Financing the Clean Industrial Revolution

Panelists discuss private capital’s role in leading the clean energy transition and what it takes to establish a redeployment of steady capital investing in decarbonization. 

KISSANE: Hi, everyone. It’s wonderful to see you all. I am really delighted to be here with you today. And we have a really exceptional, exceptional panel. I want to thank all of you that are here in the room. We have over 170 people joining us over Zoom. So during the Q&A we’ll definitely have opportunities to ask questions both here and those that are joining us virtually. My name is Carolyn Kissane. I am the associate dean at the NYU Center for Global Affairs. And I’m also the founding director of the Energy, Climate Justice, and Sustainability Lab. And absolutely delighted to have three stellar panelists here to talk about “Financing the Clean Industrial Revolution.” 

So we have Mark Wiedman. Mark is a head, global client business, at BlackRock. And if you don’t already listen, you must listen to his podcast, Leaders in Net Zero, OK? It’s a great podcast. 

David Victor, who’s a professor of innovation and public policy at the University of California, San Diego. He’s also a CFR member. And I think he also spent some time here working— 

VICTOR: My first job out of graduate school was right upstairs. 

KISSANE: First job out of graduate school, OK, wonderful. 

VICTOR: I don’t have a podcast, though. (Laughter.) 

KISSANE: You don’t have a podcast. But you have many labs. He does have many labs at University of San Diego. So thank you. 

And Kassia Yanosek, who is partner with McKinsey and Company, and who’s also a CFR member.  

So we’re going to jump right in. So a lot of today’s conversation, especially some of the questions that I’ll be asking to Kassia and David, if you haven’t read it they wrote a great piece that came out on November 29 in Foreign Affairs, “Capitalism’s Green Revolution: How Private Finance Can Help Decarbonize the Economy.” So, Kassia and David, I’m going to start with you. You know, this came out right at the start, right? COP-28 was about to start.  

I think we’ve oftentimes thought of these COP conferences as being very government-centric. But I think COP-28 was kind of a paradigm shift in terms of the representation from the private sector. And you make a very strong case in this piece as to, you know, the private sector has to—has to, and already is—taking a big role. In 2022, 1.1 trillion. 2023, 1.8 trillion. And, you know, you argue that estimates are about 4 trillion are needed per year up to 2050. So can you sort of tell us how you think about the role—or what the role of the private sector should be in terms of rethinking how we finance decarbonization? 

YANOSEK: I’ll start and, David, you should add, of course. I mean, honestly, without the private sector we’re not going to get anywhere near to our decarbonization goals. And it is—and we certainly argue in the article that it’s not just the private sector, but it’s private capital that’s going to drive the decarbonization of our economy. Of that 1.1 trillion and 1.8 trillion, about 25 percent of that is coming from governments. So certainly the private sector really does dwarf the amount of capital that’s going into decarbonization and just clean energy in general.  

We talked about how—in the article—that of that, you know, about a trillion—about 400 billion comes from private capital—sovereign wealth funds, infrastructure funds, private equity, you know, the BlackRocks of the world. And about another 400 billion comes from public companies. So they’re in the private sector, but the public companies. So the Exxons of the world, et cetera. And so, you know, I was at COP-28, as I think David was as well. And, you know, the reality is that the private sector really did come out in force. (Laughs.)  

And a lot of that had to do with the leadership of—with Dr. Sultan’s leadership, and certainly what he was doing behind the scenes. But it was the large incumbents that were there and making these pledges. And one of the things we argue is that, you know, it’s not just the clean tech companies that are going to be transitioning our economies. It’s actually the large incumbents that have the technology, the infrastructure, the talent, and, frankly, the wherewithal to be around for the next hundred years. So that’s kind of the thesis of what we talk about. 

VICTOR: Yeah. I’ll just add briefly, almost everything that’s interesting in deep decarbonization, radical reductions in emissions—almost everything that’s interesting is capital intensive. The energy business today is capital intensive already. It’s even more capital intensive when you think about deep decarbonization. Which means that you have to mobilize the capital. The central thesis of the article is that this long-dated capital has a big role to play. The pension funds, they need returns over long time horizons. They’re not going to be reckless with risk. But they’re willing to put capital to work for very long-term projects, much like infrastructure that’s needed for clean energy.  

