LADER: It’s a powerful mission, and along the way, you raised a lot of capital, but the results didn’t always come immediately, it sounds like. So, what has allowed you to get investors’ trust and confidence as this journey kept continuing?

    STÉPHANE BANCEL: So, we spent a lot of time over the years to cultivate long-term investors. We were very clear that we could not be this company in two weeks or in a couple of quarters – that we are to invent all the science, that was very disruptive science, that we are to build the manufacturing infrastructure right because it’s a regulated business. And because those products are injected in peoples’ bodies, you have to be very, very careful; there is a very high responsibility to do things right. And then if you want, people understood that this could not be a one-drug company. Most biotech companies, because they use analog old technology, they go one drug at a time. And they have one drug, and maybe if they succeed, one day they might have another drug; we don’t know. But in our case, because mRNA is like code, and the ROMA tool that we use is genomics information that exists in nature. If you think about it, we have two sources of genomics information that we use to make our products. I have a sequence of the genomics information of a virus, like in the case of COVID-19. We take that instruction, we literally copy and paste it to a mouse on a computer, and we drop it into a cassette where we already made the vaccine before, and voila, you have a new vaccine. Literally, it took us 48 hours, where before, it would take years in the labs to develop drugs before you can take it to a clinical trial. And the other source of raw genetic information that we use is the human genome. The human genome has been sequenced. It’s actually available online; it’s free. And we can use that as instructions to code into mRNA based on different diseases we are trying to go and cure in your body.

    MARY-CATHERINE LADER: And so, what were some of the breakthroughs that allowed that to happen? What allowed this to take place that you could design a vaccine in a matter of hours, days, that was different than five years ago, even a year ago?

    STÉPHANE BANCEL: So, a few things. First, we had to figure out how to make mRNA that will not get you sick. If you think about it, viruses like COVID-19 are made of mRNA virus, same as the flu.


    STÉPHANE BANCEL: So, through evolution, our body has developed a lot of tools – like sensors, if you want to think about it – in your body to find foreign mRNA. By definition, when you inject an mRNA in your body that we make in a factory, it’s foreign to your body; you did not make it. And so, we had to figure out a lot of tricks on how to make a very pure and design an mRNA that will not basically trigger those sensors in your body. That was a big technical challenge. The second technical challenge was how do you get the mRNA into the right cells? And then you have the difficult challenge of manufacturing; how do you make a high-quality product? And there are other things we need at Moderna because mRNA’s code – we invested a lot in digital. We are a very digitalized company where all the systems are integrated. We have a lot of robotics as well, which is why when we design a vaccine like the COVID-19 vaccine, literally our teams design it on a computer. So we designed in those 48 hours the first vaccine last year, but we never had access to the physical virus in our labs.


    STÉPHANE BANCEL: Just information, literally you could have sent us an email with the genomics instruction of the virus, we have it, we download it from the posting that was done by the Chinese government of the sequence of the virus. And we worked on computers. When the team agreed that this was, they believed, the best vaccine they could do at the time with what they knew, they then literally clicked on order like you do on the Amazon store when you buy something. You went electronically to a factory which is ten miles south of Boston, and the robots are then making the product right away. Usually, it will take months and months to make products, where 42 days after, we shipped the first clinical product to Dr. Fauci’s team for him to sell at phase I. It was reported in the media last year on March 16. And we just actually sent to them again a new product for the variant for the virus first identified in South Africa, which is of concern for down the road. And that time, we made it in 30 days.

    MARY-CATHERINE LADER: You make it sound so easy, you make it sound like you were so ready for this time, but what was the hardest parts? What were the biggest challenges in delivering on this?

    STÉPHANE BANCEL: So, if you look and go back in time to January of 2020 when we started chasing this virus, Moderna had never run a phase III study. Moderna had never launched a product and got a product approved; Moderna never made a lot of products. Now in 2019, we made around 100,000 doses for the entire year. Last week, we shipped to the U.S. government 10 million doses as a weekly shipment. So, what the team had to realize last year – and we got help from a lot of partners – was how do we do clinical development in a year where usually it would take you five, six, seven years? If you think about the world record before of getting a vaccine approved, it’s four years.  But most times, it’s eight to twelve years, if you look at the data. And then, as we were running this product to the clinic, that was massively reported in the media, but what you guys didn’t see is on the manufacturing front, we did an incredible scale up. We actually raised $1.4 billion in the market in the follow-on financing on May 18th last year, where 100% of the proceeds went into investing in manufacturing scale, buying machines, buying raw materials. Because a lot of suppliers, given the 10,000x increase in material we were asking them for, if a product was going to fail in the clinic, they would go under. So, they asked us to pay upfront the entire order. We had to hire hundreds and hundreds of people to train them to make products. So, it was an incredible industrialization that usually would have taken three to four years to happen, that the team knew we had less than a year to make happen.

    MARY-CATHERINE LADER: It’s just remarkable. A lot has been discussed about the collaboration between different companies and dialogue between the government and companies during the pandemic. To what extent did that influence your ability to deliver the vaccine? And what of that do you think might stick around?

    STÉPHANE BANCEL:  Yeah, it’s a great question. As I’ve said many times, I’ve been in this business for 20 years, I have never seen something like we’ve seen in this collaboration. First, with regulatory agencies, the team at the FDA was amazing. Very quick dialogue, problem-solving mindset, working seven days a week, sometimes crazy hours early in the morning or late in the evening. Moncef Slaoui, who used to run Operation Warp Speed in the previous administration, he and I used to catch up at 4:00 in the morning because we were both early risers.  And one day, if I needed something, I would text at 4:00 and say are you up? And literally within 30 seconds, I would get a phone call from Moncef or vice versa. And so, incredible collaboration – the government played a critical role and I really think Operation Warp Speed was an incredible success. Because they said we need to remove capital as a reason to waste anything. We need vaccines for the U.S. population, and the way they said it, we’re going to build a portfolio of three technologies. Protein technology that does many approved vaccines, including flu vaccines, but that is slower; so, it was higher risk of working, but much slower technology. The adenovirus technology used by J&J and AstraZeneca. And the mRNA technology which had never had a product approved under the sun. So, it was very risky, but on paper, and through a vaccine like Moderna had done before, because we had no vaccine before starting the COVID-19 vaccine development, we had shown we could go really, really fast. And then they bet on two companies, per those three technologies, to reduce the extension risk of a company. The way I’d compare it to stocks, if you knew which stock would go 100x in the next two years, you would only buy one stock with of all your assets.  Of course, nobody does that because nobody knows before. So, it’s the same thing, I think it was a very thoughtful approach. And then they gave each company in different set-ups, they paid for clinical trials and they paid a lower price for doses. But basically, if you look at all the contracts, the punchline is each company got around $2 billion saying, develop the drug, and get me 100 million doses for those $2 billion. And you've seen the results, really incredible.

    MARY-CATHERINE LADER: Totally. Very clear instructions but a lot of uncertainty, obviously. And there were some regulatory changes in advance of this that the last administration had made. What sort of regulations or regulatory changes do you think should persist? And what other ones might need to be made to allow this kind of innovation to continue?

    STÉPHANE BANCEL:  Yeah. So, one thing that was done was to give guidance of what was required to get emergency use authorization. The piece of that that’s important to understand for people is that usually products, especially vaccines, because they’re given to healthy people, not to sick people, you go for full approval. But one condition of approval is you need six to twelve months of safety data before you can even file the file – and the file will take six to eight months to get reviewed. And so, what we had to invent with the agency is how do you get an emergency use authorization – so it’s a special authorization – that the agency can revoke any time they want if they believe it’s the right thing to do, based on the data.  And that, of course, is not going to stay, because vaccines need to be fully reviewed given that they’re given to healthy people. So, this is a part of a regulation that will not be used in the future, but in an outbreak or in a pandemic. But a lot of processes and understanding of the platform like Moderna’s platform will be helpful. Because if you think about it, by the end of this year, given we’re around a billion dollars and you need two doses per person, we’re going to have a safety database of around 500 million people. That is quite incredible. Most medicines do not have such a sizable safety database that can be applied to all the vaccines because mRNA is a platform. So, those will help a lot for future products.

    MARY-CATHERINE LADER: So, speaking of future products, what is next for Moderna after this? And when do you even start thinking about that given that we’re still really in the midst of managing this pandemic?

    STÉPHANE BANCEL: So Moderna, a bit like you do with a stock in portfolio building, because we believe the technology could work and change medicine forever, we said we cannot bet on one drug and go pray every morning that we were right. We need to diversify the portfolio of drugs of Moderna, so that we don’t rely on only one drug. Because there is, of course, technology risk around mRNA technology; it has never been approved before. And so, biology risk, which is how well do we understand the disease? So, before the COVID vaccine started to keep us a bit busy, we had already 20 drugs in development. I’m not talking about in the labs, I’m talking about in development. Across infectious diseases, of course, but also cardiology, oncology, regenerative disease and auto-immune disease. So, we have a very large portfolio. And one of the things we did last year was to not slow down this portfolio, which is really important, because those disease products were developing before; people are still being hurt by those diseases. And so, what we said last year, it was very clear to us around the end of January that this was going to be a pandemic like the 1918 flu pandemic. So basically, I split the leadership team of the company. Some members focused on keeping the current portfolio moving forward so that it will not waste time for patients that are waiting for those important cancer drugs or cardiac drugs. And then the other team was fully indicated to COVID-19 so that COVID could move at the speed of light. And that’s basically how we played the trick. We, of course, hired a lot of people under those leaders to give them the capability and capacity to be able to execute that. But basically, I had one executive committee member, our Chief Medical Officer, I told him, Tal, this year you can do only one thing, I need you to have dreams and nightmares about one thing: COVID-19.

    MARY-CATHERINE LADER:  Yeah. Well, mRNA, you’re not the only company using this, so what do you think is the future for it more broadly? Do you think we’ll see others innovating in this area, and what do you think lies ahead?

    STÉPHANE BANCEL:  Yeah. So, I’ve always thought – and this was just confirmed with the authorization of those products – that mRNA is going to disrupt the pharmaceutical industry in a gigantic way. Because for the first time in the history of the pharmaceutical industry, we are moving from an analog world like small molecule to a digital world. Because mRNA is code. So, think about what has been done by the digitalization of industries, like early in my career, we used to go rent a DVD at Blockbuster for the weekend.


    STÉPHANE BANCEL: We don’t do that anymore. We get my iPad on my lap and you click on a button and download from the App Store the movie you want.  This is the type of disruption we’re talking about here, which is how we even predict that some pharmaceutical companies five or ten years out – because when the long cycle industry with patents and so on – are going to be in a very different shape than from what they are today, because they’re going to be disrupted. Think about the flu. We are going after a flu vaccine, right. I will predict that this vaccine will be 90 plus percent efficacy. The current vaccine that you might get when you get your annual flu shot is 60% efficacy in a good year, down to 30% efficacy in a bad year. Plus, we can combine different mRNAs in a single dose. So, our vision is to have you get every year, if you want it of course, a seasonal flu vaccine with very high efficacy for Moderna. And in the same dose, a boost of COVID-19 variant. Then we can add more and more things, because we already have vaccines that have six mRNAs in the same vial. And so, we’re going to go after viruses that don’t exist, we’re going to go after businesses that exist, that we’re just going to combine, make it better for the consumer in terms of efficacy or products, and the convenience of not needing five shots but getting one shot. Nobody likes needles too much. So, we’re going to go and invent a lot of things, but also disrupt a lot of things.

    MARY-CATHERINE LADER: So, I’m curious how you think incumbents are going to handle that. But you keep mentioning one shot, and a lot has been discussed about the two-shot vaccine versus the one-shot vaccine. So does that mean a one-shot vaccine is on the horizon?

    STÉPHANE BANCEL: So, not for today. What is very unknown today on both the two-shot vaccines and the one-shot vaccine is duration. What we should not forget and be careful about is all the vaccines, including ours, have an efficacy data read out. If you think about it, a couple months after you get injected, we have no clinical data yet of how protected you are with the one-dose vaccine or the two-dose vaccine a year after, two years after. I would predict – but I have no clinical data, it’s just my current belief – that vaccines that have two doses will have longer-lasting effects than vaccines that have one dose. Because when you hit your immune system a second time, with the instructions of the virus again, what you tend to see in vaccinology is not only a higher production of antibodies, but also a longer duration; we have seen it over many vaccines that we have clinical data across more than a year. But if I had to predict what will happen, I don’t think we will go into a world where we get a one-shot mRNA vaccine for COVID. But what I predict is we will get to a world where you get a one-shot boost if you got the vaccine before, with the right variant so that you don’t become sick as the virus keeps evolving, like with the flu. If you think about it, we are used to variants with the flu. Every year, you have new flu strain. What is it? It’s a natural evolution and mutation of the virus.

    MARY-CATHERINE LADER: No, that makes a lot of sense, the natural trade-offs. Just two last questions, one is you talked about disrupting pharmaceuticals in this spirit of duration. What do you think is the duration of some of these pharmaceutical companies that don’t have this approach? And how do you think they’re going to adapt, and will they be able to be more nimble than incumbents in other industries that have been digitized?

    STÉPHANE BANCEL:  Yeah. So, I think what is highly farcical today – and again I know the industry well having worked in there – is as has been massively documented by analysts and consulting firms, the return on R&D investment is pretty bad. Most drugs, as we all know, fail. I think this is one of the biggest disruptions that mRNA is going to bring, is the strike rate of molecules is going to go through the roof. Because again, if you go back to it, between the flu vaccine and the COVID vaccine, we use 100% the same chemicals. Most drugs fail in the clinic because of toxicity. But if I’m giving your body exactly the same chemicals, which by the way, for the foreigners that are coding the mRNA message, the instructions, it’s letters that already exist in your own cells. So those chemicals are not foreign to you. Think about those famous molecules that have been amazing for patients in Lipitor or Prozac. Those are molecules that don’t exist in nature. So, think about all the molecules that go into the clinic that have never seen the human body before, and the human body is a very complex machine. So, if it just binds to something it’s not supposed to bind to, that might give you side effects. And so, I think people are not realizing that the attrition rate of industry is going to be transformed with this technology. And so, when you think about it from a multi-year perspective, if I invest a billion dollars, but most drugs I invest in get to market, I’m going to generate so many shares to allow me to reinvest into more products. So, you can have exponential growth of your R&D money as your sales top line increases. But if 90% of the things you invest in, which is around pharmaceutical strike rate, go into the Charles River or you get zero return for your capital, it’s going to be hard all the time to compete because of loss of compounding.

    MARY-CATHERINE LADER: So, with that multi-year perspective, last question: What are you most excited about in innovation in therapeutics in the next 20 years? What do you hope we’ll see?

    STÉPHANE BANCEL: So, I think we’re going to be able to get in a place with cancer where cancer is a disease that we are not afraid of anymore. That when you get the diagnosis for cancer, there will be solutions to keep you with no disease or to fully cure you. Look already today, the checkpoint inhibitors, when they work on you, you go into complete remission. So, I tell my friends, stay healthy for another ten years, because I really think that we’re going to get to a place where many of us are going to have many cancers over our lifetime, and we’ll be able to have a healthy life to live normally. And that will be just a wonderful impact to human beings.

    MARY-CATHERINE LADER: It’s a really exciting future and thank you for all that you and Moderna have done for the world this year. Thank you for this time. It’s been a pleasure having you.

    STÉPHANE BANCEL:  Thank you so much for having us today, we’re really happy. And please everybody, stay safe.

    MARY-CATHERINE LADER: That was Stéphane Bancel, CEO of Moderna.  Next, let’s turn to Dr. Samarth Kulkarni, CEO of CRISPR Therapeutics.

     Sam, thanks so much for joining us today.

    1. SAMARTH KULKARNI: It’s a pleasure to be here. Thank you for having me.

    MARY-CATHERINE LADER:  So, many people have heard of CRISPR but they might not know the impact of such technology. So, can you just walk us through the history of this kind of gene editing technology? 

    1. SAMARTH KULKARNI: Sure. CRISPR Therapeutics is a gene editing company focused on a mission of developing transformative medicines for many serious diseases – like sickle cell disease or beta thalassemia – and using a breakthrough technology that goes by the same name of CRISPR.  I’ll talk more about the technology of CRISPR, but in a very short amount of time, we’ve taken this powerful technology and shown remarkable benefits in our clinical trials.  Last year, we showed that 10 of 10 patients treated – and these were patients suffering from sickle cell disease and beta thalassemia – showed a remarkable improvement in symptoms.  In fact, nearly a disappearance of all the symptoms after being treated with the gene editing medicine that we created called CTX001.  So, there’s a lot of potential with this technology, and there’s a lot more to come over the next few years with the technology itself. 

    MARY-CATHERINE LADER:  And so, can you share a little bit of just what makes CRISPR different from other therapeutics, for example?

    1. SAMARTH KULKARNI: Yeah, let me tell you about the platform itself. CRISPR was identified in bacteria as a very curious thing, and it was found that bacteria have a mechanism that they’ve evolved over millions of years to protect themselves from viruses.  They’ve developed a tiny molecular scissor that has a barcode attached to it that can cut an inactivated virus in a specific location on its genome.  This technology was then adapted to say how can we change the human genome at a specific location using these tiny molecular scissors.  And that’s the invention; that’s CRISPR.  And so, our company has taken this platform to say let’s identify diseases which are caused by mutations in genomes, caused by any sort of changes in the genetics, and using this molecular scissor, we can either correct the mutation or the defect, or make a change in the genome to get the desired effect in terms of disease.  And this paradigm is very different from before.  We’re not trying to treat symptoms.  We’re trying to fundamentally cure diseases at its basic level, and that’s a very powerful concept that can be used to address thousands of diseases.

    MARY-CATHERINE LADER:  Can you tell us a little bit about what brought you to CRISPR?

    1. SAMARTH KULKARNI: I immigrated to the United States for my Ph.D. with the firm goal of becoming an academic researcher, but along the way, I got very interested in startups and biotechs which led me to McKinsey, where I was a partner for 10 years and led all our efforts in helping biotechs develop and grow. That gave me a network of people in the biotech space. And when CRISPR was being formed, I got to talk to those folks who were starting to form the company. And for me, this was probably one of the most exciting ideas I’d ever heard.  My belief is if we look at the last 120 years, every 40 years or so, there has been a major discontinuity in biomedical research that’s led to many different drugs and many lifesaving medicines.  The last one we saw was antibodies in the early 80s, and after that, I think CRISPR has the same potential and we’re seeing it play out in this decade and the next.

    MARY-CATHERINE LADER:  So, how has CRISPR’s technology been used in fighting the COVID-19 pandemic?

    1. SAMARTH KULKARNI: CRISPR has many uses in fighting viruses. In fact, the CRISPR technology itself was elucidated in bacteria, and bacteria developed the CRISPR technology to save themselves from viral attack by creating molecular scissors that can cut and inactivate viruses.  So, at a very basic level, CRISPR can be used to inactivate viruses.  But in this pandemic for COVID-19, the primary uses have come in diagnostics, where a CRISPR-based diagnostic has been used for rapid detection of COVID-19, and in drug development where therapies have been developed against COVID-19 or vaccines, but the CRISPR tools have been used to ensure that we’re developing these vaccines and therapies against the right sequences of the virus, against the mutations that are happening in this virus, so that we’re prepared for all forms of these viruses.

    MARY-CATHERINE LADER:  So, this was a year where vaccines obviously were in the headlines more than ever.  Is there anything about 2020 and the race to a vaccine that you think is not well-understood given that you are on the frontlines of it you’d like to share?

    1. SAMARTH KULKARNI: I think before going to what’s not well understood, I think what’s underappreciated has been the pace at which biopharma has developed new vaccines. We were in a realm where it took four to five years to develop a vaccine, and in the face of this pandemic, companies have risen to the challenge and we’ve developed a vaccine in the space of months. This is truly incredible to have vaccines with this level of efficacy developed in such a short period of time, and frankly, that’s what’s going to get us back to normalcy hopefully over the next 6 to 9 months.  I think there are many other challenges that were exposed in the face of this pandemic, such as the ability to control society in terms of spread of the disease or spread of the infection.  The ability to distribute life-saving vaccines and everything else, and we’re going to learn from this example or this pandemic and be prepared for future challenges, but I think the changes in terms of the speed of innovation for vaccines and therapeutics are here to stay.

    MARY-CATHERINE LADER:  Would you have expected that speed of innovation coming into 2020 and COVID-19?

    1. SAMARTH KULKARNI: One of the things that’s changed in biomedical research today is the advent of many new platforms, CRISPR being one of them. Another one that’s powerful is mRNA technologies, and there are many other technology platforms that utilize viruses. And all of these are converging at the same time and have changed the nature of biomedical research. What used to be based on a large, stochastic experiment and serendipity to identify a drug that works is now much more of an engineering problem. So, we can use these platforms and say this is the change we want to make, or this is the sequence we want to affect in the human body, and we can come up with the medicine in a short amount of time.  I think that is a completely new paradigm of drug development and discovery, which is why there’s been so much excitement about it in the biotechnology space.  But I’m not completely surprised, because I think we recognize the power of these new platforms.  Now, would I have predicted that we would have a vaccine in 6 to 8 months?  Probably not, but would it be faster than the typical 3 to 4 years?  That I was 100% certain of.

    MARY-CATHERINE LADER:  You mentioned how we learned a lot about how to control society, how to distribute the vaccine.  What do you think are some of the changes that we need to implement to make the execution and implementation more effective if we were to have a crisis like this again?

    1. SAMARTH KULKARNI: Certainly, I think the establishment of some of these platforms or vaccines like mRNA or advanced viruses are things that are going to stay with us. I think the fact that we’ve gone through one pandemic and established these platforms will be immensely helpful with next time around when we have to deal with a certain pathogen.  Because then the sequence is different, the pathogen is different, but the modality we use is the same, and we’ve done it once before. And it’s a very welcome advance because there have been people talking about pandemics after the Ebola crisis, and how we may see one or the other.  And I think our preparedness has dramatically increased.  Beyond that, I think the pandemic has really changed how we think about the industry and the industry operations.  We were able to recruit patients into our clinical trials all the way in Australia through a virtual model.  We were able to train physicians to treat patients with our drug in the Middle East via Zoom.  And I think our regulatory interactions have become more efficient because we don’t have to wait for in-person meetings with the FDA or European regulators.  And all those efficiencies will play a big factor into how we do drug discovery and platform development in the future, and I think those are here to stay.

    MARY-CATHERINE LADER:  So, it’s estimated that about 50,000 diseases come from a single gene malfunction.  The opportunity you have to make a difference to cure diseases is enormous.  How do you begin to prioritize it? 

    1. SAMARTH KULKARNI: You know, our philosophy around all of these diseases, and these thousands of diseases are caused by mutations, and some of these are deadly diseases. We’re working on one disease, for instance, called GSD1a, which afflicts children who have a metabolism defect. And if you don’t feed these children cornstarch every 3 to 4 hours, they have a risk of dying.  So, think about what the parents go through and what the children go through for a lifetime.  And ultimately, they have a shortened life span.  So, these are all diseases that can potentially be cured by an approach like CRISPR.  Now, the approach we’re taking is let’s start with diseases where we have a greater confidence that we can cure them or impact them.  And this is based on the ability to deliver the CRISPR-Cas9 into the cells or the organs of interest.  This is based on the type of genomic modification we need to make, and that’s why we picked sickle cell disease.  This is one of the first identified genetic disease, which was identified in the early 20th century, and we know a lot about the disease, and we know what change we need to make in the genome to cure this disease.  So, we’re going to pick diseases based on trackability.  And over time, as we learn more, we’re going to expand into many more diseases.  And by the way, we’re not alone.  There are going to be other companies as well that are going to follow our path, and jointly and together we can hopefully address not just these thousands of rare diseases, but also common diseases like cancer and heart disease.

    MARY-CATHERINE LADER:  What are you all prioritizing next?  You mentioned the war on cancer.  For 2021, is it still about COVID-19 or how are you prioritizing your pipeline?

    1. SAMARTH KULKARNI: Yeah, our prioritization is in phases. I think we took on a set of rare diseases like sickle cell anemia and beta thalassemia, both deadly diseases.  Sickle cell is underappreciated.  There are 100,000 patients in the U.S. that suffer from sickle cell disease, and they live in constant pain and a risk of early death.  And I think we have an opportunity here to stamp out this disease using CRISPR-Cas9. We have a number of therapies against cancers, first with blood cancers or heme malignancies, followed by solid tumors like renal cell cancer or lung cancer.  And ultimately, the thing I’m most excited about eventually is regenerative medicine.  This is the ability to recreate organ systems.  We take stem cells and create an artificial pancreas that can be inserted into patients that suffer from type I diabetes and potentially type II diabetes.  This would make the need for insulin go away completely, because you now have an artificial organ that’s been inserted into your skin.  And I think this regen med concept – or regenerative medicine – ultimately extends beyond that to liver, lung, and many other organ systems, and we’re incredibly excited about that investment.  It’ll take some time to come to fruition, but I think that’ll change the way we look at medicine.

    MARY-CATHERINE LADER:  Regenerative medicine is even hard to get one’s head around.  It sounds like such a transformative change.  As you are working on that, doing research and development, do you all collaborate with any of the other technology platforms, or is it kind of like a war between the platforms and you’re each going after solving the same critical problems in parallel?

    1. SAMARTH KULKARNI: In our case, I think 1+1 = 5. I think we’ve seen that bringing these platforms together has made a major difference in terms of how fast we can act on these diseases and the technology cycle speed.  For instance, with approaches where we target the liver, if you can combine CRISPR with mRNA, and that was the basis for all the vaccines in COVID-19, that could be a powerful combination.  In other diseases like hemophilia, combining CRISPR with AAVs or gene therapies could be a very powerful combination. So, I think we generally had the notion that bringing these technologies together can be quite powerful, not just in treating diseases, but establishing new horizons by which we can approach medicine.

    MARY-CATHERINE LADER:  And so, given that there’s so much opportunity to cure diseases, what are you most excited about in the next three years?

    1. SAMARTH KULKARNI: One of the things I’m most excited about in the next three years is the war against cancer. It was in the 60s that we all sort of declared the modern war against cancer.  We said, you know, let’s bring every tool we have at our disposal to try and cure some of these deadly cancers: blood cancers, some of the solid tumors, especially lung cancer.  And while we have made progress, it hasn’t been dramatic progress.  I think two things are happening now.  One is the ability to detect these cancers early through the liquid biopsy technique, and there are companies using small amounts of blood to detect cancers early.  And the second is CRISPR-engineered cell therapies that are smart drugs that have been taught to go recognize a cancer cell and kill it.  I think between those two forces, I think we’re going to see a dramatic impact on cancer care, and essentially hopefully at some point, cancer cures.

    MARY-CATHERINE LADER:  And to what extent have technological trends like cloud, big data, advances in data science enabled this kind of innovation that you’re talking about?

    1. SAMARTH KULKARNI: They’re starting to make a big difference in the biomedical sector. I think what I’m most excited about is the combination of big data with artificial intelligence.  In our own labs, for instance, we can do massively parallel screening to see which genes can be knocked out or knocked in and what difference they have on the phenotype.  And we do this in mice.  And what used to take 100,000 mouse experiments can now be done through parallel screening in 1,000 mice.  And then we use big data techniques to parse through the data with advanced analytics.  And as we learn more, we’ve established artificial intelligence as a paradigm.  We’re not quite there with AI, but at least there’s a learning algorithm that allows us to identify genes that directly or indirectly impact genes, and what combination of genes would cause a difference in the disease.  And so, these techniques are coming to bear not just in small molecule spectrum, but also with advanced therapies like CRISPR-based cell medicines.

    MARY-CATHERINE LADER:  So, we’ve been talking a lot about 3 to 5 years from now.  What about in 20 years from now?  What new things do you think CRISPR can make possible then? 

    1. SAMARTH KULKARNI: As I look forward 20 years, I think one of the areas I’m most excited about is anti-aging. I firmly believe that children born today will probably have a life expectancy of 120 years, if not more.  I think this notion of regenerative medicine where we can replace any faulty organs that people have, together with advances in biology that help us understand the basis of aging, the two forces will converge and allow us to live a lot longer than you’ve ever imagined.  In fact, it’s not out of the question that future generations are going to live to 150 years with the same quality of life that we see at 65 or 70.

    MARY-CATHERINE LADER:  And you think that’s just children being born today or for those of us who are already a little bit older than that?  What do you think?

    1. SAMARTH KULKARNI: It’s going to be a continuum. I think one of the things that we don’t have – or those who are born today – we haven’t banked our cells from where we were born.  We haven’t banked our umbilical cords.  I think that’s becoming more commonplace as we go along, so you’ve banked your young cells which are pluripotent.  In other words, they can form many different cell types.  And in the future, if you have these cells banked when you’re born, and you get older and you just need to replace organs, you can just direct these banked cells to create the new organ, and that I think could be a way to replace faulty organs or malfunctioning cells.  Again, it may sound like the stuff of sci-fi today, but in 20 years, I think this is certainly going to be something that may even be in clinical trials. 

    MARY-CATHERINE LADER:  So, you mentioned that those who bank cells might be able to live that much longer. First of all, can you explain a little bit what banking cells means in practical terms?  But then also, it kind of brings to mind whether that brings with it some inequality; those of have access to banked cells, either because of the geography of where they live or because of their income, would be advantaged. How do you think about those kinds of issues?

    1. SAMARTH KULKARNI: Yeah, the notion of banked cells, and again, you’re asking about something that’s 20 years out, it’s not something that’s available today; but we are all born from single cells. And our code of life tells all of these cells how to become kidneys, or liver, or lungs, right?  Their fate is directed. And we’re all born with these cells called stem cells, and stem cells are – they don’t have a function yet, but they’re pluripotent in the sense that they can become any of these organs of interest. So, if you have cells that are stem cells that are banked, then, you can, through modern techniques, direct them into forming different organ systems. Now, you may not be able to direct them to form different-shaped ears, but you can certainly direct them to form a pancreas.  And whether you can ultimately do that for brains is unknown at this point, but that gives us this notion of extending life by recreating organs. When that happens, there are a lot of questions for society to wrestle with, including inequality, but also whether we as a society can sustain people living for 150 years.  So, lots to think about on that front, but certainly, the possibilities are opening up as we do more research with powerful platforms like CRISPR.

    MARY-CATHERINE LADER:  Well, this has been absolutely fascinating.  Thank you so much for joining us today.

    1. SAMARTH KULKARNI: Thank you for having me.

    MARY-CATHERINE LADER: The COVID-19 pandemic has accelerated the genomics and immunology megatrend, changing the way we think about medical advancements moving forward.  On our next episode, we’ll talk about another megatrend accelerated by the pandemic: climate change and resource scarcity. We’ll speak to Salim Ramji, Global Head of iShares and Index Investments for BlackRock, and Chris Ailman, Chief Investment Officer of CalSTRS, the California State Teachers’ Retirement System about what they’re doing to prepare for a lower-carbon economy.  We’ll see you next time.

  • MARY-CATHERINE LADER:  Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing.  I’m your host, Mary-Catherine Lader. We’re finishing up our mini-series on our global outlook for 2021. Today, we’re talking about sustainability. 

    In January, we outlined a series of steps we’re taking to prepare investors for the transition to a net-zero greenhouse gas emissions world. And we’ve spoken for a couple years now on how climate change is reshaping the global economy and why we believe it’s becoming an investment risk. But most projections for the economy and investment returns still don’t take climate change into account.  We believe they should, and that investors need to incorporate sustainability into how they build portfolios.  So today, we’re talking to Vivek Paul, Senior Investment Strategist for the BlackRock Investment Institute, on how to navigate the investment risk created by climate change, and sustainability more broadly. 

    Vivek, thanks so much for joining today.

    VIVEK PAUL:  Thanks, great to be here.

    MARY-CATHERINE LADER:  In the past year, sustainability has come into focus so much more.  In part because of the Covid pandemic, there’s been an increased focus on resilience and social considerations that are part of sustainable investing.  Because of the extreme weather events and temperature of last year, there’s been increased focus on environmental and climate.  What are you most focused on as you think about sustainable investing in 2021?

    VIVEK PAUL:  Well, I think just to echo what you said at the start, the last 12 months have been incredible.  We think about governments across the world and institutions across the world and the level of change we’ve seen.  For instance, of course, in the U.S., Joe Biden rejoining the Paris Accord agreements.  You see in the UK, the government prioritizing their green agenda.  And in the EU, the EU Recovery Fund having explicit climate-related targets of how that money is invested.  The European Recovery Fund is what the EU has decided to collectively pool its money and invest into the future of Europe to allow it to recover from the worst effects of the coronavirus pandemic. I think, clearly, this has been a step change in 2020.  More and more corporations are signing initiatives to limit the amount of carbon emissions they have, and so on.  I think the real question now is how does this momentum continue and what does that mean for the pricing of asset returns. We do think that this is really one of the key drivers when we’re thinking about formulating investment decisions now.

    MARY-CATHERINE LADER:  We talked about climate risk as an investment risk for some time. Particularly at BlackRock, our CEO, Larry Fink, has written an annual letter and this year it’s focused on this. What do you think that really means? Can you just refresh what is climate risk as an investment risk and how does that affect asset prices?

    VIVEK PAUL:  Absolutely.  Climate risk is investment risk is the idea that the landscape of what you can and cannot buy is changing.  There are risks associated with that that act a granular level. But one thing that I think is really important to recognize is it’s not just investment risk, it’s investment opportunity.  As we transition to a different-looking economy in the future, what that means is that there will be winners and losers across regions, across companies, across sectors.  And really positioning well ahead of this transition, I think, is crucial for investors to make the right decisions. Climate risk influences the stability of companies, the fundamentals of companies.  It influences the macroeconomic outlook. It changes, I think, the expectations one might have around GDP in different regions, across different times.  It also, importantly, changes how much we’re willing to pay for stuff.  I think you need to consider all of those when you’re making investment decisions.

    MARY-CATHERINE LADER:  That requires harnessing a lot of different data, historical data but also forward-looking data.  Because part of the challenge here is that we don’t really know how the climate’s going to change, we don’t really know what the policy remedies are going to be to drive decarbonization and work toward a net zero future.  Of course, all investing is about trying to anticipate the future and the impact that might have on markets, or a particular investment decision. But, in this case, we have that many more unknowns, in a way. It also requires bringing together climate science, climate policy, understanding of different sectors.  In short, it’s a really hard challenge that requires a breadth of expertise and a depth of data.  How do you start to think about where to begin?  Which asset classes, which geographies might be most affected and how do we think about incorporating the right data or the right adjustments to think about climate risk?

    VIVEK PAUL:  Well, look, there’s a lot there.  The first thing to just acknowledge is you’re right, this is hard.  There’s a reason why it’s not standard industry practice today to effectively take into account these multitude of issues when you’re kind of making the most important decision that one makes in investment, which is what’s the right blend of types of exposure, how much broad equity, how much credit, how much government bonds, how much private markets.  To answer that, you need to effectively try to come up with a vision for the future.  These effects that we’re talking about affect every single aspect.  Now, a couple of things we can do.  Firstly, is let’s explicitly acknowledge that it is tough.  That sounds trivial, but actually that is a crucial part of how we build portfolios at BlackRock over a long-run horizon.  We explicitly take into account this idea of fundamental uncertainty of returns.  At first glance that sounds obvious, of course returns are uncertain.  But, actually, if you acknowledge the fact that you might have different convictions on different things, you can build that information into a portfolio construction process.  I think that’s part of the way you get comfortable with the output.  But then, how does this then manifest?  How does this influence the entirety of the investment landscape?  I think the important place to start here is this idea that society and societal preferences are shifting.  That is the driver, that is the thing that is changing the world.  That changes who we elect as our elected officials and what policies they pursue.  It changes what you and I are willing to buy, how we spend our money.  This is the thing that is changing asset pricing and changing asset markets.  What we’re trying to do now is say, well, okay, great having that high level statement, but what does it mean in terms of explicit views one might have about the future?  We’re trying to tackle this in three different directions. The first is crucial: the macroeconomic outlook.  This is the idea of different levels of growth in different regions, different levels of inflation, the level of interest rates being different across regions.  It's worth just pausing on this, because there’s a really, really important point here, which I think drives the whole reason why we’re doing this.  It’s the fact that climate change is an investment opportunity.  Putting it another way, the way people have talked about this in the past has been to frame the macro picture in terms of losses, in terms of negatives.  People say if we make this transition towards a more green environment, then what that means is we have to take a hit on growth of the following magnitude.  But what’s misleading about that is that people are comparing against a fictitious benchmark.  They’re comparing against a world in which climate change doesn’t exist; we know that’s not true.  The real benchmark to compare against is one in which climate change occurs and no one does anything about it, and that is a very, very nasty set of occurrences. That is not a place where you’re going to get fantastic returns across the board because there is material impacts on different regions and different economies and so on.  Because we think people are doing stuff about it, this is why climate change is about an increase in growth. Once you change your framing, you see, really, this is why investment opportunity might occur.  I’ve got a trivial example here.  Imagine you’re a skydiver; you’ve jumped out of the plane.  You’re hurdling down towards the ground and halfway through, you say, “I don’t want to pull the parachute because I’d rather sprout wings and fly away.”  Of course, that probably would be great, but it’s not going to happen.  It’s the same thing when you’re comparing climate policy changes relative to doing nothing.  The alternative, not pulling a parachute in this case, is far, far, far worse.  Pulling your parachute is a better thing.  Climate change policies are a better thing than not.  That’s a key kind of thing to understand here. The second and third elements are this idea of repricing and this idea of corporate fundamentals.  When we’re trying to think what might occur in the future, we’re directly trying to take into account the fact that we’re all willing to pay different amounts for different things.  Now, to the point I think you led on in your question, there is no data really that we can kind of reliably look at over the past 10, 20, 30 years because this has never happened before.  This is not in the price.  But there are important things that we can learn from history because there have been other things in the past which are long run, societal effects changing demographics in different regions that actually influence asset prices.  What we can do is we can learn from those sorts of experiences here.  We’re kind of saying that actually the change in relative carbon emissions intensity actually is a key driver.  We’re already seeing some evidence of that, but we think we’ll see much more of that in the future.

    MARY-CATHERINE LADER:  Can you explain what that is, relative carbon emissions intensity?

    VIVEK PAUL:  Yeah, of course.  What I mean here is the emissions a company might pump out into the atmosphere for carbon.  We’re talking explicitly about scope one and scope two, so this is effectively the stuff that they directly control and also the stuff that is a function of them consuming electricity, if you like.  Different firms will have different amounts of carbon emissions out there. But we also need to scale for the fact that different firms are different sizes.  My local post office will have less emissions than a colossal multi-national, but it’s probably not fair to compare them.  We need to compare relative to firm size.  And our belief here is that as society evolves, what we’re expecting is that people will reward those which are more efficient with regards to carbon emissions than the less efficient, i.e., I’m willing to effectively want to purchase something from a firm who is pumping out less carbon for a given level of size of the firm than I would for some who is not as good.

    MARY-CATHERINE LADER:  Can you give an example where you think this is creating an opportunity?  You’re right, so much of the discussion around the impact of climate change on the economy is negative.  There are a couple obvious examples.  In some places in the world, higher temperatures will mean higher crop yields, and that could be positive.  Or it could mean that real estate becomes more attractive.  What else do you think this creates in terms of opportunity?

    VIVEK PAUL:  Well, I think this is a good one.  Actually, in answering this question, I think it’s worth saying that you can’t really make these sorts of judgments at a broad, regional level.  You have to go more granular.  You have to go sectoral, or even actually the underlying firm level.  But what we’re doing in terms of our long-run views of the world is trying to assess this from the lens of sectors.  You can imagine here that different sectors will have different opportunities and different challenges as we transition.  In the work that we’ve done, we find that there are some sectors which are likely to benefit from this transition more than others.  An obvious example of a sector in general which might find this transition challenging is the energy sector.  That is one where we think, all else equal, because of what’s about to occur, this is not going to be a boom time in general for all firms within a sector that might always be winners.  You can see, for instance, at a sectoral level, healthcare and technology could be beneficiaries at the expense of sectors such as energy. Corporate fundamentals are working in a positive direction. That means to say that there are opportunities out there which they can tap into, clean technology revenue streams, for instance.  But also, in that repricing angle I was talking about, the fact that actually, these sectors, these industries, are likely to emit less carbon per size of firm.  We will be willing, all else equal, I think, to prefer those sorts of exposures at a very high-level macro. Then, from those sectoral insights we can then start to learn something regionally.  There’ll be the macro effects that occur regionally and this intersection of all those effects.  By putting all those in conjunction, we get the full picture.

    MARY-CATHERINE LADER:  So, a critical question is what does it mean for the sectors that are going to be suffering the most, to put it kind of bluntly?  Do you think that we’ll see massive business model change, for example, in energy or from other companies who are going to be adversely affected?

    VIVEK PAUL:  I think you’ve seen it already, in some ways, in the sense that it’s not just the business models that will change, it’s also the composition of different indices.  The types of companies within the high yield index, for instance, has shifted dramatically already in the course of the last 10 years. The amount of names that are coal producers has just fallen dramatically, because the world is kind of shifting.  You’re going to see more of those sorts of effects transpire over the course of the next five years, ten years and beyond.  Another thing to say is that this is why this is such an investment opportunity, because the size, the magnitude of these differences, is really meaningful.  When we think about the future, when we think about investing over a long-run horizon, for us, in terms of the way in which we think about it, if I were to compare some of those sectors I mentioned earlier who we think will be the most favorable as a result of this and some of those who are the least favorable, the gap in terms of the potential performance there, that is equivalent to some of the largest expectations we might have of returns of any asset classes.  In the context of a low return environment, that gap is massive.  That’s why it’s such a big investment opportunity.  To your direct question, yes, business models are going to shift and that’s really why understanding corporate fundamentals is crucial to understanding, frankly, which are going to be the winners, which are going to be the losers.  Some won’t make it and indices we think will shift in composition as we go forward.

    MARY-CATHERINE LADER:  We’ve talked mostly about E, or climate risks specifically, not even all of E. That’s typical when we’re talking about sustainable investing because there are a number of more data sets, there’s a little bit more research around the relationship between some of the stuff we’ve been talking about in risk and return.  But what are your thoughts around social factors and governance factors? What kind of research questions are you most excited about as you think about those in 2021?

    VIVEK PAUL:  I think the first thing to say is that while we have majored in terms of this work on carbon emissions and E in particular when we’re thinking about how the broad market moves, that is not by any stretch of the imagination to say that S and G don’t matter. They do matter; they’re crucial for investment decision making today. The point here is that we think carbon emissions intensity, in the way in which I just talked about, everyone has a general idea of what is good and what is bad. As a result, that, we think, shifts market pricing.  That shifts, if you like, the return of indices; that shifts the return in aggregate of different asset classes. Now, with S and G, it’s a little bit more complicated, because not everyone universally agrees exactly what matters and what doesn’t matter. There is research that’s out there that shows, for instance, that more cohesive workforces, more diverse workforces, for instance, add value.  That you get an increase in corporate fundamentals, you get an increase in efficiency of the firm as a result of some very important metrics which fall under the S umbrella.  I guess the difficulty is to try and get systematic data across different firms, across different regions in order to draw conclusions that you think are going to drive the entirety of the market.  In different regions, different metrics are more prevalent than others.  It’s not necessarily consistent, and it doesn’t mean the same thing in different regions.  Where we view S in particular is a source of alpha, or a source of an ability to outperform the market, but not necessarily something that drives market returns.  What I’m saying here is if I believe I have fantastic insight into S drivers, I think I might be able to outperform parent indices; I can add alpha there.  But I need everyone in the world to agree with me that that is important for the market itself to shift.  That’s why we think carbon emissions intensity drives the market and S more drives alpha.

    MARY-CATHERINE LADER:  So, you mentioned that for the market to actually evolve or change, there needs to be a little more consensus around what’s good or bad, what drives returns and what doesn’t.  To what extent have some of these sustainability risks or factors been priced into markets so far, and what are you looking at to indicate whether they are and the degree to which that’s changing?

    VIVEK PAUL:  It’s a great question, and this is an area of ongoing research for us.  I think there are some things that one can say to give you some faith in the idea that this is not yet fully in the price.  When we’ve tried to assess the future and what sort of level of carbon tax one might need to see in order to meet those Paris agreements, the levels that we need to see are just nowhere near what is priced in today. Another way to think about this is the flow of capital.  Even though 2020 was a year in which sustainability mattered more in investment than, frankly, ever before, and we saw a huge increase in the amount of money that was wanting to invest sustainably, we’re still broadly speaking – it’s a drop in the ocean. Now, you can get different statistics depending upon what you look at, but the point is, we are not anywhere near where we might get to.  The reason why that really matters is actually, you get a fundamentally different conclusion about the impact on asset prices whether or not you believe it’s in the price or not in the price.  And to explain this in a bit more detail, there’s been a traditional argument that’s been out there in the past, which says it’s inevitable that you have to have a lower return for investing sustainably, because all else equal, I prefer this stock a little bit more because it’s green or whatever it might be, and as a result I’m willing to accept a lower return.  That’s the traditional argument as to why you get a lower return from green stuff.  The reason why that fails for us is that it’s not yet in the price, exactly to your question.  Because if it’s not yet in the price, it might yet get more expensive still.  The point is that there’s a shift in preferences as more and more people care and as this features more and more in investment thinking.  It is crucial to understanding the investment opportunity, and there are a bunch of ways in which you can kind of assess today that we’re not yet there.

    MARY-CATHERINE LADER:  It sounds like that’s a lot of specificity, a lot of thoughts as to how sustainability might reshape markets in the future.  Thanks so much for joining us today, Vivek.  It’s been an absolute pleasure having you.

    VIVEK PAUL:  Thank you so much.

    MARY-CATHERINE LADER:  This wraps up our miniseries on our global outlook for the year ahead.  Our next mini-series will focus on megatrends, the long-term structural forces shaping our future.  We’ll talk about technological breakthroughs like electric vehicles, cloud, 5G, the future of cities and how fighting Covid-19 will impact medical advancements for years to come.  We’ll see you next time.

  • MARY-CATHERINE LADER:  Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Mary-Catherine Lader. On our last episode, we began our deep dive into each of the three themes that BlackRock sees shaping the year ahead. Today, we’re talking about policy.

    In 2020, we saw unprecedented coordination between central banks and governments to help the global economy stay afloat. This year, we expect further policy action, but the market impact is likely to be different. Today, we’re going to talk about the new nominal with Jean Boivin, Head of the BlackRock Investment Institute. We’ll talk about how a resurgence in Covid cases will impact the restart of the global economy; what action we expect from policymakers; and how investors should navigate the year ahead.

    Jean, thank you so much for joining us today. 

    JEAN BOIVIN:  Very happy to be here, thank you.

    MARY-CATHERINE LADER:  A year ago, you had a very prescient conversation with me, and I’m excited to hear what you have to say about 2021. In this mini-series about the year ahead, we’ve spoken to Scott Thiel, Tony DeSpirito and Tom Donilon.  A key part of their outlook is that they see global growth restarting, particularly as a vaccine begins to be distributed worldwide.  We’re pro-risk as a firm in our investment views, but we’ve recently seen a new strain of the virus emerge and that’s led to a spike in hospitalizations and, of course, further lockdowns.  So, how do you think this new strain is going to impact the restart?

    JEAN BOIVIN:  The new variant and the new strain, as you mentioned, is obviously a risk, and is, I think, attributing to longer lockdown and restrictions maintaining in place.  It will affect and is affecting the near-term track of activity. But, in our view, ultimately, and I think that’s really what the markets have been absorbing or embracing, is that it’s really about the vaccine and how it’s going to be rolled out and how rapidly it’s going to be rolled out.  As long as the vaccine is rolled out according to plan and is effective against these new variants, new strains – which so far, the evidence we have suggests that they will be, especially in terms of preventing severe versions of the disease as well as hospitalization – as long as these conditions are met, then the near-term evolution of the virus is not as important.  In fact, it’s something we would advise to look to in terms of markets, of course.  I think as a result, it makes us really focus on what the restart will look like.  What we are envisioning now for the next stage or the next few weeks is once we’re in the world where hospitalization is under control in key parts of the world, we will start to see an acceleration in the restart.  It’s pretty incredible that in some parts of the world right now, we are on track to be way above 25% of the population being vaccinated by April.  So, that would be the case in the UK, we’re seeing that as well in the U.S., and some other countries are ramping up.  That’s in line with getting close to the point where hospitalizations are under control and the time where you will start to see the acceleration in the restart. I think the dynamic of the politics will change, we’ll see a relaxation of restrictions contributing to the acceleration.  All the way to the point where once not only hospitalization is under control, but the broader contamination is also very much under control and declining. Then, we’re going to be – and this is a 2021 story I think in many parts of the world – we’re going to be in a world where we’re going to see a very significant acceleration, which will have nothing to do with a typical recovery, because we’re not in a normal business cycle; pent-up demand is pretty real.  There’s a lot of suppressed demand, both for consumption goods, durables and services.  I think that’s going to be a pretty powerful force when we get to the second part of this year.

    MARY-CATHERINE LADER:  What does that pent-up demand look like?  Can you just explain that?  We can all buy anything and everything online today.  Then there, of course, has also been tremendous job loss and economic hardship that continues, even as we saw in the most recent job numbers.  What gives you so much confidence in the pent-up demand?  What is it?  What will it look like?

    JEAN BOIVIN:  A couple of things here.  I guess one place to start is that we’ve seen savings accumulation by a large fraction on average by the population; certainly in the U.S., but that’s true everywhere.  This is, again, a different dynamic than in a typical business cycle.  We have balance sheets of consumers, individuals that have improved during the pandemic as opposed to deteriorate, as was the case in 2008 or 2009.  There’s hardship, there is health hardship, and there’s job loss and so on; but it’s in the context, still, where overall, there has been an accumulation of savings and stronger balance sheets.  The second part I would say is that why there is pent-up demand is because even though we are able to buy online and do some activities, there are plenty of activities that, I don’t know about you, but I’m certainly very eager to re-engage with.  Certainly, on the service side of things.  Those would be something you would expect a big boost initially.  When we talk about services, it’s important to realize it’s not like you can start to pack up and – you cannot go twice to dinner at the same time.  You typically don’t go see the same concerts twice.  There’s a limit to how much pent-up or compensation of past losses that can come in the future.  But there’s still the ability to go more often to restaurants for a while, to have more trips, and engage in more frequent activities.  That’s what the pent-up demand would look like, I think, and it’s going to be driven by this accumulation of savings overall.  People will then also start to regain employment and so on, adding to this dynamic.

    MARY-CATHERINE LADER:  You’re right, there’s no shortage of things I think we’d all like to be doing if we could these days.  I guess this all sounds quite different from the Global Financial Crisis.  How would you then compare the shock that’s been created by Covid-19 and the challenges of last year to the Global Financial Crisis?

    JEAN BOIVIN:  One thing we’ve tried to put forward early on in 2020 – and I think we started to express ourselves or communicate around this in March of last year – is the fact that the usual business cycle playbook doesn’t apply.  This is more akin to a natural disaster situation than it is to a business cycle. Even the language we use typically doesn’t really convey the right appreciation of reality.  What we went through, in our view, is not a recession – it was a deliberate, coordinated stoppage of the activity in the global economy, which is very different than a recession.  And what we’re going through right now is a restart – it’s not a recovery.  Because artificially, activity was held back, not because of more organic evolution of the cycle, but an exogenous, natural-disaster-type phenomenon.  That has a big implication, which is a point we tried to make early on in the crisis, which is that even though it’s tempting to draw a line to 2008 and 2009, the nature of the shock is very different.  Ultimately, what will matter for markets is the cumulative impact over time; not only in the second quarter of last year, but it’s the cumulative impact on output lost over the 2020-2021, ’22 and so on.  Once you look at the cumulative impact over time of what this shock is likely to represent, in our view, and still to this day, it is a fraction of what the Global Financial Crisis represented.  The reason is that this shock was very intense and concentrated in 2020.  And the declined activity we’ve seen is never seen really before in a quarter; it’s concentrated, but the restart is real.  We don’t have a key phenomenon of 2008, which is propagation over time.  2008-2009 set in motion a deleveraging.  Deleveraging means the fact that corporations and individuals needed to rebuild their balance sheet to a healthier state.  That can only happen over time and that’s a persistent headwind.  In 2008, we learned about this phenomenon that was set in motion, would take many years.  This time around, as I said, the balance sheets are in a healthy position, even healthier than any point you would expect at this point in a recession recovery.  We don’t have as a result this propagation.

    MARY-CATHERINE LADER:  It sounds like some of that is about the conditions, as you said, that we had going into it.  Some of it’s about the nature of what caused the shock and the recession.  But, to what extent do you attribute some of that to the policy response, as well, which was quite different than it was in the Global Financial Crisis?

    JEAN BOIVIN:  The policy response, we want to think of it a bit differently than it typically is framed or discussed in the context of a recession.  Our view from the beginning has been that the role of policy here was not to stimulate the economy out of recession, but it was really to provide a bridge through that period.  The difference, I think, is key, because if you’re in a normal recession, you’re trying to boost activity through policy.  There was no point to boost activity in 2020; we were trying to stop it.  The point of policy was not to try to activate or stimulate it, but it was really to try to make sure that we are not creating permanent scars and damage while we’re stopping the economy.  That means making sure that we provide funds and liquidity where it’s needed to avoid default and maintain balance sheets that are as healthy as possible through that period.  I would say the policy is not that crucial for the restart dynamic.  The restart dynamic is a natural consequence of the virus being under control.  But the policy was absolutely crucial to avoid permanent damage by providing a bridge. I think if you bring that down to the market reactions and the fact that so many people point to a disconnect between the economy and the fact that markets are now higher than they were before the pandemic came to life, and they are in fact much higher, some people see that as a disconnect.  We would argue that there’s not really a disconnect because the shock is, over time, not as big as the Global Financial Crisis.  We have visibility on the restart and policy is avoiding the permanent scar and damage, which I think is part of the reason why markets are where they are now.

    MARY-CATHERINE LADER:  So, you’ve called this phenomenon the policy revolution.  That’s what you’re talking about right now, but basically, the joint fiscal and monetary policy response was something that you anticipated in advance of the pandemic agnostic and separate from the pandemic, but just an expectation that that kind of collaboration, if you will, would be part of an approach to any future recession.  That certainly played out in 2020, and as you suggested, that response helped the economy start to recover and limit, as you put, the long-term damage and the scarring. 

    JEAN BOIVIN:  Just to underscore one point you just made here, which is the role of policy was to bridge, not to stimulate, in 2020.  But that still required a huge intervention of policy.  I don’t want to underestimate – the fact that there’s bridging doesn’t mean it’s less. The response was bigger than the Global Financial Crisis.  As you said, we’ve seen that as nothing shorter than a policy revolution.  Something that we thought that the next big shock will require in many ways, but it’s still surprising to see how quickly things that were seen as unthinkable a few years ago and even in 2019 have been now deployed.  The unthinkable, I think, has to do a lot with the more explicit coordination between central banks and fiscal authorities.  An aspect of policy that is about going more direct and trying to put funds and money more directly in the hands of entities that need it.  A lot of what we’ve seen in 2020 is reflecting that aspect.  The other key thing is we’ve seen an unprecedented increase in debt in 2020.  In a peacetime era or period, this is never seen before.  Both the level but also the increase in discretionary spending that we’ve seen in places like the UK and the U.S.  What is also interesting, and I think this is all a basis to inform how we think about 2021, but what is also interesting is that despite this unprecedented increase in debt to record levels, in many ways, the markets, the policymakers, academics and taxpayers have never been so relaxed about debt as we currently are.  There’s no real constituency being very noisy about the need for consolidating budget deficits or austerity.  I think this is notable because in 2008, ’09, ’10 and ’11 it was the opposite.  After the response that was smaller than currently, there was a very quick reversal to concerns around big debt, a large debt and the need to control the deficit.  That is notable, I think. 

    MARY-CATHERINE LADER: So, what actions do you expect policymakers to take this year?  Especially now that we have a Democratic sweep of the U.S. government and different leadership politically in the United States?  What do you think is going to happen this year?

    JEAN BOIVIN: When we think about 2021, key points to make is that, first, there’s a big, big fiscal package being negotiated in the U.S.  I think no matter the scenarios we’re talking about, a very sizable fiscal stimulus that is coming on the back of, what I said, an unprecedented 2020 response already.  That is one part of the picture for 2021.  Markets are very relaxed about this debt.  All of that hinges on the rate environment staying low for a long time, like currently markets are anticipating.  In a world like this, it turns out that this debt is at record levels, but it’s cheaper to finance debt now than it was to finance the debt in the 1990s, which was about half the level it is now.  So, this is why we’re so relaxed.  It also implies that rates staying low will be key to this environment being sustained.  That brings me, then, to the Fed, where big questions in 2021 because I think the rate piece is very important for being relaxed about the debt level.  It’s very important about asset price valuations.  There’s a strong conviction that the Fed will be maintaining a low-rate environment for a long time, and that’s our baseline and our view and aligned with what they’ve communicated.  We think it’s going to be very difficult for them to engage in tapering quickly, so we think there’ll be a tendency to postpone that discussion way into 2021. But, it’s going to be interesting to see later, in the second half in particular, when the restart is real.  We think we’re going to see more inflation, as well.  The calculation for the Fed will become trickier, because on the one hand, the necessity to maintain the low-rate environment given everything I’ve just said before about market valuation, sustainability of the debt and so on will be a powerful force.  But, on the other hand, there’s going to be a disconnect with what’s going to happen on the ground with the activity restart and inflation starting to appear.  How to navigate that, I think, will create some more noise, potential miscommunication.  I think ultimately, they’ll reaffirm a low-rate environment.  But on the way there we might have a bit more volatility given how important their low-rate environment is to justify a lot of what we’re seeing, both on the debt side but also on the valuation of assets.

    MARY-CATHERINE LADER:  So, you just talked about why the low-rate environment is important, why it will likely persist.  Seeing a low-rate environment go on for even this long wasn’t really conscionable to many people a decade ago and you’re saying it’s going to be even longer.  A couple questions for you on that.  One, what does an investor do about that?  How should they think differently?  Then, two, what do you think are some of the lessons about fundamental economic principles?  Are elements of economics kind of broken and have rules been rewritten?

    JEAN BOIVIN:  Yeah, so these are two great questions and big questions by themselves.  Let me offer a couple of comments on both.  In terms of what investors do about this, there’s a couple of key implications, I think.  This low-rate environment is not only low, but it’s close to the lower bound of what rates, in our view, can be or can go.  It means that the role of fixed income and government debt in portfolios will be more challenged over the next few years.  Bond yields will find it hard to go much lower than they are now.  One of the big cases to allocate to fixed income in portfolios is because of their balanced properties that help to insulate your portfolio against equity drawdowns.  That role, I think, is going to be more questionable going forward. Moreover, even though rates will be lower and we think big forces will keep them low, they’ll likely be on the way up from here.  There’s also going to be more inflation.  All of this, I think, means less expected returns, more challenged expected returns certainly for fixed income, but also less of a ballast role.  That’s why we tend to favor, from a strategic, longer-term perspective, an under-allocation or underweight to fixed income in portfolios.  That’s one of the implications.  I think another key implication, however, that is more for now in the near-term, in the quarter view, is the fact that we think that the central banks, and The Fed in particular, will be responding to inflation in a much more muted way than what we’ve seen over the last 30-40 years.  That is important, because that means that even though inflation is coming, it will challenge the role of bonds in a portfolio.  It’s going to be, however, much more constructive to equities because we will see some inflation without the usual magnitude of response from yields. So, it is going to be much more muted. And that is what we call the new nominal theme, which is an environment where inflation is going up, yields are not going up as much, and that is constructive for risk assets and for equities in particular. So, I think those are the two key takeaways from this environment. One is longer term, and I think the new nominal is more of a near term boost or support to markets. On your second question, which is what has changed more fundamentally in the way to think about the macro-economic world, I think I would go straight to what I just said, which is the intellectual paradigm around how we think about debt – it’s a sea change, what we’ve seen. We had back in the early 2010s, this old debate about how do we reduce that globally after the Global Financial Crisis. There was discussion about putting at the G20 level, even, targets, for debt-to-GDP ratios that countries should work towards to get to healthier balance sheets. And now, we are in 2021, debt is higher. We’ve gone through another crisis and we’re collectively and intellectually in this paradigm a lot more relaxed about that. And you see now in a lot of work from Olivia Blanchard and Larry Summers making the strong case for why there is a different world, different paradigm, a lot more fiscal space, and emphasizing the fact that we’re in a world where interest rate are below the rate of growth of the economy. So, the economy is growing faster than the rates that we pay on debt. And that wedge between the two is justifying much more fiscal space than what we’ve seen before. There is an element of this that has a bit of a reflectivity to it. Why was the nature of the discussion in academia and elsewhere different in 2010? It was because rates were expected to go back to their historical normal. And then the whole paradigm was kind of reflective of this view. And now why do we have a different discussion? It’s because rates are not expected to go back to historical average. So, it all really depends on whether this assumption is true or not.

    MARY-CATHERINE LADER: Well, I guess, although past experience is no indication to future performance, it seems like you’re certainly not alone in suggesting that it’s true. And I’m curious, one feature, possibly an outcome, of low rates has been that asset prices have gone up across asset classes. Do you think that that’s going to continue to be the case? Should we expect that to continue to be the case? And then, is talking about a “correction” irrelevant at this point?

    JEAN BOIVIN: So, there is a lot of discussion on valuations being stretched, at this juncture. I mentioned a bit earlier the disconnect that people are pointing to between markets and the reality of the economy that hasn’t really restarted yet, and we’re working from home and so on. But I would say this is another instance where history is not necessarily a good guide to frame these valuations. It is the case that you take standard metrics, and you compare that to what you see historically; they all look to be high. And you’ll see that when I have one idea, I stick to it. But historically, the rate environment was not expected to be this low and for this long; that is key to thinking about valuations. So, once you take into account or control for the fact that we have a different rate environment, the compensation that investors are getting for equity exposures over and beyond what the interest rate or risk-free rate would suggest, is not normal. It’s pretty much in line with fair compensation we’ve seen historically. So, it’s not clear that these valuations are screaming red or appear to be stretched. That said, it’s predicated on rates staying low. And if that changes, then that would be a massive change in the landscape that would question all of this thesis. The second point I would make is that this restart is very visible, which means that markets have been able to focus on what is to come and to price it in. And so, when it comes and we actually see it, it will be difficult to justify that this is another reason for markets to have another big leg up on the back of this. So, the reason why we’re calm and positive about the market now is because we expect the restart to come. That is what people are looking to when we haven’t seen markets going down much on the back of bad news. But when we actually see that happening, a lot of it will already be in the price, I guess. And I don’t think as a result of all this – one feature of 2008 is that we saw in the aftermath, a decade-long bull market following it. In this case, given the nature of the shock, the positive is that the shock is not as big overall, but it also means that I don’t think we can just extrapolate a decade-long bull market on the back of this. For U.S. equities, we are in the low single-digits return expectations for U.S. equities on a five-year basis, for instance. So not overvalued, but at the same time, it’s a moderate return environment I think we should be expecting over the next five years.

    MARY-CATHERINE LADER: So, it sounds like we should expect things to look a little different as you suggested in terms of rates, in terms of return expectations. What about policy? So how do you think future policy action will be changed for the years ahead based on what we learned in 2020?

    JEAN BOIVIN: The big questions for policymakers now is it’s a bit hard to put the genie back in the bottle. After many years where we’ve been hearing we need to consolidate, we need to restrict our spending, we cannot finance infrastructure because of concern around debt, suddenly, in 2020, we were able to do massive spending, increase the debt very, very materially. And we are on the other side of this now, and the world hasn’t collapsed; markets are going up. And so, for many, one conclusion that seems to be drawn from this is why not do more? Why do we have to stop spending? And I think the big challenge – that is the genie I am referring to – I think putting a stop on that spending going forward, or putting the guardrails around this, the ability of the central banks to start to remove some of this bridging stimulus will not be an easy task. And it won’t be an easy task because it will be a political discussion, and politicians will have to make the case for why we need to restrict fiscal policy and monetary policy. There’s going to be a disconnect in peoples’ mind given that it appeared to have been so easy to deploy that fiscal policy in 2020 without many consequences. So, I think that this will be tricky and to me, that is a big question for policymakers over the next five years.

    MARY-CATHERINE LADER: Well Jean, it will certainly be interesting to watch all of this unfold. Thank you for sharing your perspective and vision of the future. It’s been an absolute pleasure having you.

    JEAN BOIVIN: All the pleasure was mine. Thank you so much. 

    MARY-CATHERINE LADER: On our next episode of The Bid, we’ll finish this mini-series on our global outlook, with our outlook for sustainability for the year. As a reminder, email us at with ideas for future topics or any feedback. We’ll see you next time.

  • TEDDY BUNZEL: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m a new host to the podcast, Teddy Bunzel. We’re continuing our mini-series on our outlook for 2021. On our first two episodes, we set the stage with our global outlook and what it means for the stock market. On our next three episodes, we’ll home in on each of our three themes for the year ahead. Today: geopolitics.


    The Covid-19 crisis continues to profoundly shape our geopolitical environment. We’ve seen heightened U.S.-China tensions, accelerating inequality, and companies revamping their supply chains. Scott Thiel discussed some of these dynamics during the first episode of our mini-series, when he touched on the theme of “globalization rewired.”

    Today, we’re diving into geopolitics with Tom Donilon, Chairman of the BlackRock Investment Institute and former U.S. National Security Advisor. We’ll talk about how Covid-19 has changed the international landscape, the impact of the Biden Administration and the U.S. election, and what he’s watching out for in 2021.

    Tom, thank you so much for joining us today.

    TOM DONILON: Thank you Teddy, it’s great to be here today.

    TEDDY BUNZEL: So, it’s safe to say there is a lot going on geo-politically. We have a new administration in the U.S., U.S.-China tensions remain heightened, the threat of climate change is becoming more prominent. But to start, take us a step back and talk about how you believe the COVID pandemic is affecting the geopolitical environment right now?

