Larry Fink (BlackRock Co-founder) – Financing the Global Energy Transition (Apr 2023)
Chapters
00:01:13 Navigating Global Transitions: Fear, Hope, and the Future
Global Transitions and Uncertainty: The world is currently experiencing significant transitions, including energy transition, globalization shifts, and a move from a deflationary to an inflationary world. These transitions are causing uncertainty and fear among people, leading to a decrease in hope and optimism for the future.
Hope and the Future: The United States has historically had more hope for the future compared to other countries, but this hope is now decreasing. Declining birth rates in developed countries, including the United States, are seen as an indicator of diminished hope for the future. Retirement investments, which are made with the expectation of a better future, are a reflection of hope and optimism.
Global Leadership and Long-term Planning: The current transitions can only be effectively addressed through global leadership and cooperation. Fear and uncertainty hinder long-term planning and impede progress toward desired outcomes. Long-term planning is essential for achieving the goals discussed in other sessions.
Global Economy and Climate Change: The global economy is interconnected and interdependent, and a global recession would have significant consequences for all countries. Climate change is a global issue that requires global cooperation and action to mitigate its effects.
00:04:22 Economic Implications of Deglobalization and Inflation
Inflation and Interest Rates: High inflation is likely to persist, making it challenging to bring it below 4% anytime soon. This will lead to more tightening by central banks, potentially leading to displacement and drags in economic sectors like commercial real estate. Banks may face duration mismatches and require government assistance due to inadequate asset-liability matching.
Globalization and Supply Chains: Globalization is declining, and nations are refocusing on national security concerns, such as food, energy, and chips. This shift leads to a reimagination of supply chains, resulting in more fragmentation and disruptions.
Cost of Reimagined Supply Chains: Rebuilding supply chains within countries, like constructing chip factories in the United States, may lead to higher manufacturing costs and elevated prices for consumers.
Government Policies: Governments are shifting their economic policies to address security concerns, leading to elevated inflation and higher interest rates for an extended period. This departure from previous policies of globalization and low interest rates will have lasting effects.
Capital Markets: The growth of capital markets is driving more economic activity than ever before, partially offsetting the impact of bank issues. Small bank failures have not significantly affected the economy due to the increasing role of capital markets. The magnitude of bank balance sheets and the role of capital markets have changed significantly over the past 15 years.
00:10:05 Reimagining Multilateral Development Banks to Fund the Clean Energy Transition
The Importance of Sustainable Energy and Climate Change: Larry Fink emphasizes the significance of developing technologies to make sustainable and renewable energy affordable. He believes that political realities hinder progress, leading to short-term conversations focused on energy security and prices. The inclusion of emerging economies in the transition to sustainable energy is crucial, but it requires adequate technology and financial mechanisms.
Addressing the Challenges of Climate Change: The IRA is seen as a positive step in promoting sustainable energy, but it needs to be complemented by new technologies that can rapidly lower decarbonization costs. Carbon capture and sequestration technologies are important components of the solution, and energy companies have a significant role to play in developing these technologies.
Ensuring Fair and Just Transition to Sustainable Energy: Fink emphasizes the need for honest and pragmatic discussions among stakeholders, including NGOs and energy companies, to find common ground and work collaboratively. The challenge lies in creating a fair and just transition that considers the needs of all parties, including those who may be negatively impacted by the transition.
Investment and Capital Flows in Emerging Economies: The transition to sustainable energy requires significant investments in emerging economies. However, there is a lack of capital and financial mechanisms to bring the necessary funds to these regions. Reimagining the role of multilateral development banks, such as the World Bank and IMF, is essential to provide the required support to emerging economies.
Backlash to Sustainable Investing and the Future of Capital Markets: Fink acknowledges the backlash against sustainable investing, which could have implications for climate investment and clean energy investment. The polarization and political interference in investment decisions pose a potential threat to capital markets and American economic power.
00:22:12 Fiduciary Responsibility in a Changing Investment Landscape
Fiduciary Responsibility and Client Wishes: Larry Fink emphasizes the significance of being faithful to clients’ wishes and acting as a steward of their money. BlackRock’s role is to provide guidance and support, following clients’ instructions on how they want their money invested. Fink believes that each client has the ability to determine how their money is put to work and that BlackRock must respect this.
