443. A Sneak Peek at Biden’s Top Economist

    Transitioning to a circular economy can not only reduce waste and costs, but also align with consumer preferences. The BlackRock Circular Economy Fund identifies leaders in minimizing waste, promoting longevity of products, and reducing planned obsolescence.

    en-usDecember 10, 2020

    About this Episode

    The incoming president argues that the economy and the environment are deeply connected. This is reflected in his choice for National Economic Council director — Brian Deese, a climate-policy wonk and veteran of the no-drama-Obama era. But don’t mistake Deese’s lack of drama for a lack of intensity.

    🔑 Key Takeaways

    • President-elect Biden's appointment of Deese signals a commitment to addressing climate change and integrating sustainability into economic policy. Deese's experience in climate, conservation, and finance make him well-suited for the role.
    • Brian Deese's passion and knowledge on climate change are expected to make significant contributions towards elevating climate policy in economic decisions. He manages $7 trillion in assets worldwide.
    • BlackRock, a company with over $7 trillion in management, incorporates environmental, societal, and government factors into traditional investing and plans to hold companies accountable for their business models in alignment with the Paris Climate Agreement.
    • Companies need to adapt to the reality of climate change or risk being penalized by influential financial firms like BlackRock. Climate risk is investment risk, and current models do not fully account for its impact.
    • International consensus building and private investing are essential tools to create real change in climate issues. Incremental, patient efforts are crucial to sustain progress, especially with potential regulation rollback. Obama's dedication sets a precedent for long-term impact.
    • Presidential executive orders can undo or establish environmental regulations, and the investment industry is promoting E.S.G. funds in response to public awareness of economic impact. Biden plans to restore Obama-era regulations and re-join the Paris Agreement.
    • Sustainable investments can generate financial returns through factors like employee engagement and customer relationships. Non-traditional financial metrics should not be undervalued, and the presence of sustainability experts in government and corporate leadership can drive change.
    • Brian Deese is a highly skilled policy-maker who can navigate chaos and division with ease. He advocates for sustainable investing as a means to identify performance differentials and prepare for the low-carbon transition, rather than divesting entirely.
    • Prioritizing employee training in cybersecurity and tracking carbon and water usage can enhance operational performance and indicate well-managed companies. These practices deserve attention alongside more commonly discussed sustainability measures.
    • While stronger government policies are needed to shift the economics of our consumption model, small changes in individual behavior can also make a significant impact. Younger generations recognize the need for systemic changes towards a circular economy.
    • Transitioning to a circular economy can not only reduce waste and costs, but also align with consumer preferences. The BlackRock Circular Economy Fund identifies leaders in minimizing waste, promoting longevity of products, and reducing planned obsolescence.
    • The COVID-19 pandemic has affected budgets of governments worldwide, leading to stimulus packages worth trillions of dollars. With government officials like Deese, Yellen, and Rouse leading economic policies, it's uncertain if the recovery will prioritize sustainable practices.

    📝 Podcast Summary

    Brian Deese appointed as the youngest director of the National Economic Council with expertise in climate policy.

    President-elect Joe Biden has appointed 42-year-old Brian Deese as the director of the National Economic Council (NEC), making him the youngest person to hold the position and the first with expertise in climate policy. Deese is a former senior advisor to President Obama on climate, conservation, and energy policy and worked at BlackRock, the world’s largest money manager, integrating sustainability into investment philosophy. The NEC plays a vital role in conceiving, debating, and coordinating federal economic policy and is influential, particularly its director who also serves as assistant to the president for economic policy. Deese's appointment signals Biden's commitment to tackling the climate challenge and weaving solutions into every aspect of policymaking. Deese's worldview and experience position him well for the role, making the interview with him particularly interesting

    Brian Deese: From Sustainable Investing to Economic Policy Coordination

    Brian Deese, the global head of sustainable investing for BlackRock, has been appointed as the coordinator of economic policy for President Biden. He is known for his passion and knowledge on climate change and is expected to elevate climate policy in economic decisions. Despite protests from climate groups like the Sunrise Movement, Deese's appointment has been praised by former White House economists from both political parties, who called him a fantastic choice and remarkable in economic policy. Deese grew up in a family focused on climate change and studied political science at Middlebury College, as well as getting a law degree from Yale. As BlackRock's sustainable investing leader, he manages $7 trillion in assets for clients worldwide. Despite not covering the economic damage caused by the pandemic, an interview with Deese reveals his thoughts and operating style.

    BlackRock's Sustainable Investing Efforts and Expansion in China

    BlackRock, with more than $7 trillion under management, manages sustainable investing efforts, incorporating environmental, societal, and government factors into their traditional investing process to create better long-term outcomes. They are the first foreign firm to win preliminary approval to start a wholly owned mutual-fund business in China, and CEO Larry Fink expects even more money to flow into the company. However, BlackRock operates on a fiduciary model, meaning all that money is clients’ capital. Fink declared that BlackRock will start holding companies accountable if they don’t align their business models with the goals of the Paris Climate Agreement, showing the company’s commitment to sustainable investing even though the U.S. is no longer a participant in that agreement.