But we also have to have to recognize the scale of the challenge here. Three, four, five trillion dollars a year needed to finance the deep decarbonization revolution. That’s not money you find in the couch after a party. It’s serious capital that needs to be mobilized. The world is not short on capital. What it’s been short on has been the business models. And I think one of the sources of encouragement is that the business models are starting to come into line, at least for technologies that are familiar, where the risks are familiar. There’s still a really big role for government for backing much riskier technologies. There are many industries where you just don’t know what the right technologies are. You’re not going to get private capital flooding into that—into those kinds of risks just yet. But for a lot of what’s needed, especially electric power sector, it’s really pretty impressive. 

KISSANE: Great. And you note in your article that, like, 80 percent of the investment is kind of in the—kind of the known areas, and that only 20 percent is in the—sort of areas that really provide opportunity for decarbonization. So I’ll come back to that.  

So, Mark, you’re with BlackRock. You would be a private investment fund that has a lot of money to deploy. So can you sort of share with us how BlackRock is thinking about financing decarbonization, and give us, you know, some examples that you feel sort of kind of fit within some of the work that David and Kassai have done?  

WIEDMAN: So we read their article, and went out and spent $12 ½ billion buying another company. On the basic thesis that—actually, one, that the shift to a low-carbon economy is going to be the biggest consumer demand for capital of our lifetimes. That, second, actually a huge part of it is going to come from the—I didn’t even realize how clearly we’ve represented your thesis—that it would come—was going to come from private investments. There’ll be a lot actually in the public markets, and that will be a huge part of the financing. But a lot of it has to do with project-specific, where the public markets actually just simply don’t know enough as to whether to finance something or not. You need private market money.  

So we bought an infrastructure business actually explicitly on the thesis that the transition was going to create a huge need for companies to get extra capital. And our clients globally, these are everybody from individual investors to sovereign wealth funds, are desperately looking for stable, long-dated cash flows to match their liabilities. If you’re thinking about your retirement, if you’re an insurance company, if you’re a pension plan you’re trying to figure out where can you get very long-dated cash flows that’ll meet those liabilities. One of the places you can is actually in infrastructure investments around the transition.  

And I think something you said, David, I’d just like to amplify. When you hear “the transition,” you’ve got to think transformation of OPEX into CAPEX. This is all about taking cash flows in the future that would otherwise be spent on hydrocarbons and converting them into capital investments today. But that requires financing. And fundamentally, your point on the business model, I think, is really important. That the business model—actually when people come—and I think there’s actually a lot of business models right now. That’s actually—there’s no shortage of that. Once those business models exist, the money comes out of the woodwork. There’s plenty of money in the world for profitable projects. That’s not the constraint. It’s actually then funding the business model and then actually now the challenge is actually putting it to work through permitting and licensing regimes. 

KISSANE: So, Kassia, to that—to that point, one of the things that you also address in the article is the—from brown to green, about the needed investment in what are kind of have been kind of categorized as brown companies, the traditional oil and gas, hydrocarbon companies. What does that look like? What have you seen? Because I know you’ve also worked, you know, advising oil and gas companies. So how do you sort of think about this transition, but also the need to focus capital still on the brown while transitioning to green?  

YANOSEK: Yeah. Well, it goes back to what I was saying earlier in my comments, which is it is the large incumbents that have the infrastructure, that have the assets, that, you know, want to stick around for a while. They’re not just saying—many of them are not just saying, well, I’m going to be the last one standing in the oilfields and then I’m ready to, you know, sunset. And so many of the oil and gas companies are spending quite a bit of capital on how they’re going to transition. And many of them are really focused on carbon management. And so that is, again, you know, part of the rationale for BlackRock partnering with Oxy, focusing on carbon management and direct air capture as a new technology to address, you know, carbon capture. 

I will say that deep decarbonization, which is that industrial decarbonization, that is the hard stuff. The easier stuff is the shallow decarbonization. And that’s the, you know, putting more renewables onto the grid. Now, granted, there is—we are running into some constraints in the United States, given that we have interconnects, you know, and a queue of folks that would love to, you know, have more renewables on the grid. But there are some limitations. And so, you know, the clean electrons is really what we’re seeing in terms of that trillion dollars. You know, 80 to 90 percent of that is focused on renewable power, EVs, and, you know, microgrid development. The more challenging stuff are the clean molecules. That’s the hydrogen, the green ammonia, the e-methanol. And we can talk a little bit more about that, but that is a—those are new markets that we’re trying to be—trying to develop. 