ESG and Decarbonization: BlackRock has strong views on where money should be invested, including a belief in decarbonization portfolios for long-term returns. Fink opposes divestment in hydrocarbons, arguing that it does not change the ecosystem and may only shift ownership from public to private hands. BlackRock works with energy companies to promote sustainability and decarbonization goals. The firm accommodates client requests for divestment from certain sectors, such as hydrocarbons or tobacco, while respecting their right to make such decisions.
Balancing Client Demands and Societal Trends: In Europe, societal demand for decarbonization and sustainability is strong, and BlackRock operates accordingly as a fiduciary for its clients in the region. In the United States, there are diverse demands from different states regarding ESG and decarbonization, and BlackRock navigates these complexities by following the specific wishes of each client.
BlackRock’s Identity and Choice: BlackRock’s commitment to client choice is reinforced by the fact that clients have awarded the firm $1.8 trillion of net new money in the last five years. The firm views this as a validation of its approach to ESG and fiduciary responsibility.
00:27:47 Navigating Clean Energy Investment Challenges in a Changing World
Investment Philosophy: Larry Fink emphasizes the importance of providing clients with great guidance and returns while acting as a fiduciary. He believes that investment preferences change over time and that the best investments for the next 10 years will likely differ from those of the past four years. Fink’s role is to manage clients’ hard-earned savings according to their wishes and provide the best returns within those parameters.
Barriers to Decarbonization: The biggest barrier to decarbonization is cost. Deficits and geopolitical issues can exacerbate cost concerns. Productivity has fallen in the United States due to remote working, affecting firms’ ability to grow and build organizations effectively.
Importance of Productivity: Fink emphasizes the need to grow and build productivity to improve future outcomes. Remote working has negatively impacted productivity, and many CEOs believe it has not been effective in fostering horizontal connectivity and growth. To address this, Fink suggests a return to in-person work, with flexibility for personal circumstances, to promote collaboration and innovation.
Decarbonization and New Technologies: Fink believes that new technologies are crucial for bringing down the costs of decarbonization and enabling a non-subsidized transition. The IRA presents an opportunity to accelerate demand for these technologies. Fink’s firm is raising billions of dollars to invest in new technologies and decarbonization efforts, seeing significant client interest. He hopes that these investments will transform decarbonization and drive progress.
Importance of Dialogue and Collaboration: Fink highlights the importance of dialogue and collaboration among leaders from civil society, the energy industry, and the developed and developing worlds. He acknowledges that some people may find the pace of progress on decarbonization insufficient, but emphasizes the need for ongoing conversations and collaboration to navigate the challenges and build a better future. Fink appreciates the efforts of energy leaders in addressing decarbonization and acknowledges that their approach may not always align with everyone’s expectations.
Fink’s Concluding Remarks: Fink emphasizes the need for ongoing conversations, collaboration, and innovation to build a better future and provide hope for more people. He believes that working together with industry and new unicorns can help drive progress towards a more sustainable and prosperous future.
Abstract
Global Transitions Amidst Uncertainty: Navigating the Complex Landscape of Economics, Environment, and Governance
In a world gripped by significant transitions and rising uncertainties, individuals and organizations grapple with complex challenges spanning economic, environmental, and geopolitical spheres. Amid these transitions, the shift from a deflationary to an inflationary world poses unique challenges, leading to uncertainty, fear, and a decline in hope and optimism. The United States, known for its historical optimism, is also experiencing a decline in this sentiment, reflected in decreasing birth rates and diminishing retirement investments. Addressing these transitions effectively requires global leadership, cooperation, and long-term planning, as highlighted by Larry Fink, a leading figure in the financial world.
The Crux of Global Shifts: Energy, Birth Rates, and Leadership
The global landscape is undergoing profound changes, marked by shifts in energy dynamics, declining birth rates, and the need for astute global leadership. The energy transition, driven by the urgency to adopt sustainable practices, is at the forefront of these shifts. However, this transition is not without its challenges, as fear and uncertainty hinder progress. The declining birth rates in developed countries, signaling a loss of hope in the future, further compound these challenges. In this context, effective global leadership becomes crucial, with a focus on fostering long-term planning to steer through these transitions.