    TOM DONILON: Well, COVID has been the most difficult and multi-faceted public policy problem that the world has faced since World War II. It has, obviously, health elements, it has had an economic element to it; it’s had governance elements to it as well. So, it’s been a tremendous public policy challenge for the world, and countries have dealt with it differently. I think in terms of the question that you ask about the impact of COVID, I’d say three or four things, Teddy. One is that I think overall, COVID has accelerated or exacerbated a number of existing trends that we saw in the world prior to the virus coming into the world a year or so ago. Second, I think that one of the principle impacts it has had has been to accelerate the bifurcation of the global structure. Where what we have today emerging are two poles in the world, with the United States at one pole and China at another poll, with elements of intense rivalry between the two countries – some areas of cooperation, hopefully – and where countries on some issues are being forced to choose. But we have clearly seen a bifurcation, and it's been most clear with respect to economics, I think. Third, is that you would have thought that a health crisis would have been an impetus for greater international cooperation. That has decidedly not been the case in the case of the COVID crisis.  Now, you saw cooperation in the 9/11 crisis, you saw it develop clearly after the Great Financial Crisis in 2008 and 2009, but there hasn't been the kind of thrust to international cooperation. Indeed, it's actually pushed countries away from each other in many respects. And even in the height of the Cold War, the Soviet Union and the United States worked together to eliminate smallpox. And indeed, COVID, I think, Teddy, has exacerbated with respect to U.S./China, almost every element of the U.S./China relationship over the last year, beginning with the recriminations right at the outset around the source of the virus. And those recriminations continue even through today. It became more intense as President Trump pivoted in the early part of 2020 away from his embrace of President Xi towards a more confrontational stance with China over COVID and a number of other issues. A couple of other impacts I think that we've seen which are really notable: I think it has exacerbated inequality in the world. I think its exacerbated inequality within countries and between countries. I think we see it in the United States and in the developed world, especially, where we have our population experiencing the crisis in very, very different ways. And we've had the so-called K-shaped recovery which I think accurately describes the experiences of people in a lot of the developed world, where one group of citizens are able to continue their work without interruption because they're able to work remotely. And large pieces of the population, or elements of the population, are people who are in businesses and services and professions where they have to interact with the public. And those individuals have experienced a very different crisis. And of course, it's the same between countries. I fear that we'll see poverty increases as a result of this increase in inequality. I think that the World Bank and the International Monetary Fund have pointed to significant reductions in poverty eradication, which is one of the great accomplishments in the world in the last 20 years. And I think you'll see a fallback for the first time since the late 1990s. And it really has also rewired globalization in terms of again reflecting this bifurcation. Supply chains have seen their users look to more resilience as opposed to efficiency. And I think you see both the United States and China working to limit the cost of interdependence and move towards more self-sufficiency vis-a-vis each other. So, a lot of big impacts, I think, as a result of COVID.

    TEDDY BUNZEL: So, there's a lot to unpack in there, and there are a couple of themes including around U.S.-China that I want to come back to in a little bit. But just to circle back to the United States. What about the broader set of 100-day priorities for President Biden?

    TOM DONILON: Yeah, I think, Teddy, that the first priority for President Biden's administration has to be COVID. The United States moving towards competently addressing the COVID crisis is the center of a successful administration for President Biden, both on the domestic front and on the national security front. Why do I say that? I say that because it's essential, obviously, in terms of getting better health outcomes in the United States. It's essential in terms of economic recovery. We've seen in China, for example, where they have been able to get control of the COVID crisis, that their economy is the only large economy in 2020 to have grown. But critically, it's important, I think, for America's image in the world and for its ability to operate and have influence and prestige in the world. One of the most important aspects of the American posture in the world since World War II, and maybe before, has been this can-do attitude in the United States and competence. Competence has been an essential element of American power in the world and that has taken a big blow during the course of the COVID crisis in the United States, and through the election as well, frankly, through 2020. So, I think that this has to be, both from a national security perspective and a domestic perspective, the most important priority for President Biden and his administration, and I think you'll see them you'll see them address it that way. This re-establishment of American confidence is a really, really important thing for the United States to reestablish and show its ability to snap back and again engage public policy problems in a confident way. There are another number of things which the administration has indicated that it's going to pursue very early during the administration. There'll be a large public investment package, which I hope will include a substantial infrastructure investment. That's an interesting one, Teddy, in terms of bipartisanship. And I say that because that's one where I think you could get Republican support for a Democratic initiative that was really aimed here at increasing our competitiveness in the world, increasing our ability to meet the China challenge. A number of things have come forward, right: rejoining the Paris Accord, reversing the Muslim ban, a 100-day mask challenge, right, challenging every American to wear masks and with mandates for in the case of interstate travel and on federal property. Extending the nationwide eviction and foreclosure bans. And also, I think you'll see a move forward with an immigration program. So, I think there'll be a large number of initiatives and they'll be in the form of executive orders, regulatory proposals, legislative proposals, policy statements and national security actions/foreign policy actions like joining Paris. But it is all reliant on getting COVID under control.

    TEDDY BUNZEL: So, you mentioned how that's not just a domestic priority, but the top foreign policy priority is getting COVID under control. Let's turn to the broader foreign policy agenda beyond COVID. President Trump was a disruptive presence on the international stage. But he seemed to tap into some real grievances and some underlying trends around skepticism on trade, growing tensions between the U.S. and China. So, how much of a change will we see in the foreign policy approach of the United States under a Biden administration?

    TOM DONILON: Some analysts I think are wrong when they say that there will be more continuity than change. I think there'll be significant change. There'll be a change in the dynamic of the way President Biden approaches foreign policy. President Trump, as you said, Teddy, was a distinct departure from the way the United States had approached foreign policy since World War II. And Biden, I think, will return to a number of those key precepts in terms of American leadership. He'll seek to be reliable, predictable and provide a modicum of stability to our approach to international relations. President Biden is well known to the world. I don't think we've had a president in a long time who has this much foreign policy experience or who has spent this much time with world leaders. And he has good relationships around the world. His team does too. It'll be more multilateral in its approach than unilateral. I think there's been a judgment made in the Biden team that, for example, the unilateral approach to the trade issues with China has not been a success for the United States. In fact, we see the numbers now that China's trade in the world has actually increased; it has the highest trade surplus it's had in its history, I think. You'll see allies first; that's going to be a distinct departure. I think that you'll see a real change in the tenor and tone of relations with Europe. Biden is a committed Atlanticist. His Secretary of State, Tony Blinken, spent part of his youth growing up in Europe and is well known in Europe, and I think understands the importance of allies. So, I think you'll see early summits between President Biden and European allies and also Asian allies. This, of course, is a sharp contrast in practice from where President Trump was. I think the personal relationships between leaders and President Biden will be just distinctly different than they were with President Trump. So, I think there's going to be significant change in the approach of the United States to foreign policy.

    TEDDY BUNZEL: Great, so let's turn to one of the issues you identified at the outset as a critical trend shaping the globe and being accelerated by the pandemic. And that's the relationship between the U.S. and China. So, how do you think we'll see the U.S. policy toward China evolve under a Biden administration?

    TOM DONILON: Number one, this is obviously the most difficult and challenging foreign policy and security issue for the new administration and will be the most important issue in the national security realm for the United States for a long time to come. The dynamics have changed pretty dramatically between the United States and China over the last four years. There have been fundamental rethinks and judgments made on both sides. I think there's been structural change. Trust levels have diminished dramatically. I think the Chinese economy has been reoriented as a result. I think both sides are trying to limit the cost of interdependence. The United States has acted and continues to act to protect its lead in areas like technology; there has been a managed decoupling, which is underway. Kevin Rudd, the former Prime Minister of Australia who's a real China expert, China hand, has said that structural competition is now baked into the relationship, and I think that's fair. The other thing I think I can offer here is this. I think that President Xi in China believes they emerged stronger coming out COVID after enormous challenges. President Xi and his leadership was strongly embraced by a recent set of leadership meetings and policy meetings in China, with a lot of illusions and comparisons between him and Mao. And China, of course, has come out, on an economic side, stronger than the other major economies in the in the world. Next, I think I’d say that the basic competitive posture, if you will, between the United States and indeed intense rivalry is not going to change under a Biden administration. I think that that core posture will remain the same. Now, the tenor, tone, I think that the approach to diplomacy, looking for areas of cooperation and a more comprehensive look at the strategy and a skilled look at areas of cooperation, that'll all be there, but the overall tone won't change. Next is that I think you'll see a pause and review of a number of the steps that President Trump has taken with respect to sanctions and tariffs and other actions that have been taken by the Trump administration in order to do an assessment as to their impact and the right way to go forward. And also, I think exercising looking for leverage in the relationship as well, which President Biden has referred to in interviews. Next, I think is that it'll be a big difference in terms of allies. The Biden team said during the course of the campaign that they would have an allied and partners approach to China with respect especially, but not limited to, economic issues. And I think that we'll see that going forward. I think you'll see more emphasis on human rights. If you've been following Jake Sullivan's Twitter account – Jake is the new National Security Advisor for President Biden. Jake is the youngest National Security Advisor to a President of the United States since McGeorge Bundy in 1961 to Jack Kennedy, he's going to be a very important figure in the Biden administration. And most of his Tweets have been about human rights. It's been interesting to watch that pattern. I think you'll see climate come to the fore, as not just with respect to China, but with respect to the world generally. Although the overall posture, I think, will remain similar, in terms of really the bipartisan agreement in the United States that the United States needs to undertake this challenge seriously, right – and using all the elements of government, national power and international relationships and alliances that we have – although the overall posture remains the same, I think you'll see along the lines I laid out here a very different approach.

    TEDDY BUNZEL: Tom, you mentioned that climate's going to be a priority not just in the U.S.-China relationship, but also more broadly for the Biden administration. So, walk us through what changes you're expecting this year and for the administration to focus on relating to climate? And in general what tools does Biden have is at his disposal to drive his climate agenda?

    TOM DONILON: First of all, this will be obviously a very big change between the Trump administration and the Biden administration. And indeed, President Biden has indicated that he intends to make it a centerpiece in his overall approach both to domestic and foreign policy. That's manifested, by the way, in the choice of personnel, where we have Secretary Kerry, former Secretary of State under President Obama, coming back to being the International Climate Envoy for President Biden. And although he's going to be based at the state department, he's also been named a member of the cabinet and a member of the so-called National Security Council of Principles. So, he'll be at the table on all the discussions that are going on with respect to national security and foreign policy. Also, at the National Economic Council we have Brian Deese as the Director of the National Economic Council. And Brian is obviously well known to us and he has led a really major international effort on sustainable investing. He was also, in the last part of the Obama Administration, the person who headed up the effort to secure the Paris Climate Accord. Gina McCarthy, who's a former EPA administrator, is going to be in the White House heading up the Office of Domestic Climate Change in the White House. So, a tremendous concentration of personnel focused on this which underscores its importance as a priority. The United States is now joining what has been building as a consensus in the world with respect to addressing climate change, with most of the major economies in the world committing themselves to achieving carbon neutrality by the middle of the century, China by 2060. So, it's a very big deal; it's kind of brought it to center stage. It's joined an international consensus. It's backed by really sophisticated and skilled personnel and it's going to be at the middle, I think, of a number of policy initiatives that the Biden administration is going to pursue. And I think there'll be a lot of that here, in terms of affirmative regulatory steps but also reversing a number of the steps that the Trump administration took in this area. There may also be changes in the position that the government's taking in legal cases. There are legislative proposals, I think, that will go forward. That's obviously more difficult than the regulatory side. And we have the international side, where they said Secretary Kerry will undertake that effort. And that'll begin with two things. The United States will rejoin the Paris Climate Accords, and number two, a major effort led by Secretary Kerry over the next eight months to bring a significant package of commitments to the so-called COP26 Conference, the Paris Accords Review Conference to be held this November in Glasgow, Scotland. That's an outline of kind of the range of things I think that the Biden administration will do.


    TEDDY BUNZEL: So, as investors, how should we think about the impact of Biden's climate agenda on the on the financial sector in particular?


    TOM DONILON: I think two ways. One is that the Biden administration will seek to bring substantial investment into the climate transition. And it's interesting, Teddy, you even saw that in the COVID relief package that was passed at the end of the Trump administration in the last Congress where there was between $30 and $40 billion of investment in the climate area and energy area. It was the most significant climate energy package since the recovery package in 2009 in the Obama years. So, there's some momentum here. There is tremendous investment opportunity in this global move towards public support for building private partnerships to support the climate transition. And we've seen that, by the way, obviously, in BlackRock’s business where we've had really substantial increases in funds coming into sustainable investing. Secondly, I’d point out on the regulatory front that we were talking about earlier, I think from a financial services perspective, we're likely to see the Biden administration use financial regulation as a tool in pursuing its climate goals. You could see, for example, Secretary Yellen making this a top priority at the FSOC and directing the financial regulatory agencies to have climate programs. I think you'd see that the SEC particularly in the case of disclosure. And we're going to have, I think, a strong and active Chair of the SEC in Gary Gensler. You could see it at the Fed, where I wouldn't be surprised to see the Fed move towards having a climate-related stress test. So, I think in each of the areas of financial regulation that we'll see substantial initiatives towards climate goals, including, as I said, stress testing and disclosure and transparency moving forward. And this is going to obviously have an impact on the direction of flow and reallocation of capital.


    TEDDY BUNZEL: You mentioned how regulation is going to be a key tool for Biden to achieve his climate priorities, but we’re also hearing a lot about regulation around technology. Talk to us about what you think the outlook is for greater regulatory scrutiny of technology companies and also what is Biden’s overall technology agenda going to look like?


    TOM DONILON: A couple of things. Technology generally is going to be a very big focus on the national security side. People have called for a new Sputnik moment; a time when the United States was challenged by the Soviet Union in the area of technology with the launch of the Sputnik mission and moved at that time towards establishing a number of institutions that are still with us today. NASA, DARPA, big changes in education to how we taught math and physics – a number those things are still with us as initiatives, and a lot of investment in research and development. I think you'll see a similar analysis underway in the Biden Administration of national strategies for addressing R&D in key technologies. There's a new Director at the National Security Council called the Cyber and Emerging Technologies Directorate, which is going to be headed by Anne Neuberger, who headed the National Security Agency Cyber Security Directorate. I think it's going to be a significant priority there. Generally technology is going to become much more front and center. You also see that he announced a new science team in the White House and gave them really precise directions on looking at emerging technologies. Science and technology are going to be much more front and center, particularly in the competitive aspects that we've talked about. Now technology regulation, which you asked about specifically, I think that there's a lot of momentum for a serious review, particularly the social media platforms. And that review was given a significant impetus as a result of the events at the end of the transition. And I think you've seen a number of Democrats and Republicans call for a very close look at technology. I don't think it's really debatable at this point. Now, these are hard issues. They are difficult to deal with. But I don't think there's any doubt that there will be a significant look at the role of technology in our democracy pushed forward by the Biden administration. You've heard President Biden talk about that during the course of the campaign a number of times, and I think it's going to be a significant regulatory focus.


    TEDDY BUNZEL: Tom, I want to end with a rapid fire round going around the globe. We’ve talked about a number of geopolitical issues with you on The Bid over the past year, so let’s revisit a few of them really quickly and think about the outlook for 2021. Are you ready?


    TOM DONILON: Yeah, go ahead.


    TEDDY BUNZEL: Here we go. So, Iran, what's the outlook there?


    TOM DONILON: I think that the administration will seek to rejoin and re-enter the nuclear deal – the so-called JCPOA – the nuclear deal between Iran and the international community. It may take some time to get there. There are real challenges, including Iran’s behavior, but the Europeans and others very much want the United States to come back into the deal. And I think the United States will seek to come back into that deal as a baseline. But it can build on and do additional accords going forward, addressing things that weren't addressed in that deal. such as Iran’s behavior in the region and ballistic missiles. And in fact, if they do rejoin the Iran deal, that'll have some impact on the supply of oil going into 2022.


    TEDDY BUNZEL: Okay, North Korea.


    TOM DONILON: Very difficult issue and remains so. I think you could see provocations from leader Kim Jong-un going forward here, and I think it'll be the United States will move towards at a more multilateral approach to trying to constrain and address the North Korean nuclear program. The problems have been over the last three years where there's been really no interaction other than these three summits, that the program has advanced in almost every regard.


    TEDDY BUNZEL: Okay, Russia?


    TOM DONILON: I think a significant change in the attitude of the President of the United States with respect to Russia, there's no doubt about that. President Biden, as evidenced, has no sympathy for President Putin. We've gone through four years where President Trump, in really one of the most inexplicable parts of his foreign policy, really has never criticized President Putin. The administration has taken a number of tougher steps; it's almost been a division between the President's approach on Russia and the government's approach on Russia. I think those will come together in Biden’s administration; I think you'll see a tougher line. And of course, we had, just at the end of the Trump Administration, one of the most significant cyberattacks on the United States in the SolarWinds attack, which was attributed to Russia by the intelligence and other services, but really that administration took no action with respect to that attack. I think we're in for a tougher line between the administration and a tougher line by President Biden than you ever saw from President Trump.


    TEDDY BUNZEL: Tom, thank you so much for joining us on the Bid. It's been an absolute pleasure having you, and we've all learned a lot. Thanks so much.


    TOM DONILON:  Okay thank you Teddy, thank you very much.


    TEDDY BUNZEL: On the next episode of our outlook mini-series, we’ll continue the conversation around policy with Jean Boivin, Head of the BlackRock Investment Institute. We’ll dive deep into our next theme: the new nominal. And as a reminder, send us any ideas or feedback at We’ll see you next time.


  • Oscar Pulido: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Oscar Pulido. We’re continuing our mini-series on our outlook for 2021. Today, part two: the stock market.

    After a dramatic year of volatility, the U.S. stock market ended 2020 at record highs. Can this momentum continue this year? Tony DeSpirito, Chief Investment Officer for U.S. Fundamental Equities, joins us to talk about why he believes it can. We’ll talk about what the vaccine news means for markets, what trends he sees shaping the year ahead and where he’s looking for investment opportunities.

    Tony, thank you so much for joining us today on The Bid.

    Tony DeSpirito: Thanks Oscar, it’s really a pleasure being here.

    Oscar Pulido: So, Tony, the U.S. stock market closed out 2020 at record highs, and in fact, it’s early in 2021, but already, the market is hitting new all-time highs. But just going back to last year, the S&P finished the year up more than 16% – and that’s after a year of a lot of market volatility. So, how did that happen, and did it surprise you how well the stock market did last year?

    Tony DeSpirito: Well, it’s an understatement to say that 2020 was an extraordinary year. And I’ll confess I wouldn't have expected the market to end up as high as it did. But I think in retrospect, it’s quite explainable. And the way I put it is, a typical recession is related to the economy overheating. And these recessions kind of sneak up on you. This one was way more akin to a natural disaster, almost like an earthquake. And that speed had multiple implications. One was just the recession was very steep, very quick. But the offsetting factor was that the policymaker response was extremely quick and aggressive. And usually, policymaker responses are slow. And so, we had really record fiscal and monetary stimulus. It wasn’t just the U.S., it was global. So, it was swift and coordinated action. And that’s really what saved the market in 2020. And so, towards the end of the year, we obviously got very positive news with respect to the vaccine and I think that really gives the market a clear path to the reopening of the economy. And we’re also starting to see corporate earnings recover, and you saw that in third quarter earnings, and I would expect to see more of that going forward. And so, rates, which is obviously related to monetary policy, are at historical lows, and that has really helped drive markets upwards, driven the P/E multiples of the market upward. And by P/E multiples, what I mean is basically a way in which we as investors can judge whether a stock is cheap or expensive. And so, that has been a very positive driver as well.

    Oscar Pulido: Well, it’s interesting to hear you say that even you were a bit surprised at how well the stock market did last year. But you noted the response from policymakers, you also touched on the vaccine, which is starting to become more available to the public. So, are these the reasons why you think this momentum in stock prices can continue in 2021, or are there other things that you would point to as well?

    Tony DeSpirito: Yeah, so definitely the vaccine is very important. It tells us the reopening of the economy is a matter now of when, not if. Also, typically, as we come out of a recession, you see margin expansion of companies; they find ways to save money and retain those savings. And so, I think we could have real upside from corporate earnings this year. I also think we have to watch market internals. In other words, investors need to be on the lookout for a change in leadership. The vaccine and the reopening of the economy should be very good for cyclicals and for value stocks. And when I say “cyclical stocks,” what I mean are stocks that vary with the economy, think things like housing as opposed to more stable or staple-like stocks, like food. And so that’s really the difference between cyclicals and non-cyclicals. So, meanwhile, many, but not all, of the 2020 winners are going to face difficult comparisons, and so I think that will be another factor driving 2021.

    Oscar Pulido: Notwithstanding the more positive news around the vaccine, the fact that it’s becoming more available, and you mentioned the economy’s reopening, but the truth is we’re also seeing lockdowns in certain parts of the world. We have colleagues in London, for example, that I know are dealing with pretty strong lockdowns in their part of their world. So, is that a risk? Last year when we saw lockdowns, the global economy really shut down. But are we better prepared this time around as the economy to navigate this? And therefore are markets going to look past this a bit more than they did in 2020?

    Tony DeSpirito: You know, I think they will, so I think it’s a risk, but I think it’s one the market can look through. We’re getting smarter and more targeted in our lockdown strategies. And like I said earlier, the vaccine tells us that the reopening of the economy is really a question of when, not if. And we also see policymakers that are continuing to be supportive. We just got a $900 billion stimulus bill in December, and now that the Democrats have control of both chambers of Congress, I think that’s supportive for further fiscal measures. So, yes, this second or third wave of Covid-19 is a risk, but again, I think it’s one that’s not going to be a big deal for markets.

    Oscar Pulido: So, going back to the stock market Tony, what trends did you see emerge in 2020? I think while we touched on the fact that stocks hit all-time highs, it’s fair to say that not every stock hit an all-time high; there were definitely sort of winners and losers within the stock market. So, just curious what you saw from your vantage point?

    Tony DeSpirito: Well, without a doubt, 2020 changed our lives profoundly, and some of these changes are permanent; some of them are temporary; and some of them are a little bit of both. And certainly, the role that technology has played in our lives has greatly accelerated. And I think that continues to hold, and so that is a trend I see continuing maybe at a slower rate than 2020 for sure, but a continuing trend. On the flipside, brick-and-mortar retail was on a path to slow decline and Covid-19 accelerated that. And we’ve seen a large number of permanent store closures. And those stores aren’t going to reopen. Something like travel and leisure, I think that’s more mixed. Certainly, that sector was shut down in 2020. I see a lot of pent-up demand there going forward. Once we’re all vaccinated, I think we should see that industry boom on the leisure side. Now, on the business side, it’s going to be more mixed. We’ll see some recovery in business travel, but I think we’ve all learned that video conferencing can replace not all, but much of the face-to-face meetings. So, that’s a little bit more of a mixed outlook. And then when I look purely on the investment side, I think this trend in ESG investing is really interesting. ESG investments clearly outperformed in 2020. Covid-19 also taught us how important it is to have a healthy respect for nature. And those two combined really accelerated the interest in ESG-friendly investing, and I think that’s here to stay. And that has real implications for investors. Because companies that have good ESG characteristics will experience a lower cost of capital and higher P/E multiples as investment dollars continue to flow into that space. So, I think that’s a big issue going forward for investors.

    Oscar Pulido: So, you mentioned some of the areas that were winners, like technology. You touched on some more sustainable assets or ESG assets. But you also touched on the areas that suffered – brick-and-mortar, services, hotels, restaurants. Do you think that that disparity will continue, or was that specific to 2020?

    Tony DeSpirito: I really think when I look out to 2021, I think we could see a year of rotation. I see a much better year for value investing. As the economy reopens, some of those deeply depressed cyclicals have a big earnings recovery that I would expect, and therefore, their stock prices should recover as well. I really like, sector-wise, banks and energy as great examples of that. Now, I think as an investor, it’s important to pursue a barbell strategy. On one hand, invest in what is tried and true; and on the other hand, try to be opportunistic. So I think investing in those deeply depressed cyclicals, I would put in the opportunistic camp. So, on the other side of that barbell strategy, I would put sectors like tech and healthcare. I think these are just high-quality, long-term, compounding businesses that grow. And so, I think you always want to be exposed there, but you also want to have some of your portfolio in these more opportunistic sectors.

    Oscar Pulido: And these opportunistic sectors, Tony, I think you called them value stocks. I think that’s important. Perhaps 2020, what comes to mind is the more growth-oriented sectors, the highflyers did really well. But you mentioned banks and energy companies, perhaps lag. So you’re saying 2021 is when they start to play a little bit of catch-up?

    Tony DeSpirito: Absolutely, absolutely. And if you look at prior recessions, that would be right in line with prior recoveries from recessions.

    Oscar Pulido: So, speaking of companies, we saw them pivot their businesses last year very much towards digital platforms, technology, and reopens to the virus. Certainly, you and I lived that as employees of BlackRock. What’s top of mind for businesses and companies in 2021? How might they continue to pivot their businesses, if at all?

    Tony DeSpirito: Yeah, that’s a really important issue. Certainly, companies tried to do everything they could to conserve cash in 2020. But as you pointed out, Oscar, they had to spend on technology. Now, 2021 should be a year of much better cashflow for companies. I think if they continue to spend on tech, the returns of that are very positive. But I also think we’re going to start to see companies accelerate their buyback programs. A number of companies had to shut those down last year, and we’re seeing them get restarted now. Also, given where rates are, I think we’re going to see a boom in M&A, mergers and acquisitions. And both stock buybacks and mergers and acquisitions, that is going to be highly supportive to equity markets. So one more factor to add to that list of bullishness around 2021.

    Oscar Pulido: I think this is an important point. Maybe just a follow up question: So, you’re saying stock buybacks, dividends, you noted certain companies had to pause their dividend or greatly reduce it during the worst of the pandemic. So maybe just again, why is that important for investors that you think companies can start to direct some of their cash towards buybacks, towards restarting or increasing their dividend? What’s the impact to the investor?

    Tony DeSpirito: Yeah, and so I think the impacts are different. From a buyback perspective, I think that is good for the whole market. Having an incremental buyer in the market just helps push stock prices up. From a dividend perspective, I think that’s very important for investors who are focused on income. Without a doubt, we’ve seen a consistent and growing demographic need for income over time as our society has aged. And that hasn’t changed, particularly with the Baby Boomers heading into their retirement years. On the flipside, we’re in a yield-starved world, and that’s more true today than ever before. And in many cases, we see the yields from equities being higher than that on bonds. And of course, bonds are referred to as fixed income because the income is fixed. If you buy a 10-year bond, you get a fixed coupon over the next 10 years. And I would contrast with dividend payers, particularly dividend growth companies, where they should and are expected to grow that dividend over time. And so, if a company can grow its dividend 7% a year, 10 years from now, the income from that stock is double what it was. Now, last year, as you pointed out, we experienced as a market, dividend cuts. And so, dividend investing wasn’t as fruitful in 2020 as it has been historically. That said, we’re well past the dividend cut stage; that was really focused in late spring. We’re now seeing companies start to grow their dividend again. And so, I think dividend investing, looking to get income from equities is going to be a very interesting year for investors in 2021.

    Oscar Pulido: It certainly has been a very punitive environment if you’re looking for income in the market. Not only have bond yields gone down, but you mentioned dividends took a hit last year – but they’re coming back. So, what sectors in particular do you see as providing that dividend growth? Is it some of the areas you mentioned before like financials and energy stocks, those more value-oriented areas? Or is it more broad-based than that?

    Tony DeSpirito: So, it is very broad based. I think there’s dividend opportunities in just about every sector. Although again, I would come back to that barbell strategy and really highlight the dividend opportunity there. So, on one hand, on that opportunistic side, banks and energy, those are some of the highest dividend yield stocks in the marketplace. I don’t think they’re going to grow a lot in 2021, but they’re certainly going to provide a lot of ballast in terms of income. On the flipside, those more evergreen sectors like tech and healthcare, that’s where you’re going to see the best growth from – from the high-quality compounders. And I think you want to own both sets of companies in your portfolio.

    Oscar Pulido: And Tony, it’s still early in 2021, but I’d be remiss if I didn’t ask you about the political backdrop in the U.S. We’ve already had a lot of news around the U.S. political landscape, the Senate results in Georgia, we obviously had events in DC that were unfortunate. How does that impact your view on the stock market for 2021, if at all?

    Tony DeSpirito: The big news I see is the results from Georgia, because it gives the Democrats control over both houses of Congress. And I think it’s almost like a Goldilocks from a political point of view. Meaning that if you look at the Biden agenda, there are puts and takes for the market on the agenda. I think you end up getting a lot more of the positives and maybe fewer of the negatives, which might be increased corporate taxes, for example. And so, the positive being we have a much clearer path to fiscal stimulus with 51 Democratic votes effectively in the Senate. So, I think that’s the big implication and I think that is actually pretty significant. And so, that is a really a positive for the market in 2021.

    Oscar Pulido: And fiscal stimulus will lead to, in your opinion then, better economic growth, and that sounds like it ties into your view of corporate earnings are also improving. Fiscal stimulus will just serve as another impetus to that earnings stream?

    Tony DeSpirito: Yeah. It really helps take the downside risk off the table, particularly of this wave of Covid-19 that we’re going through currently.

    Oscar Pulido: So, one last question for you Tony, and it’s one that we’re asking all of our guests in our outlook mini-series. What is the most important thing you’re looking out for in 2021?

    Tony DeSpirito: So, obviously, macro was a huge driver in 2020. And we’ve talked a lot about macro. But I think micro is going to be really important in the upcoming year. And it’s going to be about stock selection. And the key question I see on an individual stock basis for investors goes back to what we were talking about in terms of the changes brought about by Covid-19. And the question is, are those changes real and permanent versus temporary, versus some of each? So, there are clearly instances where Covid-19 was a pull forward, if you will, of expenditure. If you look at TV sales, for example, we’re all at home, so we all bought more TVs this year. Is that likely to repeat, does that have long legs? No, in fact, that means we’ve really served pent-up demand for a couple of years. And so, that’s an area where it’s very clear that there was a pull forward of demand. And I think as we go through stock by stock, that’ll be the key for investors in the upcoming year. And that is personally a market I really like, because I think that is a market where fundamental investors can shine.

    Oscar Pulido: Great, Tony, well we hope that your constructive outlook on 2021 is accurate and bodes for another good year of stock prices. Thank you so much for joining us today on The Bid.

    Tony DeSpirito: Thank you Oscar, it was a pleasure.

    Oscar Pulido: On the next episode of our outlook mini-series, we’ll talk about the geopolitical outlook for 2021 with Tom Donilon, Chairman of the BlackRock Investment Institute. And as a reminder, send us any ideas or feedback at

  • Mary Catherine Lader: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Mary-Catherine Lader. 32 years ago, BlackRock’s Chairman and CEO, Larry Fink, rallied seven other people to found a small bond firm. Since the Financial Crisis, Larry began an annual tradition of writing a letter to CEOs in our capacity as a shareholder on behalf of our clients – the institutions and individuals who invest in companies to achieve their financial goals.

    Over the last few years, the letters have addressed how our world is changing, like the rise of populism, but also how it might change for the better, such as through stakeholder capitalism. Last year’s letter called on CEOs to prepare for a shift and reallocation of capital due to climate change. And so, on this special episode, Larry joins us to talk about the events of 2020 developed this year’s letter and why net zero will reshape the economy.

    Larry, thanks so much for coming on The Bid.

    Larry Fink: It’s great to be here. Great to be in the office today.

    Mary Catherine Lader: Exactly. So, before we dive in on this year’s letter, let’s take a step back. Can you just share why you write these letters each year?

    Larry Fink: That’s a long story, but I started writing the letters because A, it was an epiphany about what we did when we acquired BGI.

    Mary Catherine Lader: And BGI, meaning Barclays Global Investors, which we acquired in 2009.

    Larry Fink: Yes, and all of a sudden, we became one of the top two largest investors in equities in the world, and a high percentage of those assets were in index assets. And indexation is the ultimate of long termism, because you own these companies’ stocks forever, as long as they’re in an index. And you can’t sell these stocks as long as they’re in an index. And so the only component where you have some role and responsibility is in the power of your vote. And it came to me that it is even more important for us to effectuate a corporate action or corporate behavior through the vote, because we can’t sell the shares if we don’t like the company or their behaviors. And so, the power of our vote became very enlarged. Two, spending time looking at the financial media. And reading the financial media, the conversations were all about the moment; it’s all about the ups and downs of the market. And as I said as an indexer, we are the ultimate long-term investor, but then importantly too, two-thirds of all the assets we manage at BlackRock are for retirement savings1. And I was becoming more sickened by watching the narrative, markets going up or down, what does it mean with one country doing this or that? And the reality is for the majority of investors, the ups and downs of today or this week or this month have very little bearing on the outcome 30, 40 years for a retirement. And so, the beginnings of the letters, 2012 now, were about long-termism and why we need to reorient ourselves away from short term behaviors to long-term behaviors. And that evolved from focusing on long-term behaviors, focusing on long-term outcomes like retirement but also trying to change the narrative. What are the contributions of a company that can create good, durable, long-term outcomes? And the whole concept of corporate stewardship and stakeholder capitalism became much more part of what I thought was the responsibilities of management teams and boards. And it just became more and more clear, we have more than a shareholder as our stakeholders. We all have multiple stakeholders that we have to work with and for. And one of the major components for me – I didn’t write this as somebody who is just writing letters to companies who we invest in. I was actually writing from the lens of a CEO of a public company. And I was writing it and trying to invoke, what are my responsibilities are as a CEO of public company? And then I focused on okay, what are my responsibilities in terms of my stakeholders, the employees at BlackRock? Our clients? And then much it has to do with the whole concept – this occurred over the last four years – this whole concept that deglobalization. My whole career, but prior to that was all about globalization and the positive nature of what globalization can bring to the world and humanity. And that became thrown out with this whole idea of deglobalization. And that just raised the whole concept of you are a stakeholder of your community. And if you are a multinational company like BlackRock, we have not just many communities here in the United States, but if we’re going to earn the license to operate in all the different countries where we work, we BlackRock, we have to have that license in every country. And so that is when I started really focusing on the needs of stakeholder capitalism on behalf of our shareholders at BlackRock but on behalf of us as a shareholder in every other company. And I get excited when I start thinking about what I’m going to write about in the fall, and I get excited about what are the issues that are bothering me? What are the issues that I think are important? And most people think I’d come up with something original, but I don’t think anything is original. I can tell you, I get all these ideas from our clients! And that’s what is so wonderful about the responsibilities and role we have. We have all of these incredible conversations with clients throughout the United States, throughout the world. And it’s through these conversations, and I hear what’s on their mind, I’m just putting all of those thoughts on paper and I’m trying to evoke what I’m hearing, what I feel, what I see, I put up in my own words and feelings. But it is through that process that it all comes together.

    Mary Catherine Lader: Well, in 2020, you had no shortage of material to choose from. You engaged with clients at a rapid pace, even more than usual, particularly during the tumultuous markets in March and April. Between the struggle over racial injustice, obviously the pandemic, the U.S. elections, there were so many short-term events, there were so many headlines – focusing on the long-term was particularly challenging. So, last fall, as you sat down to write this year’s letter, how did the events of 2020 shape what you wanted to talk about?

    Larry Fink: Well, let me start off, 2020 was shaped – a lot of it – from the fall of 2019 when it was through the conversations and the consecutive conversations I had about why sustainability was becoming important. And more and more clients were asking for it. So that letter was published in January 2020 and we talked about climate change as investment risk; and that was probably the major theory behind it, and why we believe this is going to be a tectonic shift in how we think and how we invest. 2020, obviously, when we started the year, we were aware of this rising virus in China and other parts of Asia by January/February, but when March rolled around and it became very real that it was not just a pandemic in a few countries, it was a global pandemic. And that, again, shaped everything we do and everything we did. And we still are being shaped by this existential risk of health and security. And we all now have experienced a vast change in how we live, how we work, how we are educated, how we are receiving medicine and medical advice, on and on and on. So, the year has changed quite dramatically, but through that year, though, we’ve seen blessings of humanity and we’ve seen terrors of humanity. We have learned to work and operate. We have learned, as I said, to consume information differently, to consume products and purchase things differently. We are working differently because we’re all mostly working remotely. But we were able to prevail. And that’s why I can sit here today and say why I am so optimistic about the world and the future, why I’m so optimistic with capitalism too. I think you can look back at 2020 and say there are some wonderful blessings here. But at the same time, like all recessions – recessions expose all of the inequalities, as you mentioned, the racial injustices. Recessions create real economic difficulties and segments. And because this recession was so deep and required so much government fiscal stimulus and monetary stimulus, it really shaped the outcomes in very extreme ways. We all know equity markets have rallied quite considerably; technology companies had flourished because of the necessary need for all of us to use more technology. But also at the same time, it’s created huge hardship. Parts of our economy that are based on the aggregation of human beings: culture, travel, business gatherings, social gatherings, gatherings at restaurants, hotels. These industries have been devastated; and all of the employment in these industries has been destroyed. At this time now into 2021, there are segments of the economy doing really well, and parts of the economic doing very badly. Leaving a lot of unemployment worldwide, we’ve seen much more exposure to the emerging world that is more devastated by this. The emerging world is being devastated by climate risk at the same time, the deglobalization that I spoke about. So, there are many macro trends that are leaving the society more fragmented. But the one thing that I would say that is so loud and persistent, the existential risk of health because of Covid-19 actually illuminated the existential risk of climate change on the health of the planet. And what we witnessed in 2020 was an acceleration, even a faster acceleration than I talked about, this tectonic shift. But it really has created a real acceleration globally and not just with governmental policy but investor preference. I do believe more and more investors believe that climate risk is investment risk. So it’s embodying everything they do. That’s going to be transforming how we think about investing in 2021 and beyond.

    Mary Catherine Lader: And so, you mentioned this growth in investor preferences, that despite all the macro trends that were happening last year, we saw this validation of a preference for sustainable investing and sustainability.

    Larry Fink: Yes.

    Mary Catherine Lader: How do you think that is going to change the future?

    Larry Fink: Do I need to step back for a second and talk about my career, my 40 plus year career? As a young leader in the mortgage industry back in the late-70s and early-80s, I was very self-aware that we were at the cutting edge of changing the whole capital markets. And it was – now I’m really giving my age – in 1983 when we were allowed to have personal computers on a trading floor and we were able now to use that computer to customize portfolios and mortgages into different types of securities and auto loans and credit card loans, and derivative contracts by having the computer on the portfolio manager trader’s desk. That transformed finance as we know it. As more and more companies report under SASB and TCFD – and I would urge every company that’s listening, if you haven’t begun reporting on it, you’ve got to do it now. Because the pressure is going to be on. But more importantly, through that data, we’re going to create the analytics to basically understand the behaviors of each company. And as you framed the question about investor preferences, I think through this data, we’re going to show why climate risk is investment risk. We are going to have the data to show how one company is moving forward versus another company in the same industry. Having all this data at the corporate level, we’re going to be able to now create portfolios of companies that have much greater performance related to how they’re moving forward in terms of sustainability issues, and are they moving toward a net carbon platform as a company? We are going to have the ability to customize, personalize a portfolio strategy that meets your needs. We could create a higher sustainability portfolio of companies that’s closely tracking the liability that you want but has higher standards towards sustainability. You want to have companies that have a much higher S for social issues. We can carve and create that out through better data and analytics using SASB. And so, it is my belief that the revolution is not going to be coming from the personal computer on the trading desk like it did in the mortgage era. But it’s going to be the data, and through that data and analytics that we have, we have the ability to customize any portfolio that you want that will meet those sustainability attributes, your social attributes, your governance attributes over the whole cross of ESG standards. And to me this is what is going to transform – in years, not decades, years – how people invest. And for the companies that are not going to be properly reporting and to the boards that are allowing their management not to properly report, they’re going to be left behind. And the better companies, the more stakeholder-friendly companies are performing better. And we’re seeing that, they’re producing more durable, consistent profitability. We are going to see big changes in corporate valuations, through these big, largescale transformations in how investors invest.

    Mary Catherine Lader: And you see market forces driving companies, not just a desire to do good or be transparent ultimately, disclosing more.

    Larry Fink: I’m going to say it’s not about doing good. It’s if you believe that climate risk is investment risk, it’s not being socially good. We could all be socially good, but in the United States, we have to be beyond doing something good – you have to do something with the idea that you’re going to maximize return. And if you go around that, then you’re not a fiduciary under our rules. Now that may be changing under the Biden Administration, but at this moment, we have to live under that rule. Through the data, through the process, we expect to have the analytics to show why climate risk is investment risk and why we can create these portfolios.

    Mary Catherine Lader: And so you talked about climate risk is an investment risk, how that has become so apparent. But in this year’s letter, you focus on how net zero is going to drive a transformation of the economy. And the portrait you painted of a personalized investing landscape is really powerful –it’s related to net zero, but it’s not the same. So, what do you mean when you talk about net zero requiring a transformation of the economy?

    Larry Fink: Once again, there is nothing novel about what I’m asking. I’m asking every company to move forward on reporting on a net zero economy. Basically, we’re asking every company to report under TCFD, which is asking those questions. And how every company is going to be prepared to meet the requirements of the Paris Accord. And so, basically the one beauty – and I learned this over my 40 plus years in business and finance – once we understand a problem, we bring the problem forward, and we identify it and try to minimize the problem. And that’s why I’m an optimist. When we identify a problem, we find solutions. And I believe through this process of moving this problem forward, by having more and more companies report under TCFD and for companies to report how they are moving forward in terms of net carbon economy or net carbon footprint. And we are doing that at BlackRock, we reported under TCFD and we’re moving forward, but we’re asking every company as a part of their reporting to also report to us how are they moving their company forward to reach the targets of the Paris Accord to have a net zero carbon economy.

    Mary Catherine Lader: You mentioned that at BlackRock we also submitted a TCFD report. What else are you doing, what else is BlackRock doing to lead in this way and to prepare and protect our own investors and shareholders?

    Larry Fink: I’m not sure we’re leading. I think what we are doing is responding. We are responding to where governments are asking everyone to move forward. As I said, the beauty of finance is once we identify a problem, we bring it forward and try to eradicate it. And I think that is our important role as the largest investor in the world is to identify a problem, to respond to societal needs. I could say as the CEO of a public company, our employees at BlackRock are asking me to move faster. And I’m sure most companies are saying the same thing. But as we move forward, to a net carbon free economy, it’s going to mean an acceleration of renewables. But until we have new technology – and this is one thing that I constantly write about – it is about making sure that we are focusing on technology so we can move forward. Because there are going to be segments of society that are not going to be able to adapt quickly enough. And the one thing I do write in my 2021 letter, why society still has to be just. This transition has to be a just transition. This is really, really important. Because we need to make sure that we are creating jobs as fast as we destroy jobs. And that happens, but it may not be in the same location and this is why it needs to be very thoughtful and top of mind. It has to come from government with the private sector working together. It can’t just be advocating it, or we’re going to have a great unevenness and we’re not going to have a just society. And so, it’s really important when we speak about these issues, a net zero carbon economy, it’s going to mean this transition and it’s going to mean that we have to manage it from the top down. The other thing I want to be loud about – this transition is not a transition just for public companies. We’re asking a lot from public companies. And if public companies all did this, we would not get to a net zero carbon economy unless we have the private part of the economy doing it too, and also governments. If you really worry about climate change, you have to be worried about physical risk in cities. We just can’t ask FEMA and the federal government to bail out every time there is a natural disaster. It’s been a fantastic agency to help those who have been harmed. But we need to have a plan. And every country needs to have a plan. So, one of the things about my 2021 letter is it’s not just about asking public companies to move forward, it is about governments to move forward, too, in a holistic way working alongside with the public companies.

    Mary Catherine Lader: So, talking about climate risk and the risk for cities, for example, if they don’t pay attention to these risks and change, it’s really tangible, it’s concrete, it’s clear what that is. But just switching gears a little bit, you mentioned and referenced stakeholder capitalism, the importance of just transitions. In recent years, you have written to CEOs about how companies need to articulate their purpose and be responsive to a range of stakeholders, their shareholders but also their communities, their employees and society at large. How have CEOs and companies responded to that, particularly through the pandemic?

    Larry Fink: As I say in my letter, I’m very proud of capitalism. I think so many companies have done so well at making sure that their employees were safe during the pandemic. I can’t think of a year where stakeholder capitalism wasn’t more vivid from how are we trying to move forward as a company and making sure that our employees feel secure and safe, not just physically, but the transition away from office, working from home. What is our mental health and what are we doing to make sure our employees feel safe and secure. And when you have your employees believe in the culture of the firm and believe in what the firm is doing, they’re a great sales force for the firm. They embody the culture and the organization. So, I can’t think of a year in my lifetime of business where the stakeholder of your employees is so evident. And for companies to move forward, we all know it is about making sure that we are connected with our employees, especially as so much of our employees were working remotely. Two, what I could say from 2020 is our clients were in more need of information. They were more in need for what are we thinking, where should they go, how should they move forward? And then three, my gosh, investing in being a part of the communities where you’re working, whether it’s a community in one country if you’re only housed in one country, or if you’re housed in many countries. And at BlackRock, we’re in 30 different countries and we do business in 100 different countries. And if we don’t show and earn our license to operate in those 100 places where we do business, then we’re not going to have a business in those countries. So, I would say in 2020, more light was shined on the virtues of stakeholder-ism. I’m more convinced than ever, those companies who performed really well for their employees, for their clients and the communities they operate in, their shareholders have benefitted dramatically. And as I said earlier, we’re seeing a widening between the best performing companies in industry and the worst performing companies in industry. And so much of that has to do with those who are embodying stakeholder capitalism and working for all their stakeholders. And building that enduring, durable profitability over the long run.2

    Mary Catherine Lader: So, your optimism about capitalism is clear; your optimism that we’ll accelerate in the direction that you’re painting in the letter is clear. Actions from boards, management teams, from customers. For many people, though, it’s a hard time to be optimistic. So much loss in the past year, so much job loss.

    Larry Fink: Yes.

    Mary Catherine Lader: Many people struggling to feed their families. What is your message to those people who are having a hard time being optimistic? What are either the proof points in 2021 to look towards, or other indications that you think can fuel optimism for those for whom this is a really challenging time?

    Larry Fink: Well, if I could channel the answer towards what government needs to do.

    Mary Catherine Lader: Sure.

    Larry Fink: Every government needs to broaden their economies. Economies were narrowed during the pandemic: big winners, but a lot of losers. And this is how you framed the question. For the governments that are focusing on broadening the economy, broadening the economy through positive policies, hopefully in the United States, we have a broad infrastructure bill to create better jobs, bigger jobs. We could transform our society. I think it’s going to be very critical for the Biden Administration and every government in the future to find ways to accelerate the vaccination and make sure we have herd immunity. And those who have herd immunity faster, we’re going to have those restaurants open, we’re going to have those conventions open, we’re going to have rock concerts again. We’re going to be traveling, we’re going to be going to museums. And that is how we broaden the economy. So, we have to conquer this virus, we have to conquer it together and we all have to move forward. And so, first and foremost, for people who have lost hope, it is making sure that we broaden the economy through a vaccination. And then we broaden the economy through policies, whether it’s fiscal stimulus of some sort in terms of making sure that we broaden the economy through great domestic job creation.

    Mary Catherine Lader: So, last question. There’s a lot in this year’s letter, net zero, stakeholder capitalism, we talked about that. Last year, your letter had a powerful impact making waves and really making that sentence, “climate risk as investment risk,” memorable. And then it came true in many senses. What is your hope for this year’s letter?

    Larry Fink: Just an understanding of the accelerating of how fast this is going. I am so powerfully optimistic about capitalism, and I hope that comes across, too, that when you think about what the pharmaceutical industry, which was in such disregard. At the moment, four companies that have a vaccination, three are approved and one is on the way. And I now hear another one is going to be on the way. What’s important, it took only ten months. I can’t think of another thing that is so much more powerful than the ingenuity of capitalism, the ingenuity of companies. But even things as mundane as food and food delivery and making sure that our grocery stores were stocked at a time when we’re all worried about our health and their employees are being protected. And things as exciting about the transformation of technology and our over-reliance on technology and how technology has shaped and transformed our lives and truly made our lives better. The demand for EV and electric vehicles that is only accelerating the advancements in battery. So, I am more convinced than ever that stakeholder capitalism is broader, louder. I’m also louder in this letter about the need to accelerate corporate behavior related to issues around sustainability and social issues. We have a lot to do in front of us, but I’m absolutely confident the best companies are going to exhibit incredible behaviors. And just in the last few weeks, there’s surveys coming out that the most respected parts of society now are businesses and CEOs. We’ve come a long way! But I really believe the transformation of leadership, the transformation of businesses, is about more and more leaders and their boards are focusing on things about their stakeholders, they’re connecting with their employees deeper and broader, they’re connecting with their clients broader and they’re certainly trying to be more connected to their society. So much of that is in this letter. As you said, it is about moving forward on better disclosure, more complete disclosures especially on net zero. But I also believe this letter related to this whole concept of the advancement of personalization and customization of indexes is going to change investor behaviors in a large, large way. And once again, like in everything else we do, data just becomes the engine for everything we do. Five years ago, seven years ago, most CEOs and boards didn’t want to be that transparent, and now what we’re seeing, the new leadership of companies and their boards are really focusing on how do we become more transparent? Not just transparent for their shareholders like us so we can analyze them, but more transparent so they can connect better and deeper with their employees. Greater transparency so their clients can understand the behaviors of a company. More than ever before, I would say clients, they choose who they do business with. More and more people are choosing who they do business with and why. And I believe those companies who have a loud, persistent, consistent voice are winning more of their clients’ share of wallet, whatever product they’re in. And clients are willing to pay premiums even. It’s not a run to the bottom, the cheapest price, too. It is about who do I connect with, who do I believe in, who do I identify with? And I think these are all really important parts of what leadership has to be in terms of identifying what is the best thing for their company, their employees, their clients. And so, I think this was a natural evolution, but it’s a powerful one. This transparency evolution is changing how we work, how we live, how we behave. And I’m just remarkably optimistic about how we are evolving and how we are evolving with society. And this is all good; this is not something to be afraid of. This is something to embrace. And that is one thing that I say loudly in the 2021 letter: Climate change and investing is something that is a powerful economic result. As we move towards a more sustainable world, it’s going to create great jobs, it’s going to create a great environment. And so, we should not be frightened of it. We should all be embracing it and finding ways that we can be a part of that. And I think this is one of the big messages in the 2021 letter.

    Mary Catherine Lader: Well, thank you Larry for that optimistic message as we start 2021. And who knows what this year will hold. Thank you so much for joining us today.

    Larry Fink: You’re welcome. Thank you.

  • Oscar Pulido: Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing investing. I’m your host, Oscar Pulido. This year on The Bid we're doing something a bit different. Throughout the year, we'll explore the themes that our listeners like best through mini-series on topics like technology, megatrends and Covid-19. Let us know what you want to hear more about by emailing us at

    Our first mini-series will cover our outlook for 2021. Today, Scott Thiel, BlackRock's Chief Fixed Income Strategist, shares the three themes we see driving markets this year. We'll talk about why we think investors should take risk in 2021, how to invest in a more divided world and how Covid has added fuel to long-term trends like e-commerce and sustainability.

    Scott, thank you so much for joining us today on The Bid.

    Scott Thiel: Yeah, very, very happy to be here. Thank you for inviting me.

    Oscar Pulido: So, Scott, it's a new year, which means the BlackRock Investment Institute has published a new outlook for the markets. A year ago, when we were talking about the 2020 outlook, I don't think any of us could have anticipated Covid-19 and the pandemic and the market volatility that it would bring. So, how did the events of 2020 shape the outlook for 2021?

    Scott Thiel: Well, I think that's right. It's obviously been very hard to predict any of these events that we have experienced over the course of the last two years, really. But I do think as a result of the crisis, we have entered what we're calling a new investment order. The Covid pandemic has in many respects accelerated pre-existing and, in some sense, profound shifts in how the economy and society operate. And we think about it really as four shifts leading to three investment outcomes. The four shifts are in sustainability, inequality, geopolitics and macro-policy revolution. So, in other words, the Covid crisis has accelerated changes across those four dimensions, and in many respects that has defined the new investment order. So, for investors to position to take advantage, we really look at three investment themes for 2021.

    Oscar Pulido: Let's talk a little bit about what those three investment themes are, then, for 2021.

    Scott Thiel: The first is what we're calling the new nominal, which is where we see stronger economic growth but lower real yields – so that is yields after accounting for inflation – as a vaccine-led restart accelerates the economy. But at the same time, central banks limit the rise of nominal yields – so that is Treasury yields – even as inflation expectations climb. So you get this very interesting dynamic where interest rates stay very stable but inflation begins to increase. And that environment can be very positive for assets. The second is what we're calling globalization rewired; it's quite a mouthful. But what we're trying to get at here is that the Covid crisis has, in many respects, accelerated a number of geopolitical transformations that were entrained. So, for example, U.S./China trade relations were obviously a very tense area, particularly in 2017 and 2018. And the Covid crisis has accelerated that. And we find ourselves in what we're calling a bipolar U.S.-China world and that bipolar nature – so alignment with the U.S. or alignment with China – is reshaping global supply chains and really putting greater emphasis on resilience on ensuring that you can get a product to market rather than looking for the cheapest way to develop a supply chain. The third theme is what we're calling turbocharged transformations. And this is where, again, we look at how the crisis has accelerated pre-existing structural trends in the economy. And here I think the most clear example of that is something like sustainability. Coming out of the crisis, we have seen such a demand for sustainable assets and sustainable investing, really as a result of concerns around the pandemic and around the health crisis. But there are also turbocharged transformations in inequality, and then obviously the dominance of what we're calling e-commerce at the expense of traditional retail. So, really three themes: new nominal, globalization rewired and turbocharged transformations.

    Oscar Pulido: So, let's walk through the first theme. You mentioned the new nominal and you discussed the fact that we think we'll see stronger growth in the near term. Typically, that leads to higher inflation, which I think is part of that view. I think the textbooks often tell us that if we're seeing stronger growth and higher inflation, what accompanies that is higher interest rates. But it doesn't sound like that's going to be the case this time; in fact, it sounds like you're describing an environment where interest rates would remain actually pretty low even as inflation is going up. So what why is that the case? Why is it a little bit different this time?

    Scott Thiel: To us this new nominal is really an incredibly important kind of bedrock of our outlook. Because what we're describing is this concept where inflation increases not out of control. We're talking about inflation in the two-and-a-half to three percent annual rate over the next couple of years; not runaway inflation by any means, but clearly higher than the inflation that we've had before. But importantly, as we get inflation building as a result of the economy recovering and as a result of fiscal and monetary policy stimulating the economy to make up for the shortfall associated with the economic shutdown (which was a result of the Covid crisis), importantly – and here's the important part – we do not expect central banks in a traditional way to react to that higher inflation by tightening monetary policy. And the main reason for that is that the central banks are very well aware that the healing process needs to be significant to make up for the impact of the crisis. At the same time, many central banks have noted how inflation has been under the target for so many years, and now they're looking to ensure that inflation stays higher, so on balance it would be less quick to tighten policy to address that. So, it's a very, very interesting dynamic, but a very powerful one of where unlike a traditional business cycle, inflation is actually a positive for risk assets primarily because we believe central banks will keep rates on hold for quite some time.

    Oscar Pulido: Scott, this theme of inflation moving higher: there's been some views that this would occur in recent years and it really has it hasn't manifested in the way that some people have predicted. So what's different this time? What are those pressures you think that are building that are going to start to nudge that inflation rate higher?

    Scott Thiel: Yeah, I think that's a very, very important and very germane question. And I think there are three reasons why inflation will grow over the near term. And again, just to be clear, we're not talking about runaway inflation, right, we're talking about inflation moving into the two and a half to three percent range over the next couple of years. I think the first is, again, as policy has been incredibly important in addressing the shortfall in income from the Covid crisis, monetary policy will remain easy as we continue to address that issue. So, in other words, the economic impact of the lockdowns is going to be with us for some time, and so policy will remain easy even as the economies grow and even as fiscal spending injects money into the economy. And so this idea that if central bankers will be more patient and wait for inflation to grow more than it would normally in a regular cycle is a very important part. The second is that, in our mind, production costs are set to rise and this links into one of our investment themes around global supply chains. So, the simple story is that up until the Covid crisis, up until U.S.-China trade relations turned south, companies put supply chains in the cheapest place they could. But now, because of health concerns or because of geopolitical risk, manufacturers are forced to move their supply chains to less efficient places; that results, obviously, in higher production costs. So part of the acceleration in trends for us will be this idea that production costs are going to go up. The third is what we are calling pricing power, and this gets at the idea that many companies, particularly internet and tech companies, have tried to dominate market by taking market share; Uber is a good example of something like that. What we would expect, though, is as that market share has been solidified and as production costs increase, companies are going to be able to exert what we're calling pricing power, or that is the ability to raise prices going forward. And so, in many respects, it's a policy function, because central banks are willing to let inflation run higher than they would in a normal business cycle because we're not in a normal business cycle. But it's also this fundamental acceleration that we've seen as a result of Covid, which in our mind leads to higher production costs and higher pricing power.

    Oscar Pulido: A key linchpin here as you mentioned is just really central banks and their desire to be patient with what they do with interest rates and this backdrop bodes well for, it sounds like, the stock market. But I want to talk about the second theme then, which you mentioned is globalization rewired. You touched on the tensions between the U.S. and China as part of this theme, you touched on the pandemic actually also being an important component of this theme in terms of how companies are thinking about where to source their supplies. So, tell us a little bit more about that theme, and where does an incoming Biden Administration play into this theme, or does it?

    Scott Thiel: So, I think first of all, we have to recognize that the U.S.-China, call it rivalry – because I think that's the right term – was here before the Covid crisis and that was obviously very prevalent in the in the U.S.-China relationship, particularly under the Trump Administration. But, in our mind, that's here to stay. Regardless of who was in the White House, China-U.S. rivalry resonates with Americans. It's a politically very important theme. So it's not something that we expect to change in the near term. That being said, under a Biden Administration, we would expect there to be more transparency with respect to our negotiations with the Chinese. More transparency and potentially more consistency. Even taking that into account, the world is developing into two spheres of influence: the U.S. and China. And in our mind, globalization is going to need to be rewired to deal with that. So, when we talk about supply chains, when we talk about production and where you set production up, companies, investors are going to have to think about this bipolar world that we live in and how to effectively rewire their globalization around that.

    Oscar Pulido: And with that rivalry here to stay, what does that actually mean for how we invest globally? Does that mean we avoid China as an investment destination in portfolios? Or is there actually a case to be made that we should be increasing our investments in China?

    Scott Thiel: Yeah, this is this is a very, very important question for investors. And the answer in the short order is the second thing that you mentioned, which is that we see investment in China as a very important part of our investment thesis going forward. In this bipolar world of U.S. and China, as investors, we want access to both of those. So long term, we are particularly focused on overweighting or owning more of China going forward, because we think this is going to be an important area for not only economic development but assets as well. But in the near term, over the next year, again, what we want to do is get at the U.S. and get at China. And so, the way that we do that is by advocating investment in U.S. equities, which take advantage of things like tech companies – internet, commerce, telecommunications – but also invest in emerging markets with a particular focus on Asia ex-Japan. So, it's not just China, but it's also the other countries in Asia. But the idea being that as investors we get exposure to this bipolar world in both ways. So, it is clearly a focus on China going forward both on a tactical and on a strategic basis.

    Oscar Pulido: Perhaps a good reminder to not let the geopolitical headlines get in the way of the investment thesis.

    Scott Thiel: Yeah, that's right – I think that the geopolitical tension between the U.S. and China is clearly a risk investors face when investing in China. But, and it is a very important point, over the long term we believe that investors are more than compensated for that risk at the moment.

    Oscar Pulido: So let's talk about the third theme, which you mentioned is turbocharged transformations. And you touched on Covid-19 accelerating long-term trends that were already in place before the pandemic hit; you touched on sustainability, inequality, but maybe elaborate a bit more on what we mean by these transformations?

    Scott Thiel: So I think from an investment perspective, we should focus on sustainability and the dominance of e-commerce. But we do note that from a societal perspective, the widening wealth and income and health inequality have been important themes that have been exacerbated by the Covid crisis, and ones that we all need to focus on going forward. From an investment perspective, let's look at sustainability and the dominance of e-commerce because in many respects those are trends that, as investors, I think we can we can we can look at very closely. Now it's very clear that investors are very focused on sustainability coming out of the crisis. We have seen a huge amount of demand for investments that are either green-related, green energy-related, or really more broadly around sustainability. Clearly with the outcome of the election now solidified, in the sense that we now know that that the transition of power will take place, President Biden has been very clear that things like electric cars and other green initiatives are going to be a very important part of his policy framework going forward. The second is this idea of dominance of e-commerce. And here, the reinforcement of that theme drives our equity view overall and drives our country allocation in equities. We do see technology continuing to be a very important part of the of the market. And therefore we recognize that obviously some of the bigger cap names have had very significant price run-ups. But we also think that the small cap space – so smaller capitalized companies – will also benefit from the focus on e-commerce. There's an additional wrinkle here with the Biden Administration coming in and with the results of the Georgia election now giving ever so slightly the upper hand to the Democrats in the Senate. The possibility for regulation on technology is something that we need to think about, but the space is very, very important in terms of taking advantage of that e-commerce trend. So we may see big cap names underperform as a result of threats of further regulation, but small cap names in the technology space will be very attractive and the sector overall we think will continue to do very well. The second is that in this e-commerce, but also taking into account our globalization rewired theme about this bipolar world between the U.S. and China, you also want to have exposure in your portfolio to Asia ex-Japan as a way of getting exposure to the big companies in Asia that are also taking advantage of the dominance of e-commerce. That's China but it's also countries like South Korea, as an example of where there's also opportunities. So, in many respects trying to take advantage of the quality U.S. companies and also the bipolar world of Chinese companies I think is an important way of thinking about an investment thesis going forward. One of the questions that we often get around this dominance of e-commerce is well, what happens to the companies that were really impacted by Covid? And in our mind, you have to think very carefully about those companies, because some will obviously come roaring back as demand returns once the vaccination is sorted, and once the health crisis is behind us. But some companies will have what we call structural headwinds, and those are going to be the companies that are part of the space where clearly, e-commerce is here to stay; more traditional retail is going to be more difficult. So we also want to look at companies that are going to benefit from the rebound in economic development and avoid companies that in many respects have what we're calling these structural headwinds to the development of e-commerce. So, turbocharged transformations is really about trying to effectively make the best of your investment looking at the trends that are coming out of COVID.

    Oscar Pulido: Scott, you touched on the results in Georgia and the Democrats now having a slight majority in in the Senate and perhaps it has some regulatory impact. I’d be remiss to not then also mention the events we saw in Washington DC, just more political headlines. Does any of this change the outlook that you've shared or is this short-term noise that we should try and look through and think more strategically?

    Scott Thiel: No, I think it's obviously a very interesting question and one obviously that is developing as we go through time here. On balance it does not change our investment views at a top line level. In many respects, I would say it accelerates some of them, so then the new nominal is being accelerated by the fact that you now have a Democratic control of all three parts of the U.S. government, right. Because spending will be greater, and therefore this idea about the economic recovery pushing inflation expectations higher but rates staying on hold, that is being accelerated by the results in the in the Georgia election. Things like globalization rewired or turbocharged transformations, in many respects, those will be I think themes that we have to face regardless of whether we have a Senate that is Democratic or Republican. One wrinkle there I would say is that because the Democrats now control all three parts of the government, the ability to appoint regulatory and judicial members by the Biden Administration is going to be much less encumbered than it was before. And that, on balance, would suggest that when we talked about tech companies coming under further scrutiny, that's likely to be increased as we go through time. But it's a complex process and one that we'll have to monitor very closely. So, I think that on balance, the longer-term impact of what we've gone through very recently is not going to have a big change on our on our investment themes. I would say obviously from a shorter-term perspective, part of the reason why in many respects the market – shrugged off is not the right word – but that risk assets continue to do well through the period of the Georgia runoff and through the events that happened in the Capitol is in part because democracy has ultimately prevailed in terms of the outcome. But I also think that – as I mentioned earlier – the idea that we will get more fiscal spending in the current political setup than we would have in a divided government is obviously a very big positive for markets. I think the markets are looking through it and not to dismiss the both the political and obviously the human impact of what happened in the Capitol – not to dismiss that at all – but I think the markets are looking through that.

    Oscar Pulido: Well, it is interesting when you think about the political headlines we've seen recently, but at the same time the stock market at least in the U.S. hitting new all-time highs. So, I suppose that is what you're saying here about how the political changes in DC just reinforce, if anything accelerate, that theme around the new nominal and what that means for the stock markets. Scott, just bringing it all together, what's the one thing you think investors need to know for the year ahead?

    Scott Thiel: So, I think the elevator speech, if you will, the main takeaway is that we are turning more pro-risk in 2021. Again, with the risks around the virus and the vaccines being central. We're looking to add equities, overweight credit; we think that equity premium looks reasonable, lower rates in the new nominal are going to be very supportive of valuations in equity markets more generally. We advocate a balanced approach to get at the bipolar world of the U.S. and China. But as we look to the recovery as it will come and we look to the support that we see from policy, we are turning more pro-risk in 2021.

    Oscar Pulido: Well, Scott, thank you so much for all these insights. I might add, I know you're based in London. Good luck with all the lockdown measures that are taking place there. We look forward to having you back on the podcast.

    Scott Thiel: Thank you very much; thanks for your time.

    Oscar Pulido: On our next episode of The Bid, we'll talk about our outlook for the stock market with Tony DeSpirito, Chief Investment Officer for U.S. Active Equities. We'll see you next time.

  • Mary-Catherine Lader: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Mary-Catherine Lader. Since the Global Financial Crisis over a decade ago, finance has changed significantly. With the rise of new technology and fintech, the asset management industry in particular has been turned on its head. As an asset manager, how does BlackRock innovate and build products that meet investors’ needs as they evolve?

    Patrick Olson, BlackRock’s Chief Product Officer, discusses three drivers of change in asset management: technology, the growth of index investing, and sustainability. He shares what it looks like to build a product from start to finish, what separates winners from losers, and how he thinks about building products through innovation.

    Patrick, thank you so much for joining us today.

    Patrick Olson: Thanks for having me, MC. I’m always super happy to talk about product.

    Mary-Catherine Lader: Your role is Chief Product Officer. What does it mean to oversee product at an asset manager?

    Patrick Olson: Sure, for one thing. It means I never get bored MC. But seriously as I think about my career in finance, I’ve been in commercial banking, I’ve been in investment banking, and asset management. And fundamentally as a Chief Product Officer, you oversee the product process from start to finish. To ensure that what’s on the shelf, our product lineup, is relevant to the buyer. It solves a specific need and hopefully it’s differentiated versus your competition. So, as a business, we have to be thinking across all asset classes – fixed income, equities, multi-asset, alternatives – all styles of investing – so active or index – and in all geographies. But I think what’s interesting is that in a lot of ways, the role of the Chief Product Officer at an asset manager is very similar to other industries. I have a few friends that are in similar positions but different industries to compare notes. And look, I think any organization is ultimately defined by the relevance of its product lineup and its ability to evolve with the changing client needs. You need to ensure that the business is delivering the right suite of products for the right segment at the right time.

    Mary-Catherine Lader: And how do you think about that process of creating and delivering products? What does that look like from start to finish?