And they require a premium. So, you know, the one thing—and we were talking about this on our prep call, actually—that, you know, clean electrons, you can actually have a regulator that says, well, I’m going to price in the green premium and my ratepayers are going to, you know, shoulder that burden. Much harder to do when you’re trying to sell, you know, hydrogen—green hydrogen onto a market that has a price for gray hydrogen, which is a lot cheaper than—to produce than a molecule of green hydrogen. So we can get into that. But I think that the oil and gas companies are trying to figure out where do they play and how do they play in order to transition and position themselves for the future.  

I think we’ve seen—and we talk in the article a little bit about the difference in the U.S. oil and gas companies and some of the Europeans, and the difference in, frankly, returns to shareholders when you start to see, well, you know, oil and gas companies going kind of over their skis and trying to become power companies too quickly. That doesn’t necessarily work so well. So it is a conundrum. And it’s one that I’m focusing on a lot with my clients, which is, you know, how do they transition with the right partners and address this industrial decarbonization over the long term?  

VICTOR: And I guess I’d say just two things that build on what Kassia said. First is, it’s no accident that the sector we’ve seen the most progress almost everywhere in the world is the electric power sector. It’s where the incentives are most lined up, where many companies have figured out that it’s more profitable to be a wires company. They’re getting out of coal, technologies that have lots of side effects that are adverse, and so on, and moving into more renewables, and moving into grid management, and so on. 

And so the—although it’s still, for most economies, shallow decarbonization, tens of percents of reductions as opposed to 80 percent, 100 percent reduction, it’s kind of clear what the direction of travel is. And if the brown to green hypothesis. Kassia and I’ve been working together for a long time. We wrote our first article in 2010 for Foreign Affairs. Had a great partnership with Foreign Affairs. And the article that we wrote after the COP-26 in Glasgow was about this kind of rising role for private finance, in particular the brown to green. We started seeing this happening. And there’s a lot of progress happening here. 

The last thing I’ll say is, I think it’s a big challenge for a lot of companies because you’re really good at doing—Clay Christensen’s Innovators Dilemma. The company is organized and optimized around doing one thing. If you’re an oil and gas company, that’s looking for oil and gas, producing, and selling it, and so on. And so you need to keep doing your day job, as it were, while also figuring out what a green job looks like, and creating new technologies and businesses there that don’t get destroyed by the incumbent part of the business. And it’s a very, very challenging thing to do because the incentives are different, the risks are different, the way you raise capital are very different. And as more companies figure that out, we’re going to see this accelerate, the shift to lower emission futures.  

KISSANE: So, David, maybe as a quick follow up, so what would you say? You have Mark here from BlackRock, right? And you’re talking about the clean molecules, which is the harder-to-finance area. What would you tell him as kind of to incentivize his own clients in the deployment of capital at BlackRock? 

VICTOR: Well, I think what they’ve done—he can correct me, this is a little bit of an Annie Hall moment because we have Mark right here. (Laughter.) 

WIEDMAN: You know nothing of my work! 

VICTOR: Yeah, I need to say at first, then you say I know. (Laughter.) But the model of what they’ve done with Oxy, where you’ve got an oil and gas company that’s creating a new business—which is, let’s figure out how to suck carbon out of the atmosphere and put it underground. We, as oxy, are good at putting things underground and taking things out of the ground, and managing all that. We’re good at managing complex systems. But it’s a different line of business. It’s a different set of risk profiles. And so you set that up as with enough autonomy and its own financing arrangements, that it can survive on its own. The green molecules business will come out of that, and similar kind of models. 

And I think I just want to pick up on something that Kassia and I spent a lot of time in the article. Which is, it’s—there’s way too much emphasis right now in deep decarbonization on the supply side, a new technologies, and cool widgets, and so on. And there’s a role for that. But what really gets projects going is the demand side. If you can see a reliable demand for some product, even if it’s really expensive—look, there’s a clean steel producer in Sweden that’s now selling steel reliably to an off-taker like Volvo. There’s a demand. You know, not infinite demand, but a demand for higher cost but low-carbon steel—low emission steel. When you see that demand, you’re going to start to see the molecules problem—not solve itself quickly, but that’s the way you create these niche markets, out of which then the technological revolutions spread. 

KISSANE: Mark, what are you hearing from your clients? And, you know, sovereign wealth funds, for example, right? Now, sovereign wealth funds, some of those funds have made a lot of money in the hydrocarbon space, right? But now they are potentially big investors in the decarbonization space. So how are they sort of thinking about their own risk, or the types of projects and the types of investments that they want to make? 