Economic Implications: Inflation, Globalization, and Government Policies
The economic implications of these shifts are far-reaching. Larry Fink highlights the likelihood of persistent inflation, with central banks facing the dilemma of tightening monetary policies. This scenario poses challenges to the low-interest-rate environment and the preference for illiquid assets. Moreover, the decline of globalization, shifting focus towards national security concerns, impacts supply chains, potentially leading to higher costs and economic fragmentation. Government policies are adapting to these changes, reorienting economies towards security, which could sustain inflation and elevate interest rates. Nonetheless, the growth of capital markets offers a silver lining, mitigating the impact of potential bank failures and underscoring the need for enhanced financial regulation.
The Deflationary Trend and Climate Concerns
The shift of capital from the banking system to capital markets introduces a deflationary trend, given the difference in leverage mechanisms. This transition, while necessary, could decelerate the money supply, impacting economic activities. Concurrently, the risks associated with climate change and the energy transition are evident. The high costs and political hurdles in developing cost-effective technologies for sustainable energy pose significant risks, especially in ensuring energy security. Addressing these challenges requires international collaboration and technological advancements to reduce the cost of decarbonization and sequestration.
Financing the Energy Transition in Emerging Economies
A critical aspect of the energy transition is financing in emerging economies. The estimated requirement of $1 trillion annually by 2030 for these economies highlights the inadequacy of current financial mechanisms. Reimagining the roles and structures of multilateral development banks is vital to attract private capital for large-scale financing.
Investment Dynamics: Backlash Against Sustainable Investing
A growing backlash against sustainable investing, fueled by political polarization and differing interpretations of fiduciary duty, poses challenges. This backlash could hinder the flow of capital towards climate-friendly investments, potentially impacting the unified nature of American capital markets. Despite these challenges, Larry Fink emphasizes BlackRock’s commitment to respecting clients’ investment choices and balancing societal expectations.
BlackRock’s Stance on Decarbonization and Investment Flexibility
BlackRock opposes divestment from hydrocarbons, arguing that it merely shifts ownership without reducing carbon footprints. Instead, engaging with energy companies to promote sustainable practices is advocated. Fink stresses the importance of aligning investment strategies with evolving market conditions and client preferences, emphasizing the potential in decarbonization technologies. In Europe, where sustainability is a societal priority, BlackRock aligns its strategies accordingly, reflecting its commitment to being a responsible fiduciary while maintaining a client-centric approach globally.
Fink’s Vision: Investment, Productivity, and Dialogue
Fink views investment strategy as a dynamic process, adapting to changing market conditions and client preferences. He prioritizes fiduciary responsibility, ensuring that investments align with client interests, whether they incorporate ESG considerations or not. This approach respects the varying mandates of different states, offering guidance while honoring client autonomy.
Decarbonization: Challenges and Opportunities
The journey towards decarbonization is fraught with challenges, primarily cost-related. Fink envisions a future where technological advancements drastically reduce these costs, accelerating the shift to clean energy. However, he expresses concerns about the impact of remote work on productivity, fearing it may dampen collaboration and innovation. This concern underscores the importance of maintaining effective communication and horizontal connectivity in a rapidly evolving work environment.
Inclusive and Fair Transitions
Addressing inequality during this industrial transformation is another critical aspect Fink highlights. Ensuring a just and fair transition is vital to prevent marginalizing certain groups or regions. The investment opportunities in decarbonization technologies are immense, and Fink sees potential in innovative startups driving this transformation. These ‘unicorns’ could play a pivotal role in introducing cost-effective solutions and facilitating progress.
Governmental Role in Supporting Decarbonization
Effective governmental planning is essential in supporting decarbonization. Policies and regulations that encourage investment, promote innovation, and ensure a just transition for all are crucial. This approach requires a balance between economic growth and environmental sustainability, acknowledging the diverse needs and expectations of different regions and communities.
Navigating a Complex Landscape
In conclusion, Larry Fink’s insights offer a comprehensive view of the complexities in the current global landscape. From the economic repercussions of globalization’s decline to the challenges in financing the energy transition in emerging economies, the interplay of various factors highlights the need for strategic leadership and innovative solutions. Balancing client demands with societal expectations, particularly in the field of sustainable investing, requires a nuanced approach. As we move forward, the role of governmental planning, technological advancements, and collaborative efforts becomes increasingly significant in shaping a sustainable and equitable future.
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