    Patrick Olson: I think there’s really two important functions. The first is product management: that’s really all about product and platform strategy. So, our product management needs to be forward-looking. It’s trying to anticipate what clients will want or need and then filling that need, or importantly, incubating product to fill that need in the future. The second big piece is product development. And this is where you take that strategic concept, and you make it actionable. You bring it to market or you kill the idea because we don’t think it’s going to work. But we work really closely with our clients to understand market demand, product design, where to price the product and where to sell, where we sell into to retail and wealth channels. We work hard on the narrative that we wrap around the product to support the marketing efforts. So, this is a bit of a simplification, but these are the most significant responsibilities of the Chief Product Officer in an asset manager and frankly a lot of other companies.

    Mary-Catherine Lader: You mentioned that you’re working with clients to better understand what to bring to market. How do you anticipate what might work versus what doesn’t?

    Patrick Olson: Yeah, it’s a great question. I think first, you have two different big sets of clients. You have the retail and wealth side, and then you have the institutional side. I think on the institutional side, it’s a little bit easier because you’re so in touch with a CIO across the table that you’re able to design a solution over time. And it’s a robust conversation going back and forth. I think on the retail and wealth side, it’s a little bit different. And here’s where we think a lot about the incubation concept. So, we don’t know what’s going to be in demand three years from now. They don’t know what’s going to be in demand three years from now, and I think we have to take some bets. We have to put some products out there that we don’t commercialize for the first couple of years, obviously. We let them bake. We let them develop a performance track record, and then if the market comes to us, we’re ready to go. We had a product that was incubating for three years. And we were close to pulling the product and just shutting it down because it wasn’t commercializing. It hadn’t gained any traction from an asset raising perspective, but it had phenomenal performance. And in one of the product executive meetings, we had a long discussion about what to do with it. The investors convinced the management team that this was a product that was going to be successful. The market was going to come to us, and it did. Over the course of the last year, that product raised close to three billion in assets. So, it’s been a huge success in the U.S., and now we’re just going to wrap it to make it available to Europe and Asia. When you don’t know, you’ve got to have some things that are just out there baking. And when the market hits, when the stars align, you can run with it.

    Mary-Catherine Lader: So, you mentioned that in that example, the management team believed this was a product that was going to be successful. What makes a winning product versus one that just isn’t working?

    Patrcik OLSON: Yeah, I love that question and nothing like getting right to the point, MC. It’s both the investment performance and the commercial success. So, in most cases you don’t know if you have a winner when a product is launched, because if you think about it, for a product to win, it needs to perform. Did the product do what it was intended to do over an investment cycle? And in many cases, you won’t know that immediately. But if you take a step back for a minute, I think it’s less about whether an individual product is a winner. There are lot of examples where a product performs for a while or is meeting the immediate market need, and then it doesn’t. So, you need to think about delivering a platform, not just an individual product. And in some ways, it’s like creating a network effect in other industries. The more useful your platform becomes, the more users you attract. And breadth in asset management is becoming more than just an investment offering. It’s becoming being able to provide a total solution. It’s being able to provide the technology that goes along with the investment product. Because sometimes our client wants a single product which is a building block for a portfolio they’re constructing, or they might want the whole solution which can be a model portfolio, or a custom portfolio built just for their needs, or they want a combination of the investment products and the technology to manage their assets or understand their risk. But the point is, the more capabilities you bring to the table and the more solutions that you can provide, the higher your chance of winning at scale and creating that network effect.

    Mary-Catherine Lader: So, on that note, the asset management industry has changed a lot over the past few decades, and you alluded to this in the context of your career in different parts of financial markets over that time. We’ve seen a shift towards index investing, of course, and the growth of sustainability, which you mentioned the democratization of investing to people beyond really sophisticated institutions. So, what are some of the defining moments in time that disrupted the industry in your mind, and what do you think product differentiation needs today?

    Patrick Olson: Well, I think, MC, you identified some of the most important moments of disruption in the industry. If you just take a step back, asset management developed around a really simple concept which was to give investors a cost-efficient way to access a bundle of securities, rather than trying to pick and manage individual securities. That’s the mutual fund. And for a long time, asset management really didn’t change that much. And I would say over the course of the last 15 to 20 years, there’s been a significant change that’s transformed the industry faster than ever, and there’s a probably a couple of drivers. The first is technology, and I know every company and every industry identifies technology as the key enabler of change and innovation. And that’s certainly true in asset management. But you simply could not manage the size of the assets or gather and analyze the data for investment decisions or importantly, create a seamless client experience without massive investments in technology. And this is only to get more acute, right? The mom-and-pop or the end consumer, they want to consume an investment product as easily as they consume something they buy from Amazon or Alibaba or Apple. You know it’s instantaneous, it’s frictionless. The second big change would be this monumental growth in index investing. I looked at a stat recently, and over the past 10 years, flows into index funds were close to four trillion U.S. dollars. That’s while active funds declined by almost 200 billion. And many of the trends that are driving that shift aren’t going away: the focus on cost, an aging population that’s investing in things like target date funds, which are largely index, and the simplicity of using an index product to build a portfolio. This certainly doesn’t mean that active management goes away. I think active will share the portfolio with index as investors use both frankly to express a tactical or a strategic allocation decision. And then last is sustainable investing. And sustainable investing is an amazing signal on the part of organizations and individuals that investing isn’t about financial performance only. People want to know how you’re investing. Are you taking the environment into consideration, social issues into consideration and company governance, frankly, into consideration? And they also want to know what you’re going to invest in. Is the investment having a particular impact? You know, I’ve had clients in Europe tell me that measuring a product in its ESG score is going to be more important than the financial performance of the product. So that may be a minority view globally today, but I think as wealth transfers to the next generation and the public puts more scrutiny on the managers of capital, there’s no question that sustainable investing will heavily influence how we think about our product process.

    Mary-Catherine Lader: Let’s focus on each of these a little bit. So, you talked about the growth of technology in financial services generally. Certainly, the Global Financial Crisis catalyzed the emergence of fintech firms that focused on building positive, consumer-friendly brands when consumers were less favorably inclined toward large financial services institutions, for example. This crisis has accelerated adoption of technology in new ways because we’re working digitally. So, how do you think technology exactly will continue to play a role in the transformation of the industry?

    Patrick Olson: Yeah, and I agree with you. I think technology is going to be probably the single biggest catalyst for change in our industry or in the asset management industry full stop. I’d focus on something that we call the mass customization at scale of accounts. I mean how the industry moves to customizing the investment solution for individual investors. So, today, they can create a portfolio, but that portfolio can be tailored as close as possible to what that investor might need, but not perfect, right? It doesn’t take into account lots of considerations – tax being a big one – well enough. So similar how asset managers customized investment solutions for large institutions today, I think you’re going to see that move to the individual investor over time because technology will allow you to do it. And the second is I think the use of technology to create just differentiated investment opportunities or differentiated platforms. And then I think for portfolio managers, the ability to harness and analyze data will continue to unearth information that can be used in the investment process. The mining of this data just continues to get better, faster and cheaper. And if I could add one more, I would say it would be around the client experience. I’m just a huge believer that you can create differentiation in the client experience. So, those are some of the areas where I think you know, technology is going to have a big impact. And remember, I’m just referring to the investment side. There’s going to be similar transformation I think on the distribution end.

    Mary-Catherine Lader: You also mentioned – shifting again to one of the other things you talked about – you mentioned growing investor preference for sustainability. And some of the demand for sustainability is actually around client experience as well in the wealth context as investors preferences change. We’ve talked a lot about sustainability on the podcast, so what are some of the unmet needs that you see, and how do you think about crafting products to meet them?

    Patrick Olson: Well, MC, in some ways the needs there insatiable right now because we’re just so early in development. I think it’s going to become normal for a portfolio manager to be able to model how climate risk will impact an industry, a sector or a company and that company’s public securities. To get there, there will be significant technology and data needs that will help drive better and more differentiated product. We recently surveyed clients around the world so that we could understand what they were struggling with and where innovation can help drive sustainability adoption. We touched 425 investors in 27 countries who control 25 trillion in assets under management. First, sustainability is here to stay, right? These institutions plan to double their sustainable allocations, so that’s their assets under management, in the next five years. And how they will do it will vary, meaning, they’ll use screened products in some cases. They’ll have deeper integration into the investment process in other cases. We saw big regional differences. I live in London, and while sustainability is the new normal in EMEA, Asia-Pacific and the Americas are in the earlier stages of adoption. So, there’s a huge data challenge and that came out loud and clear, something that I know you’re an expert on. Over half the clients we spoke to said that poor quality or poor availability of ESG data and a lack of analytics were the biggest barriers to them adopting sustainable more aggressively. And this was true across all regions. I think interestingly, but not surprisingly, when we asked clients what was the most important to them in terms of E, S or G – is it the environment, is it social, is it corporate governance – 88% chose the environment as their top priority. If that doesn’t speak to the urgency around climate change, I don’t know what will. But this is certainly one area in particular where we expect more linkage between product and things like the Sustainable Development Goals or the Paris Accord. So, two degree-aligned products, as an example. And the last insight from the survey is regulation. In Europe, almost half of the clients, I think it was, told us that they’re being driven by regulations which mandate consideration of ESG risk. So, this will likely become more the norm. Just like consumer protection, you’ll see more environmental protection. And just as a note to show the disparity between the regions: Goldman put out some research that showed as of December of 2019, there were over 300 standalone ESG regulations in EMEA compared to roughly 79 or 80 in Asia and around 20 in North America. So, you can see just by that regulation, how the different regions are developing. And that will influence how we think about product regionally as well.

    Mary-Catherine Lader: Patrick, one last question. You shared a lot of future-oriented thoughts this morning. I’m curious as we head into 2021, what do you think is the most important thing for investors to pay attention to in the new year?

    Patrick Olson: The most important thing; can I give you a couple? Is that okay?

    Mary-Catherine Lader: Sure. I mean, admittedly, going into 2020, the view expressed on this podcast was that we were not going to have any market crisis, any recession, certainly not a public health crisis. So, we’re not going to hold you to it, Patrick, whatever you say.

    Patrick Olson: Alright, well, I think the risks from the pandemic will be managed, but they won’t be extinguished. And I think it’ll be important to identify long-term beneficiaries; who’s going to win. But importantly, I think you’ll also have to know who’s going to be permanently harmed. It’s periods like this that just create that dispersion across and within industries. We talked a lot about sustainable. So, I think sustainable is just going to have a banner year for all of the reasons we discussed. One thing we didn’t talk about and I think this is going to become bigger and bigger is China is going to become more and more accessible to investors. There will be more products available as the underlying investment ecosystem in China continues to develop and the size of that economy grows. And then maybe last, I think you should expect that alternative investments or private market investing is going to become more accessible to the individual investor. Institutions have been continuing to increase allocations to private markets to find higher yields in fixed income or better alpha opportunities in equities. But these investments have been hard to access for individuals. So, Rob Kapito, who’s the president of BlackRock, coined the term “making alternatives less alternative” for the individual investor. And one way to do that is just by design, by combining public and private investments in one wrapper that’s easily understood and accessible for the individual investor. And I think you’re going to see more of this type of development happen.

    Mary-Catherine Lader: Well, thanks so much Patrick. You’ve given us a lot to think about and it’s been an absolute pleasure having you.

    Patrick Olson: Well, invite me back, MC.

    Mary-Catherine Lader: We will. We will.

  • Oscar Pulido: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Oscar Pulido. As 2020, perhaps finally, comes to a close, what are the biggest lessons we’ve learned?

    Today, we talk to investors from across BlackRock who share seven lessons they’ve learned this year from the markets. We’ll hear about how the Covid-19 crisis compares to past financial crises; the technology and sustainability trends that got accelerated; and the resilience we saw from companies and policymakers.

    2020 was a year of dramatic market volatility and the first recession we’ve seen since the Global Financial Crisis. But we haven’t seen a recession caused by a global health crisis before. So, how similar or different is this recession compared to past crises?

    Lesson #1: The recession caused by Covid-19 is different from past recessions.

    Kate Moore: This recession is entirely different. In fact, this entire economic cycle has been different, and that’s because it’s been created by this external threat and health risk as opposed to something like an imbalance in the financial system or a huge amount of leverage or a slowdown in demand that had to do with incomes.

    Oscar Pulido: That’s Kate Moore, Head of Thematic Strategy for the Global Allocation team.

    Kate Moore: This was really an external shock and so we’ve seen much more violent reactions in the market, and I think in terms of economic data, violent reactions on the way down. And now, we’re starting to see some pretty significant surprises on the way up. One of the big challenges is, for investors and market participants and pundits, everyone wants to make these comparisons to history, right? Everyone wants to say, in previous recessions, the following four variables or four parts of the market performed in a certain way. There’s a comfort in using a historical playbook. But the truth of the matter is, this is nothing like previous market or economic experiences because of the external shock and health crisis. And as such, we’ve had to really kind of evolve on how we think about this; what the shape of the recovery might look like and what the speed of that recovery might look like. Plus, I think the other thing that’s super different relative to other recessions is that this is leading to significant structural changes in behavior and some of it will be quite enduring even when we’re able to gather together in person and when economic activity returns closer to normal.

    Jeff Rosenberg: I mean, the similarities are that you kind of have a V-shape to many of your economic and financial statistics. But what is different was the cause.

    Oscar Pulido: That’s Jeff Rosenberg, portfolio manager for the Systematic Fixed Income team.

    Jeff Rosenberg: Prior financial crises or prior recessions typically lumped into two categories of causes: either there’s an internal overheating associated with the economy that is then met by a pre-emptive policy tightening by the Fed – that’s kind of a classical recession and financial market crisis – or you have an external financial market crisis that is a result of overheating in financial conditions, right? So, classical one everybody thinks about, of course, is the Global Financial Crisis and the excesses in the subprime and real estate lending markets that led to an overheating and then a collapse. What’s different is that this one was obviously a health crisis that induced a self-inflicted crisis that we forced the shutdown of the economy. You basically stop the lifeblood of the real economy, which is money moving through the economy. And so, the cascade into the financial markets was as a result of corporations drawing on their banks for backstop lines of credit to meet that cash flow need to fill the hole that was created by the COVID policy response. Well, you had the entire economy ask the financial markets to fill the hole. And so, the financial markets were quickly overwhelmed and that’s how we saw it kind of cascade from this kind of fundamental real economy impact into a financial economy impact that then fed back into a negative feedback loop that was later broken by central banks and policy intervention, but the initial crisis was accelerated by this negative feedback loop from first real economy to the financial economy, then the financial economy back to real economy through the loss of market functioning.

    Michael Fredericks: I think it is different than prior recessions, in part because the size of government response around the world is really unprecedented.

    Oscar Pulido: That’s Michael Fredericks, Head of Income Investing for the Multi-Asset Strategies team.

    Michael Fredericks: And so, when you look at the size of some of the programs relative to the size of economies, again, it’s just off the charts. The level of job losses were pretty jaw-dropping in the second and beginning of the third quarter, but they were very industry-specific. So, they tended to be very concentrated in the retail sector and the travel and leisure and hospitality sectors, but they’ve been impressively contained and not as broad-based as you typically see in a recession. So, net net, I think that’s a real positive for the economy. The level of GDP growth in 2021, consensus is looking for about 4% GDP growth. So, a pretty healthy rebound. So, we’re not going to claw back all of what we lost this year, that’s going to take a few years, but we’re definitely on a positive trajectory.

    Oscar Pulido: So, this year’s crisis is different for a few reasons: It was caused by a health crisis, not a financial one; the impact to the economy was targeted at sectors directly hit by the pandemic; and we saw unprecedented action from governments and policymakers. And as a brief aside from our lessons, there’s one other difference to highlight: the music we listened to.

    Back in April, Kate noted that the 2008 chart topper was oddly fitting for the state of the markets.

    Kate Moore: Some of you might remember that Flo Rida’s “Low” was topping the charts 12 years ago during the financial crisis. It wasn’t just a catchy dance tune, but eerily appropriate given the market collapse: low, low, low.

    Oscar Pulido: So, what music best describes this year? 

    Kate Moore: I think the song that best describes 2020 is “Uneventful Days” by Beck. Now, let me just say, Beck’s music keeps on getting better. This particular track was released in late November of 2019, but it started to get a lot more airplay in the beginning part of 2020. I just can’t think of a song that better captures the year. There’s particularly this part of the chorus that talks about uneventful days and uneventful nights and then later sort of evolves into never-ending days and never-ending nights. Time has warped in 2020. But to be fair, the song I’ve been listening to on repeat in 2020 is “Colors” by Black Pumas. It’s just a great tune.

    Oscar Pulido: Now that we have a soundtrack heading into 2021, let’s get into our second lesson learned: Covid-19 has accelerated a number of longer-term trends in the economy. Which trends do we have our eye on?

    Jeff Rosenberg: I think there’s a much more important trend from an economic and economic policy forward-looking outlook here that was accelerated by the COVID crisis, and that is the trend of inequality.

    Oscar Pulido: Jeff Rosenberg again.

    Jeff Rosenberg: And here, I’m going to talk about inequality in terms of wealth and assets. And this goes back to the 2008 financial crisis and the policy response. Then was to use financial repression, to use low interest rates, to use a channel that Ben Bernanke called the portfolio rebalance channel to try to rebuild wealth through subsidizing housing. Remember, in the Global Financial Crisis, it was a collapse in housing values that collapsed real economy confidence. So, the fastest way back was to reflate financial assets. That was a successful intervention, but it had an undercurrent of a cost and that cost was to exacerbate the differences between asset owners, people who had wealth and exposure to the benefits of asset reflation from those who didn’t. And the COVID crisis has exacerbated that gap even further.

    Kate Moore: I think the most powerful trend and change has been an acceleration in the adoption and investment in digital platforms. This is true across all companies in all industries.

    Oscar Pulido: Kate Moore again.

    Kate Moore: You know, even before the pandemic, we really had started to see a huge differentiation between companies that had adopted digital platforms and were being kind of more innovative in the way that they were interacting with consumers or their end users and those that were really sticking to maybe sometimes decades old business models. But now everyone has sort of caught the religion, if you will. Now, some people have said that some of that spend will decelerate once we actually get back to kind of a more normal economic activity and I would disagree. I think this has just been a step change in a powerful trend that was already in place.

    Tony Kim: We had everything about digital experiences, and I think all of that accelerated across COVID and those quote digital experiences manifest in probably a dozen different categories, everything from obviously commerce and retail to food and grocery and health care and education.

    Oscar Pulido: That’s Tony Kim, portfolio manager and head of the technology sector for the Fundamental Active Equities team.

    Tony Kim: And then it extended, which I think was surprising, into other industries and accelerated that transition. We saw that in auto not just the electric vehicle craze, but you can’t go into car dealerships to buy used cars. Well, you can buy those through a digitally native experience where you don’t have to go into a dealership. Accelerated insurance, the adoption of new kinds of insurance policies and these digitally native insurance programs. And then even in agriculture, it extended all the way into that, in terms of getting that supply chain, all the pressures and inefficiencies in that supply chain to get from the farm to the table. You saw the digital migration accelerate.

    Ashley Schulten: We did see a continued and stronger interest in sustainable investing and there, I think, are many reasons for that.

    Oscar Pulido: That’s Ashley Schulten, Head of ESG Investing for the Global Fixed Income team.

    Ashley Schulten: But I think also, too, there were other themes whether it was continued sense of de-globalization, de-urbanization if you will. Those of us who lived in cities thinking about moving to suburbs, but even within cities, thinking about the concept of livable cities. Moving toward more public transport or bike shares or public spaces. I think another theme that has picked up is this idea of the flexible working model. We flirted with this idea of flex time and now we’ve really fast forwarded into this situation where it seems very viable that we could work from home or remotely several days a week that we have the technology set up to do that.

    Oscar Pulido: Covid-19 fueled a number of longer-term trends this year, like technology and sustainability. Our next two lessons focus in on each of these trends. Lesson #3: The technology industry has thrived this year – and tech has expanded beyond just the tech sector.

    Tony Kim: The biggest lesson learned is the resilience of the technology industry, the resilience of many of the companies, and really the resilience of maybe the U.S. economy.

    Oscar Pulido: Tony Kim again.

    Tony Kim: You would have thought in a global pandemic and a macroeconomic hit that the technology sector like in past recessions would have been impacted just as much or more than others. But that was not the case, it was quite the opposite. So, this resilience especially in the companies themselves was something that really came to the fore.

    Oscar Pulido: As Tony mentioned, unlike past crises, technology didn’t falter this year; it thrived. Was the resilience of technology due to Covid and the rise of digital, or something deeper?

    Tony Kim: While the pandemic, obviously, was a global calamity and had just tremendous impacts, the reason that technology companies have done well is not because of the pandemic. The pandemic accelerated certain things, but the motion was already in place many, many years prior to the pandemic. And I always say the technology industry is driven not by policy, not by pandemics and government policy or tax rates, or whatever, or even GDP per se. It’s driven by this innovation and the speed of change. And technology companies thrive when there is high rate of change. And there we had a tremendous high rate of change and accelerated rate of change because of the pandemic. If we enter a world where that rate of change slows down, decelerates or stops, then technology companies will not do well. So, the question is, will it continue in 2021? Will the rate of change be as elevated as it was in 2020? Maybe not as high, but I think in general, this world that we live in in the 21st century, the rate of change has been elevated from what I’ve seen over the last decade, and I see no signs of that abatement. And you know, the other thing I would say is, it is now extending into literally every single industry on this planet. There is not a single industry that is not being somewhat impacted or utilizing technology. So, I don’t see that stopping.

    Oscar Pulido: Tony noted that while innovation in technology has been happening for years, one major change is that technology is now expanding beyond the sector itself. How else did technology change in 2020?

    Tony Kim: The tech sector for a long, long time always engaged in a war of creative destruction amongst itself. My new tech is better than the last new tech, and technology companies often engaged in battle on its particular domain. My chip is better than your chip. My code is better than your code, et cetera. But what I think the pandemic really kind of highlighted and these were trends already happening but accelerated is, tech moving beyond tech into other, non-traditional industries. And they’ve invaded basically every other industry: financial services, education, healthcare, agriculture, insurance, construction, automotive, manufacturing, you name it. There are all of these new tech companies being created and they’re attacking these non-traditional tech industries at an accelerated pace and this is what I saw this year. And the second thing, it’s not really a technology per se, it’s on the financing side, and we saw a new wave of what they call SPACs or special purpose acquisition companies, basically a way to bring private unicorns that might have not gone public for maybe three, four, five years to be pulled forward merging into these public SPACs and bringing a whole other wave of private technology companies to the public market sooner and faster than they would. And so, this whole new way of financing technology companies also so happened to really explode in 2020.

    Oscar Pulido: In addition to technology, another trend that was accelerated by the Covid-19 pandemic was sustainability. Which brings us to lesson #4: Sustainable investing is becoming central to investing overall.

    Ashley Schulten: So, I think in 2020, what has been most impressive to me is this realization of how connected we all are even in a world that’s de-globalizing.

    Oscar Pulido: That’s Ashley Schulten.

    Ashley Schulten: I think it’s reinforced the small degrees of separation that we can have, and I think we’ve seen that whether it’s from tight contact tracing or how quickly supply chains got disrupted that we are so connected globally. I think that it’s inspiring in a way to think about when we were forced to change and really collectively take action that we can really make a difference very quickly. And so, for me, it’s helpful to think about that in a context of climate change. If we can get behind getting a vaccine around COVID or regulatory support around this, we can take action on climate change.

    Oscar Pulido: Sustainability has become top of mind. So, what’s behind this growth, and what actions are we seeing from investors, corporations and governments?

    Ashley Schulten: I think the one thing is this sense I think of a collective vulnerability perhaps that COVID has put on to us that we do need to focus on these existential issues sooner rather than later. We all know the connections between climate change and further pandemics, but also climate change in terms of its existential threat on our survival, and I think that has really hit home to people this year. I think also that we continued to see government support around the Paris goals. And so, you’ve had number of countries that have further stressed their willingness to adhere to their Paris goals and make public pronouncements and announcements from governments and also from corporations about their goal to be net zero by 2050. I think also, we have seen this year a strong performance of sustainable funds. I think what we’ve shown is that there are lot aspects about sustainable investing that can help provide protection in downside, can help abate volatility in portfolios and those types of things. And then finally I think that we’re all individuals, right? Investors are all individuals and we’re sitting in nature now and we’ve seen the planet take a breath and we’ve seen what happens to air pollution and we’ve seen what happens to the water canals in Venice, or any of these anecdotal stories that you can think of, and that we appreciate those and those are important to us. And so, I think that that further reinforced people’s desire to do a little bit more with their money rather than just think about at the end of the day what is their financial yield return.

    Becci Mckinley Rowe: Sustainability and ESG has really been at the forefront in Europe for many years. But particularly this year you’ve seen yet another acceleration here.

    Oscar Pulido: That’s Becci McKinley Rowe, Co-Head of the Fundamental Active Equities business.

    Becci Mckinley Rowe: There’s a €750 billion European Recovery Fund, and that’s actually going to kick off in 2021, and roughly 80% of that spending should be focused on green and digital transition. So, this will continue to be a tailwind for Europe’s cutting-edge companies that are involved in this space, but again, it shows that continued focus and acceleration around sustainability topic and themes.

    Ashley Schulten: But I think what’s interesting also is that the recovery plans that we have around this have really been centered on build back better.

    Oscar Pulido: Ashley Schulten again.

    Ashley Schulten: So, whether we’re thinking about Green New Deals in Europe or in the U.S. is how to do we rebuild in a way that takes into account climate considerations, takes into account social justice issues and leads us to a place that we’re more resilient on the back end of this than we were going in.

    Oscar Pulido: One theme that’s come up: Resilience. Despite the year we’ve had, we’ve seen strength and determination from the global economy and the people within it. Our fifth lesson: Companies have shown resilience through the pandemic.

    Becci Mckinley Rowe: I think for 2020, there’s been a lot of lessons that have been learned, but I think one thing that really springs to mind is resilience, because I think what we saw was tremendous resilience from people, and I think tremendous resilience from businesses. Not just to carry on as business as usual, but to try and sort of thrive and get through it, and be stronger at the other end.

    Oscar Pulido: That’s Becci McKinley Rowe.

    Becci Mckinley Rowe: I think being in fundamental equities and sitting in EMEA, the one thing that I’ve definitely learned from 2020 is about not getting wrapped up in the eye of the storm and really trying to unpack things to focus on the fundamentals. Why do investors own a certain company, and has the long-term thesis changed because of the situation that we’re in here and now? And it’s really trying to see through those moments of extreme, I think a definite lesson.

    Kate Moore: So, there was a real question at the beginning of the pandemic whether or not we were going to see mass bankruptcies and whether or not companies were going to really kind of fall apart at the seams.

    Oscar Pulido: Kate Moore again.

    Kate Moore: And if there’s one thing equity investors have learned throughout the course of 2020, or maybe not just learned but this idea has been reinforced, is that most companies, and certainly those that are publicly listed in the large cap space in particular, are incredibly resilient. We first started to see this hint in the second quarter earnings where we knew the economy was in terrible shape. There were large swaths of the U.S. that were shut down, and the global economy felt like it had ground to a halt. But companies were producing better-than-expected earnings, certainly better than the analysts had forecast, and were giving slightly more constructive guidance. And why was this? It’s because they really focused on their cost control. I mean, even in an environment where the top line where revenue growth was relatively anemic and in some cases quite negative, companies cut their costs, they streamlined their businesses and they delivered much better earnings, and this was doubled and tripled in third quarter earnings. For example, in the third quarter, analysts were expecting earnings to decline anywhere between say 18% and 20% year-over-year. And when all earnings were reported, it was much closer to like an 8% decline year-over-year. And it was really concentrated, the bulk of that, in sectors you would expect that were disrupted, like entertainment and travel and leisure, and businesses that relied on people congregating together; service-oriented businesses. So, I think the big message from the pandemic is, don’t bet against corporate resilience, don’t bet against corporate flexibility and don’t bet against companies that are investing in technology to improve their efficiencies even in challenging economic environments.

    Oscar Pulido: As the global economy came to a standstill earlier this year, companies were forced to pivot their business models to survive. As Becci and Kate mentioned, the resilience exhibited by companies was quite impressive. 

    But Kate talked about how the decline in earnings was focused on areas of the economy that were disrupted by the pandemic. Sectors like entertainment and travel and services struggled. Which brings us to lesson #6: Covid has created clear winners and losers in the economy. Kate shares her thoughts from her seat in the U.S., and Becci gives her perspective on the ground in Europe.

    Kate Moore: So, the winners and losers this year really were around the pandemic. And companies that had the digital platforms that were already positioned to serve customers or end users in an environment where people couldn’t gather together out before. And an interesting stat here is that the companies that had premium valuations to the market, either say in January or February of 2020, actually continue to see multiple expansion throughout the course of the year. And those that were in more structurally impaired sectors, or specific companies and businesses that just didn’t have the right platform and business model, continued to get cheaper. And so, the winners won more, and the losers lost more. And that was a very powerful trend throughout the course of this year. Now, in terms of what wins and loses next year, a lot of it is going to be about the continuation of this resilience theme. Do companies continue to make the smart investments and control their costs throughout the course of next year? I think we’re going to see more people invest in the re-opening trades; companies that will benefit from more normal economic activity. But I would note there is still a bifurcation here where some companies and some industries have the ability to operate in a more remote environment, because it’s going to take a while for us all to get the vaccine. Healthy adults won’t get it until the end of the second quarter, perhaps beginning of the third, and that’s a long way to go. We’ve got another couple of quarters of real tough work ahead of us. So, I think even in the travel, leisure, entertainment, community service space, we’re going to see some of those businesses do very well and some of them struggle a little bit, and a lot of that is going to depend on how much they’ve adapted their business model.

    Becci Mckinley Rowe: If I think within Europe, the IT sector has been a big winner. And that really comes down to the semis stocks that you’ve got within Europe and the long-term trends there, where you’re seeing greater demand and greater requirement for more efficient computing power, whether that’s the shift to electric vehicles, whether that’s AI automation. Probably a less obvious one would be the utility sector. This is a sector which has transitioned to renewables, where you’re now seeing greater predictability of the cash flows, you’re seeing better cost and productivity gains. And so really, this is another sector which is really evolving to be fit for purpose in the future all around renewables. If we think about the losers in 2020, it’s the flip side of what we’ve seen in technology. Clearly, it’s been the traditional bricks and mortar. It’s been the sort of the retail whether that’s out of town, big retail centers or retail in a high street. It’s just the ability to get footfall to actually get the traffic in to be able to actually make the returns that you need to cover your costs. It was a trend that was in existence pre-COVID, and it will continue to be challenging as more and more of the consumers really demand that efficiency.

    Oscar Pulido: It's probably no surprise that the areas of the economy that shined this year were in areas like technology. Those that struggled were in areas like travel, entertainment, and other services. Regardless, though, the pandemic caused the economy overall to come to a grinding halt.

    When the downturn first started in the spring, we saw policymakers step in in a way they haven’t before to mitigate the impact. Our seventh and final lesson? You can’t fight policymakers.

    Kate Moore: It wasn’t so much a new lesson that I learned in 2020 but kind of a reinforcing of a lesson that we’ve all learned over the last decade, which is, “Do not fight policymakers.” And there’s a phrase that we’ve talked about before which is, “Markets stop panicking when policymakers start panicking.” Policymakers started to panic and employed really aggressive tools and came to market much sooner during this crisis than we’d ever seen before even over the last decade. And if there’s a big investing lesson, it is that policymakers are on their front foot at this era in a time when we really needed it.

    Jeff Rosenberg: We have learned that our Central Bankers are on the job.

    Oscar Pulido: That’s Jeff Rosenberg.

    Jeff Rosenberg: Now, in the height of the crisis, it took them a little while. I mean, we were looking at what was going on in terms of the degradation of performance, market functioning. There were a lot of phone calls that were going back and forth. I was part of some of those, and they eventually got the right answer. And that’s the most important takeaway; the central bank policy response can very effective to dealing with market functioning, to deal with uncertainty and to deal with fundamentally what was at the heart of COVID crisis, which was a liquidity crisis. What we will see, however, are some of the limits to central bank policies – what they can’t deal with are some of the longer-run fundamental outcomes of the COVID crisis. Things that liquidity solutions and low interest rates really can’t address, such as inequality and the differential impact that the COVID crisis has had across the spectrum of our society.

    Oscar Pulido: As Kate and Jeff both mentioned, central bankers were on the job when the economy needed them most. But what do central bank actions mean for investors?

    Michael Fredericks: The Federal Reserve bought many parts of the bond market, mainly U.S. Treasuries, agency mortgages and even investment grade rated bonds. And so, their buying behavior drove up prices and drove down yields to incredibly low levels.

    Oscar Pulido: Michael Fredericks again.

    Michael Fredericks: And so, here we are today looking at an index like the Barclays Aggregate Bond Index, which has a yield of about one and a quarter percent, which is very close to the all-time lows. So, looking forward, it sets up a more challenging environment for fixed income investors, particularly those that are heavily invested in the safest parts of the bond market. That’s going to be a challenge. The other consequence of the central bank response has been that I think we’ve seen really a very dramatic repricing of the growth part of the equity market. You’ve seen the fastest growing stocks really benefit from a new lower interest rate environment. So, the discount rate is a lot lower than it has been in many, many years, near all-time lows, and that triggered a big repricing and growth. What I thought was interesting though was that there were many parts of the equity market that did not benefit or did not participate nearly as much in price appreciation this year. And one thing that really sticks out at us is the relatively weak performance of dividend paying stocks. So here, you’ve got investment-grade bond yields that are at very, very low levels and for many, many companies, you can earn a lot more yield by buying the company stock and getting that dividend. So, a lot of companies grow their dividend, raise their dividend regularly, if not annually, and you just don’t get that in fixed income. And that’s what it says on the label: It’s fixed income. Dividend growth I think is really valuable and I think it’s going to really come back into favor as investors come to terms with these really low interest rates.

    Oscar Pulido: With bond yields and interest rates at all-time lows, have central banks used up their toolkit this year, or is there still room for further action should the economy need it?

    Michael Fredericks: Well, I think they do have tools left. But they probably aren’t going to use them. So, monetary policy is incredibly accommodative already. The Fed funds rate, which controls short-term interest rates in the U.S., is at zero, and it’s probably going to stay there for the next several years. That’s not to say that longer-term interest rates, which the Fed has less influence over, can’t move higher, but we think that they’ll actually be fairly contained. And frankly, what’s not getting enough airtime is the fact that real yields are quite low. So, steadily over the course of the year, inflation expectations have moved higher. And that’s really important because when you think about an investor who might own the 10-year U.S. Treasury bond, that currently has a yield of about 1%, but inflation over the next 10 years is expected to be about 2%. So, that investor is inherently stepping into an investment that’s going to have a negative 1% real return over the next 10 years, which is fairly depressing, but it’s certainly consistent with this idea that there’s a lot of stimulus and very easy policy out there. And the investor reaction to these really low negative real yields is that they’re going to look for better opportunities and they’re going to look out the risk spectrum. And I think that’s exactly what the Federal Reserve wants to see. They want to see people investing more and taking more risk and getting out of cash.

    Jeff Rosenberg: You know there’s a big question about the central bank efficacy at the zero-lower bound. Certainly, the Fed is going to continue to support the recovery by keeping its policy in place. The biggest change in the Central Bank policy tool kit is removing the symmetric response to employment and the preemptive view on inflation. I don’t think the tool kit is empty, but I think it is more limited, and I think the best that the Fed and global central bank policymakers can do at this point is to help support the fiscal policy initiatives from fiscal policy makers and that’s going to be to keep the cost of fiscal policy low by keeping borrowing rates for sovereigns low through policies of financial support, asset purchases broadly under the rubric of financial repression, narrowly under the rubric of yield curve control and asset purchases, and forward guidance. And I think we will see more of that in 2021.

    Oscar Pulido: As we look back on an eventful year, there’s a lot we’ve learned. Let’s sum it up:

    Lesson #1: The recession caused by Covid-19 is different from past recessions.

    #2: Covid-19 has accelerated a number of longer-term trends in the economy.

    Lesson 3: Technology is one of those trends, and now more than ever, tech is expanding beyond the tech sector.

    #4: Sustainability is continuing to become central to investing.

    #5: Companies displayed incredible resilience this year, but lesson 6: Covid did create winners and losers in the economy.

    And finally, lesson #7: Policymakers are key to keeping the global economy afloat.

    That’s it for this episode of The Bid. We’ll see you next time.

  • Mary-Catherine Lader: Welcome back to The Bid and to our mini-series, “Sustainability. Our new standard,” where we discuss the ways that sustainability – across climate change, COVID and other factors – is transforming investing. I’m your host, Mary-Catherine Lader.

    In 2050, global electricity consumption is expected to be 60% greater than it is today1. And in that same period, the world needs to transition to an economy less reliant on carbon and fossil fuels if we want to protect the planet. So, as this energy transition takes shape, demand for renewable power and policies that accelerate it has grown. And renewables are now the cheapest source of power in two-thirds of the world2.

    This transition has major implications for private markets broadly, not just in renewables. So today, we speak to Teresa O’Flynn, Global Head of Sustainable Investing for BlackRock’s Alternatives business. Teresa talks about how sustainability comes to life in private markets, from the growth in renewable power to the disruptions COVID has created in the energy and real estate market.

    Teresa, thanks so much for joining us today.

    Teresa O’Flynn: Hi, MC, it’s great to be here.

    Mary-Catherine Lader: So, your work focuses on the intersection of sustainability and private markets. Can you talk a little bit about what that means in practice?

    Teresa O’Flynn: I think the first thing I would say is, sustainability and ESG are more important for private markets as an asset class in my opinion. Of course, it’s important for every asset class, but the reason it’s particularly important for private markets is, we’re long-term investors and the positions that we hold are illiquid. We are often holding positions for five, seven, sometimes 10 plus years. And if we think about sustainability as a disruptor, and something that’s only going to increase into the future, when we’re making private markets investments, we really need to think about this. And we think about it in two main ways: Firstly, for all types of investments, how we integrate ESG considerations when we’re making investment decisions and owning assets. And the issues that we have to consider will vary considerably depending on what sector you’re in, right? If you’re making an energy investment, if you’re making a healthcare investment, if you’re in the technology sector, different ESG issues will be material and relevant to those sectors. So that’s all about ESG integration. The other bucket when it comes to sustainability in private markets is those strategies that target specific sustainable outcomes. Renewable power infrastructure is just one example of that. As a private markets investor, you directly own the project or the company and ultimately can drive ESG value creation or sustainability value creation over time.

    Mary-Catherine Lader: You mentioned that as you integrate sustainability in your investment approach, your decisions depend on what sector you’re looking at, like energy or healthcare or technology. Can you give some examples of the kinds of ESG issues that you are thinking about in specific sectors?

    Teresa O’Flynn: Let me talk about the healthcare sector. If we take investing in private healthcare providers, a key consideration for us is digging into the care quality of the healthcare provider, what are the patients being treated for, and how is the care being provided. Of course, from an investment perspective, one needs to ensure that they’re investing in companies that are providing healthcare to the highest standards and absolutely complying with local healthcare regulations. So, that’s a big S component of healthcare investing. A big G component of private healthcare investing is looking at the governance framework in the care provider: what’s the strength of the management team, what are the qualifications and credentials of the staff in the medical practice, and what’s the framework around how any customer complaints might get dealt with. If I contrast that with investments in technology companies and the relevant ESG issues that come to the fore, obviously cyber security, data privacy are really important and very hot topics. But it’s interesting, you might sometimes see an interesting cross section between E and S and G components. So, if you’re looking at a technology provider that’s providing services to the oil and gas sector as an example, well, clearly, a key consideration from a business strength perspective is assessing whether that oil and gas customer will still need that service or if their needs will change over time as a result of this energy transition path that we’re on.

    Mary-Catherine Lader: A major thesis in sustainable investing in private markets is that the energy transition from fossil fuels to renewable power sources will create huge growth in renewable power investments. And when the pandemic hit, we saw greenhouse gas emissions decline. People are commuting less; they’re staying at home more. In some markets, that’s ticked back up quite quickly. But do you think that that dynamic, that specific, unique context, is going to continue and drive continued growth in renewable power?

    Teresa O’Flynn: Yeah, I mean it’s important to think about it in two ways. Firstly, if you look at the existing renewables that are up and running and generating electricity today, and then secondly, looking at new build projects. If we look at renewable power assets that exist today and how they fared over the pandemic, as we all know, as our economies grinded to a halt and slowed down as a result of COVID-19, clearly electricity consumption fell around the world. And what is really, really interesting, the actual share of renewables on the grid increased pretty much around the globe. And the reason for that is two-fold: as electricity consumption fell, and as a result demand fell, more and more renewables got on the grid because they were the cheapest source of power. Renewable power is the cheapest source of power in about two-thirds of the world2. So effectively, renewables were displacing more expensive sources of power generation. Another factor in many countries, particularly in Europe, renewable power has priority grid access. So, they get on to the grid first. So, I think it’s a really interesting takeaway as electricity needs fell as a result of COVID-19, more renewable power got on the system. The second topic is renewable power additions, new build projects. And if you look at some of the projections from the International Energy Agency, they are projecting that new power generation additions this year will be down by about 20%4. However, it is unevenly spread. Upstream oil and gas is going to be down about a third, but the renewable new build investment activity is recovering quickly post the initial shock of COVID-19. New build additions are expected to be down by less than a tenth this year. But we expect that to pick up or be reversed pretty quickly, and it really is driven by the fact that renewables are underpinned by this very, very compelling cost dynamic that I mentioned already.

    Mary-Catherine Lader: There are several forces driving the energy transition to a lower carbon economy. But what do you think are the most powerful? Is it policy?

    Teresa O’Flynn: Policy stimulus, government regulation is always really important, and it plays an important role, but I think when it comes to renewables, I want to talk about some of the really strong fundamentals that are underpinning the asset class. We’ve had the mainstream of renewable power and now, actually, we’re seeing the rise of climate infrastructure. So, let me break that down. Firstly, as I mentioned already, renewable power is the cheapest source of power in two-thirds of the world today2, and that’s been driven by incredible cost declines in the price of the equipment over the last five, 10 years. In the last 10 years, solar equipment, the price of the equipment per unit has fallen by about 60%2. Wind equipment, wind technology has fallen by about 40%2, and at the same time, the actual equipment itself has become incredibly more efficient. So, you’re getting more bang for your buck. At the same time, I think we all know we’re on a massive path to decarbonization. Our world needs to get greener, if we are to align with Paris. And we’ve seen many countries around the world set net zero 2050 targets. So, when countries, developers, utilities are thinking about their generation mix, they have a bias to green and clearly, if green is a cheaper source of generation, it makes lot of economic sense. And then the final point I would make is our electricity needs are increasing significantly. Between now and 2050, our electricity consumption globally is expected to increase by about 60%1. And some of that is driven by the increasing electrification of our lives. If we take transport, for example, the momentum around electric vehicles. So, these are just some of the very just strong fundamentals that are underpinning the growth and the continued growth that we expect to see in renewables. Policy support is simply an additional tailwind to that, I would say.

    Mary-Catherine Lader: So, it sounds like you think policy is just a tailwind today. How do you think a Biden presidency and their corresponding climate policy will impact the energy transition?

    Teresa O’Flynn: I think, policy is going to play an incredibly important role in helping to address the hard-to-decarbonize sectors. Clean energy, including wind and solar, tackles about 40% of global emissions3. So, decarbonization, the path to net zero is a much broader conversation than clean energy generation. One needs to look at how heavy industry is going to get cleaner. One needs to look at decarbonizing our transport and our heating sectors. There is a broader scope as well in terms of the food and agricultural sector. And in many respects, I'd categorize a lot of these as the harder-to-decarbonize sectors. If governments set smart policy signals, create smart regulation, it will help attract capital into these harder to decarbonize areas where, in fact, one could argue the investment model isn’t very clear today. Another energy policy initiative under the Biden Administration: We're looking at interest to the equation beyond renewable power. There are lots of conversations around the role of carbon capture and sequestration. There is lots of conversation around the role of the hydrogen markets. I think we need to see more regulation to drive adoption of electric vehicle use, both for high-income and low-income earners. I think this will create a very exciting investment opportunity set beyond what we have in renewable power today, which is quite mature.

    Mary-Catherine Lader: Real estate has a tremendous carbon footprint, so I imagine you’re also thinking about decarbonization in real estate.

    Teresa O’Flynn: Yeah, so just a couple of stats I'll throw at you, which I think are rather interesting. Buildings account for about 40% of global emissions3. So, in a transition to a net zero world, the stock of buildings that we have today and the buildings that are going to be built in the future need to be as green as possible. And when you think about a building’s carbon footprint, there are the landlord emissions – the owner of the building – there are tenant emissions. But also, there is the embodied carbon; the actual carbon that's consumed in actually building the building, And as we see more and more countries around the world set net zero targets, we have about 60 countries around the world today that have set that 2050 net zero targets, including the UK, which is the only legally binding one, but I think we might see that change over time. I think we can expect more regulation with teeth, addressing this carbon equation in the building sector. And my final stat that I’ll throw at you, MC, is a lot of our buildings are quite old. About 65% of the building stock that exists today will be around in 2050. When we're making real estate investments, when we're managing our existing portfolios, we need to be looking for ways to reduce their carbon footprint.

    Mary-Catherine Lader: COVID-19 has of course introduced plenty of economic and financial risk well apart from sustainability. So, for real estate, there are concerns even about collecting income and how asset prices might be affected going forward. So, if that’s the case, is it realistic that developers or investors might actually focus on ESG in real estate?

    Teresa O’Flynn: Yeah. It’s a really valid question. It plays to a question that perhaps has been on many people’s mind for many years, which is when the next economic crisis hits, will sustainability and ESG considerations get pushed to the side? The answer to that is an unequivocal no. Undeniably, real estate as a sector is going through a structural shift. As a result of the pandemic, our relationship with buildings and the need for real estate has obviously changed. Maybe it’s permanent, some would question that. And against that backdrop, I would say that ESG has never been more important for generating alpha in our real estate investments. If we lean into sustainability, if we improve the ESG credentials of our buildings, we’ll ultimately be more attractive to the end consumer, the end tenant. Let me bring that to life with an example: indoor air quality. What’s the quality of the ventilation system? The health and wellness aspect of properties is incredibly important, and COVID-19 has really put that topic center stage. And that’s just one example of if you get that equation right, you can use ESG as a way to differentiate your property. And my final comment on this topic and bringing it back to the whole conversation that we’ve been having around decarbonization. If we think about the building sector and as mentioned, it is a material contributor to carbon emissions. And with that as a backdrop and the path that we’re on to net zero, we can expect more regulation with teeth focused on the building sector. We need to be thinking about improving the sustainability performance of our assets, improving the energy efficiency of our assets, managing their carbon footprint.

    Mary-Catherine Lader: So far, we’ve talked a lot about climate risk and the E component of ESG. Can you talk about how the other elements of ESG take shape in private markets?

    Teresa O’Flynn: So, we've had a lot of talk this year about the rise of the S in ESG as a result of COVID-19. E is often easy to quantify, right? If you don't comply with a planning permission, if you don't comply with a particular piece of environmental regulation, one can price that and assess what it means from an investment perspective. The items under S can be quite varied, right? If we take infrastructure again, for example, health and safety considerations are a critical element. Right? If you are building a project, if you're operating a project, you need to get health and safety absolutely correct. And in many respects, that part of S is absolutely easy to quantify and get your head around. But I think more complex S topics are supply chain considerations. If you're investing in a company, one needs to think about its supply chain risk and climate puts a whole new increased focus on that. And I've heard some people say that COVID-19 is a dress rehearsal for climate change. And ultimately, climate change being a permanent consideration, not a temporary one. And I think, one takeaway from the pandemic is, non-financial risks can become financial risks very quickly. I guess, the second point to your question is the G piece, governance. It's absolutely critical as a private investor because you have a long-term investment orientation. But I think the G piece can be easier to navigate in the sense that you're often owning a company directly, you’re a direct owner of the equity in a company or the equity in a project. In many cases, we have majority positions, and as a result, would have the majority control of the board. So, the ability to “drive the bus” so to speak when it comes to managing G issues as a private investor helps to navigate that as a very critical and important topic.

    Mary-Catherine Lader: So, everything that we've talked about relies on being able to measure what has an environmental or social or governance impact. And sustainability data, which is essential for measurement, is notoriously difficult to source and it’s notoriously difficult to discern signal from the noise, especially in private markets. Can you share a snapshot of what the state of data in private markets is today, and what you think is going to change in the next couple of years?

    Teresa O’Flynn: Yeah, gosh. This keeps me up a lot I have to say, MC, right? I want to draw a distinction between ESG in private markets and ESG in public markets. In private markets a big, big difference is that we have to manufacture the ESG data. There is no third party ESG rating report. So, digging into environmental reports, digging into a hundred-plus page legal documents, engaging experts, technical engineers, so on and so forth in order to try and form a view on what the ESG risk profile for a given company or project is. This intensive raw data gathering exercise quite frankly is very clunky, so I’m very excited about the role that technology can play in making a more efficient and effective going forward. Comment number two, once we make an investment, really, the conversation just begins, right? How do we get access to information in an efficient and effective way on a go forward basis? Again, I think there is a really critical role for technology to play in that conversation. And then my final comment is – before our time, MC, there once was a time when there was no such thing as international financial reporting standards. Of course, we have the IFRS today, and if you pick up a P&L account of a company in China or one in Ireland, or one in the U.S., there is a consistent frame to kind of assess those numbers. It almost feels like we’re at a point in time today, where it’s like that for sustainability, right? There is an increased recognition and desire for standardization when it comes to sustainability and ESG metrics, so that one can compare one private company with another private company, or one public company with another public company. So, I think in the next few years, we will see a significant drive towards creating a common language for sustainability disclosures for both private and public markets.

    Mary-Catherine Lader: One theme on this podcast is that sustainable investing may ultimately just become part of investing. So while it feels new today, in 10 years, we might not distinguish sustainable investing from investing more broadly. Do you agree with that?

    Teresa O’Flynn: I agree wholeheartedly with that. Obviously, I have an energy background. I’ve talked a lot about energy today and I almost, like in the analogy to that, at one stage we were talking about the rise of renewables, then we were talking about the mainstream of renewables, and now we talk about the rise of climate infrastructure more broadly. And I think to me, that is a really great way to think about sustainability more broadly. We’ve seen a rise in sustainable investing. I think our view, and it’s held by many in the industry, that COVID-19 has resulted in the mainstreaming of sustainability. Its arrival onto the main stage is unequivocal, it’s unambiguous and in 10 years’ time, it’s just going to be part of our DNA completely.

    Mary-Catherine Lader: So, we end each episode of the sustainability miniseries with the same question to each of our guests. What’s one moment that changed how you thought about sustainability?

    Teresa O’Flynn: Can I give you two? I’ll cheat.

    Mary-Catherine Lader: Sure.

    Teresa O’Flynn: So, I have two moments, one from 2005 and another from 2020. And my one from 2005 is when I was working in the industry. We were an independent project developer developing a wind farm in West Texas, and as part of the closing of the project, we decided to create a little video interviewing some of the landowners who were critical partners in making sure that the project was a success. And one of the comments one of the Texan landowners said really struck a chord with me – and I’m definitely not going to put on a Texan accent – but he said, “You know, man, who’d have thought you could make money from something you don’t even own.” And I thought that that was just an awesome way to really capture the tremendous opportunity set associated with renewable power. You’re harnessing a free resource, you’re delivering green, clean electricity to the end consumer. It just makes so much economic sense and to me, it captures what sustainability should be all about. So, that’s moment number one. And then moment number two is January 2020 when our founder and CEO, Larry Fink talked about putting sustainability at the center of everything that we’re doing at BlackRock. It was an incredibly a proud moment for someone who’s worked in sustainability for a major part of my career. And I can certainly, sitting here today, hand and heart, confirm that sustainability is at the center of everything that we’re doing at BlackRock. It’s really transforming our business, it’s transforming how we serve our clients, and it really is an exciting time to be working in the sustainability sector.

    Mary-Catherine Lader: Well, as someone also in the sustainability sector, I couldn’t agree more. Thank you, Teresa. It’s been a pleasure having you.

    Teresa O’Flynn: Thank you, MC. Really enjoyed today’s conversation.

    1. Mary-Catherine Lader: Welcome back to The Bid and to our mini-series, “Sustainability. Our new standard,” where we explore the ways that sustainability – across climate change, COVID, and other factors – is transforming investing. I’m your host, Mary-Catherine Lader.

      Back in July, I spoke with Sandy Boss, BlackRock’s Global Head of Investment Stewardship. At that time, Sandy talked about how why she believes companies with a clear sense of purpose are better able to deliver, especially in times of uncertainty. Today, we’ll learn how companies stayed resilient through this year’s crisis – with both purpose and communities front of mind.

      Sandy, thanks for joining us again on The Bid.

      Sandy Boss: It’s very nice to be here, MC. Great to talk to you.

      Mary-Catherine Lader: So, we first spoke in July about investment stewardship and you were a couple of months into this role then. Can you give us a quick refresh on just what investment stewardship does and how it’s a little bit different this year?

      Sandy Boss: Investment stewardship, in a very simple way, is a lot like what any investor would do if they’re investing in a stock. They care about how the company is performing; they read the reports from the company. They might go to a shareholder meeting to hear what the management has to say, and they have the right then to vote on the company on the items that are on the proxy ballot. What we do is similar but on a larger scale. We engage with companies; we will actually have, in our case, 2,000 companies that we met with last year. We have a stewardship team globally of about 50 people. So, this enables us to really get close to companies, speak to them in local language to help understand what they’re doing to manage the companies well, but also to share with them what we expect. Another thing that we do is we actually will talk to the organizations around the world that are setting standards for companies. That might be regulators, that might be the people who own stewardship codes or governance codes in different countries, but we’ll work with them on what’s the right way for us and other investors to set expectations for companies, what are the definitions of good governance, what are the definitions of how you should have sustainable business practices. The third thing that we do is voting proxies. So, we will take voting decisions using our voting guidelines and use that vote to hold management to account, voting in support when we feel that they’re doing the things that we want them to do, but sometimes voting against management either voting against directors or voting in favor of shareholder proposals. It’s helpful to say I think that all of this is done for a reason. It’s our role in stewardship to be looking after our clients’ interests in these companies that we’re invested on their behalf. And that’s kind of a big mouthful, but it really means, if you think about it from the perspective of the clients, they have their long-term financial goals. And they’re looking to us to make sure that the companies that we invest in for them are performing as well as possible and that they are generating long-term value.

      Mary-Catherine Lader: This year was a year where it’s hard to think long-term about anything – personal lives, professional lives, what might make a company’s business grow or shrink. And so, I’m curious, how did you think about what were the most important issues to be raising with that long-term orientation as you’re meeting with management teams?

      Sandy Boss: That’s a great question. It’s interesting because obviously we started this year with Larry’s letter. We were very, very focused particularly on climate risk and our worry that climate risk was becoming a significant investment risk; we were expecting this tectonic shift in capital. And the interesting thing about this year is we got very surprised by the pandemic. I would say that the fundamental view that we have around both climate risk and other sustainability risk has really been strengthened by the experiences that we’ve had this year. On the first days of the pandemic, everybody’s time horizon shrunk in, and we met with hundreds and hundreds of companies to talk to them about resilience. So, they needed to make sure that they were operation-resilient, that they could buy and sell goods, that they could keep their workers safe, that they could operate remotely. That was incredibly important. Financial resilience: Did they have enough cash? And there was also the strategic resilience question. So many companies had strategic issues that might have taken five or ten years play out; they hit them in like five months. But the interesting thing then was very quickly, big companies thought about, what does this pandemic mean more broadly? And the first thing they talked about was how the pandemic was really forcing them to face into their social and economic contract with the stakeholders that they were dealing with; their employees at risk, suppliers at-risk, communities at risk. The entire ecosystem that any company was operating within had been in some cases completely devastated, in other cases severely disrupted. And companies increasingly recognize that if they are not thinking about their stakeholders, if they haven’t led themselves in a purposeful way and managed themselves in a manner that’s consistent with what their stakeholders need, they can really lose their social license to operate. We saw company after company that might not have thought that way before the crisis actually awakening to the fact that a profit-only or shareholder-only approach wasn’t actually going to enable them to survive and thrive through this crisis. We also saw companies who had always really, really been centered around their stakeholders actually emerge in a very successful way. But the final thing I would say is that 2020 has been an unbelievable year of acceleration around the recognition that climate risk is an incredibly important issue for companies. Obviously, the regulatory backdrop has changed. We started to see more and more countries making net-zero commitments and that makes the need to manage transition risk incredibly compelling for any company. But on a voluntary basis, we’ve also just seen companies observing the regulatory trends, observing the physical climate trends that we’re seeing, listening to their investors. We’ve also seen other industries where the companies are really doubling down, investing in new technologies, thinking ahead, working with their suppliers and regulators, and other companies in their sector to try to think about how to address some of the really difficult issues.

      Mary-Catherine Lader: What do you think we learned about what indicators there are for that kind of resilience that you just spoke about? What kind of indicators there are for stronger relationships with stakeholders? How much do you think you could try to emphasize in conversations with companies to anticipate how they’ll fare in future crises?

      Sandy Boss: From a climate risk perspective, what we have observed, in terms of what makes a good approach, is a company that has really embedded the consideration of climate risk into everything that they do. So, they don’t think of this as a hobby, but they think of it as being integral to how they will survive and thrive as a business. And I’d say something similar on the social side. Probably the single greatest indicator, and it’s not something every company can do, but what’s the time frame over which you are setting goals for sustainable social practices, and how long have you been doing it? So, the leading companies that I’m interacting with as part of this stewardship journey, they talk about their third decade-long program to do something transformational in the world of sustainability. And I do think that that significance of sustainability being fundamental over time to a company is really, really important. When it then comes to a more kind of tactical level question about metrics, I think we and other investors increasingly find that the Sustainability Accounting Standards Board’s metrics, so SASB metrics, they are really valuable for us because they’re specific to the industry. So, for an individual industry, you’re not looking at hundreds and hundreds of metrics; it’s a limited number, it might be 10 specific metrics that are relevant, that can be tracked over time, that can be compared, and that are founded on a methodology that is practical and reviewed by standard setters who know what they’re doing. So, I think that combination of the big picture vision and then these really practical metrics, that’s what gives us really what we need. So, it’s not just about living it, we also need to see it in the metrics and the numbers.

      Mary-Catherine Lader: Another important thing that you and your team talk about often with companies is purpose, and that’s something that BlackRock has emphasized – the importance of a company having a clear purpose to drive their strategy over a medium to long-term period. How has that taken shape more specifically? What do you think we’ve learned this year about what we mean when we talk about purpose?

      Sandy Boss: I think certainly what we’ve learned is that the conviction has proven to be quite real. But I think perhaps the most important thing for all of us who are operating in the corporate space is to go beyond the high level into what does that mean in practice. So, make it real. I think the first, and it’s been incredibly important this year, is fair treatment of employees. If you look two, three years ago, sometimes when people talked about their proposition to their employees, it sounded very growth-oriented and war for talent. But I think going through a situation as difficult as the one that we’re in right now, this is much more about basic things like health and safety of workers. We’ve always thought about those things in manufacturing businesses and physical industries, but health and safety of workers has mattered in every single business this year. It’s also the proposition to the employees in terms of what is the security of their work, is the work meaningful, do they feel that the company that they’re working for actually cares for them and indicates it by what they’re doing. Should a company with purpose just not lay anyone off? How do you handle that situation? There are companies that had faced existential crises that have needed to reduce their workforce, but have done it in a way that was much more humane than they might have done if they had been only thinking about the bottom line to their companies, and that includes things like helping employees with retraining, what’s the nature of the severance packages, looking for other opportunities within a broader company. So, there are mechanisms for even making very, very difficult decisions in a manner that is as close to a purposeful intent. The second thing that I think is important is we are much more conscious in certain markets in particular that racial inequity has become an unsustainable problem facing businesses. I think most large companies would say they haven’t done enough yet. Most large companies would say, “I acknowledge that my workforce doesn’t yet look like the population around me and that I need to do more.” So, what we’re really looking for is at the board level, that companies are starting to make sure that that diversity reflects all aspects of diversity. We’re also looking into how companies are managing their workforces and what they are actually doing to make sure that situations of inequity are getting redressed. The third thing I’ll mention is fair treatment of workers throughout the supply chain. So, one of the big changes that we observed in the COVID-related readjustments was when companies started to build back better, and big companies started to look at their full supply chains to think about resilience. They also asked a new question that not all of them had been asking in the past around, are the workers in my supply chain being treated fairly? And the final point I’ll just make is treatment of local communities. So, I think there is a real need for companies more and more to think about their footprint, to think about how they engage with the community. Is that community thriving? What’s their role in local education? What’s their role in local social services and charitable activities? I think employees really are demanding that. That company needs to be a good contributor to that local community, and I think increasingly companies are recognizing that.

      Mary-Catherine Lader: So, you talked about the importance of having a local presence for companies to be living their purpose. I’m curious what differences you see across different countries, different jurisdictions in terms of how companies are responding to what are otherwise very global themes of sustainability, stakeholder engagement, supply chain management. What have you noticed over the course of the past year about how regional differences or cultural differences drive differences in companies’ priorities?

      Sandy Boss: That’s an interesting question. Starting where I sit in Europe, I live in London. And I would say that European companies have in their statutes, in their local codes, expectations around stakeholder engagement. Often there are, in some countries, expectations of worker representation on boards. Where that doesn’t exist, there is nonetheless a pretty high expectation that broad stakeholder engagement is part of the corporate ethos. Similarly, in Europe, what you’ll also see is that the local environment around climate change commitments and that being brought from an EU level into a country level and the UK having its own country-level client commitments. That creates a dynamic where it’s really just the expectation for companies that they should be considering their stakeholders and that they should be considering what their path to a just transition to low carbon looks like. Now it doesn’t mean that European companies have all of the answers. But what it does mean is that the society, companies, employees, the regulatory environment, investors as well are all very much pulling in the same direction. If we then go to the U.S., what has been quite interesting is that obviously the regulatory environment and similarly corporate governance doesn’t really make expectations of companies either around their stakeholder management or around their duties to be managing climate change. So, each company, of course, needs to look at its risks, it needs to assess them, but it’s a very different environment. That said, there has been a tremendous amount of development in the U.S., and I think it’s in part because companies are engaging with their investors and their customers, and they’re seeing the financial value of taking a stakeholder-oriented approach and of managing a transition to a low-carbon economy. In the U.S., as in other countries, the regulatory environment is likely to go only one way, which is toward having, over time, greater expectation put on companies, whether it be carbon taxes or whether it be other requirements that they would be migrating toward a lower carbon-operating model. Asia is a really interesting market. On the climate and sustainability perspective, there are certain countries that have actually really pulled ahead. Interestingly, 20% of the Task Force for Climate-Related Financial Disclosures come out of Japan globally right now. There are a lot of stock exchanges that require sustainability reporting, many of the companies have been using GRI, the Global Reporting Initiative to express their sustainability risk. That said, if you go into the full range of carbon-intensive companies throughout developing Asia, there are many companies where this dialogue is just beginning. It’s not easy in certain countries when you need to invest in technology that doesn’t yet exist. In some countries, where unlike Japan, China, and Korea, which have made net-zero commitments, there may not yet be a country-level commitment.

      Mary-Catherine Lader: So, it sounds like a tremendous amount of regulatory progress and government and public sector-led progress. What are you finding effective as a private sector actor? What are we doing to hold companies accountable this year?

      Sandy Boss: BlackRock is a very long-term shareholder on behalf of clients. So, 90% of our listed equities is in index. What that means is, we will hold a company in the portfolio as long as it’s in the index, maybe 20 times longer than an active manager might hold a company in the portfolio. We really value engaging with companies, understanding their challenges and sharing our expectations, making sure though that those expectations are reasonable. So, if we think about governance, we took 5,100 votes this year against directors. We want the board to be independent, diverse, to have enough capacity to do their work well, to have appropriate decisions about executive compensation being aligned with long-term value. And we want that because that’s the company that then will be creating value on behalf of our clients. So that part of what we do, which has really always been the anchor, that remains unchanged. If we then look toward what’s been different this year, it has been the increasing urgency of sustainability risk as a risk facing companies and particularly climate risk, but also some of these social risks that I talked about earlier. We have intensified the way that we are engaging with companies on climate risk, the way that we are engaging with them on social risks. So, at this point in the year, we actually voted against management at 63 companies on climate-related reasons.

      Mary-Catherine Lader: How are you finding that those actions this year are having an effect?

      Sandy Boss: We’ve done some research where we’ve seen not only that our votes against directors are in fact very effective tools. Eighty percent of the time, if we vote against a remuneration chair in the FTSE 350 over a compensation issue, the problem is fixed the next year. Forty percent of the time, if we vote against a company in the Russell 3000 on diversity, the diversity is improved by the next year. So, we know that that classic tool of voting against directors is one that is effective for us. But we’ve also done research into shareholder proposals just to understand how these increasingly well-supported environmental proposals and also some social proposals are being effective. We’ve started to use them more since July 1. We’re making clear that if we do see a proposal from shareholders that we think we agree with the intent, we think the matter is urgent, and we think that there’s something material that the company has not yet addressed and that it could do differently, then we’re increasingly supporting shareholder proposals. We won’t be supporting all of them; we don’t think that’s the right answer. We think it’s incredibly important to engage with companies, engage with the specifics of the shareholder proposals, make sure that it’s consistent with our expectations, that it’s fair. But certainly, in our voting record since July 1 on environmental shareholder proposals, we’re using them more than we have in the past, and I think that trend will continue in 2021.

      Mary-Catherine Lader: The impact of those votes is huge, and I work here, and I didn’t even realize that. I’m curious then, how are we communicating that kind of impact? And what’s the audience that cares? Who are you finding wants to understand what your team is doing and how are you engaging with them to help them comprehend what’s happening and why it matters?

      Sandy Boss: Our primary audience is our clients. So, we do what we do on their behalf and we think that all of our tools, whether it’s focusing on getting the right standards in the market, working with others in the industry, to engaging with companies, to voting in the different ways that I’ve talked about. We’re also producing more reports than we’ve done in the past. So, we try to pull together reports that tell a story that are a bit more accessible than some of the things that we may have done over the years. We’re also using vote bulletins, where we go out on a specific vote and describe, this is the company, this is the situation, this is the vote that was taken, this is why we took it, and we find that transparency is also helpful. It’s helpful for clients to understand our decisions. It’s also helpful for companies because what we’re increasingly trying to communicate is if for example we vote against management on an issue, that doesn’t mean that we don’t support management. If we’re invested in a company for decades, by definition, we are a supportive shareholder, and we want to see the management succeed. It does mean, however, that on that issue, we didn’t agree with management or we felt that they could do more than they had done. I want to make sure as much as possible that when people do read stories about the firm and what it’s doing in stewardship, that they’re hearing the kind of balanced approach that I’m describing and that they can get the full picture of what we do from having 50 people out meeting with companies, helping them meet our expectations on these E, S and G issues that we and other investors think are important. I’d like people to really hear that story and I don’t know if they always get it if they pick up the newspaper in any odd day. So, the more that we can communicate, I think the better.

