Oscar Pulido: When you picked up your coffee this morning, what did you notice? Maybe it was the man at the counter who brought his own Thermos instead of using a cup from the store. Perhaps it was the use of paper straws instead of plastic, or compostable bowls and utensils. Or maybe it was the woman who took her coffee to go on the e-scooter she rode to work. Thinking sustainably is no longer just an option, or reserved to the innovators of San Francisco. It's becoming a way of life.
So what if you could apply this to the way you invest? Sustainable investing is starting to become mainstream. And according to one man, sustainability is really the future of investing. His name is Brian Deese and he is BlackRock's Global Head of Sustainable Investing. On this episode of The BID, we'll talk to Brian about why now is the time to get ahead of this trend, and how technology and data are going to get us there. I'm your host, Oscar Pulido, we hope you enjoy.
Brian, thank you so much for joining us today on The BID.
Brian Deese: Happy to be here.
Oscar Pulido: So it turns out that you and I actually have something in common. We both have lived parts of our lives in Washington, D.C. I was an undergrad student living a few blocks from the White House. You actually worked in the White House as an advisor on climate and energy policy and you helped negotiate the Paris Climate Agreement. So, I think it's fair to say that you probably have far more interesting stories to tell about your time in Washington, D.C. But you then joined BlackRock in late 2017 as the Global Head of Sustainable Investing. We know there's a lot of interest in sustainability as a lifestyle choice, but what does it mean to invest sustainably?
Brian Deese: Well, it's a great question and it's an important place to start because this is an area that is marked by a lot of confusion, confusion in terms, lots of different acronyms. So, we start from the basics with a simple definition of sustainable investing. So, sustainable investing combines the best of traditional investing with insights about the environment, about governance, about society in an effort to improve financial outcomes over time. So, then, how do you invest sustainably? Well, typically, clients come at this from two perspectives, either the impulse to avoid, I think people may have heard about traditionally the idea of excluding certain industries or exposures, think excluding tobacco companies or excluding companies that manufacture controversial weapons. But there's another impulse which is the impulse to advance. That's really about aligning your capital with positive behavior or positive outcomes. What we're seeing increasingly in the market is that this an area which traditionally was dominated by those avoid approaches. Increasingly, there's more and more interest about, "Can I actually advance with my capital as well?" Now, the last thing in the definitions department that we have to get out of the way is, what is ESG? ESG stands for environmental, social and governance. I think the best way to think about ESG is it's an aggregation of data, of different inputs, ways of measuring how companies operate, how assets perform. They get bucketed in these three areas, environmental, social and governance but really, it's a playground. It's an opportunity to look at data and try to understand if there's insights that we can glean that would help us be better investors.
Oscar Pulido: So, those definitions are really helpful. It's clear that there is interest in sustainability but there's also not been as much willingness for people to put their money where their mouth is. Now, I say that and actually in Europe, this is a topic that is much more relevant to investors than we tend to see in other parts of the world. Would you agree with that? Where are we then in the adoption cycle when you look at it more globally?
Brian Deese: Sure. We'll start with some context. Last year, there was about $760 billion in assets in combing of vehicles, in ETFs or mutual funds sustainability-related. About two-thirds of that was in Europe. So, to your point, there is more interest there. Compared to the broad market of investments, $760 billion is relatively small, but two important points about that. One, it's growing very quickly. Over the last couple of years, we've seen in excess of 20% annualized growth in this asset class. Two, that growth is occurring in ways that might surprise that conventional thought that this is just a European phenomenon. So, in fact, in the last couple of years, we've seen greater growth but off a lower base in the Americas, for example. So, I think it's fair to say that this is an area where as you mentioned, traditionally, there has been more interest than there has been actual assets deployed, but that's changing and it's changing very quickly.
Oscar Pulido: Is there a particular cohort of the population that you think gets more comfortable with sustainable investing first? When I think about the millennial generation, is this where you think the adoption will be - at least the initial adoption and then it will spread or do you think that this is broad based across investors of all types?
Brian Deese: Well, there's always that old adage that people refer to, about people being very liberal with their money when they're young and they get more and more conservative as they get more assets. So, there's always a little bit of a hesitance to look at the younger generation and draw conclusions. But that said, if you look at the data and in the investing patterns of the millennial generation right now, you see clearly a greater preference and a greater interest in prioritizing a variety of factors about what a company's purpose is or what an investment's purpose is in addition to generating financial return. Then you combine that with the fact that we are on the precipice of something unprecedented in human history which is we're about to see the largest transfer of wealth from the Baby Boom generation to this next generation. Probably, about $24 trillion or $25 trillion over the next 15 years that will transfer to this next generation that really is revealing a different set of interests and investment patterns across time and you start to see how we're just on the front end of that.
Oscar Pulido: Speaking about Millennials, it seems like that's a generation that interacts more with technology than any other generation up until this point. What impact do you think that has on their investments and specifically how they might think about sustainable investing?