WIEDMAN: So for the vast majority of our institutional investor clients, including sovereign wealth funds, pension funds, et cetera, it’s pretty simple. There’s a buyer out there who’s going to get some form of low-carbon output—electricity molecules, whatever it may be—from a seller who needs capital. And if you can link those three, then actually the money flows in quite quickly. So in the example that we talked about—you were talking about before with Occidental Petroleum, which is a carbon company, what they’ve done is set up a direct air capture facility that is going to suck out of the ambient air carbon and, in exchange, will pay—will sell credits—and these are real credits, because actually carbon has literally been sucked out of the atmosphere—to various buyers.  

The off take from that is the big risk, which is what you’re getting at, which is if—what happens if there are no buyers? So they announce this facility. We invest $550 million into it. And they’re fully subscribed through 2030, at a very big premium to buying, for example, carbon off of a European exchange. So what that shows is there’s a buyer base out there. You just need to organize it in a way that actually they can express themselves, they can sign a long term contract.  

So what we’re seeing from clients all over the world, it is the single biggest topic—other than maybe interest rates—that clients want to talk about. Institutional investors in particular. Again, these are investors who have long-dated liabilities. They’re thinking about twenty, thirty, forty years into the future. They’re looking for investments that match those horizons. And they’re saying: This is a place we want to be active. Some of them have a decarbonization kind of skew to their thinking in addition. But purely on a financial basis, these can be very attractive investments. And so it’s the number one topic.  

I’ll give an example. We surveyed our institutional investors globally. Fifty-six percent of our investors globally said that they plan on increasing their investments explicitly into the transition. One country had the highest percentage, 65 percent. And that was the United States. So this whole notion and the drama that, like, this is, like, a European thing. No. The biggest activity is actually happening in the U.S. And it’s happening here because the efficiency of the capital markets. It’s also happening because there’s actually a very efficient energy mix here of both having renewables and also low-cost natural gas, and being able to use them both for industrial purposes.  

So lots of interest from clients around the world in investing in the transition, in every aspect. And I actually completely agree with everything you said. I would just say a note of optimism. The easy stuff, which is electrification of more or less electrified things today. And, sorry, the decarbonization of electrified things today. There’s a lot of decarbonization we can achieve with a very clear pathway. Our estimate is that we’ll get rid of 90 percent of the electricity used—of the carbon used in electricity production in the West and Japan over the next twenty-five years. That’s a huge contribution. Then we have the problem of molecules. That gets harder. 

KISSANE: So, on that, and, Mark, you raised it, you know, what is the role then of governments, right? You know, what to governments need to be doing to help to support the private sector to make these, you know, very large financial investments with security. You talked about the demand side of it, right, which it’s, you know, oftentimes is the—is the area that doesn’t get the same traction. So can you sort of just give us kind of an understanding of what governments can be doing? I know, the United States, of course, as Mark pointed out, with the Inflation Reduction Act of 2022, that has been a great generator and, you know, has attracted a lot of capital deployment. But what else? 

YANOSEK: Yeah. Well, I think, you know, I’d say two things. One is, and we talk about this in the article, is the need for a systems approach. For governments to not just think about, you know, trying to get the supply-side focused and investing, which has traditionally been what energy policy in the United States has been about, for the most part. It’s been about, you know, subsidizing technologies. I don’t want to say picking winners, because that doesn’t necessarily demonstrate what I think the government wants to do, but in the end that’s really what we’re doing when we’re—when we see what a lot of the Inflation Reduction Act has done. 

And when we say systems thinking, we are talking about the demand side as well. So getting back to Mark’s point, which is around how Occidental was able to, you know, attain these long-term contracts for, you know, appropriately priced carbon reduction credits to underwrite the investment in the first DAC facility. Well, that is one project. How are you going to scale that kind of activity at a much greater level? Much harder to do when it’s just one-to-one direct contracts. If the government could think about ways to say, well, you know, how can I meet the needs of the, you know, bid-ask spread? And is there an auction or other types of demand-type policies that might be able to enable that kind of activity at scale? That’s what I think, you know, it would be an example of what we might see in the future. 

WIEDMAN: If I could just add, like, on government, I think you have to look at two different parts of the world. There’s developed markets and then there’s emerging markets. In developed markets, I think that government policy support, with the European Recovery Act and various other pieces of legislation and then particularly the IRA, through its pure efficiency of using tax credits, has galvanized by far the most attention globally. They’ve laid a kind of—a set of policy incentives that I actually think are more or less adequate for what we need to do for the next ten years.  