      Mary-Catherine Lader: Well, thank you, Sandy. Thanks so much for joining us.

      Sandy Boss: MC, it was great to speak with you. Always happy to join The Bid. Hope we get to do it again.

    2. Mary-Catherine Lader: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Mary-Catherine Lader. We’re in a time of crisis in more ways than one. In addition to the global pandemic, we’re also facing climate change, growing political unrest and increased competition between nations. So, what can we learn from these crises coming together, and how do we move forward?

      Today, we’re joined by Dr. Daniel Yergin. He’s an expert on energy, geopolitics and the global economy. He’s a best-selling author and a winner of the Pulitzer Prize, and he’s just released a new book called The New Map: Energy, Climate and the Clash of Nations. Dan’s also the Vice Chairman of IHS Markit and Chairman of CERAWeek.

      Dan, thank you so much for joining us today.

      Daniel Yergin: Thank you Mary-Catherine. Very glad to be with you.

      Mary-Catherine Lader: You are one of the world’s leading authorities on energy, international politics and economics. I’m very familiar with your background, but for those listeners of The Bid who may not be, can you just share a little bit about what brought you here and made you interested in the intersection of those areas?

      Daniel Yergin: Well, what really enabled me to get here was I had a postdoctoral fellowship once at Harvard, and for two years no one was supervising me, so I could do what I wanted. And I jumped into this subject, and I just found it so fascinating exactly for the reasons that you said. Because the thing about energy – it extends from everything from geopolitics to markets to technology and the story is always changing and it’s always a very important story, and so I’ve just found myself continually deeply engaged in trying to understand where we’re going.

      Mary-Catherine Lader: And so, in the spirit of where we’re going, your new book is called The New Map. Why did you call it that?

      Daniel Yergin: The idea of a map, of course, is it tells you something about directions and the directions here are across a new terrain. It’s the recognition that so much has changed in the last few years. Obviously, the shale revolution in the United States; the U.S. is the world’s largest energy producer, energy independent on that side, changing global markets. But also, on the other side, you had the Paris Climate Agreement of 2015, which has really become the benchmark for governments, for investors and increasingly for companies about heading towards lower carbon or net zero carbon. You had the falling cost of renewables, and then also the geopolitical terrain changing really rather dramatically and, in some ways, quite worryingly, moving from a world that seems to have been globalized and globalization to one in which globalization is becoming fragmented. So, all of that said, we’re on a new terrain and we need a new map, and that’s what I’ve tried to provide in The New Map.

      Mary-Catherine Lader: The new terrain which we find ourselves includes multiple crises. On top of the coronavirus crisis, we’re also facing a climate crisis, we’re facing big changes in energy and growing geopolitical tensions between nations. How did we get here? What’s happened over the last couple of years that led to today?

      Daniel Yergin: I think that several things have come together. One, is of course a much greater focus on climate. A lot of that is driven by the United Nations IPCC studies and the fact that has been taken up in so many different ways. I think the changing relationship between China and the United States has been driven by many things. And then continuing technical change and technological change. Wind and solar are 50-year-old industries basically in their modern form, but it’s only in the last 10 years that they’ve really matured and really become competitive and costs have come down. And so, that’s changing the competitive landscape. And I guess one other thing is this changed position of the United States in world energy markets, because it’s not only the largest producer of oil, it’s also the largest producer of natural gas.

      Mary-Catherine Lader: And in that sense, certainly the geopolitical landscape has changed as those energy and oil markets have changed. So, for example, the U.S. has become a net energy exporter. So, we no longer rely on other countries for energy imports necessarily. How has that affected the geopolitical landscape and what other shifts are we seeing in energy markets that could have future geopolitical implications?

      Daniel Yergin: In this case, what it’s done is it’s given the United States a kind of flexibility in foreign policy that it didn’t have when it was importing 60% of its oil and people were worried about disruptions. There was a disruption last year when the largest piece of infrastructure in the world oil industry in Saudi Arabia was attacked by Iranian drones and in years past, you would have seen panic in the market and prices going through the roof. Well, if there was panic, it only lasted about 48 hours partly because the Saudis can repair it, but partly also because the knowledge that there’s the United States producing 13 million barrels a day. It would not have worked without the change in the energy position in the United States because as the Iranians said, the world needs our oil. And I can just give one other example, which was, I was at a conference in St. Petersburg where Vladimir Putin and Chancellor Angela Merkel were on the stage, and they said I could ask the first question. And I asked a question aimed at Putin about diversifying the Russian economy and by accident, I mentioned shale, and he started shouting at me about it quite vociferously – it makes one a little nervous. And the reason for that is that he believes shale makes the U.S. more competitive in the world and he sees it as something that’s an adjunct to U.S. foreign policy. So that’s one big change.

      Mary-Catherine Lader: This year has been a really strange year and particularly in the oil market. The oil market collapsed with the coronavirus. So, what impact did that have in the short term or maybe even longer-term, and where do you see it going from here?

      Daniel Yergin: The market not only collapsed, it went into negative territory, which people hadn’t really imagined could happen. Producers were actually having to pay people to take oil back. They ran out of storage. What then happened is we saw that the world oil market was no longer OPEC versus non-OPEC, as it seemed to be for decades. It was the big three; it was the U.S., Russia and Saudi Arabia. And the U.S. stepped in and basically brokered a deal to stabilize the oil market, which is now stabilized in this kind of twilight zone of pricing. But the U.S. took it back from total disaster, and even you have the big importing nations who were very fearful of what collapse to the oil industry would mean overall to the global economy. But it’s now in a sort of waiting-for-the-virus-to-end like every other part of the economy, like central bankers, like the Federal Reserve waiting for the vaccine to get beyond it. And I think at that point, we’ll see demand recovering. And the two signals I’ll point to is in China, oil demand now – where the virus is under control – is now higher than it was at this time last year. And interestingly, in October, in India, demand for oil was higher than it was at this time last year. So, that’s a signal that when we come out of this, demand does recover. But, Mary-Catherine, there are going to be lasting changes that came from the lockdown and technological changes and behavioral changes.

      Mary-Catherine Lader: And what do you think some of those changes might be?

      Daniel Yergin: I think one thing is commuting. A lot of people working at home; particularly, people are not keen necessarily to commute every day to the office. I think a lot of CEOs and a lot of companies are saying, “But wait a second, do we need everybody in every day or do we need them two days – but what about culture? What about creativity? What about mentoring?” No one’s quite sure what the right balance it will be. But it will be changed. I think seven years of digitalization were compressed into seven months or eight months now. I think a decade ago, we couldn’t have operated. The economy is the way it is today, even companies running big industrial enterprises and international travel was affected. The world will not be exactly the same. I think it’ll be a more flexible world in terms of work.

      Mary-Catherine Lader: You said that you do think oil demand will be coming back. But certainly, there was a dramatic drop in emissions and carbon emissions over the course of the past six months or for periods in different markets depending on what was going on. What do you think the impact of all this will be on the energy transition? And how might that transition and as it unfolds affect the shift of the global balance of power that we’ve been talking about?

      Daniel Yergin: Even as we have been going through the pandemic and the lockdowns, there is more and more discussion and focus around the energy transition. I think it has become the single most common phrase used in any energy discussions today. And it really means a shift from the energy mix we have today, which is 84% fossil fuels for the world, to one that’s lower carbon or net zero carbon. The big question is how fast it comes? What the cost will be? What will be the elements of it? What are the strategies to get there? When you have an $87 trillion economy, which we had in 2019, this change doesn’t happen overnight. And in fact, we don’t have all the technologies that are needed for that. We, working with former Energy Secretary Moniz, did a study for the Bill Gates Foundation energy breakthrough coalition identifying the technologies that aren’t there in a commercial way. So, I think we have to be realistic about that. But I think if you’re getting at the geopolitical significance, China would be in stronger position for an energy transition because first, it would not be importing anywhere near as much as oil and it regards oil imports as a strategic issue. And secondly, it’s carved out a pretty big strong position in what they call “new energy.” Half of the electric cars in the world are in China. Seventy percent of solar panels come from China. Countries that are heavenly dependent upon exporting oil will eventually be affected by this, maybe not as quickly as people think; at least, I think we’re going to see a rebound in oil, and demand will continue to grow for a while. And I think the U.S. has this incredible strength, that maybe it’s not fully appreciated, but we have an incredible ecosystem of innovation from our 17 national laboratories, from the $6.5 billion a year that the Department of Energy spends on basic science, to companies, to start ups, to universities, to research institutions; and I think, innovation responds to need. It just doesn’t happen necessarily overnight.

      Mary-Catherine Lader: And so, what are some of the drivers that would accelerate that transition? You said there’s a big technology gap, where are the biggest gaps in technology? Where do you see gaps in demand that would otherwise accelerate that transition?

      Daniel Yergin: Number one is batteries, because the big issue with wind and solar is that they are intermittent; they do depend upon sun and wind. If you could store electricity for extended periods, for days and days and into weeks, that would really change the role of wind and solar in the electricity supply system. I think the second thing that’s getting so much attention is hydrogen. And whether hydrogen is something that could be substituted to provide heating, maybe also in cars, although electricity seems to be the favorite right now. And I think the third, and this is why that word “net” is so important – net zero carbon – is carbon capture. The ability to capture carbon, whether you do what is called “natural based solutions” with plants; with technologies it’s now called air capture, which sounds a little science fiction-y, but it’s being scaled up. I think I put those at the top of the list that would be necessary. And it’s not just proving something in a laboratory. It’s being able to scale it up for an $87 trillion economy.

      Mary-Catherine Lader: And you spent a lot of time with energy executives, with those who are investing in these technologies. Do you think that right now we have the level of investment and focus to get us there? Do we need more government involvement? What’s going to help close the gaps in those areas?

      Daniel Yergin: I think we have a lot of government involvement, and Joe Biden has a $2 trillion climate plan. The EU has very ambitious goals and planning for spending. So, I think the financial resources are there, although I think coming out of the pandemic, governments can have a lot of debt and that there’s going to be this tension – to put it in sort of generic terms – between environment ministers and finance ministers as to how much goes into recovery, how much goes into bringing small business back – which has really been very hard hit by the pandemic – and how much goes into the energy transition. But I think the commitment is there and with the Biden administration, you’ll have the U.S. rejoining the global effort. But I think, it does come back to technology; and technology takes time.

      Mary-Catherine Lader: You mentioned that Biden certainly has made climate a key part of his campaign, and already in the transition policies that they put out and expression of intended policy, the climate feature is really prominently among them. So, it sounds like you think that’s likely to bring a little bit more multilateralism about.

      Daniel Yergin: I think that, Mary-Catherine, you put your finger on a very important issue that goes beyond climate and energy, and its multilateralism; that believing that there is an international community and that one of the great strengths that the United States has had is its allies. It’s the other countries that it works with, rather than an environment where we regard our allies as our adversaries. And I think that these global problems require global solutions. And the number one example is the pandemic itself. Compare this reaction to 2008, the financial crisis, where you had the G20 and other countries really working together to address this problem and a very bad economic situation. You haven’t had that with the pandemic. You haven’t had it with the virus. And there’s a cost for that, and there’s a big cost from that. It doesn’t work when you’re dealing with big global problems. So, I think a return to multilateralism will be very important for addressing a lot of the world’s issues.

      Mary-Catherine Lader: So, Dan, you mentioned that you think China will be a winner in the energy transition. We have seen heightened tensions between the U.S. and China in the past few years, ranging from trade and technology to finance and diplomacy. What do you think that energy dynamic is going to look like between the U.S. and China in the next couple of years?

      Daniel Yergin: I think there is more than one part to it. One of these changes you wouldn’t have expected a decade ago is the U.S. exporting oil and natural gas to China, and that is part of the way of trying to fix the trade deficit that the U.S. has with China. But I think energy looms very large for China as a growing economy in a country that still gets about 60% of its total energy from coal, but imports oil and imports natural gas. One of the areas that I write about in The New Map involves a map of the South China Sea, which is the most important body of water in the world for world commerce. One-third of world commerce passes through it. I think it’s also the most dangerous body of water in the world because that’s the place where the U.S. and China could collide, and U.S. and Chinese naval ships have come close over the last few years several times to colliding. And that body of water for the Chinese, one of their main interests in it is assuring the security of the imported oil that comes through it from the Middle East and from Africa. And then the significance of another map which is the map of what they call the Belt and Road, their $1.4 trillion plan to tie Central Asia, South Asia, Middle East, Europe, Africa into kind of a greater economic connectivity, as they call it. That, too, has a very big energy dimension, and it also has inevitably a geopolitical dimension.

      Mary-Catherine Lader: And how are China’s relationships with emerging economies, for example? We have talked a lot about the more developed markets. How are the relationships and the ties that they are building with more emerging markets playing into this?

      Daniel Yergin: For a lot of countries who look to China, China becomes a very important market for them. We have heard now, the Prime Minister of Singapore has said publicly, “Don’t make us choose between the United States and China.” I hear it from people in the Middle East. I did a dialogue with the President of Colombia and he said China is a really important market; our most important relationship is with the United States, but let’s not get caught in the middle. I think for many developing countries, China does loom large as the market for their commodities. But there is controversy about that, there is controversy about their investment and about their debt terms, which are not transparent. But if you look at Central Asian countries, well, they have Russia there and then they have China there, and China is their economic future. The other big emerging market where things are going in the opposite direction are between China and India, where there actually had shooting confrontations in the Himalayas over the summer and India now is really actually saying how do we back off from some of these supply chains with China. So, I think there is a sense where there is a natural rivalry between those two giant countries.

      Mary-Catherine Lader: And how do you see the energy transition playing out for leaders of those emerging markets and what are sort of realistic expectations if the delta between obligations on developed markets and the pressure for growth and opportunity in emerging markets that create some of the geopolitical tension around energy transition? What do you think is likely to play out? What do you see leaders of those countries saying? What do you think is fair?

      Daniel Yergin: Well, I think it’s complicated for them. They don’t have the financial resources that a Germany does, or The Netherlands does, and they don’t have the level of income for their people. So just a couple of weeks ago I did a big India energy forum with Prime Minister Modi and we had several of his cabinet ministers – the Minister of Finance as well as Petroleum and Industry and Commerce and so forth – and their message is that to them, the energy transition has a different meaning than it does to, let’s say, if you are sitting in Amsterdam or Berlin or Paris. Because for them, they have hundreds and hundreds of millions of very poor people, and those people are cooking with waste wood, with animal waste, crop waste. And the World Health Organization has said that the single biggest environmental problem in the world is indoor air pollution, and there are three billion people, maybe 40% of the world’s population, that are afflicted by that. So, for India, an energy transition does not only mean wind and solar – and they have big commitments in wind and solar – it also means commercial energy, using oil and particularly natural gas to get people away from waste wood. And so, India has a $60 billion natural gas infrastructure program. And I think it is important to understand that there is a difference in how they look at it, all with the same concerns about climate, but with other imperatives that don’t exist for the developed world.

      Mary-Catherine Lader: We at BlackRock are very focused on the energy transition from a financial market perspective, and while all of the geopolitical dynamics that we have been talking about play into that, we spend a lot of time thinking about the impact on specific companies. And so, I am curious how you see those companies transitioning. Do you feel like we will see oil and gas companies look quite different and be that much more proactive or perhaps enter large transactions to transform themselves over the coming years? What do you think the change in the private sector might look like?

      Daniel Yergin: I think that the pressure on the private sector is really becoming much more pronounced. There are more investors who are more focused on it. And that one of the elements of it is how do your strategies comport with Paris objectives, going back to the Paris Climate Agreement. And so, companies are adapting to that and you have seen major European oil and gas companies saying we are no longer international oil and gas companies, we are now integrated energy companies, and we are going to build up our position in electricity and wind and solar and new technologies. And so, that is something that I think is really just getting going, although some of them have been in the wind business, for instance, for a long time, and I think U.S. companies, too, kind of have different strategies for approaching it. But I think every management that I know of now thinks about ESG and how to respond and how to be responsive to it.

      Mary-Catherine Lader: We have talked a lot about the intersection of the coronavirus crisis and climate change and geopolitical tensions and as we now have a new administration coming into effect in the U.S., there is a lot for them to tackle, intersecting crises. What do you think the new map that needs to be drawn looks like (to reference the title of your book)? Where do they need to start as they think about how these crises are intersecting and the role that energy in particular plays in that?

      Daniel Yergin: I think in terms of climate, they have already sketched it out. Joe Biden has said it. It is one of the four priorities of his administration. And it will be very engaged internationally as well as domestically, and if I may use a phrase, stepping on the gas on renewables. I think where their challenges will be is dealing with, as you said, the geopolitical side; how to deal with Russia, which is the other country where we sort of have an incipient cold war. We are using a lot of sanctions on Russia even as Russia asserts itself as a global power. And one consequence of that, by the way, is we see a much stronger relationship between Russia and China. I have a great picture in the book of President Xi Jinping and Vladimir Putin wearing aprons making Russian pancakes together, cooking them. Putin is showing Xi how to make them. But at the same time as they were cooking up pancakes, they were cooking up something bigger, too, because for the first time Chinese troops were participating in a huge Russian military exercise. So, I think that is a geopolitical reality that’s not fully taken into account. I think how to deal with China is going to be the number one geopolitical issue for a Biden administration, how to deal with it multilaterally, how to get the right balance. So, I think it’s not going to be like the old relationship with China, where every president has said things like we need a constructive relationship with China, engage with a changing China. You don’t hear that anymore, Mary-Catherine. Whether it’s Democrats or Republicans, China is now a strategic rival; it’s a great power competition. The Chinese are saying the same thing, and that is a more difficult relationship. And yet fundamentally, and this is why it’s so different from the Soviet and American Cold War, China is so deeply embedded in the world economy and the U.S. and China are so interdependent. China is the largest holder of U.S. government debt. And how you manage a relationship where you are both rivals and so interconnected is going to take a lot of very wise and thoughtful statecraft.

      Mary-Catherine Lader: It’s quite an agenda for 2021; a lot faces the new administration. I am struck by the fact that you said as you were writing the book, you had this list of all of the different quotes that heads of state have said about our relationship with China. And although you spend all of your time and have for so many years focused on these issues, speaking with leaders in the private sector and the public sector who shape energy markets and geopolitics, I am curious if in the process of writing the book you learned a few things. Are there a few things that kind of stood out to you over the course of writing The New Map that may have been new insights?

      Daniel Yergin: Well, first I think it was seeing where U.S.-Chinese relations were going and where the sensitive spots were. I think secondly, what became apparent is wind and solar; the degree to which they have become mainstream. And thirdly, I would say this shift towards from what was agreed at Paris in 2015 to see the impact in 2020 is quite striking. And then it was also just the process of discovery. We think about change coming because of great forces in history; that’s true, but also just to see the role of individuals who want to make things happen. A guy standing on a street corner in 2008, he is late for a date in San Francisco and he can’t get a cab and he looks at his iPhone and says, well, maybe I could do something with software and out of that comes Uber. Or a totally obsessed individual who believes for 18 years that you can get gas out of shale rock, and everybody says you are wasting your money. It takes 18 years, but he gets there. Or a young technologist in San Francisco, a guy who is just really obsessed with electric vehicles going to lunch at a fish restaurant with Elon Musk, and wanting first to convince him about an electric airplane, and Musk says, “I am not interested.” But he says electric car. He says, “I’ll be interested.” And the electric car died a century ago; it was finished. I guess that’s another thing that really has changed, that if you look a decade ago, electric cars, they weren’t serious things; it was a remnant of the past. Look at now, every automobile maker is gearing up to make electric cars and governments are promoting it. So, the role of individuals strikes me even as you have these great forces at the same time, and I think that’s one of the things that I also learned from writing The New Map.

      Mary-Catherine Lader: It is striking to hear how many of those trends may mean that we are on the precipice of major changes. I am curious, what do you think then your next book maybe in 10 more years might be about?

      Daniel Yergin: Well, maybe not in 10 years because, you know, it’s not a good idea to wait 10 years between one book and another, so let’s say five years. I co-wrote a book years ago called The Commanding Heights about globalization moving from state control to confidence in markets, and how instead of the balance of power, how the balance of confidence had shifted. Well, I think we are seeing a lot of shift back, and I think I would like to revisit that, about how people think about economies and what it means in terms of policies and what governments do, because I think there is this pendulum that swings back and forth. And you know, Mary-Catherine, it’s very interesting that you don’t think about it at the time you write a book like this, and you realize all the books that you have written before kind of play into it and things you have thought about become part of it as the world keeps changing, and the world will continue to change and so there will be a lot to write about in the next book, whatever it is.

      Mary-Catherine Lader: Well, I will look forward to that. I loved The New Map, as I have loved each of your books. And so, thank you so much for joining us today. It’s been an absolute pleasure having you.

      Daniel Yergin: Thank you Mary-Catherine. It is great to talk with you.

    3. Mary-Catherine Lader:  Welcome to The Bid and our mini-series, “Sustainability. Our new standard,” where we explore the ways that sustainability – across climate change, COVID-19 and other factors – is transforming investing. I’m your host, Mary-Catherine Lader.

      We’ve talked a lot about how investor preferences have shifted towards more sustainable companies. But what does that actually mean? How do you know that a company’s commitments translate to their actions, and what’s the investment case for choosing them anyway? Today, we speak to Eric Van Nostrand, Head of Research for Sustainable Investments. Eric walks through what it means to do research in sustainability, what’s not so well understood, where it’s headed, and why we have to get creative to figure out which companies are actually doing it right.

      Eric, thank you for joining us today.

      Eric Van Nostrand:  Thank you, MC.  It’s great to be here.

      Mary-Catherine Lader:  So, speaking of here, we’re actually sitting in our office in Midtown Manhattan.  I don’t think many people have been here since mid-March.  How does it feel to be back?

      Eric Van Nostrand:  I cannot believe it.  There is a sign about 15 feet from us that says, “See you in April.”  A rather sad reflection on how we thought about the world in February.

      Mary-Catherine Lader:  So, as someone whose job it is to predict the future, do you think we’ll be back here in April 2021?

      Eric Van Nostrand:  I’m going to take exception to the predicting the future thing. We’re rational investors based on data and science, but I think efforts to predict the return to office have been generally disappointed over the past couple of months, so I’m not going to dive back into that business right now.

      Mary-Catherine Lader:  Okay, nice job avoiding my first question.  So, we can talk now about your day job and your area of current expertise.  You started a new role as Head of Research for Sustainable Investments in addition to your role as Head of Multi-Asset Strategies.  What does that involve?  What does it mean to conduct research in sustainability in 2020?

      Eric Van Nostrand:  Sustainable research is really about the why and how by which ESG issues affect our investments.  It’s about understanding the specific transmission mechanisms by which things like climate risk, social engagement of various companies, and the different ways in which companies govern themselves, manifest themselves for their investors and their clients.  So obviously, there’s a lot of hype right now around sustainable investing.  We’ve spent a lot of time talking about that, but my job is really to go underneath the hype and apply the same standards of investment research that BlackRock applies to its traditional portfolio management arm and apply that to sustainability and figure out why is it that climate risk is investment risk.  Why is it that companies engaging better with their stakeholders, with their clients, with their customers, with their employees, all helps their outperformance in the long run?

      Mary-Catherine Lader:  So, in that context then, how is sustainability research any different from research on more traditional investing categories?

      Eric Van Nostrand:  Well, there’s a lot of reasons that it’s a lot harder.  When you just think about it at a high level, it sounds a lot easier.  It seems intuitive that firms that are better prepared for the climate transition, firms that have more sound, long-term governance procedures, firms that are more socially engaged in their communities might do well in the long run.  But there’s a severe deficiency in our ability to prove that based on historical data, because we’re in the middle of a sea change.  We’re in the middle of a structural rotation in the way the investment community thinks about sustainability generally.  I love to dig into the historical data and prove out all the different investment hypotheses.  And if I have a thesis about how central banks are going to respond to ongoing cultural developments in the emerging world, I can prove that out with data from 2001 and 2002.  I can’t do that in sustainability because markets didn’t reward sustainable companies in the decades behind us.  So, we have to think an awful lot more creatively about the way that sustainability is going to be rewarded and penalized by markets in the future.  And that takes new kinds of research relative to the norm.

      Mary-Catherine Lader:  You mentioned that it’s challenging because you have limited historical perspective or time period of data because the social context has changed, and the market context has changed.  But it’s also because some of that data probably may not have been available.  So, how is the information available to have these sorts of views evolved? 

      Eric Van Nostrand:  So, what MC might not tell you here on The Bid podcast is that her day job involves paying close attention to sustainable data, and she’s very artfully pushed this conversation along in that direction.  But I’m glad she did because this is really central to the research question we deal with as sustainable investors.  We cannot invest at all without good data, without understanding what are the environmental, social, and governance-related implications or attributes of a particular company or country or sector that we’re investing in.  And the evolution of sustainable data as you, MC, know better than anyone, has been very rocky and very slow.  And it’s only really in the past couple of years that we’ve been able to get a more holistic view from a lot of different external providers and from some of our own internal big data-driven analytics to really get a better sense of that data.  And if we drop the ball on driving forward understanding sustainable data, we don’t have a shot in the long-term game of how to invest on this stuff.  That’s really central to getting the question right.

      Mary-Catherine Lader:  And we could drop the ball.  It could also get a lot better in the very short term.  So, for example, even since Larry Fink wrote a letter urging companies to disclose the Sustainability Accounting Standards Board’s disclosures and information, we’ve seen like a 400% increase in just the past three quarters in the number of companies that are doing that.  So, it seems like more companies are disclosing.  In September of this year, there were a number of calls for convergence from some of those different organizations that set those frameworks.  So, what’s your view as to whether that’s going to get easier or harder, and how might sustainability research be different even in a year from now?

      Eric Van Nostrand:  Well, there are a lot of reasons to be optimistic about that, and the most important one is investor demand.  Our focus on sustainability is not something we came up with in a vacuum.  It’s not something we were sitting around on an idle Tuesday afternoon and decided it would be cool if we started thinking about carbon instead of currencies.  This is something that reflects the changing investor demand as we see it around us.  And we are not going at this alone.  We are representing a broad investor community and a broad client community that recognizes the importance in both the short term, as we’ve seen this year in the way sustainability has outperformed the COVID pandemic – but also in the long-term – about the importance of these kinds of thinking, this kind of research strand to the broader financial markets.  And that tailwind creates the demand to put pressure on companies, to put pressure on third-party reporting agencies and incentives for there to be more third-party reporting agencies to create these data.  I think it’s pretty clear that firms that aren’t playing ball here, firms that aren’t disclosing in a way that allows us to come to a good view on their sustainability characteristics are going to be penalized by the market.  They’re going to be embarrassed, and I think that’s an encouraging thing for our efforts, but also for the quality of broad financial market assessments of these issues.

      Mary-Catherine Lader:  So, looking back a couple years, before you came to BlackRock, you worked at the White House during the Obama Administration.  You were an economist for the Council of Economic Advisers. A couple years ago, how much was sustainability research on your radar when you were in that role?  We’ve talked about how the conversation has changed in a lot of ways, but your job then was to be anticipating future economic policy and where things might go.  Was this part of what you were thinking about?

      Eric Van Nostrand:  Yeah, absolutely.  I was there during President Obama’s second term, which was not a time when the financial sector was nearly as focused on sustainability issues as it is today.  But we were thinking an awful lot about the transmission mechanism between, really, all these issues.  Between climate risks, certainly elements of stakeholder capitalism and the way that governance issues are adjudicated from a policy perspective.  We were focused on how they transmitted themselves to the macro economy.  I wasn’t spending my days necessarily thinking about how that passed through the financial markets, but I was spending an awful lot of time thinking about how it translated to growth, and business formation, and innovation, and productivity growth across the U.S. economy.  And I do find myself thinking about a lot of those same transmission mechanisms when trying to figure out how we can apply that logic to investments.

      Mary-Catherine Lader:  What were some of those used then and what were you really right about, and what do you think you think about differently now?

      Eric Van Nostrand:  Let’s focus on climate to begin with.  It’s obvious who the big carbon emitters were: The big oil and gas majors, other large manufacturers who weren’t investing in clean technology, who weren’t investing in alternative energy.  And it was kind of easy to identify them as the weak spots of the source of climate risk in the economy and companies that were focused on alternative energy sources as the good actors.  And of course, that’s still basically true.  But that’s not something the market has missed. Now, we have to think a bit more creatively about how we find opportunities and risks that the market in general maybe hasn’t zeroed in on. So, we’re looking past things like, who is the biggest emitter today?  And instead using alternative data, comparing how companies talk about their strategies with the actual statistics on how they’re evolving their carbon emissions.  We’re focused on changes in emissions rather than levels of emissions.  And what I think that does is that allows us to spot opportunities in the market, companies that aren’t obviously bad actors or aren’t obviously good actors. 

      Mary-Catherine Lader:  Staying on climate for a second, do you think that climate risk as an investment risk is going to be internalized, adopted, maybe more quickly than we thought?  Do you think that next year, we’ll see many and most investors even incorporating that in their investment decision-making?

      Eric Van Nostrand:  Yeah, so I think there’s really strong evidence that it’s already happening.  I don’t think it’s done by any stretch.  But the fact that investors are already starting to catch on to this means we can’t be lazy and say, “Just lean into those good companies that we know well year after year.”  We have to be more and more creative about thinking, alright, where are the new opportunities going to be?  Where is the company that doesn’t talk that much about sustainability, but we see in their happier employees, we see in their lower employee turnover, we see in the way that they have good reputations in the press, that they’re doing good things and likely to outperform.  And that kind of creativity is, I think, what’s going to animate the second phase of success for sustainable investing.

      Mary-Catherine Lader:  You’re suggesting that the second piece of success, yes, there’s a lot in the E of ESG, but that there’s a lot more precision that could be applied in, certainly, the S, when you’re talking about employee happiness, attrition, et cetera.  What are some of the more interesting questions in the S of ESG, or the frame of stakeholder capitalism more broadly?

      Eric Van Nostrand:  You’ve zeroed in on what I basically want my central takeaway from this conversation to be.  If you’ve been asleep today, just listen to this one sentence.  This is the bottom line here: I think climate, while not completely understood, and we have a lot more to learn, the wool has not been pulled over the eyes of the investment community generally.  Appreciation of climate risks as investment risks is not a secret.  However, I think the actual value of sustainability defined as “S” is much, much higher than is widely appreciated.  S conventionally stands for “social.”  I prefer to twist it around a little bit and imagine that it stands for “stakeholder capitalism.” And sometimes, it sounds a little gimmicky, to be honest with you. 

      Mary-Catherine Lader:  What do you mean?  Like, it sounds like CEOs at Davos are all trying to get credit and good headlines?

      Eric Van Nostrand:  I think stakeholder capitalism in general is something that is very easy for CEOs and business leaders in general to point to if they are tempted to just tell a good story about themselves. That is not a reason not to pursue stakeholder issues from an investment perspective.  That’s a reason to be really careful about how you pursue stakeholder capitalism from an investment perspective, because we have to watch that we’re not just leaning into companies that are talking about it.  We need to make sure we’re leaning into companies that are doing it.  And what that means is, again, to come back to where I started this conversation, focusing on transmission mechanisms, focusing on the why and how by which stakeholder capitalism affects investment outcomes.  So, it’s not just about picking the nicest company, it’s about picking the company that has the best social or stakeholder-driven attributes in a way that’s going to be financially-material; it’s going to be related to outperformance. 

      Mary-Catherine Lader:  We haven’t touched on governance at all.  What do you think are some of the more interesting questions in governance?

      Eric Van Nostrand:  So, governance is something I always smile when we talk about it as being a new investment topic.  Companies have been thinking about who’s a better-governed company for decades.  As public equity markets shift in terms of the changing popularity of activist shareholders and the evolving legal questions on how the power of shareholders to change corporate direction, we again need to think more creatively about the way markets are going to respond to that.  So, issues that are a little bit new, that are different from kind of conventional governance investment processes, issues focused on audit management, task risk management, board independence, are going to be a bigger part of the conversation than they have been before.  Markets used to reward companies for having captive boards, and that’s something that clearly isn’t going to work in the decades to come.

      Mary-Catherine Lader:  You’ve talked about what sustainability is, what it isn’t, its information, different perspectives.  But that whole question of the definition is kind of problematic and complicated right now.

      Eric Van Nostrand:  Yeah, it’s difficult.

      Mary-Catherine Lader:  So, when you’re talking to clients and they’re asking you what do we think sustainability is, one, what do you say?  And then second is, what has surprised you about some of the misperceptions that are out there?

      Eric Van Nostrand:  So, when I think about what sustainability is, I think about the subset of environmental, social, and governance issues that we expect to drive outperformance in financial markets over the decades to come.  And it’s very important that we never lose sight of that investment lens as we go about this work. We are not taking our eye off the ball that our fundamental fiduciary duty, at the end of the day, is to deliver our clients the best possible investment returns; the kind of old idea that we’re sacrificing return to invest in companies that make us feel better about ourselves, or companies that we think are better for the world.  We are investing in sustainable investing because we think it is better for our clients to be aligned in the long run with companies that are aligned with a future in which the market is going to reward companies with a more acute understanding of climate risks, of social issues, et cetera.  We have seen a tremendous amount of demand from our clients for products that are aligned with companies that think hard about these issues.  And that’s not, in our view, a fad; that’s something that reflects a sea change in the way investors are thinking about this. 

      Mary-Catherine Lader:  So, have we seen that?  Let’s take a couple of examples.  For example, when a company has announced net zero commitment, has it been affecting their share prices, and for how long?  Should CEOs feel like this is about more than headlines basically, or just doing the right thing, even though I understand from our perspective, we have to make decisions as a fiduciary. For managers, how should they be thinking about it?

      Eric Van Nostrand:  Yeah.  I view the COVID pandemic as providing a very compelling natural experiment about where investors turn when the near-term outlook for not just growth, inflation, policy, and typical macroeconomic impulses; but really, when the near-term outlook for the very stability of our financial system and the way we interact with one another, working at home, are changing, where do investors turn?  Sustainable companies outperformed meaningfully in 2020, and they outperformed across a lot of different dimensions.  More environmentally where companies outperform, more socially where companies outperformed.  And in my view, that’s pretty compelling evidence.  It’s a small sample size.  It’s an anecdote.  It’s not data, but in a world where anecdotes can help us generate a bit more forward-looking evidence than the historical data can, I think it’s pretty compelling evidence that these sorts of factors are not things that investors look past anymore.  And while that may have been the case in the 90s and the 2000s, hence our lack of reliance on historical data to illustrate these points, there’s a lot more conviction going forward that sustainability is not some kind of short-term fad.

      Mary-Catherine Lader:  Can you give me a more specific example where that was the case, it’s not a company, or that wasn’t a sector where we might expect that, like big tech for example?

      Eric Van Nostrand:  Yeah, so I’ll point to a couple things.  The low carbon companies are outperforming in 2020 because they’re talking a lot more about climate change in the context of COVID, et cetera.  We measure readiness for the low carbon transition in a very different way than that.  We’re more interested in signals that companies are taking and strategies that companies are taking rather than the kind of facts of how much they emit today, to show that they’re ready for a transition to a low-carbon economy.  And we do that a number of different ways.  We look at short-term changes in their carbon emissions.  We look at how well they manage their water usage, how well they manage their waste usage, their investments in clean technology.  All of those issues are things where we have empirical research that gives us confidence that those companies are better prepared for a transition to a low-carbon economy, even if in some cases, they’re emitting a lot today.  Our views on who’s ready for a low-carbon transition by those metrics are actually rather uncorrelated, meaning they tell a very different story than just the list of who emits the most carbon today.  And despite those two lists, who emits the most carbon today and who we think is most ready for the low-carbon transition being very different, both of those outperformed this year.  And my point is that very different ideas of how to think about sustainability worked quite broadly this year.  One thing I really want to get across that I think is very important to the way we think about this, is we cannot lose our conventional investor skepticism about these ideas.  Particularly in a topic like ESG, where there’s an awful lot of hype in the markets, justifiable excitement but excitement nonetheless, that gets people very excited about these topics.  And does risk tempting us to kind of leap too quickly to the conclusion that these things work.  Each statement I’m making today about things that we believe is something that works is something that’s rooted in empirical evidence that we’ve investigated, relationships and correlations between sustainable investment strategies and other outcomes, other transmission mechanisms, to economic growth and earnings growth at the company level.  And all that gives us more confidence that these things were leaning into work.  But it’s very important to do that in a nuanced way that’s cognizant of what specific thing we’re thinking about, rather than just naively leaning into the “good headline companies,” if you will.

      Mary-Catherine Lader:  I’m tempted to just sort of ask: Is it unfair to say that sustainability is about reframing your time horizon in some way?  Is it about a more long-term approach, or is it about thinking that there are fundamentally different things that are going to define value, particularly as more of a company’s value is determined by intangible things?

      Eric Van Nostrand:  That’s a great question, and it’s really a central question in sustainability research right now.  It’s certainly the case that we have more confidence in the medium term, like year over year, outperformance of sustainability-related factors than we do of the short-term outperformance.  So, if I’ve identified a company that I think is more ready for the low-carbon transition than its peer, I’m generally not going to have a lot of confidence that it’ll beat its peer over the next month.  Because this is something that takes a long time.  You might ask, “How did we get the medium-term confidence without much historical data?”  Well, because we do have empirical confidence in transmission mechanisms and relationships between these sustainability attributes and other data related to operating efficiency and other corporate-level data that we think produces returns in the medium term.  But there’s been much less work done in that short-term question for sustainability, things that are open questions, difficult questions, what I want to approach with an open, skeptical mind as a researcher. 

      Mary-Catherine Lader:  So, you’ve mentioned a couple of research questions that you’re excited about.  Is there one that’s just too hard to touch, that you think is your 2022 question?

      Eric Van Nostrand:  It’s not too hard to touch, but it’s a question that we’ll never be sure we can get absolutely right.  And that’s the question of scope 3 carbon emissions.  So, scope 3 carbon emissions are not the way we measure carbon generally. Scope 1 emissions are those that a company produces themselves and their production process.  Scope 2 are the ones that they consume through utilities they contract with.  Scope 3 is kind of a broader, all-encompassing, all the way down the supply chain measure of the carbon impact of one company on the world.  So, all the way down the ripple effects of what my company or yours produces, how much carbon is that?  Is that changing the world?  It’s a really hard thing to measure, and a lot of different data providers have taken different perspectives on this question.  And generally, their answers right now are all pretty different.  Estimates of scope 3 emissions from different places are all over the place, completely uncorrelated.  We’re thinking about how to do it internally ourselves.  We’re talking with third-party providers to do it different ways.  It’s a hard question but it’s a question I believe is really the key to the next phase of climate research for investment risk.

      Mary-Catherine Lader:  One last question before we get to our rapid-fire round. How will four years of a President Joe Biden be different for those investors interested in sustainable investing?

      Eric Van Nostrand:  Well, look.  Policy expectations are important to our outlook, particularly on the climate side.  They’re not the only thing that’s important.  Market forces are really important, too.  But I do think it’s clear that a U.S. administration that is more amenable than past U.S. administrations to viewing climate risk as something that needs to be handled from a public policy level is likely to accelerate a lot of these trends that we’ve been talking about in terms of what the market’s going to reward and penalize.  Not only are we achieving better outcomes for the world via a set of these policies, but we’re also training the market to recognize companies that are better-aligned with those good outcomes as more likely long-term outperformers.  And that’ll be reflected by investors recognizing that in a world where the United States is perhaps more Paris-aligned than it has been over the past couple of years, that companies that are more Paris-aligned are likely to face less regulatory risk and likely to be rewarded by their shareholders.

      Mary-Catherine Lader:  And by Paris-aligned, you mean more likely to help us enter a world that where we don’t go beyond 2° Celsius consistent with Paris Climate Agreement, even though the U.S. just left it?

      Eric Van Nostrand:  Exactly right.

      Mary-Catherine Lader:  Okay, rapid-fire round, are you ready? Best show you watched during the pandemic?

      Eric Van Nostrand:  I did not watch the Tiger King thing.  I think the Tiger King era of the pandemic was a little overstated.

      Mary-Catherine Lader:  Totally agree.

      Eric Van Nostrand:  I’ve been very into Queen’s Gambit of late.

      Mary-Catherine Lader:  Cooking accomplishment of 2020 for you?

      Eric Van Nostrand:  I bought a grill.  I’ve been cooking outside.  I’ve been smoking things much to the chagrin of my neighbors with open windows, but it’s been quite delightful for me.

      Mary-Catherine Lader:  You live in New York City and you’ve been here the whole time during the pandemic, right?

      Eric Van Nostrand:  Yes.

      Mary-Catherine Lader:  There’s been a lot of chatter. New York City: dead, alive, something in between?

      Eric Van Nostrand:  This city is very much alive, very much alive.  Look at the people walking around our office now in a very professionally, socially distanced manner.  I think there’s a lot of good that’s going to be happening to the life of this city in the back of this.  The vibe of outdoor dining that’s made us feel maybe a little European in a good way, has I think been a tremendous add, and I hope it sticks around even once we get rid of the plastic partitions. 

      Mary-Catherine Lader:  Couldn’t agree more.  Two more.  You recently got a puppy.

      Eric Van Nostrand:  I did.

      Mary-Catherine Lader:  What’s her name and the inspiration behind it?

      Eric Van Nostrand:  Her name is Pepper.  It’s short for Pepperoni.  The idea is that we say Pepper when she’s being good, and we can castigate her with Pepperoni when she’s bad.

      Mary-Catherine Lader:  And is it working?

      Eric Van Nostrand:  Well, it’s been two weeks, so I’ll keep you posted.  On the next Bid, we’ll follow up.

      Mary-Catherine Lader:  Okay.  And we end each episode of our sustainability mini-series with the same question to each of our guests.  What’s one moment that changed the way you think about sustainability?

      Eric Van Nostrand:  Well, you know, maybe I’ll be a little boring here, but I think it’s a really important answer that I want to remind everyone. The onset of COVID and the way that markets reacted, the natural experiment provided there was I think very powerful for illustrating the way that sustainability concerns are now being treated by the market, which is that it provides a certain amount of resilience, provides a certain amount of quality to use the factor investing parlance, that is a critical part of portfolios in the next era for financial markets.

      Mary-Catherine Lader:  Thank you, Eric.  It’s been a pleasure having you.

      Eric Van Nostrand:  Thank you, MC.

    4. Oscar Pulido: Welcome to The Bid, where we break down what’s happening in financial markets and explore the forces changing investing. I’m your host, Oscar Pulido. The COVID-19 pandemic has reshaped the healthcare sector, accelerating trends like digital health, at-home care and new methods of vaccine development. How have the virus and the upcoming U.S. election changed the way we think about investing in healthcare?

      Today, we’ll speak to three healthcare experts: Erin Xie, Lead Portfolio Manager for Health Sciences within Active Equities; Sarah Thomas, Research Analyst for the European Equity team; and Andrew Farris of BlackRock’s Private Equity Partners group.

      To start, Sarah Thomas shares the trends that have emerged since COVID-19 came into focus and how that’s reshaped the healthcare sector both on a global level and with a European focus.

      So curious to hear your views on the trends that have emerged in the healthcare sector since the pandemic began. I know the healthcare sector is quite broad and diverse, but are there actually any areas that we’ve seen fall out of focus?

      Sarah Thomas: So, you’re absolutely right. It’s a huge topic at the moment. In the short term, we’ve seen loads of trends that I hope don’t stick. We’ve seen patient stocking of drugs, we’ve seen pressure on elective procedures, a shrinking oncology market, for example. But luckily, moving through the third quarter, we’ve seen those trends start to reverse, which is really encouraging. I’m hoping to see maybe greater adherence to medication for patients, particularly given the link of comorbidities to COVID. We’re definitely seeing increased use of technology and digital in terms of diagnosing patients, drug marketing and maybe even how they’re running clinical trials. Other trends, perhaps the importance of vaccines might come to the forefront. That sounds relatively simple perhaps to people in the U.S. but regions like China have never really had proper vaccination programs. More on the med tech side, very much an ongoing trend of people moving away from hospitals in some more outpatient settings. This definitely started before, but because of the pressure in the hospital system, it’s absolutely being accelerated. And then perhaps more as we think about the life sciences segment, I think we should have greater confidence in the funding environment for R&D. I think COVID has certainly highlighted the importance of that and I would hope that maybe we start to see greater use of diagnostics as well, being able to diagnose people and treat people better. You asked about trends that might be weakening. The two that I may be keeping an eye on, firstly on the consumer side, will depend on the depth of the recession, but you know how people choose to spend their money. For example, will they go for dental implants? Or buy the latest hearing aid? That’s going to be important. Increased cost generally of doing business is going to be a bit of a negative trend that will impact the margins I would say. Capex spend as well is probably an important one. We were just entering a big capex cycle as hospitals were upgrading fast their imaging equipment, for example. I think going forward, governments aren’t going to have as much money and hospitals are certainly going to be struggling. So, I wonder if we might see either a reduction in capex or perhaps just being more selective, maybe they don’t need that next robot, for example.

      Oscar Pulido: It’s fascinating to hear all the different moving parts. I’d like to go back – you mentioned digital medicine and we’ve heard a lot about telemedicine this year. I’m just curious, do you see this changing that the usage of that as economies begin to restart? I mean, presumably if we go back to normal at some point, you know, people will just start going back to the doctor’s office, won’t they?

      Sarah Thomas: I think it’s going to be a mix really when you talk about digital. Telemedicine, I agree with you. I think people will probably start going back to the doctor a reasonable amount, but it will completely depend on the reason. There are certain things, whether you just need a quick prescription or something that will absolutely still be done digitally, I think. Areas where you need to be examined, where doctors aren’t as comfortable, I think people will come back relatively quickly. In terms of selling drugs, again, I think salespeople prefer face-to-face contact. So again, I think that will probably revert back as quickly as possible. But other areas when I talk about digital, they are starting to develop apps, for example, to help patients track symptoms better, and that links directly into doctor’s office. They’re starting to run clinical trials using digital endpoints. Marketing, they’ve been doing virtual conferences, for example. There are definitely aspects of this that are likely to stick around for the foreseeable future.

      Oscar Pulido: It sounds like a kind of a balance in terms of how people will engage in going back to the doctor and you also mentioned the vaccine. I have to admit, I’m one of those people that still squirms at the thought of getting a vaccine, but I can’t wait until we have one for COVID. I’ll be rushing to the doctor’s office or however it will be administered. So, how has that race towards the vaccine progressed? Where are we in terms of actually having this cure?

      Sarah Thomas: Yeah, so you ask the question just as we’re waiting for the phase 3 data. It’s a bit of a tough one to answer. But what I would say is that so far, I’ve been pleasantly surprised at the speed at which everything has happened up until now. Vaccine development normally takes a decade. We could be at the point of having a product with emergency approval by the end of the year. So, that’s huge. I think if I go back bigger picture first, the early stage data that we’ve seen looks really encouraging. We’re seeing immune responses when we use the vaccine and we’ve also shown separately if we inject antibodies as a drug, which is something that’s being pursued separately, we are seeing that it helps reduce symptoms and reduce viral loads. Now, these are all separate points, but I’m hoping the data from the vaccine will help us join all the dots together. The frontrunners are Pfizer and Moderna who are using this MRNA approach. It’s a bit technical, but basically what you’re doing is injecting the vaccine, the genetic code into our bodies and our bodies will read this code and make the spike protein ourselves. And then we have an immune response to the spike protein. So it’s pretty cool, but it is an unproven technology and it is a little bit more difficult to manufacture and needs to be distributed at between -20 and -70 so it’s a little bit tricky from that perspective, but they’re in the frontrunning position and we should get data within the next month. We have a couple behind from Aster and J&J. These were different mechanism looking at viral vectors, and all I’ll say here is that they’re both on pause at the moment because of safety. I don’t think that’ll end up being a long-term issue here, but it’s interesting that both of the viral vector approaches are struggling at the moment. And then behind that is actually my favorite approach, these are called subunit vaccines and you just make the spike protein in the lab and inject it directly into the body. It’s a proven technology used in many vaccines that we use today, but they are three to six months behind. So, going back to your original question of where we are. I’m kind of cautiously optimistic that we’re in a good place. I think the vaccine studies will likely be positive. But I think it’s more likely to reduce disease rather than stop people transmitting the virus. I’m a bit nervous on data in the elderly. We know they have weaker immune systems and I’m also a bit nervous on how long the vaccine will last. It may well end up being a seasonal vaccine and it’s worth remembering that we don’t really have very effective respiratory vaccines. Flu is a little bit harder because it changes its spots every year if you like. So, we should do better than flu, but it’s still going to be difficult and I imagine we’ll still have plenty of questions even when we start to get their data coming out.

      Oscar Pulido: It sounds like there’s been a lot of progress and human ingenuity never ceases to amaze me. I want to then turn to investment opportunities. You’ve talked a lot about what’s going on at what I’ll say is a more macro level just trends in the industry. But then how do investors take advantage of this if they’re looking at individual companies?

      Sarah Thomas: This absolutely depends on your timeframe and then stock specifics. Today, I do really like the life science and the diagnostic segments. I liked those before COVID as well I would add, but I do still like them today. Not only are earnings underpinned in the near term by the COVID theme if you like, but the underlying trends are really strong. With life sciences, it’s about making drugs and we’re just needing more and more of those and more complex types of drugs as well. And then on the diagnostic side, as I talked about at the beginning, we’re just starting to use diagnostics more and more now to help personalize medicine if you like. The other area is large cap pharmaceuticals to highlight. I’m hesitant on this one because valuations are looking attractive and the fundamentals are good, I think in this phase, it very rarely does well through an election, there’s often a lot of conversation on pricing pressure and what’s going to happen generally with drug pricing. So, while it’s looking attractive, I think it’s a good opportunity today on a multi-year view, but for the next three or four months, I am perhaps a little bit more nervous. And then finally, maybe just mentioning med tech. I think there are all trades to be had here, but we have seen a lot of moves in the last three months or so in the recovery trade. And what’s really hard with the med tech piece is working out what is pent up demand because people missed appointments through the last three to six months, you know, and what is the underlying trend that were seeing. So, the space is very attractive on a long-term view, with reliable mid-single-digit growth at least. But just working out that piece is going to be quite important for finding out what’s attractive over the next few months.

      Oscar Pulido: And then, Sarah, you’re based actually in our London office and as I understand it, London is not quite under lockdown, but I think it’s a little bit more restrictive than here back in the U.S. So, talk to us a little bit about what’s it like being on the ground there? And then, does that have any implications in terms of investment opportunities in Europe in the healthcare sector?

      Sarah Thomas: So, London is actually going into stricter lockdowns. We were doing okay at the beginning of October, and then a couple of weeks ago, we did all get sent home again because the numbers started to spike. And we’re moving into what the UK has introduced the next tiered category which means that you can now only meet to six people outdoors which isn’t particularly attractive as we move into November. So, we’re doing okay, but concerningly, we don’t have the infrastructure in place. Testing has been horrific. Our testing and tracing strategy isn’t particularly working, and getting access to test has just not particularly worked. So, I’m not sure were in the best place, if I’m honest. As I think about how it affects my investments, from a healthcare perspective, I’m not sure it does too much as I think about Europe. I tend to bucket it into four in Europe: the drugs and therapeutics, the life sciences, the med tech and the diagnostics and all of those themes and trends would generally be supportive regardless aside perhaps from, elective procedures if people are locked down. When you think about the globe though, the U.S. has a lot more ways to invest in healthcare. There is a lot more segments, you could own health care insurers for example, that hospitals managed care businesses, even healthcare IT has its own segment on the market. So, I think there’s a broader way that you can play the theme through the U.S. But here in Europe, we still have enough choice to, you know, to make some money for our clients.

      Oscar Pulido: As Sarah mentioned, the healthcare sector in the U.S. is pretty different from Europe – namely, there are more ways to invest. In the U.S., we also have next week’s election top of mind. I spoke to Erin Xie, Lead Portfolio Manager for BlackRock’s healthcare fund, about the potential implications in different election scenarios and which policy areas she thinks will play out no matter what the results end up being.

      Erin, as you know, we have an election that is imminent in the U.S. and anytime we have presidential elections, the health care industry takes center stage. What’s top of mind for you in terms of implications for the industry as we get closer to the election?

      Erin Xie: Monitoring the potential policy changes is definitely a very important focus for us. If we look at the polls, it does look like Democratic sweep is the most likely election scenario. However, Democrats would probably have 51 to 53 seats in the Senate, which lack the 60 votes that are necessary to pass major legislative changes. Therefore, we think any changes will likely be limited in scope. In terms of the specifics, Biden would likely want to expand Obamacare, which could be a net positive for health insurance companies. A public plan could be proposed, although our work suggests that the passage is unlikely. Elsewhere, drug pricing could be a focus. Here, we think the devil will be in the details. While some form of drug pricing reform is likely, we view the drastic scenario as a low probability. In an alternative election scenario of Trump getting re-elected, we think health policy most likely remains status quo. Although Obamacare repeal is a concern, taking healthcare coverage away from 20 million Americans is politically very challenging, especially during COVID. We would expect the ultimate outcome be moderated. So, net net, while we see a lot of rhetoric on healthcare, the actual changes will likely be more muted.

      Oscar Pulido: And so just to kind of maybe dissect that a bit, you mentioned sort of scenarios under a more Democratic administration versus a more Republican administration essentially the incumbents winning. What are the policy areas you expect will be the same regardless of the result?

      Erin Xie: We would expect the policy to continue to favor value-based care. Meaning that the care will become increasingly focused on quality and outcome as opposed to quantity and this will help to manage healthcare cost increases. For example, there will likely be a continued push to lower cost settings such as home care. We also expect regulation around telemedicine to become more robust. Elsewhere, drug pricing is a bipartisan issue. We would expect some changes likely, but unlikely drastic.

      Oscar Pulido: Erin, as you talk about some of these policy areas that you expect to play out regardless of the result of the election, how should investors think about that when they’re investing in the healthcare industry?

      Erin Xie: So, we think companies benefiting from such policy shift should have very strong fundamental momentum and represent attractive investment opportunities. For example, telehealth was still very early in the adoption curve, even though COVID has fast forwarded the telemedicine adoption. We’ve seen a six-fold increase in the use of telemedicine services during the first half of 2020, and we believe this trend is here to stay. But we’re seeing very widespread investments from hospitals, from physicians, investing in telehealth capabilities. And we think consumers have also started to get used to this model. We think there’s still a lot of room for continued adoption. We also believe that business models that provide care away from hospitals such as outpatient surgical centers as well as home care will continue to gain momentum as well. I think the penetration is still relatively low and many kinds of care can be taken care of at home instead of being done at more expensive provider sites such as hospitals.

      Oscar Pulido: You mentioned trends that have been accelerated due to the COVID-19 pandemic like telehealth and wider adoption of at-home care. How has the healthcare industry changed since the pandemic hit the U.S.?

      ERIN XIE: Yeah, Oscar, you’re right. The healthcare industry has definitely been front and center during this pandemic. The industry has put in tremendous effort developing COVID vaccines, drugs, as well as diagnostic tests. We believe ultimately the combination of vaccines and drugs will really take the wall out of the pandemic. And the fast pace of vaccines and drug development speaks to the innovation power of the industry. For example, we’ve seen more than 150 vaccine programs get underway and we expect to see some pivotal vaccine data released before the end of the year. COVID-19 has catalyzed some structural shift in healthcare.

      Oscar Pulido: And it seems like these days, there’s a lot of talk of the second wave, that it’s coming or maybe it’s already here in the U.S. and it’s hit other parts of the world. So, I’m just curious in terms of the path forward, what is that path forward? How do we get out of this? And is the U.S. on a different path than the rest of the world?

      Erin Xie: So, I actually think we’ve been in one wave. The first wave just really never stopped. The ultimate path forward, I would think is really going to depend on the vaccines and drugs. There’s obviously a lot of focus on vaccines, but I actually think drugs will be an important component as well. The elderly and people with underlying diseases tend not to respond to vaccines as well as healthy adults or young people. So, in those populations, I think that the drugs will actually be very important if those people still get sick even when we get a vaccine. And I think that ultimately, the whole world is the same boat and if one country it’s not under control, the whole world is not safe, and the vaccines and drugs will ultimately help get us out of the pandemic.

      Oscar Pulido: Erin and Sarah both discussed how the coronavirus pandemic has reshaped healthcare, particularly in the public stock market. But what about companies that aren’t listed on a stock exchange? We turn to Andrew Farris of BlackRock’s Private Equity Partners to talk about what’s changing in private markets.

      Andrew, your role is in private markets rather than the public stock market. So, can you just take a second to help us understand what that means?

      ANDREW FARRIS: Sure. Private markets include investments in companies that aren’t publicly listed on a stock exchange. This could include venture capital, growth equity and leveraged buyouts. These companies can invest in long-term growth initiatives without the pressure of public quarterly earnings reports.

      Oscar Pulido: So, it sounds like maybe a different set of investment opportunities that you’re looking at relative to what’s just on the stock exchange. So, then with respect to the health care industry, how is that industry different for private versus public companies?

      ANDREW FARRIS: Private healthcare companies are generally smaller and earlier in their development than their public counterparts. On the early stage side, healthcare venture capital investment activity has risen a lot in recent years and that’s most notably happened in biotech, which has been driven by advances and drug research and an improved environment for exiting via IPO or sale to strategic buyers. We’ve also seen increasing activity across the healthcare landscape both in growth equity investments as companies stay private longer and in leveraged buyouts, which are private acquisitions of companies using a significant amount of debt. A key difference versus public markets is that private equity investors typically have a four to five-year investment horizon, which allows them to invest for growth outside of the public eye.

      Oscar Pulido: So, you mentioned things like biotech, is that one of the areas of the healthcare sector that you’re more focused on right now? Or are there other areas as well?

      ANDREW FARRIS: Biotech is one of those areas that we are looking at, but in terms of areas of deeper focus, I’d say we’re mostly looking at companies that are benefiting from certain thematic market growth drivers and they can make the healthcare system more efficient. I’ll just highlight a few themes to illustrate that. The first focus area I’d mention is value-based care, which is experiencing a continued shift from fee-for-service. More providers are assuming risk in a value-based care environment and there’s increasing vertical integration between payers and providers. The second area I’d touch on is digital health which includes areas such as telemedicine, data analytics and remote patient monitoring. These companies can have strong growth potential as they solve pain points in the healthcare system by increasing convenience for physicians and patients or providing cost savings for payers. The third area I’d mention here is pharmaceutical outsourced services such as contract drug development and manufacturing. These are companies that can benefit from the growth trends and pharmaceutical R&D and prescription drug volumes, but they have limited reliance on the success of any single drug. The final area I’d highlight here is Medicare advantage, which for our non-U.S. listeners, are plans for retirees offered by private insurers partnering with the government. The Medicare policy addressable market is growing fast with 10,000 seniors reaching age 65 every day, and they’re increasingly choosing Medicare advantage as it can offer lower premiums and more benefits. Penetration of Medicare advantage is still low at 35%, but that’s forecast to rise to 60% to 70% percent over the next one to two decades.

      Oscar Pulido: Some of the things that you’re mentioning were benefiting from trends that were already in place before COVID-19. For example, an aging population, it’s sort of well-known that there’s a number of parts of the world that are getting older, developed markets in particular. So, how do you see the aging population around the world impacting the healthcare sector?

      ANDREW FARRIS: That’s a great point, Oscar. I’d say that the world is really at a steep point in the aging curve right now. That should continue to propel growth in the healthcare sector over the next few decades. In the U.S., we’ll have the baby boomers aging through their 60s, 70s and 80s. And the over 65 populations in emerging markets such as China and India are expected to triple over the next 30 years. So, these are major demographic trends which should continue to support the demand for healthcare. That’s because spending increases pretty dramatically as people age. If you just look at some data in the U.S., healthcare spending per person is about three times higher for those 65 and older versus working age people. The key reason for that difference is that the elderly have higher incidents of chronic conditions such as heart disease, cancer, diabetes and high blood pressure. These are conditions that require ongoing treatment and monitoring. So, they will continue to support demand for healthcare providers, pharmaceuticals, medical devices and diagnostics.

      Oscar Pulido: Andrew, as we mentioned, you’re looking at companies in the private markets and you’re investing for the long-term. So, I’m just curious, where do you see the industry moving in the next 10 or 20 years?

      ANDREW FARRIS: I’d say we expect to see significant changes across the healthcare landscape and there’s a few areas that I would highlight here. So, the first is that the industry will move more towards an integrated approach to caring for the patient. This would really represent a shift from today’s typical care model where doctors are often focusing on treating a single issue. We could see primary care physicians playing a central role in coordinating patient care across a team of other providers. To support this more holistic care model, electronic health record systems will become more integrated across providers. The second point I would highlight is that where doctors see patients will shift to more convenient and cost-effective locations enabled by advances in technology. We’ve seen the adoption curve for telemedicine pulled forward by several years due to the COVID-19 pandemic and expect that its use will continue to be widespread in the future. There should also be a continued shift of medical procedures from the hospital to outpatient settings. The final point I would make here is that advances in technology will support both preventative care and improve patient outcomes. We’ll see an increased adoption of wearable devices that send health data to providers and allow them to proactively see patients and address potential issues before they become acute. We also expect advances in personalized medicine to allow better customization of therapies for individual patients.

      Oscar Pulido: Sarah, Erin and Andrew all talked about how COVID-19 has changed the landscape for healthcare, accelerating innovation in technology and in methods of providing care. And with the U.S. election just a short time away, we may see more changes in healthcare policy. But they also had a sense of optimism – with these advances come opportunities for vaccines, better access to care, and higher efficiency in the ways we provide care. All of this opens the door for new investment opportunities in the sector.

      That’s it for this episode of The Bid. We’ll see you next time.

    5. Catherine Kress: Welcome back to The Bid, where we break down what's happening in markets, and explore the forces shaping investing. I'm your host, Catherine Kress. With the U.S. election just a few weeks away, what are the key issues we should be tracking, and how might the result impact markets? 

      Today, Mike Pyle, BlackRock's Chief Investment Strategist, walks through three different scenarios to plan for. He'll share his views on the implications of these scenarios for macro policy as well as his thinking on how the elections might impact sectors like healthcare, technology, and energy given the potential for regulatory reform. 

      Mike, thanks so much for joining us today.

      Mike Pyle: It's great to be here. Thanks for having me.

      Catherine Kress: You worked for five years in the Obama White House – really at the center of the president's economic team. So needless to say, you've spent a fair share of your career thinking about politics and how policymaking can influence economic and market outcomes. With this in mind, I'd like to get a better understanding of how you're thinking about politics today, and specifically, the upcoming elections in the U.S. The election this year, at least as I see it, looks to be one of the most consequential elections in modern history. Would you agree with that? As a follow up, what would you say makes this year different?

      Mike Pyle: So, I clearly think it's an extraordinarily consequential election. First, the country is facing a pretty historic degree of interlocking crises or challenges at this moment. 2020 has certainly presented all of the crisis and challenge associated with the coronavirus pandemic, the catastrophic human toll that that has placed on the United States and so many Americans. Secondly, the economic crisis that has come as a result of the coronavirus crisis that we've come out of the worst of it, but there's a long way back and a lot of household, small businesses, larger businesses still really grappling with that challenge in pretty profound ways. Third, 2020 has been a year of social unrest, social change, demands for justice in ways that we haven't seen in this country probably in my lifetime. And then lastly, looking out over the longer-term, we see the climate crisis and that that is an accelerating challenge, a challenge that is with every passing day more and more upon us. I'd say the other thing that makes this so consequential, of course, is the really stark divergence in terms of the two party's policy platforms. So, the stakes are high in terms of the issues we face, the stakes are high in terms of the divergent perspectives that the two parties, the two candidates bring to those. The one other thing I would say – you mentioned my background in policy, in politics. I'd say one thing that's different – I was in the White House in 2012 during the reelection campaign. And one of the things that I felt as part of that experience is, in the final months, there comes a moment when you recognize that you've kind of gotten done what you're going to get done in terms of policy. There are no more legislative opportunities, very little by way of things that could be done by executive authority. And you're kind of handing them off to a campaign to go persuade the American people that you've done the right things and done enough of the right things to merit reelection. I think it's a slightly different environment this time where, because of these crises that are unfolding in real time, policy still matters right now. Even if the path is very narrow, we still see live negotiations around additional economic relief. Obviously, the ongoing public health challenge requires countless decisions by governments, including the federal government day in and day out. So, I think just one big thing that's different today versus 2012 is precisely because of the unfolding, interlocking crises that the country faces.

      Catherine Kress: Mike, that's super insightful. Policy makers are still trying to get so much done, but it's in the midst of an election season, and so that can certainly complicate things and influence decision-making. But we're right now just a few weeks away from November 3rd, so as we think about the range of election outcomes, what would you say are the key scenarios that you're planning for?

      Mike Pyle: So, there are three scenarios that we're really tracking. We're tracking the likelihood of a status quo election where President Trump is reelected. Congress remains in divided hands with Democrats controlling the House, Republicans in the Senate. Secondly, we’re tracking the likelihood for a Biden win with unified government with Democrats in control of both the House and the Senate. And lastly, tracking the likelihood of a Biden win in the presidential race with divided government in Congress, with the Senate remaining in Republican hands. When we look at the polls, we see three things. We see a national race that looks as if it has a material advantage now for Vice President Biden. Secondly, we see a race that’s been extraordinarily stable for the past several months – four, five, six months. And that compares to the significant volatility that we saw in the polling in 2016; it’s much more stable than that. It is striking in light of the interlocking crises that the country is facing in 2020, and it's striking how stable the polling has been even in the face of historic events. But third, President Trump continues to run somewhat stronger in some of the decisive states than the nation as a whole, which continues to put the potential for President Trump to be reelected through a narrow win in the Electoral College even given, a pretty material lead for Vice President Biden in the national polls. 

      Catherine Kress: So that’s for the presidential contest; what about the Senate race?