    The Economic Consequences of Climate Change

    The climate issue has become an economic issue that cannot be ignored. Companies must adjust to this new reality or risk being adjusted for by firms like BlackRock who have already voted against thousands of directors for unsustainable practices. Other financial firms have also made similar declarations, but BlackRock's $7 trillion gives them significant leverage. BlackRock partners with index providers like Standard and Poor's or M.S.C.I., and encourages them to create sustainable versions of their indices or creates sustainable portfolios themselves. Despite market efficiency theory, there is a structural mismatch in the efficient markets hypothesis, particularly in slow-moving but predictable changes like demographics and climate change. BlackRock's admonition is that climate risk is investment risk, and although their models have not uniquely cracked the code, they recognize that current models do not fully capture the impact of climate change on investments.

    President Obama's Lasting Climate Legacy

    President Obama's efforts in international consensus building on climate change may be his most lasting legacy as it has fundamentally changed the way countries approach the issue. It took almost a decade of work, discipline, focus, and patience to achieve this result, which shows the importance of using all tools available to create real change. Private investing can also help accelerate sustainable global processes. However, regulation rollback by subsequent administrations may lessen the impact of some policy and political efforts. Therefore, it is crucial to stay at it, remain patient, and work incrementally to change consensus. President Obama's dedication to climate change issues demonstrates the potential for long-term impact, even in complex, multiplayer issues.

    The Impact of Presidential Executive Orders on Environmental Regulations

    The undoing of environmental regulations through executive orders by new presidents is a common practice in the United States. President Trump rolled back dozens of environmental regulations set up by President Obama using executive orders. The reliance on executive orders highlights a growing trend of presidents using this method when they lack legislative leverage. President-elect Biden is expected to restore and expand Obama-era regulations on greenhouse-gas emissions and re-join the Paris Climate Agreement. The investment industry is also promoting E.S.G. funds (environmental, social, and governance), with Larry Fink, CEO of BlackRock, stating that it is becoming an economic issue driven by public awareness. The industry has seen significant growth, but it is still in its early days.

    The Financial Benefits and Importance of Sustainable Investing

    Sustainable investing is generating excess returns, and factors like better employee engagement and customer relationships are driving financial performance. Sustainable strategies are not just about energy sector investments and can compete with traditional market-cap benchmarks. Traditional financial analysis has undervalued non-traditional financial metrics that can contribute to financial performance. The presence of someone like Brian Deese, a financial-services and sustainability guy, as the head of the N.E.C., may change the relationship between the investment industry, companies they invest in, and government. The recent letter from 40 big U.S. corporations showing support for ambitious, durable, bipartisan climate solutions further highlights the importance of addressing climate issues from a business perspective.

    The Capabilities of Brian Deese in Policy-making

    Brian Deese is a rare talent in policy-making who can get things done without a lot of drama, according to former Obama economists. While there may be chaos between progressive and moderate Democrats in terms of corporations and sustainability, Deese has a track record of handling chaos well. Deese also highlights the misconception about sustainable investing being equated with divestment. Instead, the aim should be to identify differential performance on sustainability and think about skewing among companies within a particular industry to prepare for the low-carbon transition. A sustainable strategy doesn't need to exit the oil-and-gas industry altogether but should focus on innovation and identifying ways to benefit from new opportunities in the future.

    Overlooked Sustainability Measures: Cybersecurity and Resource Management.

    Investing in cybersecurity measures and managing natural-resource footprint are often overlooked areas of sustainability where positive momentum can be found. Companies who prioritize employee training and engagement in cybersecurity measures are better equipped to handle dispersed workforces and mitigate the risks of cyber attacks. Additionally, tracking a company's carbon and water usage per unit of output or sales can provide valuable insight into their operational performance and overall management. These measures not only prepare companies for potential environmental regulations and taxes but also indicate well-managed companies. While plastic shopping bags are a common point of focus in sustainability discussions, it's important to consider these lesser-known sustainability practices for effective investment decisions.

    The Return of Plastic Bags in Covid Times: Government Policies and Individual Nudges towards Sustainability

    Plastic bags are making a comeback in the Covid environment, highlighting the need for stronger government policies to change the economics of our consumption model. However, small 'nudges' towards sustainable behavior can also have a significant impact without feeling forced upon consumers. Additionally, younger generations are increasingly connecting individual actions to larger societal change, with a growing desire to shift towards a circular economy. This highlights the need for systemic changes and a holistic approach towards sustainability.

    Investing in a Circular Economy for Long-term Benefits

    Transitioning to a circular economy can reduce waste and save costs in the long run, while also positioning brands to meet consumer preferences. The BlackRock Circular Economy Fund invests in companies that are leaders in minimizing waste and addressing the full life-cycle of their inputs and outputs. While negative externalities exist in certain industries, the fund still seeks to identify relative leaders pursuing business and operational changes. The fund also looks at the longevity of physical products and engages with companies on reducing planned obsolescence. Disruptive business models that can overcome these challenges altogether are also considered. The Covid-19 pandemic has disrupted every part of the economy.

    US Stimulus Packages and the Challenge of Sustainable Economic Recovery

    The COVID-19 pandemic has caused significant disruptions in various sectors like production, consumption, employment, and travel, leading to deep holes in budgets of federal, state, and municipal governments. To address the crisis, the US government has rolled out stimulus packages worth trillions of dollars, challenging the world to accelerate initiatives towards lower carbon outputs and circular economy models. With Deese's appointment as the director of the National Economic Council, he will form a knowledgeable team along with Treasury Secretary-designate Janet Yellen and C.E.A. Chair-designate Cecilia Rouse to coordinate and implement economic policies. However, it is still uncertain if the pandemic will only increase consumption patterns or hasten initiatives towards sustainable practices.

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