Brian Deese: Well, I think first, that generation and that cohort that has grown up as a tech enabled and tech savvy generation is going to expect more out of how they invest, and that includes -- you guys have talked about on this podcast before, making investing go with the grain of how people increasingly use technology. Sustainable investing is going to have to be part of that, both in terms of the ease in investing, but also the customization that people will increasingly expect. The other element of technology that's really exciting in the sustainability space is that improvements in technology and data are allowing us to actually measure things in ways that we haven't before. So, you take the issue of climate-related risks and how exposed a company or an asset is to the risk of extreme weather events along a coastline like we happen to be sitting along the East Coast of the United States right now. In just the last couple of years, the combination of improvements in satellite imagery, downscale data and computing power are allowing us to get a much finer grain picture down not only to the zip code but the individual building and asset level of the types of risks that an area might face. So, when you take those types of technologies which are not directly investment related, but then you apply them to how we measure and how we assess these sustainability-related risks and we start to be able to develop higher conviction, better investment strategies as well.
Oscar Pulido: What role do companies play in helping this ecosystem? In other words, providing information around their sustainability. Do you see all companies embracing this very strongly or do some companies provide more information more than others?
Brian Deese: Well, disclosure is a big part of how you can invest sustainably, because essentially you're trying to look uniformly across companies to understand how they approach a different issue, like climate risks or like how they deal with the employee training and development. Definitely, disclosure is not uniform. One, you see what we refer to in wonky terms as a size bias. So, in ESG data there is a clear size bias: larger companies, better resources, they have more ability to disclose, put out reports, put out information, that's much harder if you're a small company. Two, the regulatory regimes differ. So, they have different disclosure rules and obligations in Europe than they do in the United States for example. But I think you're going to see two things that are exciting. One is, I think you will see greater convergence and not uniformity but convergence around those types of disclosure regimes. But also, you're increasingly seeing again data and technology, empower the ability to say, I'm interested not just in what the company is telling the market or what the company is disclosing. But also what the market is saying about the company, right? So, increasingly for example, if you want to understand how happy and engaged employees are at a given company. While you're interested in part on what the disclosed data coming out of that company is, but you're also interested in the proliferation of data on social media sites and on job application sites and otherwise. Looking at that unstructured data and looking for patterns and information in that data is also going to be a part of how we fill in this picture of which companies are better positioned to take advantage of sustainability-related risks and opportunities.
Oscar Pulido: So this is a topic that's gaining more interest. There is growth in the space, clearly adoption is on the rise, both in and outside the U.S. It seems to me then that the question has shifted to why sustainable to why not sustainable. So why now?
Brian Deese: A lot of the conversation around sustainable investing whether explicitly or implicitly has been marked in the last couple of decades by this idea of a negative trade off that you had to sacrifice some value in order to invest consistent with your values. Even among those who were the most ardent believers in sustainable investing, there's always this overhang of skepticism that, "Yeah, this is nice," but you're trading something off. I think what we are seeing which is an important moment is that increasingly, the data in the evidence suggest that that's no longer by definition the case. You can actually in a growing number of asset classes and investment styles invest in a sustainable approach and get the same risk adjusted return outcomes as a non-sustainable variant. So, I think that's powerful because it has the potential to shift that conversation that for all these decades, there's been no negative presumption which you could distill into the question why? "Why would I do this? Why would I trade off some financial return to invest consistent with my values?" You shift to a scenario where the question really becomes, "Why not if I can get the financial outcomes that I'm looking for?" Then, "Why wouldn't I shift to the more sustainable variant?" We still have a lot of ways to go, there are still lots to improve in the data and otherwise, but it's a very significant exciting moment that we can see that opportunity. I think that that's a part of why, what we'll see is that this is not a space that will grow linearly, that we'll see bigger step changes when people get comfortable, but that's actually where we are.
Oscar Pulido: Let's bring this to the current environment. There's a lot of talk around the path of interest rates, the Fed, geopolitical concerns, there's all these things that are driving markets day to day. When we take some of these structural trends around sustainable investing and bring it to right now, can investing sustainably help in the current environment with all of the headwinds and tailwinds we have?
Brian Deese: One of the things that's most interesting if you look at ESG data, this again, this is the scores that are generated by ESG providers is that they share a lot of characteristics with some traditional style factors, particularly quality or minimum volatility. So, you look and you say, "What do we know about those types of companies?" What we know is that they tend to be more resilient which means that if you're in a risk on period in the market, they may actually underperform.
Oscar Pulido: Risk on meaning, stock market is doing well, right?
Brian Deese: The people are seeking greater risk, right? But at that same time, it means that when we move into periods of greater uncertainty, you see a flight to safety, that those quality attributes are actually likely to overperform.
Oscar Pulido: When you say quality, just describe that a little bit more. What does that mean about a company?