      Mike Pyle: On the Senate side I think something actually quite consequential has happened over the last week to 10 days. We've seen the polls nationally, which had favored Vice President Biden nationally widen out by an additional couple of points probably, on the heels of the debate in light of President Trump's COVID diagnosis. That has taken the Senate from a setup where, to our eyes, it looked more like a toss up to a place – as a result of those kind of couple of points difference in the national environment – where it leans a little more significantly democratic. The big question over the next week, two weeks is whether we see the overall national environment revert back to the national lead that we'd seen for four, five, six months before this – or whether this larger lead is the new normal. That's going to make a good deal of difference about how we think about the likelihood of the presidential race, how we think about the likelihood of contested election scenarios post the election, and how we think about the environment in the Senate which, as we'll get into I suspect, is going to be extraordinarily consequential for defining the policy pathways post the election, with huge consequences for markets and asset allocation as well.

      Catherine Kress: I found it interesting that you noted just how stable the polls have been, because I know one thing I've been reading a little bit about, too, is just how small the number of undecided voters is this year relative to previous years, which indicates that that polling may indeed remain more stable moving forward. So, as we move on to some of the policy implications of these different scenarios, it's clear given how far apart the parties are in terms of their policy priorities that each of the scenarios that you mentioned could have really different implications for the policy outlook. What are some of the key areas, in your view, where we could see meaningful policy change? Which ones are you paying most attention to?

      Mike Pyle: So, we're tracking five big macro policy areas across each of those three scenarios – macro policy areas that we think have top-down consequences for global economics and global financial markets. Those five are stimulus and ongoing coronavirus relief, public investment, tax, the regulatory environment, and then foreign policy including U.S.-China relations and trade. Some of those will turn based just on the result of the White House, in particular the regulatory environment, the foreign policy environment. Some of those require Congress and the president working together – anything really to do with fiscal policy either on the public investment side or on the tax side. And so how are we thinking about it? First, with respect to the issues really in the hands of the executive branch, in the hands of the president, we think that the regulatory approach under a President Biden would be considerably more stringent than we would expect under a second Trump term, where deregulation has really been the touchstone of the past four years. We think that's going to matter a lot for the energy sector, but I'd like to also sort of point out that we think it could be quite consequential for the tech sector. Renewed energy around things like anti-trust, renewed energy around things like privacy, is really putting the technology sector front and center in the regulatory conversation. And that's particularly important because the handful of, in particular, mega-cap technology names in the U.S. have been such an important part of overall market performance both this year and recent years. And a change in the regulatory environment there could mean a much different operating environment, a much different financial environment for those companies. Secondly, on the foreign policy and trade side, one of the things we've talked about is the ways in which there has been a bipartisan shift on China in a direction more towards strategic competition, towards rivalry. So, our expectations regardless of who wins in November, we're likely to see a much more competitive, significantly more aggressive posture towards China than we've seen in past decades. That said, we think that a Biden administration would be different than a Trump administration both in its emphasis on working with allies, but also in terms of providing greater transparency, greater predictability about the framework that it's bringing to bear on U.S.-China relations on trade, what have you. In some ways, it's been the uncertainty and unpredictability of the Trump approach that has been the biggest source of volatility in markets as a result of this changed direction on China. And so, on balance, we think that a similarly tough but more predictable framework on U.S.-China relations and trade policy is probably a market positive. 

      Catherine Kress: You just discussed regulation and foreign policy – two areas that are largely driven by the executive branch. But it seems that some of the other issues you mentioned – especially in the fiscal space – will require more participation from the legislative branch (Congress).

      Mike Pyle: Yeah, so going to the areas that require legislation, this is where the Senate becomes so consequential. We could see quite substantial changes both in terms of tax policy, but also in terms of the scale of stimulus and public investment that we see. Obviously, in divided government scenarios, perhaps especially under a President Biden, we wouldn’t expect a great deal of movement on the big fiscal policy questions. Maybe some capacity in a Trump reelection scenario for some additional relief, but what we've seen really is just over the past couple of months and the struggles to get a phase four stimulus deal done ahead of the election highlights that, even in a status quo election, it's going to be really hard to get additional fiscal policy over the line. So, what we're really talking about is a Biden unified government scenario just being categorically different than the other two. The additional thing I would say is I think during this summer in particular, there was a lot of focus on the tax pieces of the Biden agenda and what that could mean in a unified government scenario. The likelihood of higher corporate tax rates, the likelihood of higher capital gains tax rates of other transitions in individual taxation. And I don't think investors are wrong to pay attention to that. I do think that that's likely to happen. There are likely to be changes in a Democratic scenario. Taxes are likely to move higher. That is likely to flow through to corporate bottom lines. And in particular, again, given some of the tax changes that are being proposed on the international tax front, you could see particular headwinds to some of the larger tech firms, to some of the pharma firms. But the thing we've been saying again and again is, it's right and fine to sort of focus on those bottom-line impacts, but you shouldn't ignore the top-line impacts of a much more aggressive posture around additional stimulus, a much more aggressive posture around public investment whether it's in infrastructure, or clean energy, or R&D. We think that that kind of scale of fiscal impulse, of public investment impulse, you would see from a unified Biden scenario would have pretty profound implications for the top line for overall economic growth and the economy, for growth in earnings for firms large and small to really accelerating the U.S. back to something like potential output and beyond. That’s a big difference, and we think that when investors take too much of a tax-centric approach, too much of a bottom-line-centric approach, they're missing what could be the big fiscal policy stories – the impact on the top line, on revenue, on growth in the overall economy and in businesses.

      Catherine Kress: Mike, I want to follow up on your fiscal outlook. You mentioned that this is an area where the Senate really matters. It's clear when we think about the Senate outlook, we could have a situation where we have 49 Democratic senators, or we could have 50 Democratic senators or more. How do you think about the impact of that difference in the actual Senate makeup when you think about the overarching fiscal outlook and potential for stimulus moving forward?

      Mike Pyle: That's a great question. The single biggest question is who has control of the Senate, and that is going to create the biggest difference in policy outcomes. The difference between 49 Democratic senators and 50 Democratic senators, plus a tie-breaking vote from a new vice president, is extraordinarily large in terms of the types of policy outcomes that we can expect. I think some of our back of the envelope thinking suggests that that difference alone could amount to a difference on the order of three, four, five percentage points of GDP in additional stimulus and public investment over each of the next two to three years. Just one or two Senate seats can really make a very profound difference in terms of the macroeconomic policy environment we step into post January: around coronavirus relief, around public investment, around just major change on infrastructure or clean energy, R&D, as well as just basic support for households and small businesses, and states and localities.

      Catherine Kress: So, it's clear it's not just a consequential election, but it's likely to be very close, and so we have to track all of these issues closely. But on that note, we've seen so many pieces and so many analysts and experts commenting on the risk of a contested election, and what that might mean for volatility in financial markets. I know the three themes that we've been thinking about along these lines are, one, potential disruption to the mechanics of the election, just given kind of the uncertainty that the COVID pandemic has injected into the elections. The second being a potential delay in the tally and actual announcement of the election results. Election Day could become election week just depending on how quickly the actual votes are counted and the ways in which states manage the election. And then third, the risk of potential disputes just given how close the election could be. So, I want to get a sense from you as to how you're thinking about this risk of a contested election, and what that might mean for volatility in markets?

      Mike Pyle: Well, we've certainly seen volatility markets respond to the likelihood and evolving assessment of risks around the prospect for a contested U.S. election. So that's clearly happening in terms of market pricing. I think we acknowledge that we are, as a country, conducting an election in a historic moment, a moment unlike really any other that we've attempted to conduct a presidential election in, and that is introducing a host of challenges to the set up. I think in our base case, precisely as you said, because of, appropriately, a lot of people transitioning to voting by mail, voting absentee as opposed to voting in person in order to stay safe, we do expect that there are likely to be some delays in counting votes including in some of the key states, places like Pennsylvania. I think our base case is we see resolution of the election, we know who the next president's going to be, but it may not happen on election night. It may take two or three days to get to a place where the results are clear, the results are counted, the major networks and other observers begin to call the election. That's kind of our base case. 

      Catherine Kress: What do you see as the risks to our base case?

      Mike Pyle: We see risks on both sides of that. In terms of getting clarity on election result, there are going to be a lot of eyes on places like Florida, which will count its ballots both mail-in and in-person on election night. We should have a pretty clear sense three or four hours after the polls close who's won Florida. And if it's outside of the automatic recount margin, and if that happens to be Vice President Biden, I think we're going to get a pretty clear sense of which way the election is likely to go, precisely because it's very hard to construct maps where President Trump can win in the absence of having Florida. So that I think is an outcome where you could see a lot more clarity sooner than in our base case. And then of course on the other side, there is the risk that a number of these decisive states, especially in the upper Midwest, decided by narrow margins, decided by margins of mail-in ballots, maybe margins of mail-in ballots that have been excluded for one reason or another. And that's the type of scenario that brings in significant litigation risk, significant risk of state legislatures and state courts getting significantly involved, significant risk of Congress and the Supreme Court ultimately getting involved. I think it's very hard to trace what exactly would transpire in that situation. But all that said, I'll make two final observations. One, this is part of the reason why I think this question that I posed earlier about whether or not this widening out of the polls that we've seen over the last seven to ten days, whether that proves to be durable. Which path we take could be pretty consequential here. Volatility markets have begun to settle a little bit in the past couple of days, looking out into November and December volatility pricing. I think that's partly because, in a world where Vice President Biden's leading by ten points as opposed to seven and a half points, markets I think appropriately are assessing that the risk of a contested election is significantly reduced. It's going to be very important to see over the next little bit of time whether we stay where we are, or we revert back to that prior mean. And the other thing I would say is I do think that we have conviction that ultimately, we're going to see a resolution. There is going to be a president who is sworn in on January 20th. We have conviction that that's going to be a result that's generally accepted and seen as legitimate. And as a result of that, from an investment perspective, we believe that any volatility on the heels of the risk of a contested election, the actuality of a contested election, that by and large is going to be something that may be uncomfortable in the moment, but is going to be best looked through by long-term investors who keep their long-term goals in mind, who if anything, use the volatility to maybe add to high conviction positions. But really something to look through and keep those long-term goals in mind.

      Catherine Kress: Mike, that's very refreshing to hear your view that we will ultimately get to some form of a resolution. So, building on that last point you just made in terms of seeing through some of the noise, seeing through some of the uncertainty, what are the key investment themes that you're thinking about that you think investors should be prepared to move on in the aftermath of the election?

      Mike Pyle: The first would be to look at international equities, perhaps especially places like emerging market equities. We think, especially in a scenario where we see a Biden win or we see unified Democratic government, that should be a pretty favorable environment for global cyclical exposures. We think we could see quite an acceleration of that fiscal impulse, quite an acceleration of global recovery particularly perhaps when paired with a vaccine in 2021. And places like the emerging markets – perhaps especially when paired with a more certain foreign policy and trade environment which, of course, has been such a source of uncertainty and volatility over the past four years – that to us looks like a place that's interesting in the face of a Biden win with unified government. And secondly, we'd say within U.S. equities, a Biden win with unified government is potentially a real cause to see a rotation in leadership in the U.S. stock market. The past few quarters, even the past few years, has really been characterized by this very pronounced tech outperformance, and even within that, this very pronounced outperformance of the handful of megacap names in the technology space. We think that that sort of election and policy scenario could lead to a pretty substantial reordering of leadership within the U.S. equity market as I was talking about for reasons like anti-trust regulation, for reasons like tax policy changes that could pose particular headwinds to the U.S. tech megacaps. We see more by way of headwinds there to ongoing outperformance. On the flip side, I think we see that kind of big push on fiscal, that big push on public investment, leading to a much more kind of bottom-up growth picture in terms of the U.S. restart and recovery, and as a result, more of a bottom-up led U.S. equity markets. So, looking to places like small cap U.S. stocks, looking to places even like an equally weighted S&P 500. Those are exposures to us that look as if they have more significant tailwinds behind them in that kind of scenario. You know, in a world where President Trump is reelected, in a world where we see divided government, in a world where we see less of that big kind of fiscal rotation on the policy side, I think that to us is a little bit more of a what we've seen is what we're likely to continue to see. So, to us, the knife's edge is around leadership in the U.S. equity market and whether we should expect to see more of the same, or a much more profound transformation in what's leading the U.S. equity market. 

      Catherine Kress: So, the first two themes are international equities and leadership in the U.S. equity market. What about the fixed income market?

      Mike Pyle: There, too, the big divergences are between a Biden united government scenario and the others where the big reflationary impulse that we could see on the fiscal policy side and that unified government scenario could be pretty important for causing U.S. yield curves to steepen, causing the long end of the curve to sell off a touch. Break-evens could widen. We think that the kind of big impact would be a pretty significant rally in a place like TIPS. Both because we do think inflation expectations would move somewhat higher on the back of a view that, particularly combined with fiscal stimulus, the Fed would be likely to achieve its objectives of a modest to moderate inflation overshoot in the years ahead. But that in particular, because the Fed is also likely to be pretty aggressive in not letting financial conditions tighten, not allowing the long end of the U.S. yield curve to sell off too aggressively. But a lot of that adjustment is going to come on the real interest rate side, is going to come through TIPS and through TIPS rallying given the real interest rate exposure there. 

      Catherine Kress: Mike, thanks so much for your insights today. I know you mentioned these are unprecedented and uncertain times. So, I'm looking forward to speaking with you in a few weeks to see how all of this plays out.

      Mike Pyle: Absolutely. I can't wait to continue the conversation. Thanks for having me.

    6. Mary-Catherine Lader: Welcome to The Bid and to our mini-series, “Sustainability. Our New Standard,” where we explore the ways sustainability and climate change in particular will transform investing. I’m your host, Mary-Catherine Lader.

      Today, we’ll focus on one area of sustainability, impact investing. Impact investments aim to deliver progress on environmental and social goals in addition to financial returns: doing well while doing good. That might sound a lot like ESG, or environmental, social and governance investing. How is it different? You’ll have to listen to find out. Joining us today is Eric Rice, Head of Impact Investing for BlackRock’s Active Equities. We will talk about how impact investing differs from other forms of sustainable investing, the attributes that define an impact company and how businesses have pivoted in the face of a global pandemic and the focus on social and racial inequities.

      Eric, thank you for joining us today.

      Eric Rice: Hey Mary-Catherine. Very nice to be here. Thank you.

      Mary-Catherine Lader: So, throughout our mini-series on sustainability we have talked a lot about ESG or environmental, social and governance investing. Your role and part of your career has been in impact investing. Can you just explain what impact investing is and how it differs from ESG investing?

      Eric Rice: I think the simplest way of thinking about that difference is that ESG is about how companies do what they do, and impact investing is about what they do. So, we are all thinking about how they treat their world, but ESG is about how any company operates. Is it good to its environment? Is it good to its stakeholders? Does it have good governance? And any company could be a great ESG company, but an impact company is a company that makes goods and services that are actively solving the world’s great problems. And of course, if done properly, an impact investing strategy should involve ESG integration. It should also involve the kind of negative screening; no one wants to see a gun maker in an impact strategy. Of course, that would never be a solution to a big world problem, but you know what I mean is that impact investing is like a 2.0 here. It includes other aspects of sustainability and it also includes engagement with the company.

      Mary-Catherine Lader: That is such a helpful way of thinking about it that ESG is about how a company does what they do, and impacts is what they do. And so, I guess from that perspective, what activities then make a company an impact company? What criteria are you looking for to qualify as impact?

      Eric Rice: The starting point is this thematic area: Are they doing something good for the planet or good for our society? On the planet side, it could be cleaning up the environment or doing renewables or making things more efficient. On the people side, it’s quite a range. It’s from access to education, healthcare, it’s digital and financial inclusion, it’s better health, better safety, security, all sorts of things that are the identified big problems of the world. You want companies that are advancing those solutions to problems. Two other criteria are important for us. One is called materiality. Materiality means that it should be most of what the company does. So, we don’t want a company that is dabbling in do good, but at the same time they are just making chairs and steel like every other company might be doing. The second thing is that the company should be additional, and that’s really interesting. That means that the goods and services of that company should have either a new technology or a new business model or be bringing those goods to a new population that hasn’t had them before, so it’s additional in the sense that if it weren’t for that company and what it’s doing, that problem wouldn’t be addressed.

      Mary-Catherine Lader: So with those criteria in mind, what are some of the more exciting opportunities that you’re seeing in the world’s stock markets right now?

      Eric Rice: It sounds like you are asking me if I have a favorite child, do I like financial inclusion or do I like environmental cleanup, and I can’t tell you that, that’s not fair, because we have lots of exciting things going on. But I would tell you, I think more relevant for right now is that we are at a moment on the financial side when some of the most unloved stocks this year that never recovered after the March downturn are starting to look interesting and we are starting to see that they have the prospect of going into 2021 with some recovery and some strength. Like the most terribly beaten down, high efficiency buildings and building systems and materials, they never recovered, most of them. I think what we are learning is that the companies are telling us, the management is telling us that they are starting to see business come back. We have of course online education, those rallied, but we have some in-person education companies in emerging markets; those have done really poorly, but those too are starting to show signs of recovery and signs of M&A activity and that’s encouraging and exciting. And then a lot of healthcare has done well, but some of it hasn’t because elective surgeries have been put off, so many things have been put off just to make room for COVID-19 activity and so now that there is a little bit of breathing space we think that that’s going to be a 2021 opportunity.

      Mary-Catherine Lader: On that note of things being put off to handle COVID-19, how have you seen companies pivot in the wake of this crisis as well as around unrest around racial inequality?

      Eric Rice: I use exactly that word, to “pivot.” I think one of the reasons that some impact strategies did really well this year is because we have companies that were not necessarily producing the goods and services that would naturally be a solution to COVID-19, but they were just because they are problem-solving companies, they did pivot to solve some of these problems, Some examples are in healthcare, we have one medical devices company that never produced a ventilator in its history, but when COVID-19 came along they are very good at tinkering with things, they came up with a substitute that’s used in the U.S. and many countries that is not exactly a ventilator, but it serves the purpose of a ventilator only at 95% less cost. So, they have been pumping out thousands of these and they have been going to hospitals around the world. We also have a mass notification company and what that means is if there is a flood, they notify of a flood to the employees; if it’s a company it’s the client or to the citizens if it’s a country. And now what do they notify? They notify people about COVID hotspots or changes in the rules around shelter-in-place. It’s amazing. And companies that do education, they pivoted to distance learning. On the side of inequality, I think the pivot is really to more awareness, and awareness among companies about getting their E and S more right, that they have to improve in ESG even more urgently than before. And you see companies that are oriented to helping with inequality, financial inclusion companies. We have Brazilian university companies that are solving a problem there, that’s a problem of inequality for working class students. But it’s less a pivot than the fact that a lot of these companies are always oriented to those kind of inequality issues.

      Mary-Catherine Lader: You mentioned 2021 opportunities. As you think about 2021, how does the upcoming U.S. election figure into your thinking as an investor generally, but also in terms of what impact-related opportunities it might present or infringe upon?

      Eric Rice: So we saw an interesting thing in 2016, which was in November 2016 we weren’t investing in “Making America Great Again,” in the sense that we were investing globally and we weren’t invested in coal or petroleum or steel or old industries, we were invested in disruptors and solutions to problems and especially new kinds of technologies and for some weeks after the election that did badly. So, I think that would be true in a Trump victory. And alternatively, I think in an election that resulted in Biden winning, a perception that the Green New Deal will go through, the kind of stocks that we’ll invest in will do well. I think in an environment where there is a perceived respect for science and education, technology that this will be an opportunity for impact investors going out the gate. But our universe that we invest in has done well because it’s a faster growing universe. It’s an inexpensive universe in terms of stocks, because people don’t really understand what it’s going to be. And so, I think year after year, there can be terrific performance, no matter what happens politically.

      Mary-Catherine Lader: So, one of the common views about sustainable investing generally is that it means sacrificing financial returns. You were a traditional investor. You have now been in the impact space for seven years. What’s your perspective in terms of whether this focus on values can sometimes mean a tradeoff in terms of value?

      Eric Rice: I have been asked that often. I think there is a reality to it that there could be a tradeoff, but I think there’s a way to construct an impact investing strategy where there isn’t one. And I will tell you what our early insight was; that we had to separate the identification of what are high-impact companies. So, we built out a universe. We have a universe of nearly 800 companies and that’s $7 or $8 trillion of market cap. So, it’s a vast universe that we could invest in. And because we have identified them and set that high bar for impact among those companies, then what the team can do is just do conventional investing. We are doing the usual kind of stock selection and portfolio construction. If you separate the two out and if your universe is good enough and big enough, why should there be a tradeoff?

      Mary-Catherine Lader: Why isn’t impact investing totally mainstream? Why doesn’t every asset manager have an impact investing fund or team and why isn’t it part of everyone’s portfolio?

      Eric Rice: Well, that’s a multipart question. I think it’s not in everyone’s interest among investors to do it. Just as investors are moving toward all portfolios being sustainable to some extent, I think you will see some more movement, but this is where we talk about what we do as being a satellite kind of strategy. You might want to have exposure to steel makers and cola makers and whatever, that’s not what’s going to be in this portfolio. So, it’s necessarily a bit niche and it’s necessarily going to deviate a bit from a benchmark-hugging strategy. It just will. And so, this is useful as another building block of one’s allocation of assets, but it’s not going to be a standalone. You are not going to replace everything in global equities with impact. It’s just not like that.

      Mary-Catherine Lader: I am curious, you used to be a diplomat and a World Bank economist, how did you become interested in impact investing?

      Eric Rice: Well, I suppose I might have been interested in it when I was a development economist, but it didn’t exist. I am old enough that I had to grow up in an older paradigm where if you wanted to do something good in the world you would be a diplomat or a development person. And I actually ended up in finance because I took an extended leave of absence, a sabbatical to go check out the financial industry after I had been working in the financial crisis in Mexico and I thought I would go back to the World Bank, but some other things started emerging, like social entrepreneurship and impact investment that I was finding fascinating, but that was all in the private markets. And so, seven, eight years ago I pitched the idea to my then employer that we should be able to do the same thing in the public markets; it shouldn’t be the case that only someone with a million dollars of investable assets can be an impact investor. Everybody wants to be. And so, I was just driven by this idea that you could bring together the public markets and the private sector to the solutions that I was seeing being done at small scale in the private markets.

      Mary-Catherine Lader: And so, given that you have said that you are part of an older paradigm, I am curious then what paradigm you think we are in now and then what you see for the next 10 or 20 years for impact investing.

      Eric Rice: I think there is a recognition when everybody looks at the scale of problems that we have that we are very much in a new paradigm where you say okay, it’s great, the government, NGOs, philanthropy, they all do important things of some size, but it takes everybody to solve these problems and in particular it takes the kind of technologies and market approaches that are in the private sector and that impact investors can bring to bear. So, there is no going back at this point. I think that that’s going to be a very exciting thing over this period. I think also that public markets’ impact investing is here to stay and will become bigger. I think also we will have regulatory changes so that retail investors and pension holders will be more permitted to invest with a view toward impact just in the way that ESG is still in question in some places. And so, I think that we will be moving to a world where everyone recognizes that sustainable investment is just investment and impact investment is also alpha-oriented investment.

      Mary-Catherine Lader: When you say we’ll move to a world where sustainable investment is just investment, and impact is just another way to generate alpha in portfolios, it makes me wonder if then you think we will have some standardization, or just a shared understanding of how one measures impact? In ESG investing, for example, we constantly hear that we don’t have standards and that makes it hard to compare products with one another. In impact investing, do you see us moving towards some kind of agreed upon approach to measuring performance or do you think that doesn’t matter so much?

      Eric Rice: It absolutely does matter. There was a handful of things that stand in the way of that transformation. There has been a lack of democratization, bringing it to the public markets. And so that if I have a hundred dollars, I can invest in impact. There has been a lack of information and education, what is impact. I mean even after all these years people mean different things when people ask me that question. And then as you might have been alluding to, there is the lack of impact standards. When we started there weren’t UN Sustainable Development Goals to tell us some of the ways of thinking about what the big problems of the world are. That came later, and that’s helpful, but it’s not really a standard, and I would tell you that inadvertently it facilitates greenwashing and impact washing. What’s better is that on top of this, we have the Impact Management Project and what’s called the IFC Operating Principles for impact investing and there is a taxonomy for impact goals, which is called IRIS+. All these things are setting up some standards so it won’t be that you’ll see funds that say that they are impact funds, but they invest in fizzy drinks or ice cream makers or that they invest in your local water utility that’s just been delivering water to your wealthy door the same way for the last many decades, but that it requires that these be companies behind which there is some theory of change and that these are actually companies that are not just aligning with the UN SDGs but advancing the solutions to the problems.

      Mary-Catherine Lader: You mentioned the United Nations Sustainable Development Goals and I am curious if you could just share your view as to why it is that investors and their clients have become interested in mapping their portfolios to those Sustainable Development Goals. They are essentially a set of objectives that the United Nations put forth to improve the state of the world, everything from ending poverty to ending hunger and so they are ambitious and lofty, and you might not think of them as immediately tied to financial markets. So why is it that that’s become a framework for thinking about impact?

      Eric Rice: The UN SDGs have been very useful, I would say, for catalyzing and mobilizing around the problems and what it would take to solve those problems. When we started there weren’t UN SDGs, and we came up with a set of social and environmental problems and lo and behold a few years later when the UN did probably similar research they came up with a quite similar set of problems. The thing is, though, it’s not actually aligned with investors or in line with what companies do. For instance, they don’t talk about financial inclusion or digital inclusion or personal safety and security. Those are things that companies do. And so, it’s great, but it’s a little bit misaligned. And so, what we do is we look not to the 17 UN SDGs, the goals, but to the SDG targets, of which there are 169, and those tell you what the problems really are. And when you look at those, you can see why for a development agency or for a philanthropy it really homes in on what needs to be fixed and a lot of that translates to investment, but some of that we have to go beyond; we call it a little bit cheekily SDG+. If we are dealing with factory security or cybersecurity, that’s not in the UN SDGs, so that’s for us an SDG+, things that companies can bring a solution to and that we and our clients care about solving.

      Mary-Catherine Lader: We end each episode of our sustainability mini-series with the same question to each of our guests, Eric. What’s the one moment that changed the way you thought about sustainability?

      Eric Rice: It’s funny, I can tell you exactly when that was and it was me a couple of years ago standing in the old neighborhood I lived in 30+ years ago in Kigali, Rwanda. That’s where I was a diplomat and I was reminded of how people solve problems before. That in my neighborhood there were local folks and they live in the city, and if you live in the city, there is always someone back in the village who is sick. And so, they would typically come to me to ask to borrow some money or give them some money for medicine and then they would buy some medicine and they would take a jitney for days, some of them would walk to go bring the medicine to whoever is ill in their village, and it’s very cumbersome and inefficient. What struck me that day was how much has changed, because what I saw on my walk through Kigali that day was a microlender that we are invested in, that meant that if someone is sick in the village, they will have called you on your cellphone, you can go to the microlender to get a $10 loan to buy the medicines you need. You don’t have to go travel for a week to bring the medicine, you tap your phone at the mobile money kiosk and it gets transferred to your family back in the village. And then if you are lucky enough to be in Rwanda, that’s where they have had the trials of drone ports. And so, a drone will bring the medicine to your village from a city and it’s just all solved seamlessly, and I realized that sustainability, and for me it means impact investing, that these companies can actually solve problems so much better than in the old paradigm. It was just a lack of imagination, a lack of experimentation that has taken us so far in the last decade.

      Mary-Catherine Lader: That’s a compelling anecdote. I spent time myself working in Nairobi in mobile money and I think that the way that that empowers economic growth and change was really stunning. So that resonates with me. Eric, it’s been an absolute pleasure having you today. Thank you so much for joining us.

      Eric Rice: Thank you very much for having me.

    7. Oscar Pulido: Welcome back to The Bid, where we break down what’s happening in the markets and explore the forces shaping investing. I’m your host, Oscar Pulido. Seventy-four percent of Chief Financial Officers expect some portion of their workforce to remain virtual forever. Stay at home orders have led to a 60 percent increase in content consumption on video and audio streaming platforms, and there’s been a 35 percent surge in video game sales over the past few months.

      These are just a few of the ways the world has changed since the coronavirus pandemic first started. And they can all be encompassed by megatrends: the long-term forces shaping society. Today, Jeff Spiegel, U.S. Head of Megatrends and International ETFs, will walk us through a few of the themes he’s thinking about, including virtual work, the future of innovation, technology and healthcare.

      Jeff, thank you for joining us today on The Bid.

      Jeff Spiegel: Thanks for having me back, Oscar.

      Oscar Pulido: And in fact, you are coming back. We had you back on in April to talk about the coronavirus and how it has accelerated the five megatrends that we’ve been watching. And just as a reminder, those five megatrends are technological breakthrough, demographics and social change, rapid urbanization, climate change and emerging global wealth. Now I guess my question is, are we continuing to see these trends accelerate over the past few months?

      Jeff Spiegel: In some ways, April feels like a lifetime ago. Yet in others, and this certainly applies to megatrends, 2020 has actually propelled the future to come at us faster than ever. So, more directly to your question, I’ll quickly click through those five megatrends you listed and give you a sense of some of those acceleration highlights. In technological breakthroughs, greater connectivity is really leading to huge investments in big data, in networks, and cyber-security; while at the same time, deglobalization driven by the pandemic is driving greater focus in areas like robotics and automation. In demographics, genomics and immunology were major focuses of our last discussion and how they’re enabling us to fight back against COVID, because they’re the disciplines at the forefront of the vaccines and the therapeutics that are providing us hope. Rapid urbanization and climate change I’ll put together here. We’re seeing hundreds of billions and actually expect trillions of dollars of investments in these two areas in the near term. In traditional infrastructure and clean energy, as governments use stimulus specifically in these spaces to get people back to work. Then in emerging global wealth, we’re already seeing countries like China post-rebounding spending and manufacturing at a far faster rate than the rest of the world, propelled by the rise of the middle-class consumer in that and similar countries. But finally, the most powerful themes actually coexist at the intersection of multiple megatrends. And so, at the intersection of tech and demographics, we’re experiencing this amazingly rapid expansion of virtualization that’s fundamentally changing the way we work and the way we live.

      Oscar Pulido: So, you’ve touched on this a little bit, but as you think about these broader megatrends, what are some more of these specific themes within that that you’re focused on in light of all of these societal shifts that you’ve started to mention?

      Jeff Spiegel: Yeah. So, I’ll go further on that tech demographic intersection that is driving towards more virtual work and virtual living. A rise in connectivity was already a fast-moving megatrend long before the pandemic. In fact, there were about 30 billion internet connected devices at the start of this year, and that was set to rise to 75 billion by 2025. Then, the pandemic forced an even more rapid acceleration. Countless activities done in person every day by hundreds of millions if not billions of people had to be replaced in short order by virtual solutions. So, in considering that, we really think about it as two distinct categories that have taken off: virtual work and virtual life. What really has to be emphasized, though, is that this virtualization was well underway within the tech and demographics megatrends before the pandemic; it just managed to leapfrog much of the earlier adoption phase given our sudden need to go virtual in the crisis.

      Oscar Pulido: It’s very true – you said something before about the future kind of coming at us. I don’t know about you, I used to work from home maybe once or twice a month and obviously now it’s a daily occurrence for me. So, speaking of that, we’ve heard that companies are letting their employees work from home through the end of the year and in some cases, actually even into next summer. So how do you see the nature of work changing on a go-forward basis?

      Jeff Spiegel: So, we think different companies are going to take different approaches to bring workers back. That’s primarily because there’s no real playbook or even any consensus regarding the course of the virus and it differs profession to profession, geography to geography how safe it is to come back. We do know that workers will eventually be able to return to offices safely, whether that’s in six months, twelve months, eighteen months. The big question is what happens then? And to that point, 74 percent of CFOs expect to offer more virtual work forever, long after the pandemic. Many of them because they see ways to maintain productivity, reduce costs and meet employee demand. That’s been one of the important lessons of this work from home experiment forced by the crisis. At the same time, a similar number, 72 percent of workers, actually want the flexibility to work two or more days from home long term, in that case so they can avoid a grueling commute, so they can have more flexibility in where they live, and so they can have a greater ability to manage more personal needs like childcare. Now companies ranging from tech firms like Twitter to insurance providers like Nationwide have actually announced that they are going 100 percent fully virtual for the long term. As a counterpoint, Reed Hastings, the CEO of Netflix, has been really vocal in saying there is no way he’ll offer his teams more remote work once return is safe, because he worries that at Netflix, he would be stifling creativity. Now those are the extremes, but most of us will not be 100 percent virtual or 100 percent in person going forward. And you know, BlackRock actually surveyed us and asked what percentage of the time we’d all like to work from home, post-pandemic. I have to admit, in contrast to my prediction a moment ago, I personally said I’d like to work from home 100 percent of the time. Oscar, I know you’re the one asking the questions today but I’m curious if you could share where you cast your vote?

      Oscar Pulido: I don’t remember exactly how I answered it, but I will tell you, I did not answer 100 percent of time that I want to work from home. I like variety; I don’t mind a commute. Perhaps mine is a little less grueling than folks who might live out deep in the suburbs. I live pretty close to New York City. But I tend to think that there are some benefits to being in the office and being around your colleagues. So obviously work from home is one of these things that has changed in the course of our lives over the last few months, but there’s a lot of other things that have been brought into our home. It seems like exercise classes have been brought into living rooms and people are watching friends get married over virtual wedding ceremonies. What are some of the other areas besides just working from home we’re you’ve seen technology really break through?

      Jeff Spiegel: So, in virtual life, we’re seeing the end game for some megatrends that have been running for a while. And we’re also seeing a massive leap forward for those that had just started emerging. And just like you and I were talking about, right, with different views on how frequently we want to go to work, different CEOs have different perspectives on this, there isn’t a one-size-fits-all solution going forward. So, to some of those end game examples, those hold-outs, we all know some of them who never had an Amazon Prime account or never had a Netflix account. Well, the vast majority of them during this pandemic have finally signed up. Amazingly, Disney+ achieved 50 million users only months after launch. It took Facebook years to accomplish a number like that. At the same time, video game sales saw that 35 percent surge and 20 percent of romantic couples are now meeting online. Including, by the way, and as an aside, yours truly and the love of my life. Actually, to be precise, she and I met in nursery school, went our separate ways at the age of six, and then actually found each other again 30 years later on Hinge. But we’ll save the details of that story maybe for another Bid, Oscar. To be fair, most of us had experienced e-commerce, streaming, video games. I had certainly experienced online dating changing my life. And many of us had embraced these areas pre-crisis. Newer areas of virtualization, though, are really leaping forward from those early innings. Areas like tele-education and tele-medicine that most of us really hadn’t tried previously. Now yes, our kids will go back to school. That is a boon for the many of us out there tired of having every other Zoom call abruptly interrupted by our little guys and gals. But tele-education will nonetheless live on. In fact, global ed-tech spending is expected to grow 18 times through 2025. Why? Because recorded lectures allow students to learn at their own pace. Because a limited number can fit in a room to hear from the world’s preeminent professor of nuclear physics. But an infinite number can hear from her online. At the lows of pandemic life, I actually took a free Yale University course on happiness, and it had an amazing impact on me. Another game-changer was the speed with which health insurance companies abruptly changed policies to allow for tele-medicine in the face of the pandemic, which is, by the way, impressive in that industry’s speed to respond. And yes, many types of doctors’ visits will continue to require in person examinations, but many won’t. Again, I’ll share a personal anecdote and I hope that the aforementioned love of my life doesn’t mind that I keep referencing her today. But Kim is a psychiatrist at New York Presbyterian Hospital. At the height of the pandemic, she was still going in every day to take care of the in-patient unit she manages. But her private patients obviously weren’t going to come in and see her live at the hospital, so they moved to tele-psych. Nine months later, not one of them wants to go back to in person sessions.  And as a clinician, she’s actually been shocked to find that she is just as effective in that virtual environment.

      Oscar Pulido: Jeff, I actually think that it’s not just another podcast – we might have a feature film that we need to make about you and Kim and the 30 years that it took for you to reunite.

      Jeff Spiegel: Let me know when we’re filming the movie. I’m all in. I’ll check with Kim to see if she is down.

      Oscar Pulido: Certainly, a lot of the things you mentioned resonate with me in terms of yes, I signed up for a Disney+ account, my nine-year-old daughter now is reciting lines from Hamilton. We were definitely experiencing the education at home through Zoom, so I have to imagine a lot of people are relating to this.

      Jeff Spiegel: And I also have to note, Hamilton has been stuck in my heat for months since Disney+ put it online, which is certainly a good thing, although I have to resist singing or humming it while I’m on calls with clients.

      Oscar Pulido: And then you touched on healthcare and the advancements we’re seeing there. There’s obviously a race towards a vaccine, that continues. What other areas of development are we seeing in the healthcare space?

      Jeff Spiegel: So that’s going to come back to genomics and immunology again, and we discussed it at length back in April, the extent to which RNA vaccines, the domain of genomics and anti-body replication therapies, the domain of immunology early at the forefront of fighting back against this virus. And I actually think the bigger point here is the long-term impact of the tremendous amounts of research and development that are being marshalled against COVID-19. We’re talking about a Manhattan Project-level of focus and resources. RNA vaccines and antibody replication therapies have never actually been applied to any disease before. They’re massive new breakthroughs. So while it’s hard to say exactly which vaccine or therapeutic will be approved first, or just how effective each one will be or which company is going to get there first, we can say with a pretty good level of confidence that our understanding of game-changing treatments has expanded rapidly. And when COVID is thankfully behind us, we’ll turn our research and development to using these new war-time advances in genomics and immunology to fight countless diseases that have vexed us in the past, or that we may come to face in the future.

      Oscar Pulido: Jeff, earlier you asked me about my intention about working from home, and I mentioned that I live close to New York, my commute is not so bad. So, going back to the office doesn’t seem so scary. But there has been a lot of discussion around this trend of rapid urbanization and whether COVID-19 will reverse it given people have the fear of the ongoing pandemic and the longer-term increases and the ability to remote work. Have we updated our rapid urbanization expectations as a result?

      Jeff Spiegel: Oscar, I get this question more than almost any other lately. So, recall, rapid urbanization is about the rise of cities in emerging markets and the revitalization of urban infrastructure in developed markets, a pairing that we see together driving $100 trillion dollars in infrastructure spending over the next 20 years. So yes, many have lamented the death of rapid urbanization, but the first rebuttal to this concern is that 70 percent of that $100 trillion dollars of incoming infrastructure spending will be sourced in emerging markets. Think about why people move to cities in emerging market countries? They make the rural to urban shift in search of basic education, basic healthcare, non-remote work and even clean water. And often, to cities where disease is already a longstanding concern. So, we see that 70 percent preponderance of this really important megatrend, rapid urbanization, largely unaffected. But clearly, the source of this potential reversal is more focused on the other 30 percent, the developed markets component. In our earlier discussion of remote work, we landed on the view that most office jobs will require less time in the office, but not no time in the office, and different employees are going to have different views as you and I do of how much we want to be there. And that is why in major metro areas like San Francisco or New York, we’ve seen a huge run-up in suburban property markets and an accompanying decline in city rents. But San Franciscans and New Yorkers aren’t, by and large, moving out of their metro areas. Because they will still need some proximity to offices and certainly to friends and family and culture, and the other longstanding draws of cities. So, the urbanization trend and the need to revitalize urban infrastructure in developed markets, doesn’t decline at the metropolitan area level. The burden and therefore the investment, just ends up redistributed away from downtown centers to broader metropolitan areas that we expect to continue to grow.

      Oscar Pulido: And it’s a good point, when we talk about rapid urbanization, it’s not just a U.S. phenomenon, it’s a global phenomenon. So, it’s important to distinguish between how this trend is developing in the emerging markets versus the more developed markets. A lot of the themes we talked about today get into pretty specific areas, such as innovation in healthcare or working from home. So, how does an investor go about taking advantage of investing in these megatrends?

      Jeff Spiegel: Well, the key with these themes across today’s discussions, and really all megatrend investing, is to focus on the long term and to focus on diversification. This acceleration of a number of the megatrends hasn’t changed that. But at the end of the day, we still see too many investors seeking to access megatrends by just picking a single stock winner or trying to make a quick trade. The problem there is, if you get it right, you can certainly achieve returns that knock it out of the park, but if you get it wrong, you could lose it all. We posit three mega-rules that we use to build diversified portfolios for accessing megatrends. Now the first is to weight for tomorrow, not w-a-i-t, but w-e-i-g-h-t. You know, only one of the five largest companies in the S&P 500 from back in 2000 is actually still in the top five today. The others were replaced by firms like Facebook, Amazon and Apple, that rode megatrend themes over the last 20 years, like social media, e-commerce and smartphones, to become the mega-cap leaders of today. We have to think about weighting toward small and mid-cap players who have the potential to ride a new set of megatrends, the next 20 years of megatrends, to become the mega-cap leaders of tomorrow. The second is to connect the value chain. Think about a trend like virtualization, which we spent a good bit of time on today. That’s an entire eco-system of opportunities. It’s not just one company, it’s not even one type of company. Firms set to benefit range from those that build the digital infrastructure, the physical infrastructure that keeps us connected to those building the software that we connect through, the cyber-security that keeps our network safe, and the services, be they online dating, tele-medicine, streaming or video games that we want to connect to. So that second rule, connect the value chain. And the third is to think beyond borders. Yes, the U.S. is the world’s largest economy and is the number-one innovator and we don’t expect either of those facts to change any time soon. But that doesn’t mean that megatrend investing should be U.S.-only. In fact, many opportunities, and connectivity is a great example, show more promise beyond our borders. India has more than two times the number of people online as the U.S. today; 300 million versus about 600 million. But more startling is that while we only have about 30 million people here who have yet to access the internet, India has over 600 million people still offline. Talk about untapped virtualization potential. So, we see these rules applying to all the exciting themes we discussed today from virtual work and life to big data to robotics and cyber-security, to global infrastructure and to clean energy.

      Oscar Pulido: I think when we spoke in April, I might have said this to you as well, but you are a treasure trove of fun facts. Any final thoughts for today, Jeff?

      Jeff Spiegel: Well thank you, I very much appreciate that. In closing, the world will be different after COVID-19. As investors seek to rebalance, rebuild, and reimagine investment allocations for that future, megatrends have a huge role to play in delivering on that future to our portfolios.

      Oscar Pulido: Well, it’s a positive message, we need more of that in 2020. Jeff, thank you so much for joining us today. It was a pleasure having you.

      Jeff Spiegel: Pleasure as always Oscar. I hope you’ll invite me back for a third go in 2021, and also on the hopeful note, that by then, we and our listeners will find ourselves in a happier and a healthier world.

    8. Oscar Pulido: Welcome back to The Bid, where we break down what’s happening in the markets and explore the forces shaping investing. I’m your host, Oscar Pulido. We’ve talked recently about how corporations have changed their behaviors in light of the COVID-19 pandemic. But it’s not just COVID-19. Racial injustice and inequity have also come into increased focus, and individuals and corporations alike are taking notice. How are companies changing in light of conversations on race?

      Today, we’ll hear from two leaders who are spearheading conversation and action around race, bias and inequity: Dr. Laura Morgan Roberts, Professor of Practice at the University of Virginia’s Darden School of Business, and Wes Moore, CEO of the Robin Hood Foundation, a nonprofit focused on fighting poverty.

      BlackRock’s Lyenda Delp recently sat down with these leaders at the BlackRock Future Forum, a virtual event for thousands of our clients covering topics ranging from technology and the future of investing, to healthcare and post-COVID governance. First,

      Dr. Roberts shares her views on how corporations can tackle issues of systemic racism.

      Lyenda Delp: So, last September you and two professors from Harvard Business School published an important book called Race, Work, and Leadership. Is systemic racism truly commonplace? And I'm very curious to know why you think it persists.

      Laura Roberts: So, with your first important question about systemic racism, is it truly commonplace, is it endemic to the ways that our organizations function today? And, unfortunately, I have to answer based on the data that, yes, systemic racism is still widespread, and it’s deeply baked into many of the structures and practices in corporate America. You know, it shows up at various levels of the process when we think about entry, we think about advancement, when we think about engagement, and when we think about leadership impact, all central important questions around talent management. We see the longstanding and current impact of racism on those processes. So, at the entry level, we see racial disparities in terms of who gets hired and the ways in which racial bias enters into that process just from the point of screening a resume and looking at a person’s name to code or decode whether or not that person might be white or whether they might be a person of color. And numerous field studies have shown that those kinds of split-second decisions will weed somebody out of the hiring process just that quickly. But, let’s assume you get into the door. We see that there are racial disparities in terms of the kinds of developmental experiences that people are afforded, the types of mentoring and sponsorship that they get along the way, and those translate into whether or not they’re tapped for these high potential opportunities that allow them to advance beyond entry levels in organizations. And then, the last piece is around the leadership impact question. So, let’s say you advance, and you make it to the level of managing director or similar senior leadership roles within your organizations. We find that even at those levels, people of color and black people in particular still face the day-to-day stressors of racial microaggressions, of people questioning or doubting their authority, of being mistaken for lower level or lower wage workers in the organization or perhaps an administrative assistant or someone who’s on the custodial team, rather than someone who’s responsible for initiating and executing important decisions. So, all throughout the journey of one’s career, racism still plays a role. It persists because systemic racism is capturing the idea that racism operates as a system and by system we mean the reinforcing system of beliefs, decisions, practices that create self-fulfilling prophecies around who has power and advantage and opportunities within our organizations and who has to struggle harder to get access to those opportunities, if they get them at all.

      Lyenda Delp: Clearly now there’s a bright light being shone on corporations and leadership across America.

      Laura Roberts: I think, Lyenda, the first step is to do what we’re doing today, which is to invite more open engagement and learning conversations around race. For so long, race has been unspeakable. I have certainly seen a difference in the past months and the floodgate of opportunities that are opening for organizations to start to advance anti-racist work because people have started listening. And when leaders signal that they’re listening, then members of the organization and other critical stakeholders will begin to speak more freely about their experiences and people can learn together how to create or co-create the best path forward. But what corporations are doing now is looking internally, so also having to create cultural audits to say, hmm, let me look at my engagement practices, let me look at my hiring practices, let me look at the rate of advancement and the level of credentialing for members of different racial and gender groups within the organization to see is there a different path that certain individuals have to follow within my organization versus others. So everybody has to get that internal data and then from there invest in the necessary infrastructure to promote sustainable diversity, equity, and inclusion initiatives. 

      Lyenda Delp: So, what do you think are further catalysts that corporations need to act and go beyond the talk to demonstrate their real commitment? What would be the drivers?

      Laura Roberts: I think it’s important for us to acknowledge that a lot of the urgency of change right now is coming from those external catalysts and drivers of success. It’s been a public global outcry around racial injustice and that is much of the same horror that drove change during the 20th century civil rights movement and the anti-apartheid movements. Now, internally, what happens here in driving the change is to have those courageous voices who can partner with their colleagues in the organizations to help engage this new call to consciousness. But there are others for whom race represents a collective shame or guilt or just a lack of empowerment, a frustration about what to do with this big challenge and how to fix it. So, therefore, I'm afraid to talk about it and acknowledge it. And then there’s a third group who have actively resisted a lot of the DEI initiatives. So, for those who say they feel that their organizations haven’t done enough, there are others who have been reflected in these that say white men are being overlooked and excluded by DEI initiatives. And so, the DEI initiatives then have fallen out of favor, especially when people feel that they are focusing too much on race or racial and ethnic minorities. So, leaders, in order to move through change are going to have to contend in some way with that conflict, the internal conflict within the organization about how much attention and how many resources, to be quite frank, this kind of work should be getting. COVID is still having a disproportionate impact in a shocking and brutal way on black and brown communities. And we are still not of common mind or common voice about what it takes to protect the lives and livelihoods of our planet, much less those who are most vulnerable. And so, those remain deep-seated concerns for me. I'm encouraged by the fact that many corporate leaders have expressed their unequivocal support. I'm also mindful and observing the fact that there is still a wide continuum where some corporate leaders are all-in and other corporate leaders sort of dipped their toe in the water and now they’re realizing it’s a little hotter than they expected that it would be and they’re starting to pull back a little bit. So, you know, bottom line am I hopeful? Yes, I'm hopeful. 

      Oscar Pulido: That was BlackRock’s Lyenda Delp with Dr. Laura Morgan Roberts, Professor of Practice at the University of Virginia’s Darden School of Business. Next, we’ll hear Lyenda’s conversation with Wes Moore, CEO of the Robin Hood Foundation, on the role race plays in the fight against poverty and how the Robin Hood Foundation has transformed over the past few months.

      Lyenda Delp: Wes, you are the CEO of Robin Hood, one of the most important organizations in the effort to address poverty in our nation. You are a combat veteran, a bestselling author, a social entrepreneur. What were some of the challenges and the key influences that enabled you to become the man you are today?

      Wes Moore: I am the grandson of someone who was the first one on my mom’s family actually born in the United States. But, it was actually the Ku Klux Klan, that actually ran my family, my grandfather and my great-grandfather, out of the country, because my great-grandfather was a minister who was very vocal and verbal threats eventually turned into physical threats, to the point that he decided that he had to pick up his family and leave the country. And most of my family made a pledge never to come back to the United States. But, my grandfather did, and my grandfather always said that this was the country that he was born into he felt that he had just as much ownership as anybody else. He came back here. My father died in front of me when I was young and my mother was having a really difficult time with that transition, then decided to move us, myself, my older sister, and my younger sister, to go live with my grandparents, who lived up in the South Bronx. And they had a house that was barely big enough for them, but they figured out a way to make it big enough for all of us. I think in many ways the fact that my family has always gone through this idea of being tested, the fact that the neighborhood that, frankly, I grew up in was one that was chronically neglected, and we knew it. We continue to feel this need of being able to feel a self of justification for belonging. And I think that feeling, that push, and frankly the fact that I had a lot of people, to include my family, but eventually leading to this amazing string of people who entered into my life and showed me and believed in me in a way that I wasn’t even prepared to believe in myself at the time, that they really helped to guide me and direct me into not just the person that I am, but also into the things that I want to focus on and the impact that I'm hoping to make.

      Lyenda Delp: Would you say there were any differences in the type of racism and bias that you may have observed either at different times or at different places? 

      Wes Moore: Some of the most predictable life outcomes are completely highlighted by race, right, and that includes life expectancy. It includes academic achievement. It includes income and wealth, physical and mental health, maternal mortality. That's just the data. But it’s also highlighting how those different mechanisms continue to have generational impact. The fact that I was the first in my family to go on to places that my family didn’t even imagine even existed. Going to school in England and all this kind of stuff and doing everything, again, that was being asked. But here’s also the reality is that a black person with a college degree has the same wealth as a white person who is a high school dropout. And that’s a true fact right now in this country, that a black woman who has breast cancer has a 42% higher chance of dying than a white woman with breast cancer. If it was just about, well, you lived in an impoverished community and, therefore, this is what it is, that’s one thing. But, the thing that the data continues to show us is that even if you transcend from there, that racism still continues to show itself, because it is one of these things that has permeated every system that we have within our society, from housing, transportation, education, criminal justice, everything. 

      Lyenda Delp: Can you explain for us the cost of child poverty? Can you break that down just a little bit further?

      Wes Moore: Absolutely. So, if we’re looking at the cost of child poverty, the numbers actually come from an OECD study. And so, we’re talking about a study that’s looking at the impact in the levels of deep poverty and what deep poverty has actually meant and done to our measures of society. So, you consider the fact that three decades ago the poorest families in America received, most of the transfers going to families with private aid comes below 200% of the federal poverty threshold. But if you look at kind of where that is right now in recent years, those families receive less than one-third of all of the transfers. We have fundamentally made the challenge of child poverty more and more difficult. And so, when you’re looking at things like the OECD study, when you're looking at things like the National Academy of Sciences, who are talking about the $800 billion to the $1.1 trillion a year, they’re looking at it in lost adult productivity, so increased costs related to crime, increased health expenditures. And as staggering as that number is, it also fails to capture that level of untapped genius and unrealized potential of the nearly 10 million children, 10 million children in this country who are trapped in poverty.

      Lyenda Delp: How has the work of your organization changed in any way since the murder of George Floyd in particular? 

      Wes Moore: 2020 has been a year that none of us could’ve predicted and all of us wish we did not have to have these twin crises that arrived at our doorstep, right. It’s twin crises of the introduction of a virus that has had absolutely catastrophic health and economic implications on society and also, the very unneeded reminder of how policing is not equitable in every neighborhood. But the interesting thing that I think it also has shown that while COVID-19 impacts everybody, it did not impact everybody equally. And while policing reform is necessary in every neighborhood, we watched how George Floyd’s name was added to a long litany of people to include names like Michael Brown and Philando Castile and Freddie Gray and Walter Scott and Sean Bell and Eric Garner and Sandra Bland and Breonna Taylor and Laquan McDonald and Tamir Rice and Ahmaud Arbery and Travon Martin and the list goes on. But you watch how these twin crises really exposed a singular truth. And that singular truth is the role that race plays in our society. And if you look at our work, it’s absolutely undeniable to understand the role that race plays in the poverty fight that we have going on right now. And so, organizationally we have really pushed in and doubled down on our commitment, not just to keep our north star of moving families out of poverty measurably and sustainably, but also double down on being able to attack these things that we’re seeing not just at the effects but also at the cause, being able to address this issue of racial inequity in a very real and a sustainable way. And we’ve made a few movements in that space that I'm very, very proud of. One is how we’re thinking about it from an organizational perspective about how we really move to attacking it internally and externally in every way that we see it, but also in the creation of something called the Power Fund. So, the Power Fund is a new initiative to fund and elevate nonprofit leaders of color who share in Robin Hood’s mission of increasing economic mobility from poverty, and it allows us to address this issue of poverty through the lens of that interplay between racial injustice and economic injustice. Robin Hood, in addition, is putting $10 million of our own capital into this, but also being work with other partners to be able to target something that we know is not just an issue now, but address it on a long-term basis as well by supporting the leaders of today and also the leaders of tomorrow.

      Lyenda Delp: Thank you for all you’re doing at Robin Hood to help those less fortunate, to help make things better for others. The common themes implore us to learn, reflect and act decisively and with empathy for the betterment of others, perhaps, but also for the larger society and therefore our own selves and our own organizations. Many thanks to our guests and to all involved in making this important discussion possible.

    9. Brian Chesky: Today, companies aren’t just entities that make things. Today, companies are entities that stand for things. And when you buy something, you not only buy what they do, you buy why they do it. So, I honestly think a purpose-driven company is the very best thing for society.

      Catherine Kress: Welcome back to The Bid, where we break down what’s happening in the markets and explore the forces shaping investing. I’m your host, Catherine Kress. The overarching view for decades, if not centuries, was that a company’s mission is to create profits and drive value for its shareholders. But in recent years, that view has changed. Companies need to do more than just generate profits – they need to have a purpose. Employees are demanding it; more customers are expecting it; and more communities are requiring it. In the wake of the COVID-19 pandemic, the expectations for companies to lead with purpose has only intensified.

      BlackRock Chief Marketing Officer Frank Cooper and Airbnb CEO Brian Chesky recently sat down at the BlackRock Future Forum, a virtual event for thousands of Blackrock clients covering topics ranging from technology and the future of investing to healthcare and post-COVID governance. Today, we’re sharing their conversation on why company purpose is more important than ever in times of crisis. We hope you enjoy.

      Frank Cooper: We’re at a critical moment in our society overall, but we’re also at a critical moment in business where purpose during this crisis, I believe, will become one of the most critical factors in determining who emerges from the crisis more strongly. But the fundamental question we hear virtually every day from leaders who are grappling with purpose is how do you make it real, and how do you actually make it real in periods of a social crisis? I want to start by digging into how purpose is discovered or revealed. You know, my view is that purpose is not invented. It’s revealed or discovered. But specifically, how Airbnb found its purpose, its why. It’s 2007-2008. You're living in San Francisco. It’s the beginning of the global financial crisis. Millions of people are losing their jobs and there’s a critical election coming up. In the midst of all of this – this chaos, this anxiety, and this uncertainty – you decide to launch Airbnb. In the beginning, at that moment, was your focus on purpose? Was it purpose-driven action or was it something else? And if not, if it wasn’t started with that, how did Airbnb find its way to being a purpose-driven company?

      Brian Chesky: That first weekend, my purpose was to make rent so I had a place to live. I mean the way it started, I had just turned 26-years-old. I was a designer by background. I'm living in San Francisco with my roommate, Joe, and we don’t even have enough money to pay our rent. And it turns out that weekend, an international design conference was coming to San Francisco. All the hotels were sold out and we had an idea. We said, what if we just turned our house into a bed and breakfast for the design conference. I didn’t have any beds, but Joe had three airbeds. We pulled the airbeds out of the closet. We called it We ended up hosting three people that weekend, Michael, Kat, and Amol. Well, we were able to make rent. That was pretty important. But something more special than that happened. You know, these three designers like ended up living with us. We brought them into our homes. We introduced them to our friends. We took them to this conference. We kind of shared our hopes and dreams and what we wanted to do in our lives. And that’s I think when we realized like there is something deeper here. And we thought wow, we can get paid to meet cool people. And I asked Joe, who’s the best engineer you know? He said my old roommate Nate is. And we set out to build Airbnb. But to answer your question, it wasn’t ‘til years later when we actually put words to what we did. Airbnb back then was the power of human connection, the idea that you could have a meaningful connection with somebody else. And so, years later, we kind of put words to it and we basically said our purpose is really this idea that you can belong anywhere. And I think that a mission is the reason people actually come to work every day. It’s the reason people actually buy your products. It’s the reason that people actually want you to exist.

      Frank Cooper: I imagine some CEOs and leaders are thinking, okay, Brian, that sounds great. You know, you’re from Silicon Valley. You guys have the high-minded ideas and ideals and you guys are always pushing the envelope. My company, we’ve been around for 50, 75, or 100 years. Is this purpose thing, is it just for newer companies, for the kind of leading-edge companies that are starting out? If you were advising a CEO at a company that’s been around for 50 to 100 years, what would you say to that CEO about purpose-driven leadership within their company?

      Brian Chesky: I would repeat back something you said, and I’ll just add to it. You said companies don’t invent their purpose, they discover it. If that’s true, and a company’s been around for 80 years, then they already have a purpose. They already have ways of doing things. They already are distinct. I love that when somebody once said, imagine your company is on the brink of disappearing and/or it does disappear, and your customers and your employees and your partners have to go to your eulogy for your company. What would they say? Whatever they’d say at the eulogy, that’s why you actually exist. And I never really thought I'd have to ever have done that exercise in my head until four months ago when a global pandemic shuts down all of travel and suddenly our business flashes before our eyes.

      Frank Cooper: You know what’s fascinating is that if you rewind back a couple of years and you looked at book titles, there are a bunch of books with the word purpose in the title. And a bunch of CEOs and leaders were saying, hey, I'm purpose-driven and the economy was doing fairly well. People were feeling good. Stock price was strong. We’re now in the midst of a deep crisis and some of the skeptics will say, you know what? That purpose thing was fascinating. I want to hold onto it, but I'm going to put it on hold right now, because I'm in the crisis and I'm fighting for my survival. What’s your perspective? How do you manage Airbnb through this tumultuous time where we are trying to survive but we also want to emerge stronger? How do you put purpose in perspective in a time of crisis?

      Brian Chesky: Well, honestly, I can’t think of a better time to put purpose into the center of the company than a time of crisis. In other words, a way a company could discover its purpose is to look at prior crisis and see how they handled it and what emerged and what was unique. I just want to back up and say the following. I came back from the holidays, like many people who are fortunate enough to go somewhere for vacation. And I came back this January feeling pretty good about myself and pretty good about the company. We had a pretty good run over 10 or 12 years, and we were planning to go public. And then suddenly within six weeks, we lost 80% of our business, 80% of what we had built more than a decade creating. And in that moment, I saw our business flash before our eyes. It felt like I was staring into a travel abyss. There were reporters writing headlines like, “Will Airbnb exist, and will they survive the coronavirus?” And in the midst of the crisis, suddenly when your business drops by 80%, everything breaks at once. I’ll give you an example. We had more than one billion dollars of reservations that customers, guests, had booked on Airbnb. It wasn’t our money. It wasn’t the hosts’ money. It was money we were holding on behalf of the hosts and then you pay the hosts when the guest checks in. Suddenly, more than a billion dollars of cancellations come in. What do you do when a billion dollars’ worth of customers want their money back but the people that depend on the money, hosts, are telling you they need this money to pay their rent or their mortgage? That was the first test in how do you manage multiple stakeholders? We were going to have to make a series of defining decisions during this crisis and that these decisions were going to be leaving indelible marks over the course of a decade. And I decided at that moment as a team that we were not going to make, quote, business decisions. We were going to make, quote, principle decisions. A business decision is a decision you make when you try to optimize for the outcome and the outcome usually benefits the corporation. A principle decision says you know what? Things are so bad, they’re so crazy, I don’t know how they’re going to end. How do I want to be remembered? So, we decided to refund the guests, because we didn’t want them feeling like they were in a moral hazard traveling in the midst of a pandemic. We ended up giving $250 million of our own money to hosts. We didn’t ask for the money back. That was a big deal. And then we had to do a series of other decisions. And in that crisis, I started getting emails and calls and text messages from early employees, early community members reading these articles saying, we do want Airbnb to exist. And I started asking myself, why do they want us to exist? It’s the idea that at the end of the day what we’re really just trying to do is help bring people together in communities all over the world and that is a pretty special thing. And it’s actually even more special now during a pandemic, because there’s also another pandemic or epidemic happening in this world. It’s an epidemic of loneliness, an epidemic of division, epidemic of disconnection, isolation, race. They’re all things that are basically obstacles to people like connecting and coexisting together. As we get more digitally connected, it doesn’t seem like it’s totally getting better. You know, your purpose is likely how you survive the crisis, not something you put on the shelf to revisit after the end of the crisis.

      Frank Cooper: What’s fascinating about that, you mentioned earlier that purpose requires courage and commitment and consistency. What you just explained certainly demonstrates that. The other interesting thing about a deep social crisis is it reveals the pain points and the tensions that exist beneath the surface of everyday life in society. And the coronavirus pandemic has, among other things, brought to the surface of mainstream culture issues of racial injustice and racial inequity, as well as the related topic of diversity and inclusion. As Airbnb seeks to create a community and connection through hosts and guests, how do you think about mitigating the inevitable challenge of bias?

      Brian Chesky: Yeah. It is a big challenge and I have to admit my cofounders, Joe, Nate, and I, three white guys that were about 25-26 years old starting Airbnb, we hadn't experienced what others in our community experienced. In 2016, there was a hashtag on Twitter that was trending, and the hashtag was #AirbnbWhileBlack. And that was basically a bunch of black guests, primarily African American in the United States, although it was really a global phenomenon but it was mostly most of the attention was in the United States, were describing discrimination and bias that they were experiencing when they tried to book an Airbnb because in Airbnb you often would see the photo of the guest. The whole point was to connect. Well, when there’s an opportunity to connect, there’s also an opportunity for discrimination and bias. And this became an existential crisis for us, right. If our whole purpose is to help bring people together, discrimination and bias is a major obstacle to that purpose. We declared it an emergency and I think one of the things is, a lot of times I think there’s an instinct of leaders when there’s a crisis to not jump on it right away. We always wanted to feel like we made a bigger deal about a crisis than the public did. So, if the public is an eight out of ten on outrage about the crisis, we’re going to be a 20 out of 10. Because either we get dragged into the future kicking and screaming or we could lead our way into the future. And always the goal was we must do more than the world expects. Because if you do what the world expects of you, you get zero credit. You always end up falling short. So, we said we have to skate into the future of where the world is going and choose to be a mirror of society where it wants to be. But that gets really hard, because now you have to start admitting stuff, like you’re not where you need to be. So, we did a whole bunch of work and over the last four years it’s culminated in a partnership with the largest online civil rights group in America, Color of Change. They have never done a partnership with a tech company before. And we partnered with them to work on a project called Project Lighthouse, which essentially is a huge commitment to try to end discrimination on our platform by measuring it. No internet company has tried to measure the amount of bias and discrimination on their platform in a systematic way And while working with privacy groups, we are going to now measure the amount of discrimination and bias that we can see on the platform so we can better design the platform to hopefully reduce it in the years ahead, because if our purpose is to do something, and we’ve got to be honest, this is an obstacle to it, then this has to be a priority to address. So, that’s a journey we were on.

      Frank Cooper: And I'm sure people recognize, and they commend you and Airbnb for embracing purpose and ESG and diversity and inclusion and that’s all great. But, is it profitable? Do you see purpose and profit being at odds?

      Brian Chesky: Today, companies aren’t just entities that make things. Today, companies are entities that stand for things. And when you buy something, you not only buy what they do, you buy why they do it. That is how billions of young consumers are going to think. Businesses are becoming so big, I think the best thing for shareholders is that society wants you to exist. So, I honestly think a purpose-driven company is the very best thing for society. In the midst of the crisis, our business drops by 80% and we don’t know how long the recovery is. And we made a series of decisions that we thought were the right things, not knowing what the outcome would look like. And something kind of remarkable started happening. Our business started coming back. I can’t prove to you all the reasons why that is and there’s probably a whole bunch of kind of systemic, kind of industry-oriented winds to our back that afforded that and it might be pent up demand, but I will say I do think that there was some benefit to some of the decisions we did make that I think drew people back to Airbnb. I do think people pay attention. And as the problems of the world get bigger, almost every problem in the world is a global problem. There are very few problems that are limited to a single geography. And I think if there was ever an example of that, this pandemic’s a reminder that problems are global, and they can’t just be governments rising to the occasion. There are going to be companies and that citizens are watching, because citizens are also consumers. And so, honestly, I think the very best thing for business and for shareholders of these companies, for people to want these companies to exist and I think here’s a way forward, something that Larry Fink talks about, just following your purpose.

      Frank Cooper: I love that. Brian, I think we have time for one last question. What I’ve found is that in the work I’ve done around purpose is that when the employees, the workforce, they have a personal connection to the true purpose of the company, it flourishes. How do you get it into the hearts and minds of the workforce?

      Brian Chesky: Yeah. It’s a really good question. A lot of crazy things we did. I interviewed the first 400 employees and around the first like 100 or so, I tried to convince them to join. And after that, my final interview, I try to convince you not to join, because I realized I'd rather make sure you really, really want to be here rather than trying to sell you to be here.So, we tried to really make sure that everyone came for the right reasons. We created these things called core values interviews, where we trained people that weren’t in the direct line of reporting of the person interviewing to be able to interview the people just for culture, just to make sure they will be successful here. And they had a veto that the hiring manager couldn’t override. It can only get escalated to me. That was actually really, really important. I also think employees notice every defining action you make. Your culture are your most defining actions. It’s the rituals, the rhythms, the things that happen when you're not in the room. But, it's also the things that are most defining. Whatever those most defining things are, are the things that represent your purpose, because everything you do ideally ladders up to that.

