Larry Fink (BlackRock Co-founder) – BBVA Sustainability Forum Conversation re (Sep 2022)

Chapters

Abstract

Decarbonization in a Shifting Global Landscape: Balancing Economic Challenges and Climate Imperatives

In the face of unprecedented economic challenges and a rapidly changing climate, the world stands at a pivotal juncture. The aftermath of the COVID-19 pandemic, ongoing geopolitical tensions, and the urgent need for decarbonization have converged to create a complex tapestry of issues that demand immediate attention and action. This article, drawing on expert insights, explores the intricate balance between economic needs and the imperative of transitioning to a decarbonized future.

Urgent Decarbonization Amidst Economic Challenges

The world is grappling with significant economic uncertainties, including the repercussions of the pandemic and the war in Ukraine. These challenges have intensified the need for decarbonization. BlackRock’s Larry Fink acknowledges the formidable challenge of decarbonizing while addressing short-term economic concerns. The need for significant investment, innovation, and mobilization of trillions of dollars to deploy new and existing technologies is emphasized. The current geopolitical and economic uncertainty, including the Ukraine invasion and energy dependency, poses additional challenges. The pressing priority remains to shift towards a sustainable future, despite the risks posed to global economic stability.

The Delicate Balance of Immediate and Long-Term Goals

Addressing short-term economic concerns while committing to long-term decarbonization presents a delicate balancing act. Fink believes that it’s unrealistic to eliminate hydrocarbons overnight, given their continued importance as an energy source. He advocates for a balanced approach that embraces certain hydrocarbons like gas as a transitional fuel while developing long-term decarbonization solutions. An abrupt move away from fossil fuels could trigger economic disruptions, especially in regions heavily dependent on hydrocarbon industries.

Hydrocarbons’ Transitional Role

In the journey towards a fully decarbonized energy system, hydrocarbons, particularly natural gas, will play a transitional role. Emitting less carbon dioxide than other fossil fuels, natural gas is seen as a bridge fuel, facilitating the shift to renewable energy sources. Fink highlights the importance of gas as a backup to renewable energy sources, considering its lower pollution compared to other hydrocarbons. He acknowledges the need for gas pipelines and LNG plants to ensure consistency in energy supply. The urgency of reducing permitting times for energy infrastructure projects is highlighted to facilitate the transition.

Investment in Decarbonization Technologies

Accelerating decarbonization necessitates substantial investments in technologies like carbon capture and storage, hydrogen production, and renewable energy infrastructure. Fink emphasizes the need to focus on long-term solutions, including mobilizing financial engines to find new technologies that can compete with the cost of hydrocarbons. He recognizes the importance of addressing the intermittent nature of renewable energy sources like solar and wind by investing in battery technology and hydrogen as a potential source for large engines and machinery. Collaboration between governments, private entities, and financial institutions is vital to mobilize the required capital and expertise.

Ensuring a Fair and Just Transition

A just transition to a decarbonized economy is essential. This involves equitable sharing of benefits and support for workers in hydrocarbon industries who may face job losses as we move away from fossil fuels. Fink stresses the importance of a just and fair energy transition, avoiding economic disruptions and ensuring that emerging markets are not left behind. He advocates for collaboration with hydrocarbon companies, recognizing their potential role in carbon sequestration and their expertise in managing large reserves.

The Need for Policy Stability and Long-Term Planning

Successful decarbonization hinges on long-term perspectives and policy stability. Clear and consistent policies are imperative to give businesses the confidence to invest in new technologies and infrastructure. Fink emphasizes the need for careful planning and balancing between utilizing hydrocarbons and moving towards decarbonization. He acknowledges the urgency of addressing climate change while considering the economic implications of energy price fluctuations. The importance of setting clear objectives and creating mechanisms to capture and sequester carbon is emphasized.

Financial Institutions’ Role in Decarbonization

Financial institutions play a crucial role in driving decarbonization by directing investments towards sustainable projects and advocating for responsible business practices. They also help companies set and achieve ambitious decarbonization targets. Fink highlights that climate risk is an investment risk, and BlackRock starts with this foundational belief. The transition to a low-carbon economy will be a 20-30 year process, and companies need to inform BlackRock about their plans for moving forward. Fink stresses the need for governments to ask all businesses, not just public companies, to move forward with decarbonization efforts. He highlights the issue of arbitrage, where public companies sell hydrocarbons to private companies, resulting in no net change in global emissions. Fink believes that technology will bring down the cost of decarbonization, and every company needs to participate in this process. He also emphasizes the role of stakeholders, particularly employees, in demanding action from businesses on climate change.

Collaboration and Innovation as Catalysts

The acceleration of decarbonization efforts requires collaboration among governments, businesses, financial institutions, and civil society. Innovation and technological advancements are key to developing cost-effective and scalable solutions.

Balancing Energy Prices and Decarbonization

Governments face the challenge of balancing energy prices with decarbonization goals. Policies should promote investment in renewable energy and energy efficiency while keeping energy affordable. Fink emphasizes the need for balancing act and long-term planning. He acknowledges the urgency of addressing climate change while considering the economic implications of energy price fluctuations.

The Imperative of Immediate Action

The escalating climate crisis necessitates immediate and decisive action. Fink highlights the tangible evidence of climate change, including record heat, droughts, crop destruction, and extreme weather events. He underscores the need for action in light of these visible impacts. Recent extreme weather events highlight the urgent need for a comprehensive transition to a decarbonized economy.

Emerging Markets and Climate Risks

Emerging markets, particularly outside China, lag in clean technology investment. They face significant climate risks, necessitating rapid decarbonization. However, barriers to capital mobilization in these markets, such as regulatory standards and risk assessments, impede progress. Fink expresses concern about the lagging investment in clean technologies in emerging markets, excluding China. He stresses the importance of decarbonization in these countries, given their exposure to climate change and potential for nature-based solutions. Fink identifies capital standards and Basel regulations as factors limiting banks’ ability to lend in the emerging world. He also mentions the fiduciary duty of investment firms like BlackRock, which requires them to be mindful of risks associated with investing in emerging markets. Reimagining the role of the IMF and World Bank is crucial to attract sufficient capital for sustainable development. A proposal to change their charter to provide subordinated lending could facilitate investment in the decarbonization of emerging economies.

Rethinking the Role of the IMF and World Bank

Larry Fink emphasizes the need to re-examine the role and responsibilities of the International Monetary Fund (IMF) and the World Bank in addressing the investment challenges faced by the emerging world. The current charter of the IMF and World Bank only permits them to be senior lenders, leading to a lack of private sector participation due to concerns about subordination to the IMF. Fink proposes that the IMF and World Bank should provide subordinated loans, with the country providing the first loss and the IMF/World Bank providing the second loss. This would create a capital structure similar to mortgage-backed securities, where the country provides equity, the IMF/World Bank provides first and second loss pieces, and private capital fills the remaining gap.

Spain’s Role in Energy Transition

Spain is seen as a potential leader in Europe’s energy transformation, with abundant solar and wind resources. Investments in these areas, coupled with Spain’s skilled workforce and proximity to North African energy sources, position it as a pivotal player in the decarbonization process.

Conclusion

The journey towards a decarbonized future is fraught with complexities, balancing immediate economic pressures with the long-term imperative of addressing climate change. Collaboration, innovation, and a reimagined approach to global finance and policy are critical in navigating this transition, ensuring a sustainable and equitable future for all.

Notes by: QuantumQuest