Brian Deese: Traditionally, quality in a style factor has been thought about as traditional financial metrics that would reinforce the view that this was a solid company from a financial and operating perspective. What's interesting about ESG is that ESG is correlated with, but could be additive to saying, high scoring ESG companies are potentially higher quality companies which means that they may not generate as much upside. There may not be as much opportunity in those high-risk market environments. But these companies are more likely to weather economic downturns and come out on the right side, on the other side. So, that's one interesting element about the market. Today, as people are asking questions about how do I make my portfolio more resilient? How do I weather this period of uncertainty? Well, ESG may actually be a helpful way to improve the resilience of your portfolio.
Oscar Pulido: Brian you've made a very compelling case for why investors should be thinking about investing sustainably but what would the skeptics say?
Brian Deese: That's a great question, because this is the space where there's been a lot of skepticism and while I think we've made a lot of progress, the skeptics and that view continues to be important in the space. One, as far as we've come on the data, we still have some distance to travel. And so, if you look at the amount of data that we have on some of these key sustainability metrics, it's less than you would want. And if you look at the uniformity of the ways in which different ESG data providers, for example, look at different companies. By definition, these issues are more subjective, so there's not as much uniformity. And two, the fact that it is now possible for example to identify ways of investing sustainably without giving up risk adjusted return doesn't mean that it's an "as always connection." Like any good area of investing, this is an area that is growing up and getting more mainstream and as a result, there needs to be a hard focus on what actually does work and where can we prove that out and then scaling that and moving away from areas where if it sounds too good to be true, it actually is too good to be true. For me, part of what's exciting is that the proliferation of data and some of the uncertainty and questions that it raises is an extraordinary opportunity, because this is data that is newer and this is data that's less well understood. And anytime you see that, there's opportunity. Opportunity to bring better techniques to bear and ultimately, you know, bring a better and then higher conviction to bear as well.
Oscar Pulido: Brian, let's move away from investing for just a moment then. Last year BlackRock announced a partnership with France, Germany, and a variety of philanthropies to develop an investment vehicle that will invest in climate infrastructure in emerging markets. Talk a little bit about that, I know you're involved in it and what does that all mean actually?
Brian Deese: Look, you start at the beginning. We know that in order to see a transition to low carbon economy, there is a huge demand for investment in low carbon infrastructure. What does that mean? It means renewable power, but it also means in the infrastructure around electric vehicles, energy efficiency, public transport and otherwise. And there was growing market opportunity that now extends beyond traditional developed countries like the U.S., like many European countries into emerging market economies. And in a number of these places you're seeing that on a project by project basis it's actually the same or cheaper to invest in solar for example than to invest in new coal. But these markets are also challenging to operate in. There are other risks that are associated with operating in these markets and so oftentimes what you need is you need to put together a structure that is not typical or not conventional. So, this partnership stemmed from a set of conversations where a couple of countries, the Germans and the French, a couple of foundations, as well as BlackRock sit around the table and said, could we put together a structure that would help overcome those risks and really help accelerate the deployment of capital to climate friendly infrastructure in these emerging market economies. And so it's the type of thing where again, the goal is to generate returns that are attractive to investors, investors that may not be principally motivated by a sustainability consideration but show that you can increasingly do that at scale and again coming back to that original definition of sustainable investing that we're bringing an insider an opportunity by sustainability and combining it with a traditional investing approach with the hope of generating better return over the long run.
Oscar Pulido: And so, it goes back to your point of avoid versus advance. This is clearly within that category of thinking about sustainable investing and advancing a financial goal but also advancing a sustainability goal.
Brian Deese: That's certainly the goal.
Oscar Pulido: I want to end with a rapid-fire round. I'm going to ask you series of things here and I want you to tell the audience whether you think they will come to life in 5, 10, 30 years or never. You ready for this?
Brian Deese: I'm ready.
Oscar Pulido: Okay. Renewable energy makes up 10% of global energy consumption?
Brian Deese: Inside five years.
Oscar Pulido: All countries meet the Paris climate agreement's objective to limit the global temperature rise to 1.5 degrees Celsius.
Brian Deese: Well, I'll cheat a little since those objectives are inherently set on about a 30-year time horizon and be optimistic and say 30.
Oscar Pulido: Mail delivery by drones replaces mail delivery by humans.
Brian Deese: I like this one because I have no particular comparative advantage answering it. I'm going to say 10.
Oscar Pulido: All right. And the last one here, humans become able to control technology with our minds?
Brian Deese: I'm a tech optimist, so I'll say 30.
Oscar Pulido: Great. And do you have a favorite place in Washington D.C. that you used to go to?
Brian Deese: Well, I have two small children and so Washington D.C. is fantastic because of all of the extraordinary museums and other Smithsonian apparatus, all of which are fantastic and free so, the Air and Space Museum was one we spent a lot of time.
Oscar Pulido: I agree. It's a great city. Brian, thanks for joining us on The BID.
Brian Deese: Thank you for having me.
This post originally appeared on BlackRock.