      Frank Cooper: Brian, thank you so much, that was a fascinating conversation. I want to thank you so much for taking time out of your schedule to spend time with us at the BlackRock Future Forum. I personally am encouraged and energized by the thoughts and actions that you shared with us about purpose-driven leadership. We wish you and the entire Airbnb community well.

    10. Jack Aldrich: Welcome back to The Bid, where we break down what’s happening in the markets and explore the forces shaping investing. I’m your host, Jack Aldrich. At the start of each year, the BlackRock Investment Institute sets three themes for the year ahead. When we created this year’s themes, though, we never could have anticipated the coronavirus shock and the impact it would have on markets. With just a few months left in the year, how has the coronavirus changed our market views?

      In short: The future is running at us. The trends we saw as market drivers in the long term – namely, inequality, globalization, macroeconomic policy, and sustainability – need to also be considered today.

      Today, we’ll hear from Elga Bartsch, Mike Pyle and Vivek Paul on why that is and how our views have changed in light of this year’s coronavirus crisis and market volatility.

      To start, let’s assess where the economy is today. When the pandemic hit, global economic activity was put on pause, and the initial shock was sudden and very deep. But now that we’re a few months in, we asked Elga Bartsch, Head of Macro Research for the BlackRock Investment Institute, for her take on what we’ve seen since.

      Elga, now that we’ve seen some of the impact of the current downturn, how would you say this macro shock compares to that of the global financial crisis or other prior downturns?

      Elga Bartsch: So, the shock itself is certainly bigger than the global financial crisis; most likely bigger than anything that we have seen since the Second World War or the Great Depression, but what matters for financial markets is the cumulative loss in economic activity, and that is determined by the extent to which the original shock is propagating through the system. And given the very material and swift policy response that we are seeing which is helping to build a bridge across disrupted income and cash flow streams, we expect the propagation of the original shock to be much more contained this time around than it was during the global financial crisis. And we can already see that the restart of the economy is getting underway. It might take some time before we make a full recovery back to the level of activity that we saw before the outbreak of the pandemic and indeed even longer to make it back to the trend level of activity that we were on before the virus outbreak. But for the moment, the restart looks encouraging and if anything, we see only some temporary local setbacks in terms of pickup and infections and we potentially also see some headwinds caused by the uncertainty about the continuation of the policy responses in some countries.

      Jack Aldrich: You mentioned that global economic activity has begun to restart and that, that’s encouraging in part. What risks are we watching out for that might derail that or threaten the trajectory of that?

      Elga Bartsch: Yes, so, as you said, there is a robust rebound in the making, especially in the early months after the social distancing measures were eased again, but there are some indication that that initial rebound is starting to lose a little bit of momentum in recent weeks, and I think there are two main reasons around it. One is the fact that infections have picked up again as activity restarted, so that could mean that consumers are more cautious again in terms of going out, visiting restaurants, visiting retail outlets. And secondly, there is still some uncertainty in a number of countries about the continuation of the policy support which could mean that households as well as companies for the moment rather sort of preferred to build up some precautionary cash buffers, precautionary savings rather than go out and spend the money on discretionary items or decisions.

      Jack Aldrich: So, with those risks in mind, what signposts are we tracking to determine the health of the economy? 

      Elga Bartsch: Once we have assessed the size of the shock, we want to know about the restart of the activity for which we can track the interaction between virus infections, mobility and then high-frequency indicators of economic activity, and what is key is the ability of countries to restart activity without seeing a material and broad-based increase in virus infections. That’s the first signpost. The second signpost is regarding the policy stimulus, which is important to bridge across the shock period during which income and cash flow streams were disrupted. So, it’s important that the policy stimulus is sufficient in size but also that it reaches households and firms. And then thirdly, we are looking for any signs that despite the policy response, there are indications of a buildup of financial vulnerabilities or any other forms of scarring that might dent productive capacities more permanently than we are currently factoring in.

      Jack Aldrich: So, lastly, what do you see as the potential long-term consequences of the coronavirus shock?

      Elga Bartsch: I would stress two. One is the much closer coordination between monetary and fiscal policy, which we think amounts to a true policy revolution. That could mean that going forward, central banks will leave interest rates low for much longer than they have done in previous recoveries, that they will continue with their asset purchase programs and that they might even embrace, explicitly or implicitly, a strategy of yield curve control. And then the second important economic trend is that of deglobalization. That means that we see an unwinding of some of the international division of labor, notably in the area of global supply chains. This could mean that we move away from the most cost-efficient global supply chains to global supply chains arrangements that are more resilient and hence, longer term, sort of the more sensible choice. But what this also means is that the costs of production are likely to increase and together with very easy monetary policy, this all could boil down to a material upside risk to inflation long-term.

      Jack Aldrich: Elga made the point that while the initial economic shock was deep, it’s the cumulative impact, or how global growth shakes out over time, that’s most worth watching. As economies start to reopen, there’s a lot of uncertainty, from the rate of reinfection to how long policy support will last.

      The world has changed, and that’s led us to a new framework for our views on the markets. So how have our three themes changed since the start of the year? We asked Mike Pyle, BlackRock’s Global Chief Investment Strategist.

      Mike, at the beginning of each year we create three themes as part of our investment outlook. How have the themes changed since the start of this year?

      Mike Pyle: Well, they have changed a tremendous amount. When we started this year, we talked about growth steadily ticking higher, we talked about policy basically on pause, and we talked about the need to redefine resilience in light of late cycle conditions. Well, of course, the world has been transformed since then and our themes are similarly transformed versus what they were just a handful of months ago.

      Jack Aldrich: What are our three themes for the rest of 2020?

      Mike Pyle: So the three themes are first, activity restart. On the back of the historic standstill on economic activity as a result of the coronavirus shock, activity is restarting around the globe but at different speeds and different regions and in different parts of the economy. This multi-speed restart is the first of our three themes. The second is policy revolution. In the face of the shock, monetary and fiscal policy have responded with an unprecedented speed and scale, but beyond that, we’re seeing monetary and fiscal policymakers coordinating the policy effort together in historic, indeed revolutionary ways. And third, the theme that we’re also focused on is what we call real resilience, and this is the idea that the coronavirus shock has accelerated a set of tectonic trends in the real economy and these transformations around sustainability, around deglobalization. They’re really going to define the investing landscape for the coming period of years, even a decade or more, and investors need to be making decisions that are built to stand the test of those trends today and in real time, to build portfolios that are resilient in the face of these real economy shocks. Those are our three themes.

      Jack Aldrich: I want to walk through each one of those themes individually and talk a little bit more about what it means for investors. Maybe we can start with activity restart, the first theme.

      Mike Pyle: Absolutely. So that theme itself is really meant to highlight that activity is restarting after the standstill from the coronavirus but it’s restarting at different speeds in different parts of the world – East Asia and the robust public health response they’ve had there perhaps leading the way, Europe maybe a step or two back from that, emerging markets outside of Asia having some more significant difficulties around the public health dimensions of the coronavirus shock, more challenges restarting those economies, and the United States itself facing significant headwinds restarting. I think coming into the period of the crisis where the contraction in economic activity was most acute, we had really one strong view reflected across the book, and that was to be up in quality and to be underweight cyclicality and value. And now that we’ve gotten past that, now that we’re getting into the phase of the shock that involves the restarting of economies, we don't want to be as cautious on cyclicality, but we also want to calibrate them to the parts of the global economy that are seeing the speediest and smoothest restarts. So as a result of this, we have done things like close our underweight in value, close our overweight in min-vol, but in particular we’ve zeroed in on Europe as a cyclical exposure, both by virtue of the strong restart in activity they’re getting on the back of their robust public health response as well as the significant uptick they’re getting from the policy framework that both monetary and fiscal policymakers have increasingly put in place in the past period of weeks.

      Jack Aldrich: Let’s shift gears and talk a little bit about the second theme, policy revolution. Walk us through that in a bit more detail.

      Mike Pyle: In some ways, this has been consistent since the coronavirus shock first manifested itself and the policy response was taking shape, and the idea here was investors should be seeking out strong policy backstops. That's true in a very direct sense. The Fed, the ECB have announced historic programs that back credit markets and seeking out assets that have those strong policy backstops is going to continue to be an important theme and an important way of generating protective downside but we think some ongoing upside in the period of time ahead. We think that the policy framework that has now been put in place in Europe is a particularly strong backstop to be seeking out while in the U.S., we’re a little more cautious. The U.S. for the early stages of the crisis delivered the most comprehensive and forceful fiscal and monetary response; looking ahead, especially into the uncertainty of the election, we see some risks around the U.S. policy response, especially on the fiscal side, and that, along with the greater challenges the U.S. is having on the public health side, has caused us to pull back our optimism around U.S. equity exposures to something more like neutral, and that's not a negative call on U.S. equities. We think they’re going to perform in line with the rest of the world but the belief that they were going to outperform, as they have through much of the year, we’re more cautious on that from the midyear forward.

      Jack Aldrich: Our third theme is real resilience. What do we mean by that?

      Mike Pyle: What we mean by that is in a moment where rates have been driven to even deeper historic lows, when the policy revolution looks to be holding rates at historic lows deep into the future, and when inflation risks can potentially be ticking up over the next handful of years, nominal government bonds, those traditional diversifiers in portfolios, are less central to solving the portfolio challenge perhaps now than they have been. In some ways the most high conviction view we have in the portfolio is to be overweight high-quality assets, and that's particularly true in the case of the equity quality factor. These are companies that have really strong business models, that have really strong financial metrics, strong balance sheets, strong cash flows, oftentimes in a commanding position within their sectors, and really have both seen secular tailwinds at their back – in technology, in pharmaceuticals, in consumer discretionary – but have also seen very strong resilience in their performance through the period of the coronavirus shock to date. I think the core of the real resilience theme, though, is looking out over longer horizons and looking at the total portfolio. This is the idea that resilience at the total portfolio level has traditionally been a financial concept, pairing risk assets with a duration asset like nominal government bonds that cushion the portfolio in the face of shocks. But in this moment, when the value of nominal government bonds in portfolios over periods measured over years is perhaps less than it’s ever been, resilience needs to be rethought and in particular needs to be rethought along the lines of the profound transformations happening in the real economy globally, as we talked about, things like deglobalization, things like sustainability. And what that means is what we thought were going to be slow-moving longer-term investment decisions that investors and assets owners had to make are really decisions that they’re going to have to be making in the here and now. To take just one example, this concept around deglobalization, around the reversal of a lot of the trends towards the stronger integration of goods markets, of financial markets over the past number of decades. Over the decade ahead we continue to see the U.S. and East Asia rooted in China as really the two big engines of global growth. Having a balanced set of exposures to those two key engines of global growth and doing so in thoughtful and intentional way is going to be an important way that investors build resilience into portfolios but is going to be a different way than they have traditionally built resilience over the past number of decades.

      Jack Aldrich: To sum it up, Mike mentioned three new themes for the year: Activity restart, policy revolution and real resilience. Mike walked us through how these themes play out in the near term. But he also mentioned why we believe that long term trends are becoming more important today.

      Structural trends are being accelerated by the coronavirus. We turn to Vivek Paul, Senior Portfolio Strategist for the BlackRock Investment Institute, to talk about how we’re rethinking our views. 


      So, earlier we spoke with Mike Pyle about our shorter-term investment views. Among other things, Vivek, you focus on our strategic views, or views which span a five-year time horizon and longer. How do the themes Mike talked about apply to that time period?

      Vivek Paul: One of the critical aspects of our outlook is this idea of the future running at us. In a strategic horizon, trends have been supercharged. So, this central idea around the views has just never been more relevant to building portfolios with a strategic horizon. And if we think about some of those key themes, you know, the idea of the policy revolution. The extraordinary measures we’re seeing in monetary policy and in fiscal policy, this fundamentally shapes our strategic views. The path of government bond deals shifting lower, the idea that we might be approaching levels where they can’t get any lower still, this has material impacts for the role of government bonds. We would hold less government bonds all else equal than we would have done before, by materially so. And also, the monetary and fiscal interlink is part of that policy revolution. It paints a picture for us of an environment where we could see higher inflation in the future, and that’s why we like inflation-linked bonds. And the idea of this need for real resilience, which is another one of our key themes, that underpins and drives our belief on a strategic horizon. The Chinese assets, private markets assets for their diversification potential, and at a more fundamental level sustainable assets as well are critical to strategic horizon portfolios.

      Jack Aldrich: We also spoke with both Elga and Mike about the emerging restart in economic activity. How does that shape our long-term views?

      Vivek Paul: The economic restart I think is crucial of course, but I think the thing we’ve got to bear in mind for strategic portfolios is it’s the cumulative impact rather than the very near-term impact. So, what I mean by that is, the fact that the economy gets up and running now versus next month, all else equal, actually has less of an impact on a strategic horizon. The only reason why that might not be true is if that additional month delay causes some structural long-term issues or debilitating issues for the economy. But if we see that that wasn’t the case, we’ve got to remember it’s the cumulative that matters. And let’s think about this in the context of equities. Very simply, equities are just effectively a stream of cash flows going out into the future and we’re placing a price on those cash flows today, and the point there is the plural. It’s not just a cash flow. We don’t just care about the next year. We care about the year after that, the year after that, the year after that. And critical to our view here is this idea that the cumulative impact is just materially less, it’s a different order of magnitude than, for instance that we saw in the global financial crisis. And that underpins our view around equity, our view around credit that these risk on assets and still play a role in the portfolio despite the fact that we’ve seen this lockdown and this extreme market move.

      Jack Aldrich: That’s really helpful. And I want to touch on some of the things you’ve already brought up, Vivek. Perhaps starting with the role of government bonds. Historically bonds have been a complement to stocks in portfolios as a way of providing diversification, but this policy revolution you’ve mentioned has pushed bond yields to record lows; and this has been magnified by central banks globally cutting rates in response to the coronavirus shock. How has the role of bonds changed and how are you thinking about that?

      Vivek Paul: So, the role of government bonds has materially shifted for us, and there’s a couple of things to say here. This is much more than just returns being lower. The fact that those yields have fallen means government bonds are more expensive. It means the forward-looking return might be lower. But the key point here is it’s much deeper than that, and the reason is, as you pointed out in your question, Jack, I mean, part of the appeal for holding government bonds in the first place is this kind of risk-off behavior, what they might do when equity markets also sell off. And that is the thing that actually we really have to start to question now because of where yields are. Because if you were to believe that there’s a chance that yields are not that far away from the lowest that they can go for nominal yields, for instance, the idea that yields can’t get below zero in the U.S., then the critical point here is that there’s a whole host of potential future outcomes where yields aren’t falling when equities might be falling. That means the government bonds are not giving you that return that they previously did when equities are falling. And so, it’s a combination of those two things. It’s the fact that the returns are lower but also that kind of protection you’re getting is just naturally going to be impinged by the fact that yields are so low, because yields can’t fall that much further, has a huge impact on the amount of government bonds being held. 

      Jack Aldrich: And so, with that said and with bonds no longer playing as much of that diversifying role, where should investors be looking for diversification today?

      Vivek Paul: It’s a great question and the sad answer, the short answer is there’s actually almost no asset that is direct like-for-like. You know, if you think about the last 20 years, you look at the role of nominal government bonds like a consistently materially negative correlation or relationship to equities or risk-on assets, and there’s just nothing out there that plays the same role in the same way. And so, the answer to your question is there’s no one asset that does this, and we’ve got to think more holistically about the overall portfolio. For instance, the role that Chinese assets can play. Chinese assets increasingly in a world where we’re kind of moving towards a sort of bifurcated state of affairs; the idea that there’s a U.S.-centric hub, there is a Chinese-centric hub and more than ever before they’re a little bit disparate. That means that buying Chinese exposure is getting you genuinely diversified sets of cash flows, sets of returns and much more diversified arguably in the future than it was in the past, when globalization was at its peak and effectively there was just one homogenous single market. Another asset that could help is inflation-linked bonds. I think linked to this idea of the policy revolution, we believe that there could be a case where inflation is greater in the future than the markets are currently pricing. That would mean, all else equal, inflation-linked bonds are part of the solution in replacing some of that lost resilience benefit that you’re getting from a nominal government bonds, and private markets as well. Private markets give you the ability to shape deals and exposures. And the way to think about this, maybe, is you know, if you were to go into a supermarket and just buy something off the shelf, that’s like a public market. But if you were to go in and be able to kind of shape precisely what type of pasta you got or whatever it might be, you know, that’s more like the private markets. You have the additional ability to shape those exposures which means you have an additional ability to shape the amount of resiliency in your portfolio. But the final point I’ll say here, Jack, just to kind of reemphasize this point, there is no one-for-one asset. It’s more at a whole portfolio level, and this really gets to this idea about the real resilience, because this acts at a more granular level than just broad asset classes. Think about the post-Covid world. We might have material sectoral impacts. Thematic impacts that you can’t just summarize in one-line item called U.S. equity or European equity or whatever it might be. Sustainability is a good example of this, right? So, sustainability can act in different ways, in different sectors, in different regions and we’d be silly to try and think that the way in which we position a portfolio is just to buy more or less of an overall group bucketed asset class because of these factors. We’ve got to go below the hood, and that’s what we mean by real resilience.

      Jack Aldrich: I’m glad you just mentioned sustainability because my next question for you is actually on that topic. We talk a lot about sustainability as a firm and Mike mentioned how it ties into our theme around building real resilience in portfolios. How do we see this sustainability trend playing out in the long term?

      Vivek Paul: For us this is crucial because what we’ve seen over the last few months has just been the tip of the iceberg in our view. This is investment risk, first and foremost. And the thing to say here is that we are very firmly of the view that sustainability is a return enhancer. It’s not one of those things where it’s not going to harm your return so you might as well do it to be good to the world. It’s more than that. If you kind of think about the flows into sustainable assets and products over the course of this last year, even though we’ve had an extreme sell-off in markets, that flow continues. That’s just evidence here we think that this is really a structural sort of societal shift towards sustainability. And the crucial point is if it’s not yet in the price as is our thesis, well, the return you’re going to get is going to be enhanced by everybody else getting onto this bandwagon. Everyone else seeing the light. Everyone else getting involved with sustainable assets. The fact this is topical like never before means that arguably this is actually going to play out maybe not over decades but maybe over a single decade, for instance, and the time horizon’s been brought forward.

      Jack Aldrich: Vivek, this has all been really helpful, and just to wrap it up, I wanted to ask, bringing it all together, what’s one thing investors really need to know when thinking about markets in the longer term?

      Vivek Paul: I think the one thing I’d say is that right here and right now, the most important single decision an investor needs to make is to reconsider the strategic asset allocation that they have. It’s the number one thing. Typically, strategic horizon decisions, portfolio construction, because it’s like slow-moving, because it’s long run, it’s not as newsworthy. And people might think well, look, that’ll take care of itself. I’m going to care about the near-term stuff. Now more than ever, you know, it’s, this is the newsworthy thing, because all of the things we’ve talked about today, you know, the idea of the policy revolution. The idea of sustainability, the idea of deglobalization and the role of China in the world, these are structural issues. These are things that have basically been supercharged and it’s shifting the investment landscape. If you think about our personal lives, for many of us, buying a house is the most important strategic decision we ever make, right? Imagine you were someone with a long-term plan to upscale your apartment. You want to do it at some point in the future, but that day will come. You’re not really worrying about it; it’s going to happen in the future. And suddenly you and your partner discover that you’re pregnant with triplets. You’re not going to be able to kind of resolve this by just buying some wet wipes, right. You need to supercharge your plan as to where you’re going to live. And this is really the same with Covid-19 and the impact of this shock. This is not something that you can do by tweaking around the edges. The whole thing needs to be reevaluated, and it needs to be reevaluated now.

      Jack Aldrich: The coronavirus crisis has caused us to reevaluate our market views. The pandemic has exacerbated inequality across income levels, race and countries. It’s exposed the vulnerabilities in global supply chains, adding more fuel to the fire of geopolitical fragmentation. As central banks and governments alike have stepped up to respond, we’ve seen the lines of monetary and fiscal policy start to blur. And lastly, it’s emphasized the importance of sustainability, particularly around the role of corporations.

      As a result, we have three new themes for the rest of 2020. We are moderately pro risk in our investment views, and we like credit over stocks. In the longer term, we see Chinese assets, private markets and sustainability all playing a greater role.

      That’s it for this episode of The Bid. We’ll see you next time.

    11. Mary-Catherine Lader: Welcome back to The Bid and to our mini-series, “Sustainability. Our new standard.” I’m your host, Mary-Catherine Lader. The coronavirus crisis has accelerated sustainability. It’s brought to light issues around the environment and our climate, as well as social issues like how companies engage their employees, their communities and their customers. And so investors are turning to sustainable investing more and more to build resilient portfolios. Now as economies around the world begin to aim for recovery, or at least adjust to a new normal, can sustainability accelerate that recovery?

      Recently, at BlackRock’s first annual Global Summit, I had a conversation with leaders in this field about how sustainability can help us build back better. Today, we’re sharing that conversation. We’ll hear from Mindy Lubber, CEO and President of Ceres, Fiona Reynolds, CEO of the Principles for Responsible Investment, Marisa Drew, CEO of Impact Advisory and Finance for Credit Suisse, and Peter Bakker, President and CEO of the World Business Counsel for Sustainable Development. Let’s get to it.

      Mary-Catherine Lader: So to start, the overall theme is can sustainability accelerate recovery? Fiona, much of your role at PRI is helping to advocate for policies with both public sector and private sector leaders. What are you doing to capture the opportunities of this crisis?

      Fiona Reynolds: Anyone who has been in doubt about sustainability issues I now think understands the interconnectedness of issues, so I keep saying that people really can now see through Covid-19 that if you don't have healthy people and you don't have a healthy planet, you can't possibly have a healthy economy. Those three things go together. And, at the beginning of this pandemic, I had so many people particularly in media and other people who said to me, well, surely sustainability is going to fall off the agenda. That hasn't been the case. I think sustainability has been very much at the fore, but what we need to do making sure going forward and just mentioning about build back better is that with stimulus packages that are going to total somewhere between $10 to 20 trillion, really we have to think about that what we do today and tomorrow, over the next couple of years is really going to shape the future of our economy but also our society for the next decade. And the private sector business and investors really need to play a significant part of that solution, because governments alone are not going to be able to fund the transformation that we need, and I think that we’ve got such a great opportunity from the sustainability community to make sure that we're part of ensuring that the new normal is the world that we want to be in, that we have an economy fit for the 21st century and that really has environmental and social aims at the heart, and that we can create the jobs for the future and the skills that we also need for the future. So, as they say, never waste a good crisis, and I think from our perspective from the investment community, that's what we're very much trying to do. How do we push sustainability forward.

      Mary-Catherine Lader: And, Peter, on that note, you wrote an article recently saying that CEO leadership would be absolutely critical in pushing sustainability forward and trying to not waste this crisis and create some systemic change, so what specific actions do you think in 2020 you would hope to see from leaders who care about really using this to accelerate sustainability?

      Peter Bakker: I think for every CEO and every leader in business, the perspective of risk will be completely changed. Most supply chains in the world found themselves ill-prepared for the shock that COVID brought. We all realized that climate change has the potential to bring even bigger shocks to our systems, so how do we get prepared? So the first step that companies need to do is integrate sustainability truly into their governance, into their risk assessment, into their position making, eventually in their disclosures to capital markets, their investors or financiers. The second thing we really need to do is we need to, as this system transformation gets underway, understand that to implement sustainability well, you're really building the competitive position of your company. And then, thirdly, as you disclose transparently the process that your company is making, really find new ways to engage the investors in the capital markets. Now, we need to move to a system where the cost of capital of a company is determined by its sustainability performance as well as its financial performance. 

      Mary-Catherine Lader: Mindy, the work that Peter's talking about is certainly your work every day as well. I'm curious how optimistic you are that we'll see real change in the next 12 months and what exactly you'd be asking CEOs to do differently as they think about incorporating ESG issues into their decision making and strategies.

      Mindy Lubber: Well, let me just pull the lens back a tiny bit in response to a few of my colleagues and then go right into that question. Right now, I think Fiona mentioned it, there will be about $12 trillion moving into our economy to remedy and to help build us out of the Covid economic crisis. That's the global number, and that's stimulus packages and infrastructure packages, certainly $2-4 trillion in the United States. Not all of that is in the marketplace yet, but some of it is, and it's moving out quickly. That money could be spent in one of two ways. It could move us back to a business as usual, highly fossil-fuel-driven economy, or it could be around a clean energy, clean transportation start evolving us as it relates to the chemicals we use and the cement we use and the steel we use and the way we build bridges and schools and the infrastructure of electric vehicles. So to come back to what we ask of the companies we work with, we do expect integration of sustainability or ESG from the board room to the supply chain. We might train corporate boards, help them set goals, so we get to a Paris-aligned future that we know where we need to get, and we can't start in 2045. We need to start today, so set audacious goals for the next 20, 30 years starting today, apply those goals and standards to their supply chain. If they have climate and human rights and other standards in the states, make sure we're applying that equity and fairness around the world. And to start changing what they do, what they buy, what kind of products, and it will help them with their employees, with their consumers, with their profitability, and we work with hundreds of investors, that's what they want to see from their companies, integration of climate risk and opportunity, of sustainability risk and opportunity into everything they do, and this is not about changing trading off values for value. This is about making money, creating a long -erm sustainable future, doing so in a way that's good for the company but also good for the planet, and the final point is those very same companies that Peter and I are referencing or Fiona as it relates to investors need to join us and stand up and support policy and support those stimulus packages to move us to a sustainable future.

      Mary-Catherine Lader: Marisa, I would love a reality check from you. When we say that it's not about trading off value for values, look, I talk with all kinds of investors all over the world in off-the-record settings every day, as you do, too. Is that a debate that you think is really settled, or how much of your time is still trying to make that case, trying to illustrate that the data's there such that sustainable investing does not have to mean a trade off in return?

      Marisa Drew: I think it depends on who my audience is. So I think the institutional community for sure now is seeing just through the crisis alone we see the performance. When I speak to people as individuals though, I think there's an education to be had. I do often have a conversation about whether this is trading off return if people are aligning values with their investing habits, so the more cases that we can demonstrate that we do generate good returns, the better off we are able to drive that further bucket, if you will, of the private investment, which then of course is giving asset managers capital and then demanding of them certain things, so there's sort of a holistic value chain effect. When we also think about the smartest investors who have had tremendous success over decades, increasingly one by one, they're joining our party too and waving the flag and saying this is an enormous investment opportunity. Jeff Ubben at ValueAct, who is relinquishing part of his old fund, jumped in, and he said when you address something like climate change, which is the single most important thing that we need to be investing in for global prosperity, I'm paraphrasing his words, but he says when you're addressing climate change with a business solution, in his words, he says that's a 10 times your money deal, and that kind of mantra I think is what we need to continue to reinforce in whatever way we can, but good data and good case studies I think is key to that. 

      Mary-Catherine Lader: So to help quantify the 10 times your money deal, we still have some gaps, right? There's growing data about the potential risks of not having more sustainable strategies and investments, but still kind of quantifying even specifically climate risk is a little bit challenging and still an evolving space. Fiona, what do you see as near-term needs to help make climate risk in particular sort of more tangible and actionable?

      Fiona Reynolds: In many parts of the world, and certainly in a lot of our signatory base, rather than just thinking about ESG from the fact of how do ESG issues come in and affect my portfolio from a risk/return point of view, more of our signatories are starting to think about how do ESG factors in my portfolio affect the real world, and we have to have that discussion as well. But as the reality of climate change becomes increasingly apparent, it's not when governments will act or it's not if, it's when, and the longer we leave it, the more that we are going to see that more drastic and urgent policy issues are going to need to be brought in. So we're seeing across the world that there's many countries, including the EU that's now got a green new deal and that's leading the way. The UK's got a net zero target, as have countries such as Canada, Norway, Denmark, and the list goes on. But also achieving net zero doesn't just magically happen. The only way governments can actually achieve them is by changing the policy sense. I think that the message that we certainly try to give to investors is you need to act now, or you're going to pay the price later, because this is happening, and it's a reality. 

      Mary-Catherine Lader: In that spirit of acting now, I'm curious, who are we looking to as leaders? Who are we looking to to really step out, whether I think of a specific government or a specific company? We had the Bank of England, for example, like took the lead in identifying what climate stress tests might look like, but that's been put on hold to some extent, understandably given the challenges of the current crisis. So for the next six months what names should we be looking out for?

      Mindy Lubber: Well, first of all we need to look at all categories. Let's start with companies, and I could give you 100 examples. But Jeff Bezos stepping up with a 2040 net zero pledge, so that's 10 years sooner than most. It's obviously a company of inordinate power and magnitude. Some of our largest asset owners, people who manage $300 billion, whether it's the California public pensions fund or the California teacher's fund or the New York state fund, we are working with them to come out with a plan for Paris-aligned portfolios. A few others, we have to have policy. There are tens of thousands of companies below the Russell 1000 who aren't doing anything. We need policies so there's a level playing field. And our Federal Reserve Bank needs to follow the lead of the Bank of England. We are working with them every day and with leaders in every one of the federal offices to make climate a systemic risk, meaning the risk is to all of our economy, and they need to be part of the discussion and regulation, not just congress or not just the securities and exchange commission. And finally I would ask the SEC to mandate the disclosure of climate risk, because you can't act until you understand the risk. If we can move on all of those fronts, we would make a good deal of progress. 

      Mary-Catherine Lader: Indeed. Peter, I see you nodding. Would you add a few to that list?

      Peter Bakker: I would give a generic answer and then name a few names, so I think generically what you need to do is make a list of which are the companies that have signed up to science-based targets, because that's where the climate change journey starts for a company. Set yourself a target to get to 1 ½ degrees or net zero carbon by no later than 2050 and have a realistic plan to half the emissions in the next decade. Any company who does that will probably qualify. The second element, which are the companies that have signed up to TCFD to bring this stuff in their governance and be transparent towards capital markets. If you look at it like Mindy says, you probably want to go sector by sector, you know. I thought some of the companies that stood out in the last few months were probably BP, that as the first major oil and gas company came out with a net zero target, swiftly followed by Shell. In the food and fast-moving consumer space, Danone is really pushing hard for regenerative agriculture. Unilever broadened their ambitions with a holistic plan that captured not only climate change but also biodiversity loss and some of the social aspects, so there's the big brand names out there, but I think the generic; is there a framework science-based targets companies adhere to and then start through their disclosures measuring what they actually do and not just talk.

      Mary-Catherine Lader: Absolutely. Moving onto another dimension of sustainability, so the social responsibilities and opportunities or risks in the investment landscape, there's been a lot of talk that in the wake of Covid-19 there's more focus on S, and that I think is a false construct, because we need to be thinking about all of these simultaneously. That's the point of sustainability, but to the extent that this is an opportunity to refine our understanding of what data we need to be collecting, what companies need to be doing to think about social risks, that this is a welcome opportunity to do that, whether it's about resilience in the wake of great challenges and exogenous shocks like Covid or a pandemic or whether it's about what drives employee loyalty, retention and even how we think about elements of social equality and how they refract inside a corporation or an investment opportunity, so, Fiona, I'm curious, from PRI's perspective, what are you doing in the wake of that kind of conversation right now when there's a discussion that there's, quote, more focus on S, what are you going doing about that to take advantage of that opportunity?

      Fiona Reynolds: I completely agree with you that you need to look holistically at the issues, but for some reason, people don't. And I think that Covid-19 has really just exacerbated the systemic social issues across the globe, from inequality and inclusion, decent work, social protections, and I think it's really unveiled a lot of the shortfalls in our economic system. The ITC have estimated that up to 300 million jobs can be lost, and this is going to cause some people to slip back in poverty. There's sort of two types of people in this crisis. So there's the people who are getting paid, who are working at home, and we can homeschool our kids, and, yeah, sure, we've got a bit of inconvenience in our life, but, if we're healthy, that's all we have. But we also see lots of other people who are in jobs where they're on the front line or they have no sick pay, they have no social protections, they are feeling even if they're sick, which isn't helping anyone, that they have to go to work. So we need to really not just be looking at the climate issues, we need to be looking at the social protection issues. A lot of the disruption that's happening at the moment and a lot of the social divisions that are happening, a lot of it stems from inequality. We're talking about the fact that we need to build back better, we're talking about that it's between $10, 20 trillion that's going to be spent on the recovery, that recovery needs to focus on creating jobs, but they need to be jobs that are focused on the skills that we need for the future, but we also need to make sure that they are good jobs and that we have good social protections in place. If we look at some of the reasons that countries in the world that don't want to make this transition to a low carbon economy, it's because they've got lots of people in jobs in the fossil fuel sector, and that can't hold us back, but we can't leave those people on the scrap heap either. We need to make sure that there is a just transition to a net zero world and that we factor in work forces and we factor in communities, or we're not going to get anywhere.

      Mary-Catherine Lader: Marisa, what do you make of this increased focus on social factors and sustainability?

      Marisa Drew: I think there was a recognition through the crisis that the E and the S are inextricably interlinked. If you don't have a healthy planet, we are going to have more sickness, we are going to have more pandemics and so on. The companies I think that have demonstrated they've taken all of the ESG into consideration to me are the ones that have outperformed to the crisis. Why? Because they've been more aware of the total factors, they've demonstrated more resiliency, they've probably by the virtue of better governance had better scenario planning, and then I would point to the companies that handled, even when they were going through, say, a furlough process, the companies who handled that well versus those who didn't, just think of the headline risk of the ones who didn't. So, as we come out of the crisis, then those are the companies that are going to create I think customer affinity over the longer term. They're going to be the companies who will be the employers of choice, so the business case I think is becoming very clear.

      Mary-Catherine Lader: So just as you said the E and the S are linked, so are the E and the S linked to the context in which a company operates, right, so whether that's the social lens through which you look at a company's operations as affected by the social construct and the social contract of the companies in which their operations are most concentrated, or the environmental effects of where their operations are. How do each of you think about how we adjust these themes we've been talking about, frankly, at a global level for local realities? 

      Fiona Reynolds: So I would just say of course there's regional differences and of course economies are different, but I think the baseline of what people should expect has to be the same around the world. People should expect to be able to make a living wage. Now, that wage will be different in different countries. They should be able to go to work and have safety and be protected and not be put in situations where they're working in a way that there's huge numbers of accidents. Such should be the same for everybody. 

      Marisa Drew: The only thing I would say is that we do have to be sensitive to the developing world who face many different challenges, so if I'm going to pick one sector, say that pulls at peoples' heart strings, something like animal conservation. We're facing a moment now say in Africa where we have come a very long way to retrain poachers not to go after animals because you have tourism, and that's created sustainable livelihood for those people who would otherwise seek a different outcome. Now, during the shutdown in Covid, those people cannot feed their families. The tourism has dried up, and we're seeing an increase in poaching. So, when we talk about build back better, sometimes we put our western lens on things, and, you know, you don't have those social systems or plan Bs, if you will. So I 100% agree that everybody needs that basic human right to a good livelihood and good opportunity, but, if you're making a choice between killing an animal and putting food on your table or being a conservationist, those are really tough choices, so I think over time what's incumbent upon us as we do think about building back better is to try to demonstrate to them that if we can help in whatever way to maintain and preserve the ecosystems that will be sustainable in the long term and show the benefit of making those investments for the long term and how they will then come back and create a return for those communities, that's got to be a part of the equation, but it's a sensitive topic in some of those areas today.

      Peter Bakker: I would probably put a bit of a health warning on it all. I mean, I am in complete agreement that the S will gain a lot of momentum as a result of Covid, and everybody is now talking about it, but the reality is the data quality, the tools to measure and to manage the science-based targets are simply not there in many of the areas, not the way that they have been developed on the environmental issues. So I think we need to translate this conversation quite quickly, and what are the material issues that on the social side we wish to focus on. Now, obviously human rights and supply chains is one. I would argue living wages throughout supply chains could be another one. And so let's quickly organize a global conversation about what are the 10 big indicators that we all want to start measuring, what are the tools we do not yet have or the standards we need to make those measurements happen on a comparable basis, and then step by step drive this in, because otherwise we're going to continue to talk about feel good stuff but fundamentally don't make the change that we need.

      Fiona Reynolds: Just on the developing countries, I think that one of the things that we also need to be very cognizant of during Covid-19 and in the recovery and coming back to jobs being available in those communities system, last year I chaired a financial services commission on modern slavery and human trafficking through the UN, and there's 40 million people in some form of modern slavery and human trafficking today. It's 1 in 185 people, it's a $150 billion annual business for traffickers. It's important to the finance sector, because you have to launder your money somehow, and you do it through the finance sector in cases. For investors, a lot of issues in supply chains. So this is more people within slavery than in any time in the history of the world. But one of the sad things about Covid-19 is that traffickers peak on the vulnerable, and we're going to see far more vulnerable people, and I think that we'll see an increase rather than a decrease in this issue, and it's the other reason why we in the developed world have to be very conscious of things about supply chains, making sure that suppliers are paid so workers down the chain get paid within this issue when we are thinking about this from all economies, not just from the developed economy side of things, because I really do think on that side we're going to see more human tragedy happening if we're not careful.

      Mary-Catherine Lader: Mindy?

      Mindy Lubber: I want to be sure that we don't overly separate E and S issues. They are so interconnected as to sometimes be inseparable from my perspective, and, if we just take climate change and how it exacerbates problems, particularly in the developing world, but everywhere else, climate change will cause less water availability. We already know that. We will have about 30% less water than we need as a world community in 2026 or 2027. That comes out of the World Economic Forum, not an environmental piece, and no company could survive without enough water to run manufacturing. It will decrease their share value, but the humanity of it, right now women who are already in the developing world spending hours trying to get enough water for their families, that will double, that will triple. The issues of climate, of people have traditionally thought it's an E issue, the environment. It impacts those who have been most affected by other tragedies of the economy more so than any other issue, and we've got to be mindful as we take on climate, it's not about the planet, it is about the people in the planet and whether my kids and your kids will have a future. 

      Mary-Catherine Lader: I want to ask each of you, we’ve touched on a number of different things, whether it's the importance of regulation and policy and standards or lack of excuses in that category. We talked about the integration and links between these different issues, what's one question that each of you thinks is really critical to ask to raise the credibility of what it means to do sustainable investing and to create progress in this area that we may not have touched on yet?

      Fiona Reynolds: I'll start. So, if I was talking to a company and wanting to drive sustainability forward, and I'm coming from the investment point of view, I would really want to understand how do they manage sustainability and manage profit? So how are they managing profit, people, and planet? Tell me about it all in an integrated way. You know, how does their work contribute both positively and negatively to sustainable outcomes in the world? I think it would tell me what was a really good long-term company that I want to invest in.

      Mary-Catherine Lader: Mindy?

      Mindy Lubber: So I would ask major financial enterprises, including BlackRock, if in fact the data is clear that we're seeing, no compromise in investments, if we factor in social and environmental issues, how do we move a company who's literally a trendsetter in everything? You are trendsetters and appropriately so, from a fifth or whatever number of sustainable investing products to 50%, to 70%? And how does that happen much more quickly than it might otherwise? You all have extraordinary power, I'm not putting you on the spot now, but those are the kind of questions I'm asking colleagues and at all the large financial institutions.

      Mary-Catherine Lader: I think it's an important and fair question. We've certainly set a target of a trillion dollars in 10 years, but seeing just the flows in the first quarter of this year—we have more data basically to base those goals and those targets on rather than just aspirations and hope, and I think we welcome observations and input from each of you in your organizations as you see how we and others can be doing that. Peter?

      Peter Bakker: I would say Covid has proven to all of us that we can radically change if the circumstances are there, so I would expect every business leader to come up with a very clear picture on what is the end state? What does build back better mean for your sector for your company? And then, as an investor, I would really focus my questions on how are you going to manage the transition, because I think the winners and the losers are not going to be determined by figuring out that we need to electrify transport. The winners and losers will be determined by who gets there first in a responsible way, and that's really where the focus now needs to shift.

      Marisa Drew: I would ask for our companies to be more consistent and to provide more disclosure and really, as they start to think about their transition plans and as they start to think about integrating E, S and G into their operations, to really try to identify and isolate those material factors that are helping to drive their business. Because what investors are calling for is the ability to have that information so they can make informed decisions, so to me it's a lot about the data and the disclosure. And then we add on technology, machine learning, AI. I really think we're on the cusp of being able to provide enough information so you can really pick and choose those winners.

      Mary-Catherine Lader: Well, thank you to each of you for sharing your perspective, for raising those questions, and I at least am hopeful that if we were to reconvene in six months, much less a year from now, hopefully we'll have slightly new things to talk about as opposed to saying the same things. It feels like we are at a turning point in terms of progress, and that much broader recognition of the importance of sustainable investing, so thank you.

    12. Oscar Pulido: Welcome back to The Bid, where we break down what’s happening in financial markets and explore the forces shaping investing. I’m your host, Oscar Pulido. Globalism is at a crossroads. Coronavirus has caused a dramatic pullback in the once-seamless transfer of technology and people across countries. And as a result, companies more and more have to adapt with societies and their needs, or else get left behind.

      BlackRock CEO Larry Fink and Microsoft CEO Satya Nadella recently sat down at the BlackRock Future Forum, a virtual event for thousands of our clients where they discussed topics that are informing the future of investing, from technology to post-COVID governing to healthcare. Today, we’re sharing their conversation with Becky Quick, co-anchor of CNBC’s Squawk Box. Larry and Satya talked about how changes in geopolitics are shaping the global business environment, the fortunes of different economies and the path for corporations in the long term. Let’s get to it.

      Becky Quick: Larry, I’ve been thinking about globalism, and just a few years ago it seemed like things were going so global. You had borders coming down. You had people and technology and companies moving across countries seamlessly, but that seems to have been part of the big reason that the coronavirus has replicated so quickly, too, and we’ve definitely seen a pullback since that time. When you’re on the ground, what do you hear in terms of what governments and companies are thinking these days, and what do you think about the future of globalism?

      Larry Fink: The future of globalism is intact, but it’s evolving. It’s going to be adapting with societies and societies’ needs. But let’s be clear: Globalization has helped more people in society than any other economic forum. And yet globalization has left some segments of society behind, and so that’s why I said globalization has to change and evolve. And technology is going to accelerate globalization in many ways and inhibit globalization. Right now, we’re seeing the impact, and also because of COVID, as you framed the question. The supply chains are being redefined because of technology, and we were seeing the trend of more onshoring of some manufacturing products. We’re seeing moving supply chains closer to demand, so that evolution has already occurred. It may be accelerating now, but let’s be clear. I think even now the sharing of science related to COVID is a good example of how globalization can accelerate humanity. If we don’t focus on globalization and the positive impacts of globalization, we are going to leave billions of people in society and different countries behind. And so if we are still humanists, and I think we all are, we all need to be working together to build a more holistic world. And I know that’s not fashionable at the moment, and we’re all focusing on nationalism and make America first. I believe we still can make America first, using that phrase, but in the context of globalization as a positive force.

      Becky Quick: Hey, Satya, let’s just talk a little bit about what you’ve seen and how this really accelerated how humanity uses technology. What have you all seen at Microsoft?

      Satya Nadella: So I think of it as in three phases, Becky. They’re all happening in parallel. There was the response phase. There is the recovery phase. There is the re-imagine phase, and in all of these phases, technology is creating both the conditions for business continuity. I mean during the response phase, if you think about it, the biggest challenge was how do we continue to work, but most importantly, the critical parts of our economy, the first responders. So, we became the digital first responders to the first responders out there whether it’s in healthcare, whether it’s in public sector. And so, the idea that technology can help the continuity of business, that’s been the most important thing. Now, as we start thinking about hybrid work in the recovery, in the re-imagine, we start seeing some of the structural change. Take even what’s happening in retail. Omnichannel retail was there before. Guess what? Omnichannel retail will take new shape now. What’s happening online? How does it get consummated in some contactless drop-off, and so on? So, the idea that we will now start seeing bi-business process, in other areas, telemedicine. Telemedicine has been something we’ve been talking about for 20 years, 30 years. Guess what? Telemedicine now is mainstream. Basically when every hospital shut down for COVID, all of their outpatient activity, in fact, moved to telemedicine, and it’s not going back to normal. In fact, an AI triage tool to a telemedicine consult then showing up in the hospital is going to become a norm, and so these are good changes. These are going to be helpful even in terms of us taming the healthcare costs.

      Becky Quick: So Satya, Larry just said that he doesn’t think globalization is dead, that it’s going to continue. It’ll evolve. But do you think technology is going to be a huge part of the reason why and just the means for how that happens? Do you agree with what he said?

      Satya Nadella: I liked Larry’s even overall framing. You see, in fact, I think perhaps one of the biggest mistakes we made whenever the Berlin Wall fell was to talk about it as if it was end of history. If anything, it should have been just, hey, the continuation of history, and globalization has been there. It didn’t start in ’89. It has been there all throughout human history. The question is how do we adjust even for some of the unintended consequences of globalization? If anything, I think we all are as “multinational companies” have to be grounded on what happened in that phase of globalization. A lot of businesses got created. A lot of the middle class in Asia was able to make progress or recreate it. But at the same time, communities in the United States were also devastated because of jobs going away and those communities not having the ability to move up the social ladder and the economic ladder. So now in this next phase, as a multinational company grounded in that fact, so I believe my license to operate whether it’s in the US or in the UK or in India or what have you, comes because something else that Larry has been talking about because we are creating local surplus. Companies can’t be just out there. They have to be where they are living and working and contribute, and so that to me is what I take away. So, therefore, I think globalization will continue, but we also and especially in business, also need to talk about the real issues that got created in, say, the last phase of globalization and how we’re going to address them.

      Becky Quick: Let’s talk about one of those issues, and that might be something that we’ve traded around the globe as well: the fiscal and monetary policy to deal with some of the problems, huge economic fallout that has come from this and that what we saw happen last time with the Federal Reserve and other central bankers when we saw this back in 2008, 2009 step in to try and do these things. One of the unintended consequences that was that it made wealthy people eve wealthier by trying to preserve assets and hold things up. And so I kind of wonder what happens this time around. Larry, you talk to a lot of these central bankers all the time. What do you think the potential unintended consequences could be?

      Larry Fink: And we’re engaged with five different central banks right now in helping them with their policy formation. So there’s no question. Monetary policy has been the dominant tool for stabilization of the world, and monetary policy monetizes financial assets. And financial assets have done better than any form of assets. In post-2008, it’s certainly what we witnessed since the Federal Reserve and other central banks began their policies. And so there’s no question the wealthy people who own financial assets are huge beneficiaries. Now that’s the first line. The reality though, monetary policy stabilized so many great American companies, so it’s not invisible. And in the third week of March, the Federal Reserve announced their intended programs. We announced a trillion-and-a-half-dollar fiscal stimulus with more to come. Other countries did the same. And so, the very difference between today’s monetary policy function and 2008 was the monetary policy, as the fiscal policy, is all about preservation of jobs, and in every conversation I’ve had with every central banker and policymaker, how do we preserve jobs? How do we create stability? And through that obviously you see this big impact in the valuation of equities, but the job stability was enormous from the very low point in March. And I think those are the things we’re not emphasizing enough. The positive actions, the aggressive actions of the central banks, and our Treasury was enough to stabilize our economies. It was able to stabilize hundreds and hundreds of companies, thousands of small businesses. And I’m not saying we’re over it, and we still have a lot of structural problems today, but the actions were fantastic. Now, the unintended consequences are going to be generally when you have deep recessions, we generally benefit from companies that fail because we have the resurgence of new companies. We’re not going to see that. We are creating some structural imbalances in the long run, but we shouldn’t care about the long run because if the policies work and we create new economic growth and we have a vital economy going forward, much of the unintended problems will not be as significant. Unquestionably we’re going to have trillions and trillions of dollars added to our deficits, and ultimately that will be a big issue one day, and it will be a bigger issue if we don’t create growth in between that. We have to look at it in the whole totality of what was done, and I would applaud our policymakers.

      Becky Quick: I would applaud them too, but I wonder how lasting some of these issues will be when you hear companies like United say that they may have to lay off half of their employees come the fall if things don’t turn around. 

      Larry Fink: There are going to be a lot of companies that are going to be impacted by the disease curve, and right now we’re seeing a resurgence of the disease curve. We’re seeing some rollback. And so let’s be clear. In some industries, we do have systematic problems that will still persist, but for many, many other companies, they feel a lot better today. Their prospects in the future are far better than they were in March.

      Becky Quick: Hey Satya, let me ask you about tensions between the United States and China. It’s certainly not new, but the rhetoric has dialed up recently, and I think that’s in large part because of what’s happening with the pandemic and the scare that has kicked off things. How has that changed how you handle the supply chain, how you handle your customers, and how do you just deal with your own company, dealing with a global company?

      Satya Nadella: I think one of the issues coming out of this is definitely the relationship between the U.S. and China but quite frankly the U.S. and European Union and what is happening between India and China. There’s a lot going on in the world today whether it’s nationalism, whether it is about national security, whether they’re legitimate interests each country has in terms of their own trade and what’s in their interest. So, the way I look at it, I go back, Becky, to say, okay, what does it mean for us to serve our customers where they are with the sort of types of networks and businesses that they have. For example, let’s take a European multinational customer who is on our clock. What they care about is Microsoft doing the job to help them operate both in China with the Chinese framework and the laws as well as in European Union and in the United States. So we need to be where our customers expect us to be. That’s sort of why I’m being practical about where the world is being reshaped and where are our customers expecting us to show up, and with what type of data sovereignty, what type of locality that people expect from us whether it’s employment locally, whether it’s data center operations locally. In some sense you could say tech was one of those industries that didn’t face regulation. Larry and everyone else in the financial sector has always faced a lot of barriers and a lot of sort of local regulations, whereas tech had unfettered access to markets. Those days are gone, and the idea that tech will now need to make sure that they have local operations, local jurisdictional relevance I think is going to be the case for us.

      Becky Quick: Gentlemen, you both talk an awful lot about corporate responsibility and what your companies need to do to step up in this world. I think people have turned more and more to corporations in recent days and especially in the last several months, and I just wonder if you can address the idea of what it is that you think corporations should be doing and maybe talk about one or two things that you are doing to make sure that you’re involved with this. Larry, why don’t we start with you?

      Larry Fink: I write these letters. I’m already working on the ‘21 letter. Stakeholder capitalism is becoming more and more important. Satya talked about a license to operate. This whole trend of de-globalization we have to prove in every part of the world. We earn that license to operate every day. COVID is an existential risk of health. I wrote about climate change. It’s an existential risk to health and so much larger, and I think the role of corporations are going to be even larger and larger. Society is frustrated with government. I wrote about that in the last two years, and I think society is looking for large corporations like Microsoft and BlackRock to play a bigger role. And, more importantly, our clients want us to play that role, and most importantly, if you don’t show a strong purpose, you’re not going to get the best and brightest young people joining your firm. And so, I do believe over the next 12 months we, as corporations, are going to have to be even more vigilant in terms of our role in society. In the United States, we are going to have to show a great deal of what we are going to do about the social issues in our country. We’re going to have to talk about how we are keeping our employees safe as we ask them to come back to the office. The majority of your employees in the United States are still frightened to be coming back to the office. As much as they want to get out, they are worried about public transportation. They’re worried about going up and down elevators. They’re very worried. I believe one of the good positives out of this will also mean, though, we will never have 100% of the people back in our offices. We’re going to rotate. We’re going to be working there. That’s going to be a good thing. We’re going to actually improve the environment. We’re going to have less city congestion. Can you imagine New York and Seattle with less congestion?

      Becky Quick: Less traffic.

      Larry Fink: But anyway, the most important thing that I think we have to think about as leaders in companies more than ever, we have to show a little more emotionalism. We also have to prove our actions with courage. That is something that I’m saying loudly right now that we are going to have to be more courageous as a company, and those companies that are being identified, that are making these changes, that are really focusing on stakeholder capitalism, they’re going to be the huge winners in the future. And the reluctant, non-courageous leaders at companies, they’re going to fall. They’re not going to get the best and brightest young people. Their clients are going to be pulling away from them. The thing about long-termism and long-term capital is going to accelerate more than ever, and we all are going to have to be a little more courageous.

      Becky Quick: Hey Satya, I know one of the issues that all corporations are kind of looking at right now is diversity and trying to make sure that their employee base represents their customer base and the rest of the world beyond that. I had read recently that you were going to make sure that Microsoft is reaching out to some of the historically black colleges and making sure you have better connections there, and I thought, wow, that’s the perfect sort of scientific logical way about going about doing this. 

      Satya Nadella: I think this is the time for every one of us to have that sense of purpose not just in words but at the core of the business model. And one of the things I describe it as Microsoft will do well if the world around us does well, and that has to be true. That means what we do in the core, whether the products we produce, the business model we have leads to that broad success. And diversity and inclusion is the same piece, Becky. We have to represent the world if we want to serve the world internally. So one of the things that we did, given the moment we’re living through when it comes to black and African-American experience in the country, let’s start with our own company. One of the things that has been, quite frankly, a massive learning moment I think for all of us, for sure for me, was just the limited experience of people who are black and African American in Microsoft, in Seattle, in the communities we live in and saying, okay, what are we going to do about, first, representation at all levels, inclusion at all levels? And so that’s sort of the commitment we made, which is to say let us think about our own culture, our ecosystem. So, for example, we spend a lot of money. We have supplier programs that, for example, now have sustainability metrics. Let’s even have representation metrics, so we are now expanding our supplier programs, our programs with customers, partners so that our ecosystem also takes this as a priority just like how we are taking climate change as a priority. And the same thing goes with even the communities we live in so using data perhaps to create more transparency around the criminal justice reform that is much needed. So Microsoft needs to start within our own house first and live our own culture but then reach out whether it’s to the historically black colleges to make sure that they have the STEM education, but really it’s more like when I look at the intern class – I was just looking at the demographics of the intern class at Microsoft, which by the way is all virtual. I’m sure it’s the same at BlackRock. It’s pretty stunning. It’s one of the most diverse, gender, ethnic. It’s sort of fantastic to see. One of the things that I do worry is when they look up, when they look around them, is it inviting? Is it giving them that, okay, this is a place where I can succeed? And that’s, I think, the job ahead of us, and so that’s what we committed to doing.

      Becky Quick: And finally, I’d just like to ask you each, when you look at what’s happening, the crises that we’re all dealing with in the world with the pandemic and everything associated with that with the economic fallout, do you think it puts some of these issues on the back burner? And I ask that because there was a study that took a look at the words “climate change” and how often they came up in conference calls. In the first quarter, it was down 50% from where it was in the fourth quarter. Is this a temporary thing, or is this a bigger hurdle to try and jump over? 

      Larry Fink: We’ve had record flows into sustainable funds. We’re seeing an acceleration of more and more people interested in sustainable funds. As I said, COVID is an existential risk of health. Climate change is an existential risk too. It actually accelerates it, and let me just be clear. The young people who are starting BlackRock this month, they’re doing it virtually. These are the same young people who were teenagers during the great financial recession. They were born or a few years old during 9/11. They have a totally different experience than we did. I personally had the most idyllic childhood. I was happy and dumb. It was perfect. It’s not that way anymore unfortunately. And these young people are demanding change for their future. COVID is an accelerant for more focus on climate change.

      Becky Quick: Satya, a quick last word?

      Satya Nadella: I would first of all agree with that, which is in some sense the way we think about systemic issues is to really make sure that we have a systemic response. So inside even at Microsoft when I look at what we are doing whether it’s climate change or racial inequity or dealing with healthcare coming out of this, all of these things will require us to re-imagine how to make the systems better. So, I think that we as a society can keep multiple priorities prioritized as opposed to trading one against the other. But I do think that we need institutional strength all around.

      Becky Quick: Satya and Larry, I want to thank you both very much for your time today and for the conversation.

    13. Sandy Boss: A company that has its relationship with its employees, its relationship with its customers, very clearly connected to its purpose, that company then will be much more able to deliver in a very uncertain world like the one that we are facing right now.

      Mary-Catherine Lader: Welcome to The Bid and to our mini-series, “Sustainability. Our new standard,” where we explore the ways of sustainability – and climate change in particular – will transform investing. Earlier this year, we announced at BlackRock a series of changes regarding sustainability. We’re launching new products to increase access to sustainable investing. We’re delivering data to help others build sustainable portfolios themselves and we’re increasing transparency in our Investment Stewardship activities.

      Today, we’ll speak to Sandy Boss, Global Head of Investment Stewardship. Investment Stewardship is how shareholders hold companies accountable. In short, it involves engagement with public companies to promote positive behaviors and We’ll talk about how COVID-19 has impacted company behavior, why companies are now accountable to stakeholders beyond their shareholders and what actions, we, at BlackRock have taken to increase transparency. I’m your host, Mary-Catherine Lader. We hope you enjoy.

      Sandy, thanks so much for joining us today.

      Sandy Boss: I’m very happy to be here. Thanks for having me.

      Mary-Catherine Lader: So, you’re the Head of Investment Stewardship at BlackRock, and that sounds like it could mean a lot of different things, but it really means something specific. So, can you just start by sharing what Investment Stewardship means?

      Sandy Boss: In a very simple way, we are looking after our client’s interest in the companies that they invest in. So, if you were an individual shareholder, you would invest in a company, you would watch how it was performing, you would vote on the shares, you would take that personal interest. And what we do in Stewardship is do that on behalf of our clients with a lot of companies. So we go and speak with the companies, we meet with the directors, with the CEO, with the chairman and we understand how they’re running the companies, we focus in on the big issues, the key things that are really going to drive value. And on behalf of our clients, we then take votes and help them ultimately achieve better returns for their retirement and for whatever reason that they might be investing with us.

      Mary-Catherine Lader: How do you decide what you engage them on, what issues are you talking to them about and who are you talking to?

      Sandy Boss: We’re talking to the people who are calling the shots at the company so it will be the chair, the director, the CEO, sometimes investor relations. And what we do is we’re focusing on the things that make the most difference to value. So, if it’s climate, we might be talking to a company that has a really big carbon footprint about what are they doing to manage climate risk and possibly get some opportunities from managing the transition that we’re going through to a lower carbon economy. We talk to them about board quality, so in that, we’re thinking about, are the directors independent, are they skilled, are they diverse and are they representing a wide range of perspectives that are ultimately going to make that company more valuable on behalf of our clients. We might talk to them about human capital management. Human capital management is essentially looking out for primarily the employees, but the other stakeholders in an enterprise and how are the practices in a company enabling that company to be more successful, because there’s a lot of research that says if the employees are engaged, they like the company, they’re staying, they’re doing better work, they’re more productive and that then leads to better profits for the company. So those are just a couple of examples of the kinds of things that we would talk to companies about. But always, it’s anchored on what are the issues that are really important to the companies and that are ultimately going to drive value.

      Mary-Catherine Lader: And some of those questions have quantifiable answers, but in other areas of your discussions with companies and some of these other topics, for example, S part of ESG, social issues like human capital management as you mentioned, there aren’t as quantifiable answers. So, what are the issues you are talking to companies about in those social issue categories and how do you get clear answers there?

      Sandy Boss: Well, first of all, you are definitely right that some of these social or S issues are much harder to quantify, but it’s become obvious in the context of the COVID crisis if it was not before that managing that social and economic contract between the company and its customers, its suppliers, the community that it sits in, its employees perhaps first and most foremost. That set of relationships, that’s absolutely integral to companies’ social license to operate. So what we are finding is that – and there has actually been research in the context of the crisis – the companies that have really sustainable practices across E, S and G, with S being quite prominent right now, those companies have actually been a lot more resilient in how they have managed the financial side of this crisis. And so, when we think about the connection between these factors and investment returns, we see a clear correlation. So when we meet with companies, what we’re doing is we’re trying to understand how are they embedding these types of issues into the way that they face their day-to-day business. Yes, we’re interested in how they are immediately responding to the crisis, but more importantly what we’re really looking for is how are they embedding these kinds of social considerations into the way that they intend to emerge from the crisis. And this comes back to, a company that has its relationship with its employees, its relationship with its customers, very clearly connected to its purpose, that company then will be much more able to deliver in a very uncertain world like the one that we are facing right now.


      Mary-Catherine Lader: So you mentioned climate and that’s been a particularly important topic for investment firms and particularly at BlackRock recently. And you mentioned one reason is a company’s carbon footprint, for example, is something that management teams have control over. But can you just explain a little more like as an investor, why do we care so much about companies’ climate preparedness and why should our investors in turn, then care?

      Sandy Boss: Well, I think the simplest way to put it is that climate risk is an investment risk for the companies that we’re invested in. So, we don’t see this in terms of the broader social good, that is important, but as an investment company, our job is to really focus on the returns to our shareholders. And we can see that there will be a really substantial change in the way that capital is allocated as people start to anticipate a lower carbon economy, the companies that move quickly and manage these risks will be more valuable. The companies that don’t, that then presents a real risk to our clients. We’ve actually done research that shows that the companies that are thinking about sustainability and climate in particular, they’re managing these risks better and they’re already beginning to show better risk-adjusted returns which is what we’re looking for as managers. We ask companies to use a couple of disclosures, a couple of ways of demonstrating how they are managing these risks, so that we as investors can understand better, one of them is the Task Force on Climate-Related Financial Disclosure, the other is the Sustainable Accounting Standards Board or SASB standards. But we ask for that information so that we can look at how the company is handling the strategic situation that they’re facing, what are the decisions they’re making, what are the targets they’re setting. And then as investors, we can make decisions about whether that satisfies our expectations and whether that is ultimately going to move that company to a better position from a long-term value creation perspective than if they were not managing this risk. And our belief is that indeed, by managing these risks, that will generate value.

      Mary-Catherine Lader: And so once we have that point of view, what do we ask of them and what do we do about it, what are the leverages we use?

      Sandy Boss: The two things that we do in working with companies: one is engaging, which is meeting with companies to tell them what we’re expecting and the other is using our vote. So we’ve set aside companies that we think really should be managing climate risk for example, and we’ve met with them to share with them, these are the concerns that we have, these are the expectations that we have, and then what we do is we evaluate how management responds. The board, the management, they’re responsible for ultimately the decisions to take as a company, many of them have responded to requests from ourselves, from other investors and are now disclosing how they govern risk, what their strategy is around climate, how they’re actually changing their capital investment plans, what targets they’re setting for reducing their carbon intensity, and when we see that, we’re satisfied because that’s what we’re looking for as investors. However, if we don’t see that, then we might take a couple of actions. One is voting action, so just as an individual would, owning a share, we have opportunities to vote on directors and specific proposals that are on the ballot. We’ve taken several votes this year against people who are responsible for climate risk or sustainability risk or sometimes, it’s members of the board who are in a senior position. But we’ll take a voting action in order to demonstrate that we’re not satisfied with the way that we’re handling these risks. The other thing that we might do is vote in behalf of the shareholder proposal. So, if a proposal has been put forward that we think is immediately addressing the issue that we’re concerned about, then we might support a proposal.

      Mary-Catherine Lader: So just to dig a little deeper on what exactly we mean about these climate discussions, maybe take an energy company for example. What are you asking them about, and how is that different from, or how far does the disclosure get you?

      Sandy Boss: That’s a great question. Let’s take a big oil company, for example. The primary climate question for a big oil company is how are they managing the transition to a low-carbon economy? And really what we are looking for is to what extent is that company then aligning its business to a Paris-aligned scenario. What a really good TCFD disclosure actually gets us quite a bit. It tells us how the company is governing that transition risk. It tells us what is the strategy that the company has set, it tells us what are the targets that the company has and how they are managing toward sustainable business model that is prepared for this transition and you know we can see then the connection between the targets that the company is setting, say several companies have now set net zero by 2050 targets. We can see the connection between those targets and then the decisions that the company is taking around, how they’re investing in new capital expenditures, for example, are they making green investments, starting to shift to different kinds of technology or less carbon intensive production methods as opposed to companies who are saying that they’ve got really good targets, but at the same time making investments that looked very much like they’re continuing into a very carbon intensive future, making very long-term expectations around how you know say, deep sea oil will contribute to their business model. So really with this disclosure and the dialogue that we have with it, we really get to understand that the approach of the company is taking and how that then will connect to the valuation of the company and we’ve seen in this year alone, you know enormous swings in valuation in oil companies for example, part of them having to do with the obvious pandemic that we’re all facing and with the very low oil price that we have experienced particularly the beginning of the crisis, but also part of it is that the choices those companies are making around their transition to a lower carbon economy.

      Mary-Catherine Lader: And so it sounds like our thesis, the evidence supporting it, our whole method of engagement is really well supported, but it really does depend in some cases on this voluntary engagement and voluntary responses from companies. So if they don’t respond, if a company fails to disclose, what happens then?

      Sandy Boss: Well, that’s a good question. The tool that we have is our vote. If we don’t see companies providing that kind of disclosure that we need, then we will begin to vote against them in the 2021 year. And so, we see a direct connection between our expectations and then how we use our vote.

      Mary-Catherine Lader: So, Larry Fink, our CEO often refers to this concept of stakeholder capitalism or the responsibility of companies to stakeholders like their employees and the society in which they operate, their clients and others beyond and in addition to their shareholders. So, what responsibility do you believe companies have to these stakeholders and how has that changed over time?

      Sandy Boss: I think that is self-evident now as we’ve seen how companies are handling what is one of the most turbulent situations any of us have lived through. We really think that that strong sense of purpose and commitment, that is absolutely vital to a company being able to manage this uncertainty, stay close to its customers and emerge in a successful place. This is very much in the interest of the companies themselves because our observation is that increasingly the companies that are handling these issues well, those companies are able to attract longer term capital, more patient capital, achieve lower cost of capital as a result. What we’re also seeing is the companies that are tone-deaf on these issues, they’re starting to see increasing skepticism in the market, so we’re beginning to recognize that companies who aren’t managing their stakeholder set well, who are disconnected from their stakeholders set are ultimately having a higher cost of capital.

      Mary-Catherine Lader: And so, are you suggesting there’s a link between stakeholder engagement and returns? Or maybe if that’s hard to kind of put our finger on today, is it even possible that these more sustainable behaviors more broadly can mitigate the impact of future downturns?

      Sandy Boss: Well, we’ve definitely seen a connection in research that BlackRock has done between sustainable business practices, and that’s across E, S and G. In stewardship, that’s our conviction. And so, that’s why we put the energy that we do into taking on issues which some are very quantifiable, some are less quantifiable, but there’s clear alignment between these issues and the value generation for our clients.

      Mary-Catherine Lader: And so, to what extent are we trying to then drive those more sustainable behaviors? I mean, you’ve talked about the voting mechanism, we have leverage to do that, but how persistent are we? Are there some examples you can share maybe about where we’ve really made a difference?

      Sandy Boss: I think one of the best examples of this is in Europe and particularly in the UK looking at executive compensation and the role that the pension plays in executive compensation. For a long time in the UK, it was quite typical that the executives would get a very high percent of their salary in pension, much higher than the workforce. What we saw is a disconnect between how executives were compensated and how their workforce was compensated when it came to pensions. And we pushed this issue along in our engagements with companies. We were able to get support from other investors on the issue and we’ve seen absolutely dramatic changes particularly in the last 12 months or so, where we’ve seen many, many companies now have moved to the practices that we think are more appropriate, bringing in new executives at the same level of pension as a percent of salary that they would do with the rest of their employees, and similarly, even seeing a sitting executives take cuts in their pension in order to have a much more aligned compensation structure.

      Mary-Catherine Lader: We are committed to transparency in Investment Stewardship and so, what, as part of your job and your team’s work are you doing to deliver on that commitment? How are we making these kinds of conversations available and transparent to the investors on whose behalf you’re having them?

      Sandy Boss: Well, we’ve actually done quite a bit to be more transparent, particularly since January of this year. First of all, our entire voting record is public and now, we’re disclosing every vote that we take quarterly. Also, in our quarterly report, we started doing something new, which is every quarter, we now publish a list of the companies that we’ve engaged with and we’re also publishing the subjects. So, what are the themes and issues that we’re raising with those companies. So, it really helps give much more texture around what it is that we’re doing when we engage with companies that might be less visible outside that voting record. Finally, we have vote bulletins that we’re putting out on high profile votes when we know there’s interest in the subject and we’re really trying to give that transparency to both our clients and other people who are interested. How did we vote, why did we vote that way, what are we expecting from the company going forward and we’ve gotten good feedback that that’s been quite helpful to people who are interested in what we’re doing as a stewardship group.

      Mary-Catherine Lader: So, all of this work clearly takes expertise in corporate governance, a deep understanding of how companies actually function, probably understanding regulation, a global perspective. Before you came to BlackRock to do this job, you worked at the Bank of England as a member of the Prudential Risk committee and before that, you were a senior partner at McKinsey, so you’ve done different size of those issues and developed the expertise over time, but how did your work in the public sector, in particular, shape your views about this kind of work that you’re now doing back in the private sector?


      Sandy Boss: So, working in the public sector, I think there are some differences and similarities. So, if I think about what our objective was on the Prudential Regulation Committee at the Bank of England, the objective was to oversee the activities of individual companies with a higher aim of ensuring that the UK had financial stability. We had a lot of tools at our disposal, so we were able to be quite influential with companies, but the responsibility for ensuring that the individual companies were themselves safe and sound and then, the system was safe and sound, the ultimate responsibility was with the boards and the management of those companies. So, when I now look at what I’m doing in the private sector, I’ve taken with me that absolute understanding that our expectation of companies, that their expectations and their important expectations, but ultimately, it’s a responsibility of the boards and the management of companies to actually ensure that their company is being led in the right way. Our objective function is different than what we had at the Bank of England. But looking for long-term value for our clients, it’s a broad goal, so it’s very similar to what we were seeking to do in the UK.

      Mary-Catherine Lader: So, we end each episode of our sustainability miniseries with the same question to each of our guests and I had to answer it myself a few weeks ago and it’s actually not as easy as it may sound, but what was the moment that changed the way you thought about sustainability?

      Sandy Boss: For me, this is actually an easy question. I was sitting in a meeting at the Bank of England with the Prudential Regulation Committee and we were considering the first ever climate risk policy put up by a central bank in the world. And the interesting observation that we made in that room and obviously, Mark Carney is a real advocate for thinking about the role of climate risk, was that none of the traditional ways that risk management was done in financial institutions were bringing this very, very long-term risk into the decision making of the here and now. So, a bank would look at I’m about to take out a loan and it’s a three-and-a-half- year loan. Will it pay back in three and a half years? But no one was asking, but what about the cliff edge? What about the viability of that loan, 3 years, 5 years, 10 years from now as we start moving into a transition to a lower carbon economy? And I suddenly realized that if we, at the bank, didn’t move our thinking about what’s the right time horizon, how do we bring what some people might call a non-financial risk into the way that we were doing financial risk management, that we wouldn’t be doing the right thing in our role. And I think that’s the same kind of thing that we’re doing now. When I switched hats and think about my role at Stewardship at BlackRock, these long-term, today’s non-financial risks are increasingly becoming the financial risks of the future. They will show up in the financial statement of tomorrow or two years from now, or three years from now, and that’s something that it’s our responsibility to be thinking about.

      Mary-Catherine Lader: That’s a really remarkable example because it was that series of realizations and those discussions that did exactly what you just suggested in helping make this sort of intangible, far-out risk feel more tangible and of course, help set the standards that next year will probably going to effect for stress testing. So, thank you, Sandy. It’s been an absolute pleasure talking to you and hopefully, we’ll do it again.

      Sandy Boss: MC, thank you very much. Again, a pleasure to be here.

    14. Mary-Catherine Lader: When 2020 started, we thought it would be more of the same. No one could have predicted that a global pandemic would come just a couple of months later. Since then, market volatility has been at all-time highs, unemployment has surged and there’s no question that we’re in a downturn. But one prediction we made has held true: Our view was that when the next downturn hit, it would require policy coordination between central banks and governments to help the economy stay afloat.

      Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Mary-Catherine Lader. Today, Jean Boivin, Head of the BlackRock Investment Institute, joins us to talk about how monetary and fiscal policymakers have come together in response to the coronavirus crisis. We spoke with Jean back in January about why he believed a coordinated effort would be necessary when dealing with the next downturn. Today, we’ll explore what’s happened since.

      Jean, thank you so much for joining us today.

      Jean Boivin: Thank you for having me.

      Mary-Catherine Lader: So, you and I spoke in January, and you at that time were talking about a paper you had written that predicted that during the next economic downturn, central banks and governments would have to coordinate in an unprecedented and usual way. And at that time, we talked about how an economic downturn was not anticipated. And so, this is somewhat prescient it turns out. Now that that’s actually happened, are you surprised that the policies you wrote about have become a reality so soon?

      Jean Boivin: Well, we were talking about what would happen in the next downturn and we had obviously no idea than a pandemic would be happening a few months after. So we’ve been certainly surprised that the events precipitated the need for a very aggressive response. We thought that the direction of travel was inevitable so in that sense, maybe not surprised. But certainly, very surprising how quickly that has materialized. Just to give you an example, we tried to write an op-ed as things were unfolding trying to link what was happening to what we had been discussing last August and by the time we were finishing the op-ed for publication in a newspaper, a lot of what we were describing could be happening next had already happened.

      Mary-Catherine Lader: Can you just remind us what the thesis was behind that original paper?

      Jean Boivin: Traditional tools of central banks were reaching very significant limits. So, central banks ultimately with the toolkit that they had were attempting to stimulate the economy, spending or investment, by lowering rates, either short-term or long-term rates. And with rates as low as they were, even last August or before the pandemic, there was not in our view a lot of space to get much more stimulus through this. So that was the first observation. And given that, it led to the question of what could be next. And any aspect of stimulus you can think of that does not work through lower interest rates required central banks or policy to more directly attempt to stimulate demand. Or put stimulus in the hands of the entities that could use it. And so, any policies of that form ultimately requires some specific coordination between central banks and governments, which is exactly the revolution we’ve been going through over a few weeks in February and March.

      Mary-Catherine Lader: And so, you mentioned a little bit about what happened in February and March, but can you just give us a little bit of a recap of how central banks and governments came together in a coordinated way? Those of us in the U.S. watched closely what happened in the United States, but it certainly wasn’t just here.

      Jean Boivin: No, it was literally everywhere. This shock, this pandemic was a global phenomenon. I think it created a necessity to respond very quickly. But to explain/unpack why we talked about a policy revolution, this revolution has I think three or a couple of key elements. So, over the course of a few weeks, between February and March, we first saw an increase in central bank balance sheets, and in particular of the Fed, that was greater than the increase in the balance sheet of the Fed in the entire post-Global Financial Crisis in 2008 period. So, in five weeks, we saw the deployment of central bank policies of a magnitude that was greater than what had been accomplished in five years after the Global Financial Crisis. And then it’s also the nature of these policies that was innovative where we’ve seen central banks, and I’m going to speak to the Fed more directly here, but it occurs elsewhere. Basically, deployed facilities that are aimed at lending more directly to the private sector or to entities rather than going through the traditional banking sector transmission. So less through bank, more directly through some even mainstream entities, even states. So that determinant of the revolution which we had been labeling as going direct as a short end. But it’s really about more directly trying to put liquidity in the hands of the entities that are cash constrained. So three elements: speed, size and then this very significant innovation of going direct.

      Mary-Catherine Lader: And you had talked in January about this innovation of going direct and your anticipation that it would be needed. Do you think this has worked?

      Jean Boivin: Well, the jury is still out. I think it has definitely worked in terms of creating the impression of a very decisive response where central banks and governments are ready to do whatever it takes. It has certainly in an impressive fashion calmed the market. When you think about it, markets were down as much and as quickly as we had seen in 2008 during the Global Financial Crisis when we were in February and March, and now we’ve rebounded very significantly from these lows. So, we had a 35 percent decline, now over the second quarter of this year, we have an 18 percent rebound in global equity indices. So, in that sense, it has worked. But the jury is still out because it’s one thing to announce big plans, it’s one thing to start to try to deploy them, but we need to ensure that the actual liquidity could find its way to the entities that need it. So, we have for instance, programs to support unemployed in the U.S. Not everybody is able to reach through the program, that’s true in Canada, that’s true in other places as well. And before we see the full execution, I think we need to reserve a judgment of whether it has worked. But I think in terms of building confidence, certainly it has worked and I think we are seeing money flowing already in some key places, so signs that it’s working. But we need to keep an eye on execution.

      Mary-Catherine Lader: There’s no question that money is flowing as you suggested, but there’s been a lot of criticism as to whether it’s flowing to the right recipients, especially in the U.S. perhaps; whether the recipients of PPP funds or even the fact that corporations largely receive these funds was the right response. What do you make of that?

      Jean Boivin: One observation I would make is the speed is unprecedented. Over the course of a few weeks, big decisions and facilities have been put in place. It is, I think, unrealistic to expect that money as a result has been targeted exactly where it’s needed. I think the approach here has been more about let’s be decisive, let’s make sure that we go in as meaningful direction as productively as possible. And I think the question going forward will be, what kind of recalibration was needed to ensure we don’t have excess support in places that it could lead to a misallocation of resources, and at the same time, ensure that we don’t see the appearance of very significant cash constraints and balance sheet pressures in other places that could build up into something more systemic. So that is another version of my execution is key now. Execution is about not only making the money flow, but making it flow to the right place to the point of your question.

      Mary-Catherine Lader: Now that we’ve deployed all this capital, what do you see as some of the risks of the approach that we’ve lived through?

      Jean Boivin: I think the first thing is, risk or not, the first thing to do is to provide a bridge to the economy that is facing a very significant health crisis, the solution of which is to stop the economy. And that is creating a big economic hole that needs to be bridged. So, I guess the first point I want to make clear is that yes, there will be risk and outcomes, but those risks are questions for tomorrow or next week or next year. But once we get to tomorrow, next week, or next year, given the speed at which these measures have been deployed, I think there are important governance questions around how central banks and governments interact that have not been fully resolved or even addressed. So, in the heat of the urgency of trying to deal with the situation, the importance of responding quickly was the dominant objective, and for good reasons. But we will need to reconcile, at some point, what interaction and governance issues this raises with central banks and government’s interaction. And there’s a lot to unpack here, but to make that more concrete, a lot of the measures that have been taken have a feature of being a combination of monetary policy, which is the policy of the central banks, and budgetary or fiscal policy, which is the tool of the government. But coordination means joint decision making, and without a clear framework on how these decisions will be made jointly, it leaves unclear who is going to have the final say on which part of these policy tools. And where this could become a problem is in a scenario where again, this is not for today, it’s not for next week, and it might not be for next year – but at some point, the economy will recover and if we’re in a world where inflation starts to reappear, and with all of the stimulus that has been put in place and big deficit, it is a scenario that we need to entertain seriously. And inflation at some point could reappear. And at that point, central banks would be facing a tougher decision/choice between reducing the stimulus that has been put in place in order to contain inflation, but at the same time, removing a spending tool for the government which is very attractive for governments. It is always easier to spend than to stop spending. And that decision would now even be more difficult because it’s going to be related explicitly to the inflation outlook. So, we have a more complex tension trade-off. And before the crisis, there was a clear framework where central banks, when inflation was under threat, central banks had the independence to remove the stimulus in place – that independence now is less clear. Another related risk is the strength of institutions. We’ve been building for 40 years strong central bank frameworks that were anchored in an ability to target inflation, in an independent way, and now by adding these coordinated policies, it raises a question that maybe central banks will become more politicized, or the political side of things will play a bigger role in determining interest rate and central bank decisions. So, inflation is a risk and the more institutional framework is also at risk of weakening without some way of addressing this.

      Mary-Catherine Lader: To what extent are you also worried about the deficits accumulating as a result of this approach? That’s been the case ever since the Global Financial Crisis in the U.S. and in several other markets. Do you think that we have enough to deal with now and that’s a problem for the future, or should fiscal policymakers be addressing it today?

      Jean Boivin: So again, I’m in sort of the same place, because it’s important. The risks are kind of irrelevant to deal with the current situation. We need to deal with this first, and in fact, the best way to minimize the risk I’m concerned about is to make sure the economy recovers as quickly as possible. But yeah, those deficits are meaningful. We haven’t seen deficit spending like this in peacetime, it’s not comparable to the Global Financial Crisis fiscal stimulus and spending we’ve seen. So, the increase in debt is very significant, and left to its own devices, at some point, it could create some tensions. Right after the Global Financial Crisis, very significant government spending was put in place and it didn’t take very long. In 2010, only two years after, government became very nervous about the increased debt that they were facing. And we saw a very significant move globally towards austerity. The narrative has changed: now we have an even bigger, large deficit and debt increase. Nobody is currently worried about what the debt will mean, and nobody is talking about the austerity any time soon. But at some point, that could come back on the table. And so, the couple other risks you can see as a result. One is we move back to austerity too quickly and undermine the stimulus we’ve put in place. I don’t think this is a big risk, but 2010 was a mistake in that sense, we went too quickly back to austerity. If we wait too long to deal with the debt, we might see pressure on interest rates to go up. Because investors at some point will start to question whether it makes sense turning to government for nothing or even to be paid dealing with governments with negative rates when the debt is so high. And to prevent that, I think central banks as a result will need to be more actively trying to prevent rates to go up. But if they do that, that goes back to the inflation risk that I was worried about. And I would say the last risk I would flag, and one that I’m more concerned about is, now that we’ve put on the table the new tools where it looks like you can – and it’s not true but it looks like – you can basically spend an unprecedented amount, and then try to use central bank liquidity or money to finance it. Which is the impression some people have. It opens the door for people to say, well, why don’t we do that also in normal times? And then the big deal question here is once this genie is out of the bottle, how do you put that back in? And we are seeing a lot more people making those kinds of arguments, so that is one of the risks in the absence of guardrails that hopefully we will put in place at some point.

      Mary-Catherine Lader: And what might those guardrails look like? What action or indicators do you think can be put in place?

      Jean Boivin: We need to set some rules that define when this usual policy evolution tool can be used and when should we exit from them? So that’s really what we mean by putting guardrails; it’s like the rules of the game, rule of engagement, so we know now we can use them. If we get in a world where people believe we can use that anytime and all the time, that cannot be true; there’s no free lunch. We cannot just print money out of spending. So, the question is going to be, how do we put a limit to this and an exit? Right now, those have not been defined. All we have is that central banks still have inflation targets, but we haven’t specified exactly how that’s going to play or inform their decision how to remove those new tools, and we haven’t also defined how the government will allow central banks to remove these tools, given there is an element of government policy that is involved in it. So what will be needed to clarify this is a joint agreement between central banks and government, to say for instance that these tools can be used as long as inflation is under control, and not expected to go above targets systematically. And that once we see inflation start to increase, or expected to be running above target, in those instances, the central bank will have the ability by itself to start removing or exit from these tools. So that would be an example of a framework that specifies under what circumstances we would be starting to exit from these unusual tools and who is charge of making that decision. And again, I want to reiterate, this is not the issue of the moment, and the best thing we can do right now is to make sure we recover as quickly as possible in terms of economic activity. That’s why governments and central banks have been focusing on this first ask. Once this is under control, I think it will be welcomed to clarify these guardrails.

      Mary-Catherine Lader: So, what’s your current thinking about how long this downturn will last? And what indicators are you looking at as to whether we’re moving out of it? The stock market and equity markets have recovered at least for now, but so much of the impact of the last several months is still with us. So, what are you looking to and how long do you think it’s going to last?

      Jean Boivin: I’ve realized over the last few weeks that as soon as you say we're going to come out of this and you put a date, no matter the date you put in, you look like you’re optimistic about the situation. So I’m just prefacing that because I think our view, or if you just look at the range of forecasts out there on the most bearish side of things, we’re talking about going back to the level of activity we were before the shock by the end of 2021. This is a shock that it means it is going to take two years to get out of it. It’s not only a couple of quarters. That said, I want to make clear as well even though this is a big shock, it’s very concentrated in time. So, our view is that the worst of it is behind us, it was April, and so while it’s going to take until the end of 2021 to get back to where we were, we’re already on that upward trajectory from this point onward in our view. Of course, there is risk, we could get reinfection, that could slow this down. But we are already starting to be on the recovery path. And the third point to our view is that even though it’s a big shock, unprecedented, April will be left seen as the biggest contraction in peacetime, or even since the Great Depression. We will at the end of it see a cumulative impact or shortfall economic cause of this shock that will be still a fraction of what the Global Financial Crisis cost was. The Global Financial Crisis was a shock that basically led to a downgrade of growth or activity for a decade after. This led to the slowest recovery since the Great Depression. This time around, it’s still going to be about a third to a half of what the cost of the Global Financial Crisis was. So the three points just to reiterate, it’s going to take about a couple of years to really work through this shock, uncertainty around that is important but I think that is a good benchmark. Point number two is that this is a very significant shock in the near term, very profound and cannot be underestimated, but we are already recovering from it. And the third point is that, despite all of this, it still is not comparable yet to what the Global Financial Crisis was and helps to gauge what kind of price reaction you should expect to see overall as a result of this.

      Mary-Catherine Lader: So then what does all this mean from an investor point of view?

      Jean Boivin: Well, that is a big question, but let’s break that down into a couple of key themes. Let’s first talk about the strategic, more longer-term horizon. The fact that this shock is not of the magnitude of the Global Financial Crisis I think gives us an anchor for people with a more strategic horizon to see opportunities in the repricing we’ve seen after the shock. So we should expect a Global Financial Crisis kind of price move for risk assets. As a result of this, in February and March when we saw a very significant move, we thought there was strategic opportunities to go overweight equities or risk assets more broadly. Now we’ve rebounded from this, so there is a bit less opportunity than there was because of a significant rebound, but broadly speaking, I think that leaves us to be pro-risk on a strategic basis in portfolios and looking to maintain this stance as a general statement. Another implication for investments is that the policy revolution is leading to an even lower rate environment, in fact, rates being closer to the lower bound across the entire yield curve and in many countries. And I think that starts to reduce or question more fundamentally the role of government bonds in portfolios. We don’t expect them to play as important of a ballast role as they have historically. The inflation risk that I’ve talked about, we’ve touched on, I think also leads to think carefully about getting inflation protection on a strategic basis in portfolios. I think it leads to other key implications as well around how we think about the long-term impact of the shocks. It’s not only about dealing with the health crisis, but this is changing behavior. This is accelerating some trends that we’ve been already seeing play out before the shock. We are going to see an acceleration maybe of digitalization going forward, air, the way we travel, the way we work, there is a lot of themes that are emanating from this which are not pure, simple, asset allocation themes, but I think will be important for investors to think hard about and trace going forward. If I may bring that on to more tactical horizon, I think that led us to a few things. The very significant policy revolution in the near term is to our mind very positive for credit. And so, we’ve been overweight credit for a few months. Don’t fight central banks I think is a powerful tagline for this.

      Mary-Catherine Lader: So in short, there is a lot to consider, and it’s still an evolving story; thank you so much for sharing your insights with us today, Jean.

      Jean Boivin: Well, thank you very much, it was a pleasure.

    15. Mary-Catherine Lader: What it means to retire has been evolving for some time. Before COVID, that meant stopping work entirely was no longer the goal. But in the wake of the COVID-19 crisis, it may mean that stopping work will no longer be possible. So how should retirement savers navigate what’s next?

      Welcome to The Bid, where we break down what’s happening in financial markets and explore the forces shaping investing. I’m your host, Mary-Catherine Lader. Today, BlackRock’s President, Rob Kapito, and Head of the Retirement Group, Anne Ackerley, talk about lessons learned from prior crises, share the numbers from our recent survey of retirement savers in response to the downturn, and give their advice for staying prepared through uncertainty.

      Rob, Anne, thanks so much for joining us today.

      Rob Kapito: Thanks for having me.

      Anne Ackerley: Thank you so much.

      Mary-Catherine Lader: So, Rob, as the President and a founder of BlackRock and a veteran of this industry for several decades, how has this crisis compared to other crises in your career?

      Rob Kapito: Well, most of the crises that we have been through have been financial crises. Now, many of them actually may have led to health issues, but this is really the reverse. This is where this is a health crisis – the first pandemic that I have actually been through – and it certainly is going to lead to many financial issues simply because businesses have been closed down, people have been laid off. People have been asked to shelter in place, and certainly this is going to affect peoples' financial future.

      Mary-Catherine Lader: And speaking of financial futures, for those who are saving for retirement and particularly if they're closer to retirement, this is a really scary time. There's been so much market volatility, job loss as you mentioned, health at risk, and you recently wrote a letter to retirement savers in response to those concerns and specifically the coronavirus. What is the most important thing for retirement savers to know right now, Rob?

      Rob Kapito: Well, this has been something that's been brewing for quite a long time. We have an aging population across the globe and one of the things that we have noticed is that people are living longer, and they haven't saved enough for the future. And now with the pandemic, interest rates have come down to all-time lows. The expectation is that they will stay low for longer and whatever the solution to the pandemic is, we all know that it's going to take longer. And it's going to make it harder for people to be able to save and also invest at returns that are going to enable them to retire in dignity. So, this is an issue that we've been very focused on and trying hard to create awareness of the issue and solutions for retirees.

      Mary-Catherine Lader: But it sounds like there's no simple one piece of advice. It's a challenging situation.

      Anne Ackerley: One of the big changes, I think from maybe prior crises particularly with respect to people who were saving in their 401(k) is there have been a lot of changes toward people getting into the right kind of investments, into those diversified, age-based asset allocated investments, widely known as target dates. A target date fund is really an all-in-one solution. I don't want to say totally set it and forget it, but to some extent you say when you want to retire and so long as you're investing, as you age it makes the right asset allocation choices for you. So, when you're young and you're a long way away from retirement, you're probably largely in equity in a target date. And as you get closer to retirement, we start to take risk off the table: more bonds, less equity. And so, we're taking risk off because particularly as you get right up close to retirement, if there is some sort of market downturn, you wouldn't want to be in all equities. I know particularly in your letter you were talking about if somebody was in that kind of vehicle, if they could at all, understanding that these were very hard times, to try to stay the course. And if they could, chances are as the market does start to rebound and it's already showing some signs of that, they wouldn't subject themselves to even further losses by not being able to get that rebound.

      Rob Kapito: Well, it's hard not to be frustrated when you see and hear the volatility in the marketplace, and you want to take action either to protect your principal or to make extra returns. And you know, we coined a saying that we think it's more important to have time in the market than timing the market.

      Mary-Catherine Lader: Speaking of timing, Anne, we do these retirement surveys on a range of different retirement-related issues every year. We did one in January of this year before this crisis, and then we did one again after in the wake of it. How are the answers and responses that you saw different given the market environment right now?

      Anne Ackerley: As Rob said, this is a pretty scary time and we know over the last three months that one in four workers in the United States have lost their jobs. That's about 20-plus percent of the workforce. And we knew actually coming into this that people were already struggling. Forty percent of Americans had no retirement savings as they were nearing retirement and we also knew that 40 percent couldn't come up with $400 for emergency savings. So, we knew that people were already having some trouble. I will tell you, I did think the results of the survey were a little surprising pre- and post-. We actually found that for the people who were confident about their retirement beforehand, they were largely still confident after the April survey, which I found a little bit surprising. What I think is happening is if people were confident beforehand, they were confident because they were in a 401(k). They were saving already. They were probably getting the match. And chances are that might not have changed in April. It was the people who were already not so confident about their retirement – they weren't saving enough, they weren't getting the match. We saw that they felt even less confident in April.

      Mary-Catherine Lader: And so, when it comes to managing and saving amid the crisis, what were retirement savers most concerned about? If their sense of their own standing was kind of the same, surely some things had changed given how much markets changed.

      Anne Ackerley: Right, and mostly what they were worried about was the value of their nest egg. What was happening to it?

      Mary-Catherine Lader: Right.

      Anne Ackerley: And whether they were going to be able to weather this downturn. And again, there's been a lot of change in terms of what people used to do and what they invest in now, and there's been a lot of education. So, while they were concerned, in fact we saw less than one percent of people trading in and out of their investments within a 401(k) during this crisis. So, people are hearing and if they can they're staying the course.

      Mary-Catherine Lader: That's interesting, and as you mentioned, well before the coronavirus we've talked a lot about the retirement crisis. About the nest egg, even without the sort of context that we live in right now, not being enough for many people. How have your views on the retirement crisis, Rob, perhaps evolved in this environment?

      Rob Kapito: Well, I think we still have to get the message out to enough people, and I don't think that they're saving enough. And when you have a crisis, people get very nervous, but I was actually thinking about this this morning that if someone went to sleep in the end of February and woke up today and they looked at the markets, nothing happened. And while the economy seems disconnected from the markets, there's a lot of liquidity; there are lot of people looking for assets and that's helped the stock market continue to grow and bond prices remain low. So, there aren't a lot of alternatives at the time when there is a crisis, and that's why people shouldn't just – their reflex is to try to do something, and it actually works against them. So, I think we have to make sure that people are aware that this is a long-term view that they have to take, and if you go back and look at any of the financial crises, it's really the same. It's keeping your portfolio asset allocated properly. Making those minor adjustments along the way as you get closer to retirement. So, we still need to do a lot of education because in this country as well as many other countries, people live paycheck to paycheck. And in some of the surveys, people said they would save if they had an extra $200 a month. They would start saving. So, saving is not something that is common in the United States as much as it is in other parts of the globe, but we all know, diversification, long-term, put away some money for an emergency and for the future is the most important. But we still have to create awareness amongst the general population. Living longer is supposed to be a good thing.

      Anne Ackerley: Coming out of the survey, one thing that we saw that didn't change really was this sense of one of the biggest concerns is, people have, they're afraid of running out of their money. And pre- and post-crisis, you know, over 80 percent of the people in our survey said they want help from their employers in figuring out if they have enough money. And they say they not only want their employers to help them get kind of to retirement, but through retirement in terms of the types of things that are available to them in their 401(k). And I think we as an industry will have a chance to reevaluate the systems again and say, where do we need to strengthen, and I think one of the key areas will be around helping people with this notion of are they going to run out of money? How can they generate income? And as Rob said, you know, needing to be thinking of solutions and innovations around that piece of it.

      Rob Kapito: The other part of education that's important is there is some notion that people can retire on social security. And social security was not meant as a vehicle that you can retire on solely. It was meant to supplement the income that you have. So, you do have to save. And how many times have you heard members of your family say you need to save for a rainy day, or save for an emergency? All of these things that your parents and grandparents told you are true. I think you also have to use your longevity as a benefit. So, the one point that I want to make is saving for retirement is not for the older generation; it's for the younger generation. The earlier you start, the more that you will be able to accumulate and the better a situation you will be in by retirement. So, even for kids coming out of college today, the first thing that you should do is get invested in a 401(k) at your company, or start one, or start a savings and retirement plan, because the earlier you do the better you are going to be when it becomes time to retire.

      Mary-Catherine Lader: You mentioned, Rob, in the topic of emergency savings how thin that barrier is for some people to start saving just $200 extra a month. Surely there, I mean, there's a lot of behavioral research around this, but are there innovations that are starting to work? That are starting to actually change behavior.

      Anne Ackerley: I think there will be even more focus from the industry on short-term savings and long-term savings and helping people build up that short-term emergency fund, so that they can protect their long-term savings. And one of the things we've seen in this crisis and look, this has been an incredibly difficult time for people, particularly for people who have lost their jobs, needing to take money out of the retirement account. And in fact, surveys have said that upwards of 50 percent of people who have lost their jobs may need to tap into their retirement savings. And in fact, the CARES Act which was passed and again provided lots of benefits to people really in need has allowed people to take money out of the 401(k), up to $100,000 with no penalties and to pay taxes over time. And, look, we're supportive of that when people need the money, but really post this, as an industry we've got to focus on having those short-term accounts so that we can protect that long-term account. Because once people take money out of their retirement account, they tend not to put it back in. And it may not seem like taking out a lot but it's exactly what Rob said about the compounding. You take money out and you lose the compounding for the rest of your life. And so, I think we'll see continued innovation in this area, particularly maybe with technology and how can we use technology to help people save short-term and kind of once they've filled up that bucket, start filling up their long-term bucket. And I think that'll be a really important part for employers in the industry to play.

      Rob Kapito: This is also not an issue for low-income or minimum wage people or middle-income or high-income. This really affects everyone, because most people get used to a certain style of living, and they have figured out from the money that comes in and the money that goes out that they can maintain that lifestyle. And now when you go into a period of time when there is no money coming in, what is the lifestyle that you are able to afford going forward? There's a rude awakening to people. And so, when we're going to go into a period where 20 million people are going to be out of work, you're going to see your neighbor who didn't plan, who didn't save, and when you watch that it's going to be very difficult and very frustrating and it's going to create an environment which could go one or two ways. It's going to increase peoples' awareness that they should have been saving more, but at the same time they're going to try to maintain the same way of living that they had in the past and therefore they may tap into their retirement. And they know it's the wrong thing to do but they want to maintain the lifestyle that they have. And I think our message is that you really have to think about this long and hard because it's probably better to cut back the lifestyle a bit so that you don't have to do it in the future when you know that there's not going to be income coming in. So, this is why we do a lot of work with individuals and 401(k) plans and companies to make this education available to people so that they know what can happen before they get into that situation, so then they can take the proper measures that are going to help their future and not hurt their future.

      Mary-Catherine Lader: Listening to you both, it sometimes sounds like the system is really complicated and puts so much of the burden on the individual and so, Rob, you mentioned how employers want to, are chipping in to ease that burden, but do either of you anticipate any sort of policy solutions that might affect what this landscape looks like and what one needs to do to be prepared, especially as the shape of, and the length of, our lives is changing?

      Anne Ackerley: Yes, I think there should be continued policy enhancements. And we can go back to 2006 with the Pension Protection Act that allowed the introduction of target dates. Things like auto enrollment, auto escalate, default investments, all those sorts of things have happened. Right at the end of last year we had the Secure Act which also had some improvements to the system. We need to keep going. You know, this is going to sound simple -- but let's just make it easier, and anything we can do to make it easier for people to save money is a good thing. And so, I think a number one thing that we're going to have to address is access. We know today that 50 million Americans don't have access to a 401(k) plan through their employer. And that's often because they're working through small businesses, maybe because they're gig economy. But we know when people have access to a plan, they're much more likely to save than if they have to do it on their own. And so, I think one of the key areas will be, how do we make it easier for small businesses to offer these types of plans? Can we reduce the administrative burdens? Those sorts of things.

      Rob Kapito: I think this is part of our responsibility, is to take care of the older generation. And I think we should be aware, one way or another, we're going to have to be involved in this because if we have an aging population that cannot retire and cannot afford, then government is going to have to pay for this and we pay for that, so in some way you'll be paying for it in your taxes. So, I think it's an advantage for all of us to create these programs so that we have a population of people that, as I mentioned, could retire in an appropriate way, give up jobs to the next generation, the younger people. And prosper for all the hard work that they did. So, this is not just a U.S. issue. This is a global issue, and I think anything that we can do to make this easier on the investment side and make it easier through the use of technology is going to be beneficial to the entire population going forward.

      Mary-Catherine Lader: Anne, Rob, thanks so much for joining us today.

      Rob Kapito: Thank you for focusing on a very, very important issue.

      Anne Ackerley: Thank you so much for having us today.

    16. Mary-Catherine Lader: In the past just few months, as everyone’s focus turned towards managing through volatility in markets in the wake of our current crisis and thinking about a public health crisis, we expected that climate might be put a little bit on the back-burner. And we've seen absolutely the contrary, that in talking with clients, we see a growing recognition that it’s important that they understand and quantify climate risk and understand how these non-traditional financial events could have a really material financial impact.

      Oscar Pulido: Welcome to The Bid and our mini-series, “Sustainability. Our new standard,” where we explore the ways that sustainability and climate change in particular, will transform investing. Earlier this year, BlackRock announced a series of changes regarding sustainability: launching new products that increase access to sustainable investing, being sustainable portfolios ourselves, and increasing transparency in our investment stewardship activities. As part of this announcement, we also made a commitment to use data to better understand environmental, social and governance risks.

      Today we’ll speak to Mary-Catherine Lader, Head of Aladdin Sustainability and regular moderator of The Bid, and Trevor Houser, Partner at Rhodium Group, where he leads the Energy and Climate Practice. BlackRock and Rhodium Group recently announced a partnership for data on the physical impact of climate change. We’ll talk about the advances in climate data, how this impacts investor portfolios, and what that means for company behavior in the future. I’m your host Oscar Pulido, we hope you enjoy.

      MC and Trevor, thank you so much for joining us today on The Bid.

      Mary-Catherine Lader: Thank you for having me, Oscar.

      Trevor Houser: Thanks, Oscar. It’s great to be here.

      Oscar Pulido: Well, I have to start here, MC, the truth is, you’re usually moderating the podcast and today you’re a guest, so how does it feel?

      Mary-Catherine Lader: Well, I would much rather be the person asking the questions, but I’m still delighted to be here with you today, Oscar.

      Oscar Pulido: I think you have a little bit more pressure on your side today than you usually do. So, the reason you’re a guest, by the way, is that in your day job, you actually lead the Aladdin Sustainability efforts. Trevor, you head Rhodium Group, which is an independent research provider for both the public and private sectors. BlackRock and Rhodium have recently announced a partnership. So, I’d like both of you to talk a little bit about what that partnership entails.

      Mary-Catherine Lader: At the beginning of this year, we said that climate risk is an investment risk. And the challenge is that it’s really difficult to quantify that and make it actionable and that is because there is limited data and very few tools that can make that data useful for investors to understand what exactly is the climate risk associated with their portfolio or a certain asset, and then very difficult to make that integrated in your investment process and relevant. So what BlackRock, through our financial technology platform Aladdin, and Rhodium, who is really years ahead of anybody else in combining climate science with big data and economic research, what we hope we can do together is translate climate scenarios and climate impact into financial impact. And help investors understand how different climate scenarios would affect a given investment. That sounds reasonably simple, but frankly, nobody has done it so far. 

      Trevor Houser: The only thing I’d add to what MC said is from our perspective, at Rhodium, we’ve spent the past seven years taking advantage of new types of research, new computing tools to be able to provide actionable information on climate risk and data that we think at scale has the ability to shift capital markets in a way that makes our economy more resilient and sustainable over the long term. And what we’re looking for is a partner to help us apply that research at scale in a way that could really have that transformative effect.

      Oscar Pulido: So when we talk about climate risk, I think of hurricanes, wildfires, we all watch the news and we all see the manifestation of climate risk in many ways. But how exactly do we measure physical climate risk? I’m curious, what goes into the analysis?

      Trevor Houser: Yeah. It’s a great question. Hurricanes are not new; wildfires are not new; heat waves are not new. But as releases of greenhouse gas emissions in the atmosphere increase, it’s increasingly clear that the frequency and severity of those weather events is growing. And that creates significant risks to individual communities, businesses, investment portfolios and entire economies. So, when we’re talking about climate risk, that’s what we’re referring to is the increased frequency and severity of a range of extreme weather events due to warmer temperatures in the atmosphere.

      Oscar Pulido: And MC, you touched on investment risk being a big part of this equation and one of the things that has been talked about this year is again, climate risk representing an investment risk. So, how do we take the measuring of that climate risk and translate it into investment portfolios?

      Mary-Catherine Lader: What Rhodium really does is take climate models and macro-economic research and combine those to create to damage functions and model out the financial impact of given scenarios. But the impact is really different depending on different asset classes. So you can imagine that for those assets that are oriented around a physical location, like a mortgage-backed security or a municipal bond or a utility stock for example, where the value is vulnerable to the physical environment surrounding that asset; that you can model the potential changes in the temperature and you have data that indicates what happens in that particular location when temperatures rise or fall, and you can come up with a proxy for how the value of a home or the credit worthiness of a municipality might change based on those events. What we’re also working on is quantifying that for corporate securities. So how do you think about the impact on revenue, how do you think about the impact on operating expenses for a company with a global footprint? For a company that may not have totally physical assets? And so, part of what we’re trying to do together is think about the right methodology to approximate the impact of climate change on corporate operations around the world. But in short, it’s not easy.

      Trevor Houser: So maybe, Oscar, let me take a specific example and we can walk through the entire process of how we do this research and then how BlackRock is applying that. So, let’s take two places: an agricultural community in southern Illinois and a suburban neighborhood in southern Florida. So to understand how climate change could impact the local economies and individual assets in those two places, we start by collecting model output from these large climate model researchers around the world that develop these sophisticated, what are called, general circulation models to project how increased concentrations of greenhouse gases in the atmosphere change temperatures, precipitation, hurricane activity, sea-level rise, etc. We take that model output and we downscale it to a local level to understand how these changes globally are manifesting in southern Illinois or in suburban Miami. And out of that, we get information about how the days above 90 degrees are increasing or how the frequency of extreme precipitation events, or the frequency of CAT5 hurricanes are increasing. So that’s hazard information. Then what we need to do is quantify the impact that those changes in climate have on a local economy. We, six years ago, realized that to give people actionable information about the impacts of climate change, where they live, work, invest, you needed to combine two disciplines: you needed to combine climate science with econo-metrics. If you tell an investor your building is going to have ten more days a year above 95 degrees, that’s not actionable information. What does it actually mean in terms of the operational cost of the building or value of my building? Fortunately, there’s enough variation just in normal weather that we have this rich empirical dataset about what a day above 95 degrees or what a category 5 hurricane does to economies and individual assets. So our team combs through terabytes of historical weather data and historical economic data to identify these statistical relationships. And those are the damage functions that MC mentioned. Since we've had 105 degree days in the past in southern Illinois, we know what a 105 degree day does to corn fields in southern Illinois; since we’ve had category 5 hurricanes in the past in suburban Miami, we know what a category 5 hurricane does to property values or to local economies in southern Florida. And so, we take all that rich historical information and create these econometric models, and then we apply those to projections for how days above 95 degrees or frequency of CAT5 hurricanes is going to change in the future under different emissions scenarios.

      Mary-Catherine Lader: And so Oscar, when we say that climate risk is investment risk, you now have enough extreme weather events to have some indication as to what the financial impacts of these non-financial activities, events, may be. So, if you think about what we’re living through right now, with COVID-19 and the pandemic. If you could have said, well here’s the economic and then financial impact when these parts of the city are shut down or when these things happen, I think that illustrates what we think of today as maybe not immediately material in typical financial analysis actually is extremely important in understanding the risks inherent in portfolios and investments. And so that is what we’re trying to do with climate risk.

      Oscar Pulido: Yeah. It’s really fascinating, Trevor, to hear you talk about data that relates to climate and weather and the environment, and then following the thread of how it impacts the economy and then, MC, you had mentioned earlier, that this then has very practical implications for an investor. So inherent in that response is that you think data is a game-changer when it comes to helping investors think about how to invest in a sustainable manner?

      Mary-Catherine Lader: You could argue that sustainable investing is data-driven investing, that sustainability as an approach is defined by data. It’s not like equity or fixed income where you have contractual terms that determine a set of cashflows or what happens in certain events. Instead, what sustainable investing is, is observing and measuring the behavior of corporations or the potential behavior of certain assets and to try and quantify them to catalog that over time; and to then draw conclusions about which companies or which assets you think might perform better under certain risk scenarios, whether that’s climate or who has better governance practices, or stakeholder management, labor practices, that have been demonstrated over time to deliver better returns or reduce risk. So, in short, data is critical to being able to understand the sustainability of a portfolio and I think it actually defines the entire investing strategy. That’s part of why we’re seeing this rise in sustainable investing now is because in 2013, for example, we had less than 20 percent of S&P 500 reporting their actual sustainability-related data; and now you have over 80 percent. And not only do you have more big companies doing that, but you have them more than doubling the number of data points that they are sharing, and then we also have some convergence around a few increasingly dominate disclosure frameworks that are indicating how a company should gather that data, how they should measure it, and the like, that’s creating some degree of standardization. It’s still not enough. There’s still real divergence between different sustainability metrics, but that at least proliferation of data is allowing more and more investors to have confidence that they can understand with some credibility whether a company’s behaviors are more sustainable or not.

      Trevor Houser: So, there are a few developments over the past few years that have made this kind of research possible at scale. The first is that the global climate models have – through the work of hundreds of thousands of person hours around the world, research institutions that range from the Hadley Centre in the UK, to NASA and NOAH here in the U.S. – global climate science has just improved a lot. And so, the ability of the scientific community to estimate how changes in emissions impact climate at a local level has really improved. The second and equally important is this explosion in big data econo-metric research that allows us to, for the first time, understand how those changes in the climate impact economic activity, impact markets at a local level. And then the third innovation is the rapid decline in the cost of scalable cloud computing. We are analyzing daily temperature, precipitation, storm activity, at a hyper-local level all around the world for decades into the future; and it’s an incredibly computationally intensive exercise. And just three or four years ago, the scale of the computing required would have put this kind of research out of reach for even a mid-sized research institution like Rhodium. But innovation in cloud computing and in econo-metrics have really made that possible now, at scale.

      Oscar Pulido:, When you think about it in your space and climate data, where are we and what inning are we in? Do you feel like there is more of an explosion of data to come going forward?

      Trevor Houser: I would say the climate science data, so models that project changes in temperature and precipitation and sea-level rise, they’re probably in the seventh inning. And the IPCC, the Intergovernmental Panel on Climate Change, the scientific coordinating body, published their first assessment report in the mid-1990s and have updated that science every five to six years since. Translating that climate data into economic outcomes, we’re only in the second inning; that’s really the new frontier of research. And what’s required to make changes in the climate relevant to individual people, investors, and economies as a whole.

      Oscar Pulido: So that’s actually a good segue, because that makes me wonder, what has the demand been like for the data in this space? It seems like you mentioned that just more recently people are starting to understand how the data that you collect around the climate has investment implications. Is that now causing an increase in demand for this data as opposed to a few years ago?

      Trevor Houser: Yeah. We've definitely seen a step function change in interest, in demand for climate risk data over the past couple of years, and I think that is due to a couple of things. The first is, up until the 2017 hurricane and wildfire season, we had been in a period of relatively low hurricane activity in the U.S. And then in 2017, obviously there was Hurricane Maria, Irma and Harvey; 2018 was also a large hurricane season, those occurred alongside record wildfire seasons in California and occurred alongside a big report from the Intergovernmental Panel on Climate Change in the fall of 2018. And the combination of those extreme weather events, advances in the science – and I think what had already been a growing level of interest and awareness among investors – really led to a tipping point in demand for climate risk information. That the investment community – and MC has a probably even better perspective on this than I do – I think that that was really the point for the investment community when climate risk started to move from just being one more element of your ESG strategy to really a core element of your risk management approach. MC, do you think that’s right?

      Mary-Catherine Lader: Definitely. And I mentioned this before, but I think it’s really true in the past just few months, as everyone’s focused turned toward managing through volatility in markets in the wake of our current crisis and thinking about a public heath crisis, we expected that climate might be put a little bit on the back-burner. And we've seen absolutely the contrary, that in talking with clients, we see a growing recognition that it’s important that they understand and quantify climate risk, and understand as how these non-traditional financial events could have a really material financial impact.

      Oscar Pulido: MC, just to continue down that path, obviously the partnership announced between BlackRock and Rhodium is a strong vote of confidence that BlackRock really views the data and analytics that Rhodium produces as very valuable to the investment decision making process. So, how does BlackRock plan to use that data in terms of managing portfolios?

      Mary-Catherine Lader: So, two things. One, we’re using it ourselves in our investment process as an asset manager, so our portfolio managers can run their own analysis as they build portfolios. But two, we’re building a product called Aladdin Climate that is a software application that will allow any clients of Aladdin Climate to better understand those risks; the risks of the physical impact of climate change that Trevor talked about, as well as risks associated with transitioning to a lower carbon economy. So it’s not like calculating duration, or it’s not like calculating something that everyone knows what the formula is, and you know how to interpret and digest that information as you make decisions. We think at this stage, it’s important to allow investors to interact with the data a little bit more and to understand what the assumptions are to make their own assumptions and so that is why we’re building this product.

      Oscar Pulido: And so, how do you think the dataset or what is available for investors to make decisions around sustainable investing, how will that change in the next five to ten years? And what aren't we measuring today that you think we will be able to measure in the future?

      Mary-Catherine Lader: So, I think it’s going to accelerate rapidly from here. And that increased attention and focus is going to increase scrutiny on the data that drives determination of sustainable investments. And I think that will put that much more pressure on asset managers to make sure that they can deliver credible products and then asset managers to put pressure on companies. That’s one dimension of it, growing demand is going to increase the data that is released and produced. The other is that there are more and more ways to gather information about companies. What do we not measure today? There are some things we measure but just not well today, for example, so how a company manages their employee satisfaction, for example; what elements of that are important? Is it elements of compensation? Is it retention? Is it certain practices that deliver productivity that can drive outperformance? We don’t really have the best way of measuring and capturing that today. That is one example.

      Oscar Pulido: So Trevor, it’s clear that investors benefit from being more informed around climate risk as they think about building more resilient portfolios, but speak about the broader societal benefits of having more information about climate risk and how you think companies will adapt going forward as a result of this?

      Trevor Houser: So first, the more proactive companies and capital markets are in thinking about and understanding the ways in which the climate is changing and what it means for their own business or for their local economy, the more successful they’re going to be in mitigating the damage done by future changes in climate, whether that’s by optimizing supply chains, investing in more resilient infrastructure, reducing their emissions footprint. And at a broader level, the more effective that companies and investors are in preparing for and mitigating future climate risk, the less risk it presents to the economy overall.

      Mary-Catherine Lader: Look, we talk about portfolio resilience, Oscar, all the time. I know you do. And that’s part of what has motivated our entire shift to sustainability as a standard and also our dialogue with companies through investment stewardship that we think it’s critical that management teams are clear and transparent about what they’re doing to manage for these potential scenarios. And so for those reasons, we absolutely anticipate the significant shift in capital allocation that Trevor alluded to.

      Oscar Pulido: MC and Trevor, we’re ending each episode of our sustainability mini-series with one question to each of our guests, and that is, what was the defining moment that changed the way you thought about sustainability?

      Trevor Houser: That’s a good question. So, I think for me, early in my career, I worked at the U.S. Embassy in Beijing and as an entry-level hire, one of my jobs was to track air quality and write a reporting cable back to DC on the quality of air in Beijing. And what I thought was going to be this fairly obscure task turns out that was one of the most closely watched cables leaving the Embassy because it determined the level of hardship pay that foreign service officers working in Beijing received. And as I looked at that air quality data coming across my screen every day and talking with the embassy doctor about what that meant for the health of the Embassy staff, let alone the health of 1.3 billion Chinese citizens breathing that air on a daily basis, it became clear how central environmental protection and sustainability is to economic development prospects; that you really have to address both together, and that if you don’t, you’re ultimately going to run up against serious constraints to growth. And I think that’s even more true in the case of climate change, that unless we address head on the risks of climate change and figure out how to move our capital markets and our economy in a more sustainable direction, then we’re going to hit some real hard limits to growth and prosperity going forward.

      Mary-Catherine Lader: So my first job out of college was doing renewable energy investing. But one of the things I had to work on was we were experimenting with emissions reductions at coal pants, which are controversial and many people would argue that they don’t really work. But we were investing in a few different projects to try. And one of the things I had to do was go down to these coal plants, mostly in Missouri, and monitor the application of chemicals that were intended to reduce emissions and make sure that the tests all went properly. And as I was educating myself on basic facts about this coal plant, it hit me that this one plant had the energy output that was a multiple of the entire renewable energy portfolio that had been constructed over several years. And I think that’s when it hit me that this would be a very long road. While it is nearly 15 years later, and so it has been kind of a long road, where we are today in terms of the mainstream demand for sustainable behaviors from corporations and for understanding the impact of climate on the economy is a world away from where we would have been.

      Oscar Pulido: Well, I think it’s clear from this conversation – and MC, you touched on this – that this is no longer a niche topic, it very much is mainstream the topic of sustainable investing, and listening to both of you talk, it’s clear that you're both passionate about this. So thank you so much for joining us on The Bid.

      Trevor Houser: Thanks, Oscar.

      Mary-Catherine Lader: It’s been a total pleasure.

    17. Oscar Pulido: In case you haven’t noticed, the stock market has had quite a volatile year already. And while for most investors, that’s the focus of the day to day, there’s an area of the market that often gets overlooked: credit. So what is credit? Simply put, it’s the vast market of bonds that companies issue to fund their growth ambitions. And there is a lot that credit can tell us about the overall health of the global economy.

      Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Oscar Pulido. Today, we’ll talk to Jimmy Keenan, Chief Investment Officer and Global Co-Head of Credit at BlackRock. He’ll talk to us about how companies are adapting to the COVID-19 pandemic, what it really means for a company to default, and how investors can navigate a low interest rate world.

      Jimmy, thanks so much for joining us on The Bid.

      Jimmy Keenan: Thanks, Oscar. Thanks for having me.

      Oscar Pulido: Well, Jimmy, I don’t know about you, but my work from home situation, I’m in a room that has a television and somewhat reluctantly, I have the financial news on in the background just to keep tabs on what’s going on. One of the things I’ve noticed is that the majority of the news flow talks about the stock market. And I think that’s what people are generally familiar with. But you invest in the credit markets and I wanted to ask you just help us understand, what does that mean when we talk about the credit markets?

      Jimmy Keenan: Yeah, obviously, the public equity markets are probably the most visible measure of how people think about the markets. And in general, when you’re talking about equities, those are ultimately the ownership of the companies. When you talk about the credit markets, it’s just simplistically the debt of the company. If you thought about owning a home, the equity owner owns the home, but the mortgage is the debt that is lent to that home. It’s the same from a corporate side. Those equity owners are looking to borrow money to either finance their company for growth or acquisitions. It might be expanding business or just optimizing their capital structure. And so, simplistically, we lend to the health of the cash flows of a business. And at the same time that the equity owns that long-term growth potential, as the debt, you’re ultimately giving that up, but you have a contractual obligation with regards of that company to be able to pay you an interest expense and they ultimately pay you a maturity, meaning pay back your debt in full. And so, from a company’s perspective, most companies will issue some form of debt and they can vary between the risk. You have what we call investment-grade companies which are going to be your less risky companies and those might be the bigger capitalized companies that you would see in the Dow or the S&P 500. But then, there are lot of smaller companies that have that in the leveraged finance or called the sub-investment grade market, which can include the bank loans, or the high-yield market. And generally, they’re usually a little bit small over company. They have a little bit more risk on them or they might have more financial risk on them. And that is a lot of what we look at from the credit markets and the more you go down or increase risk in credit, the more sensitive you’ll be towards the value of that equity and that cash flow.

      Oscar Pulido: So from everything you’re explaining, this sounds like a very big market. How do investors think about the credit markets relative to other investments they’ve made in other asset classes?

      Jimmy Keenan: Investors tend to invest in it because it is a diversifier, right? At first, the income is very much a focus and so for our investors, they come in and would reduce either their government bonds or cash in order to invest in the credit market in order to get some income and reduce what we would call duration risk or the interest rate sensitivity. But you also see equity investors move into the credit markets as a way to derisk or diversify the risk. Because the credit is up in the capital structure, meaning it’s more senior than the equity, it has less volatility and less downside risk than the equity markets. And so, it behaves well or better than the equity markets in kind of a downturn like we are seeing today.

      Oscar Pulido: And you talked about the visibility that the stock market often has and I’m just reflecting back on the last couple of months as we’ve been living through the coronavirus crisis. The stock market started to sell off in February as it was starting to get a little bit uncertain about what was going on. The credit markets as you’ve described, and you talked about corporate bonds and bank loans, in early March, we really hit an inflection point. What had been a more quiet area of the market really took a leg down. And so, I’m just curious you must have been right in the center of that. What happened? What was the catalyst that caused the credit markets to sell off as well?

      Jimmy Keenan: As the reality of the pandemic expanded globally, it created a bunch of uncertainty about what the growth profile would look like and what the earnings profiles look good in companies. You started to see some volatility in February. And you started to see just that equity risk with that uncertainty about earnings start to come down. Obviously, that accelerated as the realities of the pandemic increased and there were a couple things that really happened to your point and what happened in the broader credit markets. I think there was a recognition that the speed at which the virus and itself was going to increase or spread through society and the lack of I would say, the insufficiency with regards to the healthcare infrastructure to combat that, that was a real humanitarian crisis. And then the response to that from a policy perspective was to shelter at home or in simplistic terms, reduce the economic activity and reduce activity broadly speaking. And so, what the credit market then started to see was the reality that, in order prevent the humanitarian crisis was going to shut down the economy and then, beyond I would call equity risk, it then started to create a real risk of potential impairments and defaults through the credit market. Meaning that if the economy was going to go down at such a level of rate that companies wouldn’t be able to pay that down, you might see a big spike in defaults. So, the credit markets then started to reprice and at that time, there was no visibility in that March of what the government aid and support might be alongside the policy of shutting down or shelter in place. What you then started to see is, the cost of capital started to go up and then that becomes a spiral that is what we will call, deleveraging and derisking.

      Oscar Pulido: When you say deleveraging and derisking, can you go into a little bit more detail about what that practically meant for businesses?

      Jimmy Keenan: You had businesses or funds in the market that were essentially getting margin calls, which means that, the bank was charging a higher cost of capital to that because the risk and uncertainty of those businesses is much higher and you just saw this vicious spiral of deleveraging in mid-March. And that was going pretty aggressively. And the governments and the central banks and the Fed started to recognize that very quickly and had a very coordinated response with a significant amount of speed and magnitude. And what you’ve seen since then is just the better-quality businesses have all rebounded. They’ve been able to access the markets. Early in that March period of time, as companies started to get uncertain about it, you saw a lot of news around this with regards to businesses drawing down on the revolver. Meaning, they had bank availability that would be similar to like, borrowing all the money you can on your credit card. Almost every company was doing that and that was continuing to put more and more pressure on the banking system as well, which forced more tightening of capital. So, as you get through this, the Fed programs were significant of scale, they reduced that financial risk and you started to see a stabilization of the market.

      Oscar Pulido: So, let’s talk about policy. Although I have to admit I’m thinking about the number of long nights you must have had throughout March as all of this was happening. But one of the things that probably allowed you to start to get some sleep was when the Federal Reserve stepped in and maybe you can speak about the significance of what they did in March because we’ve been accustomed to seeing them buy government bonds for much of the post-2008 period, but they actually took the step to also start buying corporate bonds. Why was that an important decision?

      Jimmy Keenan: Yeah. The first thing I would say, the pandemic and itself and the policies around it; there are unique things that are different than any of the downturns that we’ve had. In order to protect humanitarian crisis, there was a decision to shut down the economy, right? And I would say that the response, as you outlined, of the Fed was very aggressive about deploying a variety of programs that existed in 2008 and reenacting them. But also, this was slightly different because of the domino effect as you start to shut down the economy has a significant impact across the supply and demand chain and every single business is ultimately getting affected by this. There are some businesses that are positive, but in general most businesses you’re seeing top-line declines down from 50-100% and that businesses are not necessarily set up to do that. But what they’re really trying to do and again, how do you bridge this economy in a period of time we were asking the policy makers are asking people to stay at home? Right? And so, the reality of all of the programs that they put in place is stabilizing the financial system. So, high quality companies are able to access the liquidity, but also injecting more liquidity directly to make sure that other businesses have means and ways they can access the market or just access liquidity to be able to essentially self-ensure or survive this period of time. And then when you get down to small businesses, that’s where some of the other more government programs and the Federal programs that are trying to inject liquidity right into that to help employment and to help small businesses survive. Because this is obviously, a very difficult period of time for a lot of business owners and a lot of employees.

      Oscar Pulido: It certainly is difficult and it’s hard to imagine it getting any worse. I’d like to talk a little bit more about the economy now and when I think about data points like, the jobless claims or the unemployment rate, again, it just seems like, these are numbers that are outliers already. So, just curious, where do you think we are in terms of the stage of the recovery? Is the worst behind us? Do you see a recovery?

      Jimmy Keenan: Yeah, that’s a good question. I mean from a starting point, the virus in itself is going to probably define where we are. I think, the financial market instability of March with regards to dealing with the unknown of the impact of the virus on who it will impact and how fast it’ll spread. But also, we didn’t know what the policy response was going to be at that point to. So, all the actions with regards to the markets were dealing with unknowns. I think that a lot of that based off of the Fed policy and the ECB and other central banks around the world, that worst is behind us. I don’t think you will see the level of financial instability that you saw in March. Now, dealing with the fact of the unknown and realizing the weakness of economic data in Q2 and potentially Q3, Q4 and beyond, we are now dealing with the fact that companies are trying to fight for survival as are individuals and people. And so, that’s where businesses, yes in some cases they’re able to seek liquidity and aid, but at the same time many are reducing expenses in order to try to survive when they have no revenues coming in. And unfortunately, in many cases, that means that, that’s what’s driving the unemployment rate because they are reducing expenses for that point of survival. I think, you will continue to see that maybe not at the same pace, but I think you’ll continue to see some of those levels go up in the short term. Hopefully, that will be balanced as again, we have more data. You will start to see the reopening of the economy and you’ll start to see some level of economic activity start to come back up and I think that’s a positive. So, from a data perspective, I think Q2 will probably be the worst from a realized point of the macro data from the economic activity because I don’t think we’ll come back to the same level of economic shutdown. But what that does mean is that, as you get into Q3 and Q4, the unknowns are different industries, different regions, the slope of recovery is going to vary based off of behavioral changes, but also just some of the damage done based off of the last several months and the weakness in certain economies. We will deal with more defaults and more bankruptcies.

      Oscar Pulido: So, what does that mean when a when a company defaults? You also used the term bankruptcy, which just sounds like a scary term. But you’ve also talked about companies needing to survive during this period. So, do you have concerns about the ability for some of these companies to pay back their debt? You talked earlier about this contractual obligation that they have when they issue a bond to an investor to pay on that bond, but is that contractual obligation at risk and how do companies deal with that?

      Jimmy Keenan: Yeah, it’s a great question. I’d say, in any recession or in any normal environment, there are companies that default. Default ultimately means they fail to pay on an obligation and that might be the debt on that, but it also might mean they fail to pay one of their suppliers or their landlord depending on what kind of real estate the company incorporates. All of those are going to be contractual obligations of the company. And if they’re not making enough revenues in order to pay those then, yes, they may have to restructure that. So, that happens in normal times, but in normal times, it’s a minimal amount. In a recession, many companies may not necessarily be positioned for different levels of recession or how it may affect those companies. And yes, so you do see restructurings increase in that environment. To the question of what does that mean? Nobody wants to default. It’s not a great thing. It’s not necessarily planned. However, it doesn’t necessarily mean the company goes out of business. Sometimes you restructure because you need to because your business has changed or the environment has changed and in order to operate more efficiently, you need to restructure your balance sheet to today’s environment. And when businesses have taken too much debt or have too high of a debt burden on there and ultimately, don’t have necessarily the earnings, what a restructuring means is that you’re taking that debt profile and all the contracts that the company has and you’re ultimately restructuring them, so that the business can run and operate in today’s environment without the burden of debt. I would say, for lack of better words, choking the company. The goal of all that is to be able to keep a company operating, keep people employed and allow this business to function with a better capital structure. So, defaults aren’t the end of the world. They ultimately allow a company to rebalance itself that it can operate and then hopefully, should be good for employment and healthy. But as you do that and you stabilize those companies, you allow for the economy to kind of start to run again.

      Oscar Pulido: It sounds like when you talk about restructuring if I were to use a simple example, if I, Jimmy, had owed you $10 over the next year and you realize that now I’m financially burdened and I’m going to have trouble paying you back that $10. Perhaps you come to me and say, look you can pay me those $10 over the next 18 months instead or maybe over the next two years, or maybe I have to pay you $11 back over the next two years. I’m trying to simplify, but is that is that sort of what happens at these individual company levels?

      Jimmy Keenan: Yeah, and every situation is going to be a little bit different on what’s best. I mean, in the short term what you see right now is, most creditors and equity owners and operators meaning, the management teams themselves, recognize the current environment and the crisis and everybody’s working together to try to allow for companies to get through this in an optimal manner. But there are other businesses that are going to face real challenge with regards to that debt and so, yes. What you’re referring to is, the conversations that are going on which can be complex just because of the legal obligation and how many people own it and trying to get everybody on the same page. So sometimes, it requires going through a bankruptcy process and a court in order to get all of your debt and all of your equity holders all on the same page. It’s kind of like, if you owned a home and you had a high level of debt on that home, and necessarily couldn’t pay the mortgage, your first conversation is going to be with the mortgage provider, can you have some level of forgiveness there or change or change terms? But ultimately, if you can’t pay, then you may restructure that and the bank still has value, but that house still exists. And in most cases, when you’re talking about a company, those companies will still exist. There are cases where you will see liquidations or companies close down because they can’t operate. But in general, most businesses are going to restructure and if it’s a good business and viable, it will try to operate and yes, come to some agreement with its both its debt holders and its equity holders.

      Oscar Pulido: Jimmy, that’s really helpful. You’ve painted a really good picture about what the credit markets are, how they function, and you’ve also talked about your view on the economy. But let’s talk about investing in credit markets. With the Fed having cut rates to zero and government bonds yielding very little, how does that impact what you’re seeing in this space?

      Jimmy Keenan: Yeah. I think there’s a short-term and a long-term view on that. I mean, from a long-term perspective, I think we have some challenges. When we came into 2020, we had a lot of aggregate debt in the global economy and since the financial crisis over the last 10 years, we’ve done a lot with regards to shifting that debt from households and banks on to government balance sheets and central bank balance sheets, but we still had this lower growth, lower interest rate environment globally speaking coming into 2020 because of the debt burden. Obviously, the response to the pandemic is something that and rightfully so, the governments have stepped in here to ensure the health and welfare of the people and the economy. But the expense of that is ultimately incurring a lot more debt on to the government level. So, I think the reality of this and there are different policy responses to deliver, but in all likelihood, you’ll have volatility, but it is going to continue to put downward pressure on growth and downward pressure on, ultimately, rates which are determined by that growth and inflation. And so, from a long-term perspective, I do think that will keep global interest rates at very low levels. And so, when you think about that, if we can stabilize growth and get through this, which we will, science will win, society will get through this, we’ll start to stabilize at a growth level but we will still have to deal with that debt burden. And when you think about how do you put your portfolio together? Because at the end of the day, if we’re going to be dealing with global interest rates at very low levels, it is hard for people to supplement their income that they get from their jobs with income that they get from their savings for a long-term retirement.

      Oscar Pulido: And what about in the short term?

      Jimmy Keenan: I think in the short term, it’s all about where we are from recovery here. What’s the shape of the virus in itself? What’s the policy from here out and what that means from the level of economic activity? And then how that flows down into how do you price risk assets, whether you’re talking about government debt, in general, fixed income or corporate debt or equities. And that’s going to be the more short-term issue. And I think there are a lot of opportunities out there. The worst may not be behind us in all things, but I would say, March through May has been a pretty severe period of time. And so, from a long-term perspective, it’s a pretty good time to invest in a broad range of assets. Although, I think you need to be careful. From a short-term perspective, if you need liquidity, then I think, you balance your portfolio differently.

      Oscar Pulido: There’s a narrative or I guess, an observation by a lot of folks who are watching the market that the stock market has recovered, but it’s really a handful of companies that are driving that recovery and that there’s a few winners and most of the stock market actually still underwater for the year. And the winners are companies in technology and some in the healthcare space. Is that also the case in the credit markets, Jimmy? Is it really about a handful of companies or a handful of sectors or industries, or is it more broad-based in terms of what you’re seeing as an investment opportunity?

      Jimmy Keenan: One, it is a bit more broad based. When you think about the high yield market and the loan market in general, you’re dealing with smaller businesses. So, some of them have very strong secular tailwinds with them and are doing well in this environment, but in general it’s not as consolidated as you see the big cap equity companies. But at the same time, you’re talking about as you think about the diversity of different industries and different spaces, there’s a broader range of winners and losers associated to that and businesses struggle. And so, we see it right now in areas like oil and gas. The virus itself and the downturn of the economy has slowed demand, but they’re also supply issues associated to that. So, that has put real pressure on oil prices and therefore, has put all pressure on all things related to the energy markets. And you’ll see other things around lodging, leisure, entertainment that are, I would say, struggling in today’s environment, but at the same time across the credit markets, there’s still a lot of software companies, a lot of tech, cable, a lot of hospitals and healthcare businesses and pharma companies and you have a broader range of bifurcation where companies are doing well in this environment, but at the same time, other businesses that have really been hurt because of the current shift in how the economy is operating like, people are still eating, but they’re not eating at restaurants or eating at home. So, take out has become better than restaurants and things like that. And that will evolve over time, but certainly as we get through this, I do think there will be behavioral changes and businesses will need to adjust to those trends.

      Oscar Pulido: And Jimmy, at the beginning the year before we hit this period of talking about coronavirus, one of the things that we were talking about and we’re still talking about today is sustainability. BlackRock has taken a very strong stance on sustainability and the view that climate risk is investment risk. And I’m just curious in the corporate bond arena or the credit arena that you invest in, how important is sustainability in the investment decision making process?

      Jimmy Keenan: Yes. Sustainability has obviously got a big trend. I would say over the course of the last several years as sustainable investing and ESG or environmental and social and governance-related risk, we’ve defined it differently and we’ve now broken down our process across our teams to define and understand those risks. At the end of the day, we do believe that those trends, those companies who are going to score higher in those measures around those sustainability measures will ultimately be better performers. And at the same time, those who are going to score worse, they will have ultimately worst credit fundamentals and are going to be tougher investments. And so, we do see that when from our standpoint is pricing in those risks, when we look and try to assess a credit and we think that trend is only going to increase, and we see that more and more now as investors have demanded it. We have started to look and broadly speaking, look and value companies in that method. We see it at the boardrooms of companies, right, where companies are trying to understand their business and making investment decisions or capital expenditure decisions or decisions on how to run their teams and employees and in a manner that is more sustainable. So, I do think it is almost a necessity to think through when you’re thinking about investing right now.

      Oscar Pulido: It definitely sounds like it’s a core part of your decision-making process. Jimmy, you’ve shared a lot of great insights, I wrote down a number of things, but the one that I underlined was when you said, “Science will win.” I think people are in need of some optimism from here on out. So, thanks so much for your insights and thanks for joining us on The Bid today.

      Jimmy Keenan: Thanks for having me.

    18. Tom Donilon: This is the third great crisis of the very young 21st century. Following 9/11 and the 2008-2009 Financial Crisis, we now have the 2020 coronavirus pandemic.

      But to paraphrase the famous book by Reinhart and Rogoff—this time really is different. I believe that policymakers now face the most difficult crisis since WWII, and perhaps the worst peacetime crisis in modern history.

      Catherine Kress: When we kicked off the year, geopolitics was front and center in the market narrative. Just a few months later, the COVID-19 pandemic has exacerbated and accelerated many of the key geopolitical trends already underway. In response to the crisis, we’re seeing fragmentation between countries and a striking lack of great power leadership. We’re also seeing heightened tensions between the U.S. and China as we count down to what will undoubtedly be an unprecedented presidential election in the U.S.

      Welcome to The Bid, where we break down what’s happening in markets and explore the forces changing investing. I’m your host, Catherine Kress.

      Today, we’ll hear from Tom Donilon, Chairman of the BlackRock Investment Institute and former U.S. National Security Advisor on how the COVID-19 pandemic has shaped the geopolitical environment. Tom recently shared his perspective at a global town hall for BlackRock’s employees. In this episode, we’ll give you an inside look at what he told us about what makes this crisis different—and the key geopolitical themes that he sees emerging.

      To begin, Tom made the humbling point that we’re in a unique and extraordinarily difficult time. But what makes this crisis different? Let’s hear what Tom had to say.

      Tom Donilon: First, this is a crisis of a very unusual sort—essentially, the economy has been forced into a coma by policymakers seeking to halt the spread of the virus and prevent overwhelming healthcare systems. The financial response has been extraordinary in its scale and timeliness, and the extent of cooperation between monetary and fiscal authorities.

      But second, this is also a health crisis; and these are the most difficult challenges. At least in the United States and Europe, the financial authorities can act in a timely and effective manner. They are well exercised. Not so on the health side. We face great uncertainties as to the duration and the severity of the pandemic—and the ability of nations around the world to deal with it.

      Third, unlike 9/11 and the Great Financial Crisis, there has been a striking lack of international cooperation this time around. This time around, the G-7, G-20, and the UN have played decidedly lesser roles in addressing the crisis. And there’s been a real absence of great power leadership, and it’s particularly striking.

      Fourth, there are significant uncertainties as we try to envision the post-crisis environment—and few historical parallels to guide the way. I think behavioral analysis is going to be critical as we try and determine how individuals, and businesses, and nations will conduct themselves in a post-crisis environment. To quote the historian Adam Tooze, who wrote a significant book on the 2008 crisis, “This is a period of radical uncertainty, an order of magnitude greater than anything we’re used to.”

      And last, in addition to bringing new things forward, I think this crisis is going to accelerate and exacerbate the geopolitical trends that preceded it.

      Catherine Kress: Tom offered his perspective on why this crisis is different. The global economy has been forced into a standstill; as a health crisis, this one is much more difficult to handle; nations have acted apart instead of together; and there’s a lot of uncertainty as we try to move forward.

      But Tom also mentioned that the crisis will accelerate geopolitical trends that were already in place. He sees four trends taking shape: a coming storm for emerging markets, a worsening outlook for U.S.-China relations, massive state intervention into the private economy, and continued de-globalization.

      First, let’s dive into emerging markets. The pandemic has certainly put lot of pressure on some advanced economies – like the US, Italy, Spain and the UK. But a big worry has been among developing countries — countries like those in Asia, Latin America and Africa — whose economies are already fragile, with limited room for policy and weak healthcare infrastructure.

      Tom Donilon: The pandemic is going bring a storm to the emerging markets. These countries face really a tough set of pressures.

      One: weak healthcare infrastructures alongside more limited institutional capacities make emerging markets particularly vulnerable. India, for example, has less than 1 hospital bed for every 1,000 people. By contrast, South Korea has more than 12. Social distancing policies are often impossible to implement, and restrictions on the export of medical supplies and equipment from Europe and the United States I think will exacerbate their challenges.

      Two: emerging markets are facing a severe loss of income and significant capital flight. The IMF now expects the per capita income will shrink in 170 of 189 member countries as revenues from commodity exports, tourism, remittances, and global demand from the developed markets crash. Capital outflows from the emerging markets have been roughly 4x the size of that during the Great Financial Crisis.

      Third: the coronavirus comes at a time when the emerging markets are economically constrained in their ability to provide relief. We could very well see a series of sovereign and corporate debt crises—creating spillover risks for the global economy. Now, the IMF is seeking to offset the crisis and appears prepared to leverage its firepower to confront it. The debt moratorium announced by the G20 was welcome, and we could slowly see developed market stimulus make its way to the emerging markets via increased demand.

      Over the weeks and months ahead, pressure on governments in the emerging markets to relax lockdown policies and provide economic relief will grow. Emerging market policymakers face really difficult choices. Extended lockdown brings unsustainable poverty levels. By contrast, a premature return to activity could cause mass outbreaks of the disease.

      Finally, and more generally, emerging markets have been key beneficiaries of globalization—with drastic reductions in poverty and the building of middle-class households. Decades of progress are now at risk of being erased, leading to greater inequality between countries. This is a key concern of our global analysis, and I think should be a real focus of the developed world and the international financial institutions.

      Catherine Kress: The bottom line is that emerging markets face significant challenges on the road ahead—challenges that may threaten critical progress against poverty and social stability in these nations.

      The second trend that Tom discussed is China, and U.S.-China relations more broadly. We started the year with the view that U.S.-China tensions were structural in nature and broadening to include multiple dimensions, like technology, trade, finance and others. Let’s hear how Tom’s view has evolved since then.

      Tom Donilon: The coronavirus has exacerbated already fraught relations between the United States and China. Whatever goodwill came from the Phase 1 trade agreement has been lost amid mutual recriminations, a push by China to advance its global position, and bipartisan backlash in the United States.

      On the U.S. side: There has been an aggressive effort to place accountability on China for the virus’ origin and efforts to conceal the outbreak. On the China side: China has launched a multifaceted effort to gain a geopolitical advantage coming out of the crisis.

      Bottom line: I fear that U.S.-China relations will continue to deteriorate post-crisis, no matter the outcome of the November elections. The two countries will emerge from the crisis with reduced trust, and decoupling will accelerate in areas beyond technology. This is a very big challenge for policymakers.

      Catherine Kress: Tom’s view is that U.S.-China relations will worsen across the board—especially given that it’s an election year in the U.S.

      The next trend he highlighted was the scale of state intervention. In response to the crisis, both monetary and fiscal policymakers have taken extensive steps to keep the global economy afloat. In Tom’s eyes, those measures are just the beginning.

      Tom Donilon: The pandemic has led to a massive policy intervention by governments around the world into the private economy. The extent of that intervention in my judgment is only going to grow given the requirements. Developed market governments are deploying a monetary and fiscal response at a scale never seen before in peacetime. One thing we know from European history, and in the United States as well, is that crises and major events like wars often produce states that are larger, more powerful, and more intrusive.

      One particular area of increased, coronavirus-driven intervention is the use of surveillance technology—using cell phones—to identify those who’ve come in contact with infected persons, to track the direction of the disease, and to enforce quarantine orders. The techniques have been used successfully in Asia—particularly in South Korea.

      This begs the question: Will these intrusions that you wouldn’t normally see outside a crisis environment, particularly in countries with strong privacy traditions, will they be sunset after the crisis – as, by the way, is the case in Singapore, where the laws have indicated that they’re going to be sunset. I would bet generally not.

      Catherine Kress: Tom mentioned that times of crisis often produce states that are larger, more powerful and more intrusive. This expanding state authority is taking place against a backdrop of heightened geopolitical fragmentation and de-globalization.

      The current crisis is shining a light on the vulnerabilities that companies have in their supply chains. Between reshoring activities, border shutdowns and some of the stockpiling activity that we’ve seen, Tom shares his views on the risk to globalization as we know it.

      Tom Donilon: The coronavirus has brought nationalist, protectionist trends into sharp relief. And de-globalization I think is set to accelerate.

      The pandemic has triggered a wave of export restrictions. At least 69 countries have banned or restricted the export of protective equipment, medical devices and medicines. In the U.S., officials have explicitly called for the reshoring of medical supplies through tax breaks and “Buy America” provisions. Global trade, already under pressure from the U.S.-led trade wars of the past two years, is now set to contract more than 10% in 2020.

      Second, governments around the world have implemented extensive travel restrictions. We haven’t seen these kinds of restrictions on the borders since WWII. As countries seek to protect themselves from importing the virus and to preserve employment, it’s likely these travel and migration restrictions may be some of the last to be lifted.

      Third, and more generally, the coronavirus — and the nationalist impulses it’s ignited — will increase pressures on globalization and supply chains and force a re-evaluation of the interconnected global economy.

      Building on pressures from the financial crisis, rising populism, U.S.-China competition, business leaders and policymakers are now recognizing the need for greater supply chain resilience and diversity, even if at the expense of efficiency.

      We have national security and reliability concerns — most visible in the U.S.-China tech war — that will now extend to concerns, I think, over pharmaceuticals and medical equipment. And the drive towards greater localization will add further strain, just as larger government presence in the economy will bring increased focus to protections for domestic industries. That’s a lot of pressure. It’s a lot of pressure on supply chains; it’s a lot of pressure on globalization. I think we will look back on this moment as really an important point in the history of globalization.

      Catherine Kress: While the COVID-19 pandemic has become the only story in the news cycle, the November presidential election in the U.S. is likely to be one of the most consequential in modern history. As someone who has been close to several U.S. elections, Tom shared his perspective on how the pandemic will impact the November presidential contest.

      Tom Donilon: First, the coronavirus has injected a massive amount of uncertainty into the November elections. None of the assumptions that we held before the crisis remain useful for analysis, in my judgment, at this point. The only bit of clarity we have came when Senator Sanders dropped out of the race, thereby confirming Vice President Biden as the Democratic nominee. And the Democratic party is now in the process of uniting behind Vice President Biden.

      Second, the pandemic has dramatically upended the nature of campaigning and the presidential nomination process. Vice President Biden is campaigning virtually from his home in Delaware, and the President is present every day, and in some parts campaigning from the White House briefing room. Already, 16 states and Puerto Rico have delayed their primaries, and the Democrats have postponed their convention.

      Moving forward, we will see the parties battle over efforts to deal with voting in the time of coronavirus. Fights over extending voting times, early voting, vote by mail, other access issues. Now some have asked — it’s been one of the questions I’ve gotten the most over the last couple of weeks — is could the President could delay or postpone the November election. The answer is no. The date of the election on the first Tuesday in November is set by an 1845 statute passed by Congress. That date can only be changed by Congress. U.S. elections, by the way, took place during the Civil War in 1864, during the 1918 pandemic, and during the Second World War. And in 1864, President Lincoln famously stated, “If the rebellion could force us to forego or postpone a national election, it might fairly claim to have already conquered and ruined us.” I think the same thing would be said about the virus this time around.

      Approaching November, state polls are the measure to watch. Though national polls show Vice President Biden ahead, just a few battleground states will decide the outcome of the election. Indeed, in two out of the five last presidential elections, the winner of the popular vote lost the overall election in the electoral college. These factors point I think to a close election.

      Catherine Kress: In summary: the most complex crisis of the 21st century, a coming storm for emerging markets, continued deterioration of U.S.-China relations, massive state intervention, accelerating de-globalization and a tightly contested U.S. election.

      Tom painted a pretty grim picture. But it’s not all bad.

      Tom Donilon: While the coronavirus presents enormous challenges, it also presents significant opportunities. The crisis has stress-tested our social contracts and now forces us to address those areas where we’ve historically underinvested. With good leadership, we have an opportunity to re-evaluate the effectiveness of our international institutions and cooperate on building new ones— specifically, I think, around healthcare.

      Catherine Kress: Another opportunity we see: sustainability. We believe the current crisis is putting a bigger focus on creating a more sustainable world. There’s been a concern that when we hit a downturn, investors would run away from sustainability. But in this crisis, we’ve seen the opposite: investors are looking to sustainable investing more than ever, and sustainable investments have shown resilience despite uncertainty.

      This shift toward sustainability, along with the trends that Tom discussed, have been on our radar for several years; but the coronavirus crisis will amplify each of them. This crisis may forge a new path for years to come.

      Thanks for listening. We’ll see you next time on The Bid.

    19. Mary-Catherine Lader: The coronavirus has spread to more than 180 countries. As the virus has progressed worldwide, how has that impacted different countries at different points, and what lessons can we learn from how regions have navigated the pandemic?

      Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, Mary-Catherine Lader. Today, we talk to four of BlackRock’s leaders around the world whose regions have been most affected by the coronavirus. We’ll travel from Asia to Europe to the U.S. and touch on how the virus has affected global markets, where we’re seeing signs of recovery, and what we’re hearing from our clients.

      So let’s turn to Asia, where China and a few other countries are beginning to curb the impact of the virus. We asked Geraldine Buckingham, Chair of BlackRock in the Asia Pacific Region, to talk from her standpoint in Hong Kong what the shift back to normalcy feels like.

      Geraldine Buckingham: As the virus became very public around Chinese New Year, China went into quite extreme lockdown, particularly in parts of China like Hubei Province. And it was a very, very challenging time for our Chinese colleagues. I think over the last few weeks, there's been more of a sense that things are normalizing. Certainly, colleagues report that on the ground in major cities like Shanghai. But there's obviously concern about imported cases. And we are seeing travel restrictions. I think it's interesting, though, that when I speak to clients who have much larger operations than us on the ground in China, many report that they're effectively back to normal in terms of people in the office, et cetera. I think that the fundamental issues that existed in China around the lack of retirement infrastructure and lack of retirement savings, the need for international capital, these issues are unchanged. I've been quite impressed how through this crisis Chinese clients and regulators have remained incredibly keen to engage. They certainly haven't taken their foot off the gas. We've been able to continue to move forward, albeit, a bit more slowly.

      Mary-Catherine Lader: Geraldine talked about how business in China is beginning to come back online. What are the signs she’s looking out for to gain confidence of a fuller recovery?

      Geraldine Buckingham: Look, I think it's going to be incredibly important for people to have some sense of the health outcomes. What is the virus peak in major economies? How is that being handled? I do think the physical and monetary response we've seen from central banks and governments around the world has been extraordinary. The scale of investment, you know, in some cases 20% or even more of GDP from governments recognizes, as many of them have said, that nothing's off the table to support economies through this period. And I think that also gives the market some confidence. But I do think ultimately this is a health crisis that has then flowed into the financial system. We, obviously, for our own operations, are tracking a range of indicators. It's everything from government restrictions to the number of cases to the growth in number of cases, you know, restrictions like school closures, about 15 or so risk indicators across each of our markets to ensure we have a handle on what is the situation both in terms of what is the situation today, but is it trending positive or negative? And we'll use that as very important input to making decisions about what level of operations we should have in place for our offices.

      Mary-Catherine Lader: Geraldine mentioned a host of indicators that we’re looking for in markets and for our own business. And while we’re still in the early stages here in the U.S., China and other countries in Asia look to be the first to come out of the crisis. So, what can the rest of the world learn and hopefully follow suit?

      Geraldine Buckingham: The COVID-19 crisis obviously started in Asia earlier than many other parts of the world, and that presents something of an opportunity to learn from the Asian experience. We’ve seen markets like China, South Korea, Taiwan and Hong Kong appear to be leading with steps back to normality. It’s interesting to note, though, that even over the last few days, countries like South Korea and China, to some extent, have reported a few new clusters and spike in cases, demonstrating how hard the return to normal life actually is. We’ve got markets like Australia and Singapore that saw a sudden uptick, but are now returning more to normal, and then other markets like India where they’re trying to return to normal, but pretty significant lockdowns remain in place.

      In terms of markets more broadly, it is clear that this crisis will change the world. And sadly, de-globalization at least for a period looks like it will be under real pressure. This pandemic and the following economic crisis has really exposed fragilities that I think were there before, but are seen more clearly now: weakness in the healthcare system or the political system, populism, income inequality, all of these things I think are getting more focus as we see how this crisis will actually play out. The response from government around the world has varied, but health experts do seem to agree on the same overarching measures for containing the outbreak. It’s not rocket science; test widely, make tests extensive and affordable. Secondly, isolate those who are infected and those who have come into close contact, so contact tracing is incredibly important. For an unknown period of time, social distancing looks like it’ll just be necessary, so whether it’s school closures or whether it’s large events, certainly travel, it’s unclear how all of these things come back to the normal we’re accustomed to. And finally, good personal hygiene, like washing hands, is I think a change that’s here to stay.

      Mary-Catherine Lader: While Geraldine provided perspective from the ground in Asia, next, we’ll shift to Europe, one of the epicenters of the coronavirus: Italy. But like China, Italy has also had time to recover. Have those signs of optimism started to trickle through?

      Giovanni Sandri: The situation is improving materially. And the national health care system is now less stressed with available beds in the ICUs and less people hospitalized.

      Mary-Catherine Lader: That’s Giovanni Sandri, Head of BlackRock in Italy.

      The impact of the virus is different region by region, though. The center and the south of Italy seem to be now quite under control while the rich regions in the north, mainly Lombardy where everything started, are still reporting new cases. And authorities are looking very carefully at how things evolve. That said, the general feeling is that the worst should be behind. And now the focus is on two areas. First, the fiscal response with the support of the European Union to help the economy to restart. Second, how to structure phase two with reactivation of at least part of the functioning of the country. Regarding the latter, the business community is pushing the central government to allow as many sectors as possible to restart as soon as possible. On the other hand, medical advisors continue to be more cautious and monitor the new infections trend very carefully, looking for a longer track record. The next weeks will be key to understand what can be done without taking too much risk of a second wave as strong as the first.

      Mary-Catherine Lader: At last, the worst is likely behind us in Italy. And Giovanni says that he’s starting to phase into a “new normal.” So what will normal look like there?

      Giovanni Sandri: Thanks to the application of a rather hard lockdown, the experience in Italy is actually consistent with the epidemiological curve we saw in China where the crisis started at the end of January and things are starting to normalize after three, four months. The Italian authorities are currently discussing to relax some of the restrictive measures. And by the end of May, beginning of June, we should start to see some normalization with specific restrictions in place for a longer period. So, for instance, schools are not going to open until September. Same as China, it will be key the way phase two is designed and executed with the objective to limit the risk of a potential second wave. A vaccine will take months and probably initially will be available only to selected categories. The focus now is to have better equipped hospitals with more personnel, more beds, more ICUs, more efficient ways to test individuals, and offer more effective symptomatic treatments. The general consensus is for the so-called "new normality" i.e. a more normal life with some limitations, for instance, the travelling, large gatherings, starting before summer with restrictions relaxed gradually going towards the end of 2020 and entering 2021. Unfortunately, it is too early to say exactly how the new normal will be at the end of this process. Another important element for phase two is coordinated European approach. This is key to avoid the closure of borders within the European Union.

      Mary-Catherine Lader: Giovanni talked about normal life in Italy, but with increased restrictions. So what lessons can we learn from that about how to navigate the virus?

      Giovanni Sandri: What happened was unexpected. We have not faced anything similar in our modern history. And mistakes were made, but that was almost inevitable. What we can say now is that a key element is speed. Unfortunately, this was underestimated at the beginning. And although everyone saw what was happening in China first and after in Italy, governments were slow in taking drastic measures needed to contain the virus. The experience in Italy tells clearly that the sooner you act, the quicker you can have the situation under control. It is not by accident that the most impacted area in Italy is still Lombardy, where everything started, and the virus spread for at least a couple of weeks without controls. While the situation in other parts of the country, particularly in the south, which, by the way, has a much weaker health care system, is significantly better. Very important is also the transparency towards people explaining what's going on. It is not easy when you're still learning and you do not know everything. But it is important to be transparent anyhow and communicate clearly and openly. A critical element that has emerged from the crisis is also the additional complexity given by the split of powers between central authorities and regional ones. This has created some confusion in handling the crisis.

      Mary-Catherine Lader: As Giovanni mentioned, we haven’t faced anything like this crisis in modern history. Across the board, the consensus from all of our leaders around the world is that coronavirus presented an unprecedented challenge to markets. So, over the course of their careers, through many crises, what’s made this one so unique?

      Sarah Melvin: The coronavirus is first and foremost a health crisis. In my career, there's never been an equal situation of this scale or magnitude.

      Mary-Catherine Lader: That’s Sarah Melvin, Head of BlackRock in the United Kingdom.

      Sarah Melvin: It's also the first time that the economy has been shut down purposefully in order to stem the spread of a virus. We've honestly never seen this speed of recession before, but we've also never seen this scale of coordinated policy response. And some of this policy response will have significant ramifications for portfolio construction for our clients.

      Geraldine Buckingham: It's really difficult to say the virus has been similar to any other crisis that I've seen in my career.

      Mary-Catherine Lader: That’s Geraldine Buckingham again.

      Geraldine Buckingham: I don’t think the world has seen something of this scale in many, many decades. I think it's a crisis for humanity that has then flowed into the financial markets. And first and foremost, this is a tragic human event and will obviously have very broad social implications, not just for those who lose loved ones through this experience but also through the financial implications that it bears. In terms of market volatility, the closest thing I've seen is the global financial crisis of, you know, 12 years ago. I was still in consulting at that time. But I think that was quite different because that really was a credit crisis that sort of originated in our financial institutions and then spread into the economy. I think banks in many parts of the world are in stronger shape. I think it's very encouraging that governments and central banks have recognized this as quickly and as fully as they have and that within a matter of weeks we've had literally trillions and trillions of dollars pumped into the global economy to try and limit the negative implications of the economic shutdown that's been required to deal with the human tragedy that's unfolding.

      Giovanni Sandri: Larry Fink in his recent letter reminded all of us that in 44-years career, he has never experienced something similar. I cannot say anything different in my 23 years.

      Mary-Catherine Lader: That’s Giovanni Sandri.

      Giovanni Sandri: I went through the global financial crisis. It was a deep crisis. But this time is actually different; it is the first time that the life of billions of people across the world has been impacted so much. Awfully and as we expect, this is a huge, short or midterm shock which will have less negative long-term accumulated impact on the economy compared to the global financial crisis. Not everything is bad. Some things will be for good, for instance, a smarter use of technology and more investments in the health care sector. The crisis is also an interesting example to everyone of what a global shock triggered by the real world can cause. Today, it is a pandemic. Tomorrow, maybe the implication is coming from climate change. We believe attention to sustainability will come out stronger from this crisis with increased focus on the environment and also much more focus on the social elements and the role of companies in society.

      Mark Mccombe: Unlike the great crisis of 2008 and 2009, I think clients have been quite sanguine about what's happened in markets.

      Mary-Catherine Lader: That’s Mark McCombe, BlackRock’s Chief Client Officer who’s based in the U.S.

      Mark Mccombe: This pandemic is not one particular group's fault. And no finger pointing has taken place. I also think the experience of the great crisis in 2008 and 2009 has actually given a little bit of a playbook as to how to react when markets become very dislocated. We've seen this, for example, in something like money market funds where very quickly the government stepped in and backed much of the paper that's in the prime money market fund space. Now, I do believe that there will be regulatory reform again coming down in the future. But I think it's clear to see that for the time being, people took this much more in their stride then they might have ten years ago. So I feel very optimistic that actually as a community, as an economy, we're going to get through this.

      Mary-Catherine Lader: Sarah and Mark both mentioned their clients. There’s no doubt that the coronavirus crisis has changed the way investors will navigate building portfolios, particularly for resilience. So what’s been the client reaction?

      Sarah Melvin: Each person's response to the virus is very individual and we know that many clients are dealing with personal adjustments and concern for family and friends as well as their professional responsibilities. At the start of the crisis, many clients were focused on concerns for the health and well-being of their employees, as well as determining how to move their own people and operations to a virtual working environment. Those concerns were soon supplemented with having to navigate shocks in the market. How clients are reacting in terms of portfolio adjustments varies widely depending on client needs. Some need more liquidity right now; others are looking to re-risk their portfolios. All are reviewing their asset allocations, and that's where a lot of our conversations are right now, at the whole portfolio level.

      Mark Mccombe: As you think about something like our defined contribution business, we were very worried about how people would see all of the red ink as their retirement savings had perhaps shrunk as a result of this. And we were able to take steps to reassure many of our clients that actually the old adage of investing for the long-term will pay off if you stay in the market and not to sell just because we've seen a correction. Now, I do still think that there's more pain to be had, because clients are beginning to think about how the long-term economic impact of the coronavirus is going to affect their business. In the first few weeks, there was a great focus on liquidity. But, now, I think people are thinking more about structural impacts on their portfolios. What does that mean? Perhaps it could be something like the amount of real estate people have in their funds or the amount of private equity and whether they see markdowns in those areas that might well have an impact on the overall value of the portfolio. And that can have a dramatic impact on asset allocation decisions as they go forward. Also, I think equity markets have definitely been bouncing around as a result of sentiment, as well as people's concerns about the future long-term impact on the U.S. and global economy. But I do see people returning more cautiously into the markets to look for opportunities, not in an ambulance-chasing way, but rather thinking about asset allocation and areas and assets that they might've wanted to get into previously but maybe didn't have the opportunity.

      Geraldine Buckingham: This crisis has really emphasized how important it is for us to be nimble to our client needs. At first, clients really needed guidance as they grappled with incredible volatility. Now, clients are responding to the changing environment with quite local issues, so for example, superfunds in Australia facing funding challenges as people are allowed to access retirement savings earlier than was anticipated. Some clients are actually looking for opportunities to put significant money to work and looking for dislocations in the market. So, it’s important that we’re able to service all of those clients in quite a different way.

      Mary-Catherine Lader: Market shocks represent an opportunity for investors to think about the long term. But beyond investors, the crisis will change the way that all financial services operates. So let’s turn back to Sarah: What does she expect this means for finance, and what is BlackRock focused on now?

      Sarah Melvin: There's no doubt there will be a new normal that appears as a result of this crisis. Crises, though, also often bring innovation, and we've seen that in ways in which we're engaging with clients and with each other, particularly through technology. I don’t think this will fully reverse. I also think the lockdown is making us all much more thoughtful about the world we live in and I think that will translate to even greater focus on sustainability as we think about how we do business and how we invest. Right now, our mission is simply to help more and more people get the support they need, and we're doing that by partnering with several UK charity organizations who are on the frontline providing food supply and distribution and medical help. We've done this through donations to the National Emergencies Trust, Team Rubicon UK, and St. John’s Ambulance who are all focused on helping people through this crisis. Our own employees have taken fundraising activities to heart as well, some going as far as shaving their heads for charity.

      Mary-Catherine Lader: Sarah provided insight into how the industry and BlackRock as a company is navigating these changes. On a more personal note, the crisis has transformed all of our day-to-day lives. I now wear a mask and gloves, and I have antibacterial solution in every corner of my home. So, our last question to our regional leaders: How has the coronavirus changed their personal lives?

      Geraldine Buckingham: Coronavirus has had all sorts of impact on daily life. I think perhaps the most obvious is just the difference in working. But a number of things have really helped. I mean, technology has been an absolute save in this scenario. It's also been very important personally with family members spread around the world, the ability to Facetime, particularly for my young son, has meant that people still feel close together. I think it's important to remember that this is a marathon, not a sprint and that pacing yourself is incredibly important. So, I've tried to keep something of a routine during a workday at home. I make sure that I get out of the house for a short walk or something like that every day just to get some fresh air. But I think it is important to be gentle with one's self and gentle with others because I think the level of stress is high. And it's important to remember that everyone's feeling that.

      Giovanni Sandri: A lot of the things that were part of my normality have disappeared almost overnight: travelling, spending a weekend out of the city where I live, Milan, meeting my friends, even going to the barbershop or having a walk in the park nearby. What I suffer the most is to be forced at home without the possibility to meet my old and sick parents. They are by themselves, and we can meet only via video. On the other end, I have the chance to focus more on my teenage daughters now, and for instance, help them with their studies from home. And this has been quite a nice experience. So, I continue my day-to-day job with calls replacing meetings, not travelling anymore, and now investing more time on my other job as a father. As always in our life, also during a pandemic, there are some positives.

      Sarah Melvin: What's surprised me most about this experience is the resilience of human beings, of the spirit that I've seen amongst people, the incredible unity, people helping one another. And it's so gratifying to see colleagues and friends reach out into their communities to see how they can help. That really has been heartwarming.

      Mary-Catherine Lader: As all of us around the world seek to get through this crisis, we know we’re entering a new normal, but we don’t even know what it looks like. But despite the challenges we’ve all faced, as businesses and as individuals, it’s been an extraordinary time of resilience and of coming together. Thank you for listening to this episode of The Bid. We’ll see you next time.

    20. Oscar Pulido: The coronavirus crisis has prompted a massive response from central banks and governments around the world to help prop up the global economy. In March, the U.S. Federal Reserve cut interest rates to zero and it isn’t the only central bank that has lowered interest rates in recent weeks. But low interest rates have been a theme for longer than the past six weeks: the truth is, they’ve been declining since the early 1980’s. So how did we get here, and what do low interest rates mean for investors who rely on generating income from their investment portfolios?

      On this episode of The Bid, we’ll speak with Michael Fredericks, Head of Income Investing for BlackRock’s Multi-Asset Strategies group. We’ll get his perspective on why interest rates became so low in the first place, what stage of the recovery we are in now, and where he’s finding investment opportunities in today’s markets. I’m your host, Oscar Pulido. We hope you enjoy.

      Michael, thanks so much for joining us on The Bid.

      Michael Fredericks:: Thanks for having me, Oscar.

      Oscar Pulido: Under normal market conditions, we would both be commuting into New York City into the same building and in fact on the same floor, it turns out you and I sit pretty close to each other. But we haven’t seen each other for many weeks, so I’m glad that we have this opportunity to talk. I wanted to ask you about interest rates first, because last month, the Fed cut rates back to zero and I’m curious to hear from your perspective why the Fed acted so quickly. But perhaps taking a step back, how did we go from double-digit interest rates in the 1980s to zero?

      Michael Fredericks:: Yeah, it’s been an amazing shift in the interest rate environment going back to your point to the double-digit years of the 80s to here where you have short-term interest rates essentially pegged at zero and even longer-term rates, like 10-year Treasuries below 1%. And when you look back in 1990, the 10-year Treasury had a yield of about 8% and then 10 years later in 2000, it was down to 6%, and then in 2010, it was down to 4%, and then here we are, sub 1% today. And given all the uncertainty in the world today, it feels like we’re going to be in a really low rate environment for the foreseeable future but to your point, your question, how did we get here? I think a few key things contributed to this tumble in interest rates. One was look, I think we have to accept that the rate of economic growth has been decelerating over roughly that same time period, so if you went back and looked at GDP growth rates back in the 90s and even into the parts of the early 2000s, growth was running at reliably at 3-4%. And really since the end of the financial crisis, that number’s been more like 2%. Also, if you went back to 1990 and even 2000, inflation was running higher than it was today. And also, since the financial crisis, just inflation has been stubbornly low. And then finally, there’s some demographic issues here where people are coming out of the workforce as more and more people retire and that has been collectively a bit of a drag on productivity growth and it’s a bit circular, but it’s contributed to a world where just global growth is slower than it was and that’s all been exacerbating these problems with falling interest rates.

      Oscar Pulido: Well, it’s interesting because I’m remembering the anecdote that my dad told me once that back in the early 1980s, just to give you a sense of how high interest rates were back then, that he slept outside a bank in order to be able to qualify for a lower rate on a mortgage that he was applying for, for a house that my mom and dad eventually bought. So, it’s before a time that I can really remember, but it gives me a sense of what the environment must have been like back then. And one thing that I can remember, however, is that over the last many years, the market experts have been predicting that interest rates would go up eventually and we had sort of started to go back in that direction. But as we just said, we’re back at zero. So, why have the experts consistently gotten this wrong and what does the market think now in terms of the future path of interest rates?

      Michael Fredericks:: I think many of us including, I put myself in this camp, thought that rates would be higher over the last 10 years. This recovery after the financial crisis has been stubbornly low and it’s also worth remembering that the market is a global market. The market and the demand for safe-haven assets like U.S. Treasuries is not just coming from U.S. investors, but also from investors in Europe and other parts of the world where rates are even lower than they are here. So the extremely slow growth that you see in Europe contributes to the demand from European investors buying U.S. Treasury bonds and driving up the price and the way the bond math works, the price is up, the yields are lower. But I think more to your point, this idea of what did the market get wrong along the way and what were expectations. I think this is really fascinating because there is a betting market, if you will, for where interest rates will be in the future, and it’s called the forward rate market. And this is where the market sets a price, an expectation for where interest rates will be in the future. Well, one of the things you can look at in this betting market is where the market thinks that 10-year Treasury yields will be, say, 5 years into the future. And what we’ve seen is that over time – this expectation that interest rates in the future will be higher than they are today – those hopes continue to just get squashed. And when you look at this concept, how is that being priced today, the 10-year Treasury yield, which is less than 1% today? What is the expectation? It’s actually just above 1%. A lot of that hope has been squeezed out of the market at this point. I think the market and market participants have come around to this idea that we are mired in a very low interest rate environment for the foreseeable future.

      Oscar Pulido: So, let’s assume that the market is right, and that rates in the future will continue to stay low. Although as you just mentioned, the market hasn’t proven to be quite good at predicting the future, but let’s just say for argument’s sake they are. Shouldn’t this be something that we’re celebrating, low interest rates? I mean, if I can refinance a mortgage at a lower rate, or I can take out a personal loan at a lower rate, why is that not a good thing?

      Michael Fredericks:: Well, I think it is a good thing for anyone that wants to borrow money. Your mortgage rates are incredibly low-levels, auto loans are at very low levels, and you’ve also seen the corporate world, a lot of companies have been taking advantage of this low interest rate environment to do a couple of things. One, as they borrow, they’ve been reissuing debt at lower and lower interest rates. And because there is so much demand for yield, they’ve been extending the maturity of the bonds that they hold. So, it has been a positive for a portion of the population, but on the other hand, it has been a pretty negative thing for investors. You just aren’t generating a lot of yield or a lot of coupon today given where the response from central banks driving down interest rates lower. A lot of these structural demand issues where there’s a huge amount of need for income, particularly from investors around the world that are, I’d say, more conservative, don’t want to take a lot of risk. The yield on the Barclays Aggregate Bond Index, which is one of the bellwethers that a lot of institutional and retail investors look at as a barometer or a broad benchmark for a good quality pool of bonds, is about 1.4%, which is a record-low number.

      Oscar Pulido: In response to the coronavirus, the crisis that we’re living through, the Fed cut rates back to zero. That’s just one of many actions that policy makers around the world have taken to combat market volatility. So, just curious from your perspective as a global investor, where are we right now? What stage are we in if you’re looking at the markets globally?

      Michael Fredericks:: Yeah, stage is the right word. So, we’ve thought of it as a general pattern when you get in times like these, which are really volatile. You see in stage 1, there’s a big risk off – a big aggressive selling behavior within the markets. And in that phase, you generally see there is a rush for liquidity. That was certainly true in the month of March, and prices of everything fall. Stage 2 is when market settle down a bit and that rush for the exits abates and investors start to pick through and look for opportunities. And then stage 3 is generally the recovery stage and this is where it’s risk on again and volatility really dies down and markets accelerate. I think we’re quite a ways away from stage 3, but I think we’re well into stage 2, this part of the historical series and historical precedent where investors like us are dissecting different asset classes, taking advantage of whatever cash they might have to look around and find opportunities that look attractive.

      Oscar Pulido: That’s really interesting how you’ve characterized the market in terms of these three stages. I’m just curious, what signposts are you looking for to suggest that we’re moving into stage 3? Do we need to see a vaccine, are you looking at the hospital data in New York, are you looking at like how the Chinese economy is doing as it’s going back to work, is it all the above? What are some of the things that you’re most curious about?

      Michael Fredericks:: It would be fantastic if there was evidence that a vaccine was coming around the corner, but we think that’s pretty unlikely, and most estimates that I’ve heard from people that we believe are well-established to make judgments around these sorts of things has a vaccine probably 12 to 18 months out. More realistically, we’re hopeful that we will see some breakthrough from a treatment perspective more quickly and then we’ll see the vaccine come to market. And so, I think that is probably the most important thing that would give us more visibility around how quickly the economy will recover. So, the analogy that I think makes a lot of sense is that we’re all kind of staring over a valley right now and we know that the valley is deep, we’re not quite sure how deep it is or quite how far it is to the other side. But the second quarter GDP is going to be absolutely horrendous. Everybody knows that. That’s part of the reason we had such a big sell off. I think part of the reason we’ve seen a strong recovery, particularly in the equity market but also in some of the fixed income markets, has been a combination of a slowing rate of new cases – so there’s been progress on the virus front itself – but there’s also been a tremendous and very aggressive reaction by central banks, in particular, the Federal Reserve to put programs in place at a scale we’ve never seen before to put a floor under the economy as we go through this really uncertain period of time. So, I think the market has support but that’s not to say we’re in this recovery phase and I think really the important thing here is not to get ahead of ourselves as investors but to try to be patient. We’re going through an unprecedented period of time; we like having dry powder, we like having cash; it gives us a lot of flexibility to put that cash to work as we see opportunities, but I think we should expect to see continued higher levels of volatility. Not like we saw it back in March; I don’t think we’ll see that again. But there is a lot of good news priced into the stock market at the moment, and I’m not so sure that it’s going to be such smooth sailing especially when we get to the hard part about the specific plans and programs and the cadence of how we’re going to get back to normal after these lockdowns.

      Oscar Pulido: And so, just to be clear, it sounds like the actions of central banks and governments, which you mentioned has been a global response, has been helpful. I think you used the term, “provided a floor,” but it’s not sufficient in and of itself to take us to that next stage of recovery.

      Michael Fredericks:: I don’t think so. They’ve done what they could, but until there’s more clarity around the shape of the recovery, where there’s a lot of debate around will this be a v-shaped recovery, a severe contraction in the second quarter followed by a similarly-shaped recovery in the third and fourth quarter? Or will the slope of the recovery be a lot flatter than the sell-off? And I think the market is coming around with the idea that a v-shaped recovery is pretty unlikely as we start to think through the complexities of normalizing behavior again without triggering a second wave of virus patients. They were certainly bold – they being the Fed and central bankers – they were definitely bold with these plans and I think they will be there if needed to do more.

      Oscar Pulido: And you mentioned that because of the stage that we’re in, we saw a lot of the indiscriminate selling and that now, there are some investment opportunities that are starting to present themselves. So, let’s talk a little bit about that. You look at the world through the lens of income and thinking about how much cash flow and coupon can you generate from investments. So, what looks interesting to you when you look at the world through that lens?

      Michael Fredericks:: If you went back, call it to the middle or end of February, a lot of what we would call good quality assets, so that would be things like investment-grade bonds; it would even be really good quality stocks. Those quality types of assets around the world for the most part were really, really expensive. And then, in that phase one stage that we went through, many of them sold off dramatically. And it honestly hasn’t taken very long for a lot of other investors to come to the same conclusion and buy up a lot of those down-beaten, good quality parts of the market. There were, in our view, really oversold back in the mid- to late stages of March. That said, they haven’t fully come back to where they were, and I still think that there’s some strong value in thinking of it as thematically as these up and quality parts of the market. And what you’re seeing is kind of an interesting bifurcation. So, if you were to look at a market like the high yield bond market; so, these are non-investment grades, sub-investment grade rated bonds. Even within that part of the market, the best quality, the highest rated high yield bonds which are rated double B did suffer a pretty sharp sell-off in the vicinity of 15% to 20% over the course of March. And they’ve retraced a lot of that. And in some instances, what are perceived to be the best quality double B bonds that are not in industries that are being disrupted by the virus, some of those types of bonds are essentially back to where they were. I’m really surprised at how quickly those retraced the sell-off. At the other end of the spectrum are the lowest quality high yield bonds, the triple C rated high yield bonds, which by definition, those companies have a lot of leverage. And if you’re a highly levered company in an industry that is being disrupted by coronavirus, well, there are very legitimate questions about whether or not some of those companies are going to make it through. And those bonds sold off very sharply in March and really have not come back in part because there is so much uncertainty around the outlook of those types of companies.

      Oscar Pulido: So, Michael, it sounds like you’re trying to be opportunistic, but you also mentioned having some cash on hand. So, that tells me that you think there might be more volatility at some point in the future and give you another interesting opportunity to buy maybe some of these high-quality assets that you’re talking about.

      Michael Fredericks:: Yeah. That’s the right way to look at it. We are concerned that as we go through the earnings season, where companies report their earnings and generally tell the investment community what they’re expecting in the future with respect to their revenues and their profit outlook, they don’t have a lot of visibility right now. Companies are not providing forward guidance; they don’t know themselves what their business is going to look like over the coming quarters. We’re a little concerned that over the next few months, that weak visibility around what revenues will look like in the future and the uncertainty around the duration of how long that might persist could weigh on some of these assets classes, particularly on the fixed income side where we think that generally speaking, bond investors are more concerned about these cash flow issues than stock investors who will, I think, be more likely to look to the other side of the valley and think about, “Is this a good buying opportunity today if I’m a long-term holder of stocks?” Bond investors generally aren’t quite wired that way. They are more focused on these short-term cash flow issues. So, we like the idea of holding some cash and being patient and we’re going to watch how this plays out.

      Oscar Pulido: You touched on this concept of coupon and generating income from your investments. Why is this so important for investors?

      Michael Fredericks:: You know, your yield is your paycheck. Maybe ignore the yield on a bond for a second and think about the return profile of a stock. So, when you buy a stock, you’re buying an ownership stake within a company. And with that, usually comes with some sort of dividends. It’s usually pretty modest, but you’ll get a dividend and then you’re obviously hoping that the earnings of that company are going to grow and that the price will rise. And so, your total return over the long run for stocks has been a healthy contribution from the dividend, but a lot of that total return has been coming from the prices of those stocks moving higher as earnings propels the total value of the stock up. A little bit of a different story on the bond side, where you’re just hoping to get paid back. You’re lending the company money and if it’s a 10-year bond, 10 years from now, you get your money back and along the way, you’re getting your coupon, you’re getting your yield. And so, you’re taking a lot less risk than on stocks, but that yield number is really important. So, 20, 30 years ago, the yields that you were getting paid as that bond holder were a lot higher than you’re getting paid today. We talked about the yield today on that Barclays Aggregate Bond Index, if you can imagine, you’re tying up your savings into an asset class that is only paying you 1.4%. That’s hard to live off of for most people.

      Oscar Pulido: You mentioned the demographics and investors that are now retiring. In fact, in the U.S., there’s 10,000 people a day that are retiring and I did a little bit of math, so that’s about 300,000 people a month. That’s about the population of the cities of Orlando and Pittsburgh. And so, these are folks now that are starting to think about how to spend some of the money that they’ve accumulated over their working years. How do they go about doing that? Is that easy or is there a risk that they run out of money?

      Michael Fredericks:: It is so complicated and it sounds relatively straightforward, but when you start to think through the different permutations, it is really, really a complex problem if you’re a retiree trying to one, live off of your nest egg in an environment with such low bond yields. So for a lot of people, if they saved X and they’re only earning 1.5% or 2% on a coupon on their investments, it’s just not enough money to live off of, which then means that they need to carefully spend down some of that nest egg over time. And one of the hardest things to know, is probably impossible to know on an individual level, is life expectancy. But if you happen to retire in the early stages of a bull market, you’re in the perfect position. You can spend more money than you could probably imagine in retirement because in the early stage of your retirement, the markets are going higher and the value of your portfolio is increasing even as you are taking money out. Conversely, if you happen to retire at the front end of a bear market, you really need to change your spending behavior really quickly, spend less, and really hunker down. If you don’t, you’re selling down a substantial portion of your nest egg and there is less there to recover when the markets eventually bounce back. So, a better answer is a more dynamic approach to adjusting your retirement spending depending on market conditions at least a little bit.

      Oscar Pulido: Hey Michael, earlier you talked about the market’s expectation for interest rates in the future. And it got me to thinking that one of the things I’ve been doing since I’ve been working from home is watching a lot of movies with my kids, and we recently watched the Back to the Future trilogy, which are some of my favorite movies. So, if you were to travel into the future and encounter your older self, what would that older self be telling you about how you navigated this period of market volatility?

      Michael Fredericks:: You know, you get paid as an investor to stay in the market and it is very difficult to time the market, when to sell and when to buy, and I had a conversation with my father over the last week. He wanted to sell his U.S. equity exposure and I was trying to convince him to stay the course. So, I think in the long run, staying invested is the smart move. We’re going to get through this. We’re going to get to the other side of the valley and markets are going to recover and we’re going to move on. I am not trying to minimize how much uncertainty there is and will be over the next couple of quarters. It’s going to be uncomfortable from time to time, but policymakers are not going to sit on their hands; they’re going to do what they can to try to mitigate the turbulence.

      Oscar Pulido: Michael, we usually end this podcast with a rapid-fire round where we ask a few personal questions and given that we’ve all been working from home now for the past several weeks, we thought we would ask you about your own routine if that works for you.

      Michael Fredericks:: Sure. Let’s do it.

      Oscar Pulido: So, what piece of technology have you found the most helpful?

      Michael Fredericks:: So, I stocked up when it became pretty clear that I was going to be working from home for a while. I bought a professional gaming headset, which it looks ridiculous and people are giving me a hard time saying I look like a helicopter pilot with this thing on, but the audio is phenomenal, and the microphone is really clear. So that was my best call so far.

      Oscar Pulido: Besides running into me by the water cooler, what do you miss about going to your office in New York City?

      Michael Fredericks:: You know, I don’t miss my roughly 90-minute one-way commute. I don’t miss riding the Metro North, but it is really odd having all of our team meetings over the phone and not just bumping into people and sitting in the same room with everyone. We’ve been doing weekly team happy hours via Zoom and things like that.

      Oscar Pulido: You mentioned you’re saving 90 minutes on your commute. So, what new hobbies, if any, have you taken on now that you have more time at home?

      Michael Fredericks:: I am a bit of a car enthusiast. And so, I’ve gotten into a lot of these professional car detailing YouTube videos and bought a lot of equipment with spray foam and spending a lot of time seriously detailing cars and waxing them, and I’ve had a lot of Amazon deliveries, let’s put it that way, with specialty chemicals. We’ve also started growing vegetables. So, it’s still pretty cold in Connecticut where I live and we can’t plant them outside, but we’ve got a bunch of early stage vegetable seeds that are sprouting and I think in the next week or two, be ready to go. I’ve actually never gardened before.

      Oscar Pulido: And do you think when we go back to normal, whenever that is, do you think you’ll be working from home more than you did in the past?

      Michael Fredericks:: I think so. We’ve been talking a lot about that. I think in part because it has worked really well, and I do think that there is something to be said for the team dynamic of actually physically being present at least part of the time. So, I bet it will be more of a blend of maybe we spend two or three days a week in the office and two or three days a week at home.

      Oscar Pulido: Well, Michael, I hope you’re right, and I look forward to seeing you back in the office. Thank you so much for joining us on The Bid.

      Michael Fredericks:: It’s great to be here. Thanks for having me, Oscar.

    21. Mary-Catherine Lader: Coronavirus has set a new normal in literally everything. It’s been a time of record numbers of people working from home, of volatility in markets, of economic shutdown and unemployment. These times have tested the systems that we all rely on to work, to live, and that empower the financial markets and the economy. But there have been a few bright spots. Though there is no question that we’re in a downturn, at least for now, there has been a record growth in sustainable investing.

      So what’s been behind that? Why has it been the case that while most numbers have been flashing red, so-called green investing is just getting bigger? Today I talk to Salim Ramji, the Global Head of iShares and Index Investments, a $2 trillion-dollar business, about why that’s the case. We’ll talk about what he’s learned in this historic time and how ETFs have fared during the tests of these market swings. I’m your host, Mary-Catherine Lader. We hope you enjoy.

      Salim, thanks so much for joining us today.

      Salim Ramji: Yeah, of course. Delighted to be here, MC.

      Mary-Catherine Lader: Right, here, in our respective virtual offices.

      Salim Ramji: Exactly.

      Mary-Catherine Lader: As that indicates, it’s been a totally unprecedented start to the year. In just the past few months, the entire structure of our professional and personal lives has changed, and that has been the case for all of our colleagues all over the world. So just to start with the obvious, what has this meant for you and for the iShares business?

      Salim Ramji: Well look, for me, for you, for everybody, it’s been a pretty surreal past couple of months. Personally, the good thing is I’m at home, I’m safe, I'm with my family, and relative to what many communities including here in New York, all around the world are going through, weird though it is, we’re in a good position. Even while there’s been this humanitarian crisis essentially going on all around the world, it’s been some of the most intense periods for iShares as a whole over the past three or four weeks, or the past kind of month and a half or so.

      Mary-Catherine Lader: It seems like it’s been a time that’s really tested ETFs and certainly has created a lot of conditions that many had speculated about how ETFs would hold up during the times like the ones we just lived through, so what were some of the major lessons from your perspective?

      Salim Ramji: Well first, just to give context, it really has been. I’d say the past month and a half or so have been the most intense stresses for the ETF category and the index category. In part because of the market volatility, in part because of things that have happened in terms of market structures. These circuit breakers on the New York Stock Exchange came into effect four times. They haven’t come into effect before. And in part, because there were just so many markets that were dislocated and people were looking to the ETF to really provide liquidity, provide price discovery, provide access, and really be able to get their money back when they wanted their money back. And that was all in a period of time where all of us, all of our partners, were all working from home. And so, the encouraging thing coming out of all of this is that in this most extreme test that we've ever gone through, iShares did exactly what they were supposed to do. They tracked the market, they provided price discovery, they provided access to markets for investors all over the world, and the thing that is a real positive is that we continued to keep our promises to our clients.

      Mary-Catherine Lader: There were moments or days when there was a lot of concern about illiquidity in the market and that markets might not, frankly, work in some ways, as was particularly important in times of volatility. Were there liquidity concerns with ETFs and how did that end up playing out?

      Salim Ramji: Yeah. Some of the liquidity issues were most acute in the bond market. And the bond market relative to the equity market is pretty antiquated in how it operates. It’s pretty opaque, it’s not generally done on exchange, it’s done over the counter, so it’s just negotiated. And the ability to really find liquidity is its own mix of art and science. And I think that the thing that ETFs did, because of the characteristics they have – they’re on exchange, they’re fully transparent, and they’re very liquid – meant that investors were able to get a real sense of what the true pricing was in the bond market, during periods in which that wasn’t totally clear. And I think in doing so, they added a service not just for investors, but they added a service to the market themselves, where these became instruments of modernization within the bond market itself.

      Mary-Catherine Lader: Given that that was a unique test — ETFs hadn’t been at this volume in previous crises – do you think there are any policy or market structure implications coming out of this period that would make sense to be broadly adopted or considered?

      Salim Ramji: You know, probably. Look, this isn’t over.

      Mary-Catherine Lader: Right.

      Salim Ramji: We’ve come through the past six weeks and in the past six weeks, things have worked, but both in the world economy and in the markets themselves, this was a test but this was a first test of 2020; I doubt it’s going to be the only one. I think there will be some look at policies. But I think the thing that again was really encouraging is when you look at the policies that were put in place post-2015, around market structure, which led to a lot of the market-wide circuit breakers being activated four times in the month of March, which they’d never been activated under these new rules. So if markets were opening up outside of certain boundaries, so down more than five percent, down more than seven percent, that what would happen is there would be a temporary halt to trading for a period of 15 minutes so that the market didn’t get overly volatile or overly out of whack as a result of trading happening that was well outside the bands of normal, or even in some cases, erroneous trading. The last time they were activated was in 1997 under an old set of rules. And it worked. And so I think that was effective policy coming into action. Doesn’t mean there won’t be more, doesn’t mean there won’t be different stresses that we discover, but at least this was a good example of a series of policy changes and enacted four or five years ago that really worked and benefited markets and benefited investors as a result.

      Mary-Catherine Lader: So as we’ve been talking about, this is an extremely usual time but are there some longer-term trends that you see playing out? Trends that you think will last beyond this period?

      Salim Ramji: Look, we’ve seen different periods of volatility over the past 10, 12 years, including the financial crisis itself a dozen years ago, and in each period of volatility, it’s been a positive motivator towards ETFs. If I can give you a couple of examples just from the first part of this year, that what we’re seeing is first of all, we’re seeing greater movements towards investors moving towards model portfolios. They’re more diversified, they’re often simpler, they’re often cheaper, and over the long term, they tend to perform better than the collection of individual securities and mutual funds and things that investors have collected over the years. And we really saw in the first quarter, especially during the periods of market volatility that kicked in around February and March, more investors towards a model-based portfolio or total portfolio approach; I think that is certainly a trend that’s been around for a while, but I expect that is going to accelerate. And I think the second piece has been around the growth and access of sustainable investing. Sustainable investing for us within iShares this past quarter, it was a record quarter; we raised $10 billion dollars in sustainable ETFs. And just a year ago, we were managing only $20 billion, and now we’re managing $40 billion across our ETF and indexed mutual fund range. This quarter was a record quarter for us, even through the month of April, we’ve now raised more in sustainable ETFs and index funds then we raised in all of last year, and last year was a record year for us. So I think that there’s also some unlocking that’s happening that as a result of this volatility, people now have lower capital gains, unfortunately, because they have lower returns, but it’s enabling them to move to different asset classes that they’ve wanted to move to. And I think there is real pent-up demand for sustainable investing, which is why you’re starting to see greater movements towards flows. And I think the other piece around it is that sustainable investments tend to have more of a bias towards profitable companies, more of a bias towards companies with less leverage, more of a bias towards companies that by their nature are much more long term focused. And I think there is also increased appetite, especially in this environment that we’re in, towards more investments that exhibit those attributes.

      Mary-Catherine Lader: And we started the year of course at BlackRock saying that sustainability was going to become our new standard, so in some sense, some of those trends and drivers were anticipated or were evident, but the fact that they persisted during that period of volatility may be surprising, although the reasons you gave of unlocking opportunity and the potential to take advantage of lower capital gains certainly makes sense. But do you think there’s anything about the events of the past six weeks that influenced how investors perceive sustainable investing, or really this is a matter of timing for a trend whose time had come?

      Salim Ramji: I think it’s the second point, I think it’s a trend that had a lot of pent-up demand. I wouldn’t over-interpret the past six weeks, because I think these things take months and years to really play out in terms of investor sentiment. But I do think two really important things have shifted. And it’s not just over the past three months, but it’s really looking back over the past year or two. The first is that there is real demand amongst investors all over the world, and from individual investors to institutional investors to everybody in between for sustainable investments. And I think you’re seeing it in our flows from last year, you’re seeing it in our flows from the first quarter, I expect you’ll continue to see it in the years ahead, but I think that that’s been a change in investor sentiment that’s been building for some time. Some of it is based on values and peoples’ views of the world, but a lot more of it is starting to be just based on value and peoples’ understanding that many of the risks within ESG, particularly climate risk, is a risk just like any other investment risk. And just as you can’t ignore certain categories of investment risk, you can’t ignore ESG risks. You need to build them into your process and how you think about investing.

      Mary-Catherine Lader: And what incentives is that creating for companies in that there is now significant capital flows flowing into those companies that are classified by certain sustainable behaviors? Is that at a volume that it’s really creating any incentive for firms, and what does it mean for those that fall behind?

      Salim Ramji: There is a virtuous circle happening, MC. One piece of it is more investors want access to sustainable investing, it’s not just a niche. Sustainable investing has been around for a long time, but historically, it had been a very small niche of investors; and now it’s becoming a more, hopefully a much more mainstream way in which investors look to deploy their money. I think the second point which you raised just now is that that’s providing greater incentive for companies to disclose. And it’s remarkable, just even in the past several years; back in 2011, less than 20% of S&P 500 companies disclosed aspects about their sustainability and their ESG risks. Today, that number is more like 80%. And with that, there is now a greater lens for investors to really be able to understand what types of ESG risks companies are taking, and that creates its own circle, because then companies that are good at thinking about governance, good at thinking about the social impact of their business, good at thinking about the environmental impact of their business are able to make these disclosures, and investors who seek that are then able to identify them in a way that they weren’t otherwise able to identify it. So, I think that creates a virtual circle which really matches investor appetite with companies that exhibit those characteristics.

      Mary-Catherine Lader: That makes a lot of sense, as the data is getting better, the access can increase and so it creates that virtuous cycle. One thing that you also mentioned is that it’s not as though sustainable investing is new, it’s been around for a long time but just as more of a niche strategy, largely active managers and not as much index products. So, part of what’s happened now is that index products have been taking off more dramatically than other products in sustainable investing. Why has that been the case? What are the characteristics that have led to that growth?

      Salim Ramji: It’s really fascinating and I think really exciting, because I think the biggest part within sustainable investing from a growth point of view, in my opinion, is that it’s ripe for indexation. And if you think about what indexation is at the core, whether you're taking about sustainable investing or any other kind of investing, it’s just automating the investment process; it’s doing it in a way which is transparent, which is rules based, and which is investable. And ETFs are really the most convenient application of this automation, but sustainable investing was kind of the area that – I don’t think it’s the area that indexing forgot, it’s just like it was its own niche and the level of index penetration in sustainable investments was like less than 7% even five years ago, where in other, more mature markets, it was like 40 or 50%. And so, it’s just a huge gap in terms of the level of index penetration in sustainable investing. And I think one of the things that’s really exciting for investors, back to this point about pent-up demand, is that the other thing that index investing, and particularly ETFs do, is it makes investing far more accessible. And so, what’s now happening is that investors of all types want access to sustainable investing. Data and disclosure is getting better, so now you have an ESG index that you can invest in which is far better because of disclosures and because of the analytics being applied to it. You can offer these at a far cheaper price, and you can offer a huge amount of choice because it’s relatively efficient to wrap something in an ETF. And I think if anything is going to be growing the market for sustainable investing, I think indexation is going to be really powerful force. Even on our own projections, the total market of index funds and ETFs that oriented towards sustainable investing are just over $200 billion dollars today; we expect before the decade’s out, that is going to grow by more than a trillion dollars. What it’s really doing back to the reference of making sustainability a standard, is it’s really making it mainstream, and it’s really providing access to millions and millions of investors who want to invest in this way, the ability to do so.

      Mary-Catherine Lader: And this is an obvious question, but why is choice so important? Can’t you provide access because of price, access because of awareness, and a certain range of choice, but why dozens and dozens of different options? Is it because there are different definitions of what sustainable means? Is it because some come at it with a risk approach versus a more values-oriented approach?

      Salim Ramji: Yeah. I think choice is really important. Because every investor has a different starting point and a different need for sustainable investing. Some investors are very purist about what they want in ESG index. And those will only invest in companies that exhibit the best ESG characteristics defined by a set of transparent rules. But other investors, they want to improve their ESG scores, but they still either buy obligation, maybe a contractual obligation that may be in their investment policy statement, they still need to track a market cap weighted index, things invested in companies that exhibit better ESG scores, but still seek to track pretty closely to a market cap weighted index. And there are other investors still that are perhaps much more values based and just want to screen out certain sectors or certain types of companies that are inconsistent with their values. Our own goal is to have about 150 ETF and index funds over the next couple of years. I don’t think we intend to have thousands, but 150 seems to us to be able to get the right level of choice recognizing that there are different segments of investors.

      Mary-Catherine Lader: There may be a popular misconception that sustainable investing is a matter of personal choice of individual values. And you of course referenced that is the key for some investors. But I’m also curious to what extent you think there is a generational dynamic here? Is that one of the longer-term drivers of demand for sustainable investing as we see transfer of wealth from Baby Boomer to Generation X and Millennials, or is that a popular misconception and not a critical driver in reality?

      Salim Ramji: I’d say it’s a critical driver, but I don’t think it’s the only one. I think that even beyond the generational shifts, which are clear, and they’re as much societal shifts as anything – I think they're just shifts in how people think about this as a risk. I think some of it is peoples’ attitudes and values, and there certainly are segments of demand, but I think that the thing that is going to mainstream sustainable investing are two powerful forces working together: one is the recognition that climate risk is an investment risk, and from a fiduciary point of view, thinking about climate risk as an investment risk has very profound implications for how we think about investing in ESG and ESG risks. But I would say an equally important force is the force of indexing being brought to sustainable investing, and I’d say it’s equally important because what it’s really doing is increasing access to different segments of the population that might not have had it. Because they might have lacked the choice, or because they might not have wanted to pay so much for active investing, or because they wanted a way, and a convenient way, like an ETF, in which to get access to this investing category.

      Mary-Catherine Lader: And so what does all this growth of indexing and sustainable investing mean for active? In other categories, we’ve seen that it’s put pressure on fees in active management, sometimes challenges the value proposition, it’s maybe particularly interesting here because sustainable investing was so long this niche category of choosing companies with limited data as to whether they had sustainable behaviors or not. So what do you think will be happening going forward, whether we'll see as much demand for active sustainable investing strategies?

      Salim Ramji: Yeah. I’d say that there are two things, one of them is that you’ll start to see – and I think we already are seeing – many more sustainable investing activities in the realm of private markets. If you think about things like infrastructure or if you think about things like renewable power, those are both examples of things that are looking at long term investment opportunities and the ability to invest through private markets and long-term investment opportunities, that actually work quite well together. I think if you think of traditional liquid active management, I think the firms that are looking at this as another risk factor will yield positive long-term outcomes. And I think the other piece is that there is going to be a significant reallocation of capital from non-sustainable to sustainable investments. And I think one other place in which active investors can outperform is by getting ahead and seeing ahead to where those reallocations of capital will take place. But I think the final piece is just across other places where indexation has been brought, it’s also required existing incumbents to up their game. Because they think that indexation provides transparency and lower fees and convenience and for managers that are able to move towards private markets, for managers that are able to integrate ESG into their investment process, for managers that are able to stay ahead of the reallocation of capital, they will be able to grow alongside the growth in sustainable investing. But for those who are doing things that can be easily replicated for a fifth of the cost by an iShares, yeah it’s a problem. But I’d say that is good for investors and it’s good for the efficiency of the market. So that’s just an example of automation and convenience being brought to this particular part of the market.

      Mary-Catherine Lader: And so, in three, five years, where do you think sustainable investing – how does it look different than it looks today? Is it just investing, or what do you think?

      Salim Ramji: Well, I think one way in which it’s going to be very different is that indexation is going to be a much more powerful force within sustainable investing, it’s this trillion dollars of new assets that we see coming into sustainable indexing. It’s one important way of mainstreaming, but I think it’s also going to have profound effects to how sustainable investing across the board is done, just as this has had profound effects in other markets where indexation has grown. I think the big difference here, by our own projections, we expect it is going to take seven or eight years to do what’s taken 20 or 30 years in other markets, because the demand for sustainable investing is so great and the opportunities for indexation within sustainable are so great, so you are going to see an acceleration of those forces happening. And I think that that’s going to have some pretty profound shifts and changes in how sustainable investing across the board, whether it’s through active or through indexation, is going to be done.

      Mary-Catherine Lader: One last question and we’ve been asking the same question throughout this series of everyone who has joined. So much we talked about today, industry trends, dynamics you’re seeing as a leader of the iShares business, all solidly in the category of professional observations of sustainable investing. But I’m curious for you personally, was there a moment that changed how you thought about sustainable investing and sustainability?

      Salim Ramji: I think the moment for me was probably towards the end of last year. When we launched a greater number of these iShares ETFs back towards the end of 2018, I had imagined that this was a really good long-term growth project that would pay back many, many years from now. And the thing that really surprised me was the scale of the latent demand, and just the excitement and enthusiasm among all types of our clients, not just sustainable enthusiasts, but all types of our clients around the world, I would say just really surprised me, whether it was giving a speech in Tokyo, whether it was talking to a wealth advisor in the United States, whether it was speaking with an institutional investor in Germany, the degree of interest and enthusiasm around this just really surprised me to the upside. And so, I think we’re just at the very early stages of this, that it isn’t five or ten years out, it’s like last week.

      Mary-Catherine Lader: Well, it will be fascinating to see how that unfolds over the course of the rest of this already extremely unusual year.

      Salim Ramji: Absolutely.

      Mary-Catherine Lader: Thank you so much for joining us today, Salim, it’s been a real pleasure talking to you.

      Salim Ramji: Yeah, of course. It’s great to talk to you, MC.

    22. Oscar Pulido: The world is already starting to shift because of the coronavirus and there’s no doubt this will continue in the months and years to come. Healthcare companies and researchers around the world are mobilizing to create a vaccine; technology has shifted to emphasize solutions for working at home; and clean energy has become even more in focus as companies and individuals think about their impact on the environment.

      Today on The Bid, we’re talking about megatrends. The long-term societal shifts that we believe will persist through the pandemic. We’ll talk to Jeff Spiegel, U.S. Head of Megatrends and International ETFs about the long-term investment themes that emerged from the 2008 financial crisis, which megatrends are resonating most in today’s pandemic and how to think about investing for the long-term. I’m your host, Oscar Pulido. We hope you enjoy.

      Jeff, thank you so much for joining us today on The Bid.

      Jeff Spiegel: Oscar, thanks so much for having me. It wasn’t a long commute as we’re coming in live from my apartment in New York City.

      Oscar Pulido: Oh, for sure. I’m in my home studio as well and been getting used to it over the last couple of weeks. So, I can definitely relate to that. Let’s talk about the megatrends. It’s actually been a topic that has come up a couple of times on The Bid, certainly a topic of interest for our listeners. Now, these are, as I understand, long-term structural forces that are shaping the way we live and work. But perhaps you can give us a quick refresh on what are the exact megatrends that we’re watching.

      Jeff Spiegel: So, as you said, megatrends are long-term transformational forces that are really changing the way we live and work. And these are structural opportunities with long-term catalysts that really make them feel almost inevitable, and that’s in contrast to more purely cyclical opportunities as captured through traditional sector strategies and the like. Today, a number of them are actually having really once-in-a-lifetime moments where those long-term forces are aligning with short-term cyclical drivers. Simply put, the world will be different after COVID-19, one example of that is going to be the acceleration of key megatrend themes that were already coming and are now going to arrive even faster. So, really to