So we got enough support in terms of financial incentives from government in the West and Japan. And in China, we’ve seen very rapid decarbonization, surprising almost everybody’s projections. But it’s only one of the forces. You need the other forces. Because the subsidies aren’t large enough to make bad business models work. You also need the efficiency of—and technology of the marginal efficiency of electricity production, or the lowering costs of battery production, that are actually making the microeconomics of the individual trade more and more attractive. That’s happening.  

You need—consumer preference is a vastly understated force. Consumers actually increasingly care—not 100 percent of consumers—but an increasing set care about the carbon content of what they buy. And then you need high hydrocarbon prices, particularly on oil, for example. And, you know, when you see hydrocarbon prices falling, that’s actually not good for decarbonization, for obvious reasons. And then do you see incentives from the government of that fourth force? In EM, I actually think there’s a much bigger problem, which is that the cost of capital we estimate for decarbonization, or for anything, is double in most emerging markets, I’m not talking about China, most of what you would find in the West.  

And the problem is, it’s a capital-intensive activity. So if you have double the cost, because of legal, regulatory, political risk, and currency problems, it’s a lot harder to make the money work. And so our own unfortunate view is that private capital will not get you anywhere near what is necessary to succeed in financing decarbonization in emerging markets. In the West and Japan, we see a very clear path. But in EM, it’s looking really tricky, again, because the barriers are just so high for people who are putting money to work. When the returns are twenty or thirty years out. It’s just too risky.  

VICTOR: Yeah, let me just say two things to build on what Mark and Kassia just said. The first is on emerging markets. Completely agree. Just a reminder that in much of the world the most important climate policies are often not climate policies, but they’re about the cost of capital, they’re about openness to trade, ideas, and so on. And that’s especially true given this capital-intensive technology.  

And, you know, this is a real worry, because you see a lot of governments turning inward, setting up tariff barriers, and so on. And real tariff barriers in solar, for example, have not been as big as you read about in the newspaper. But it’s a big worry. And look at the great success story of solar. How did solar get cheap? It’s a great book by Greg Nemet. It got cheap because we had global markets. And so the ideas could be advanced anywhere, and they moved from Germany to eventually to the manufacturing revolution in China. And everyone benefited as a result of that. So I think diligence around capital and capital costs, trade policy is incredibly important.  

One other thing I’ll say, though, is I agree, we have a lot of incentives in place right now. The Inflation Reduction Act has been truly extraordinary. And we’ll see what happens, you know, if there’s a change in government and so on. My guess is most of that’s going to stick. But I’m a little worried—more than a little bit worried that we are—that government has this perennial challenge, which is it over-weights the familiar. And in part, because the familiar has an interest group that’s known, it has as interest group that’s organized. Whereas the interest groups for clean molecules are beginning, but they’re not as powerful as interest groups for the other molecules. And we have—one of the most important roles for government is to keep pushing the boundaries, keep investing in a whole range of experiments out on the tails of distributions, so that we can advance new ideas. And that part, I think, has been under-weighted in the Inflation Reduction Act. And I’m not naive that we’re going to fix that problem. But we’re probably over-weighting the familiar. 

KISSANE: So, Kassia, I’m going to go to a point that you made earlier about sort of companies here in the United States, brown energy companies that are doing better than their European counterparts. I think there’s also what we’re hearing today—in fact, just this morning I read that, you know, industrial competitiveness in Europe—that there’s a feeling that some of—the climate policies weakened industrial competitiveness in Europe. So how do you—how do you respond to that? How do you sort of think about the—you know, even BP under the new CEO is sort of pivoting away from some of the more sort of ambitious targets that they had to invest in the energy transition. 

YANOSEK: So I’m going to start with sort of, like, a—you know, a business truism, which is you want to focus on your strengths, right? You want to be focused on your competitive advantages. And that’s how you’re going to create value at the end of the day. And so when you think about what the incumbent oil and gas companies in the United States have focused on, they focused on their core business. And they didn’t—and where they have invested, they haven’t strayed too far from their core business. So Chevron investing in geothermal. Geothermal means you got to really understand the resource integrity of where you’re drilling those wells. You know, carbon management. That has been—you know, Exxon has more patents in carbon capture and storage than any other company in the world. They’ve been quietly doing this for decades. 

So there’s a bit of technology focus in the U.S. oil and gas industry on knowing their strengths and deepening their focus on their strengths. And the Europeans have—and part of this is due to the—you know, some of their shareholder base. And that’s when you also have to say, well, you know, who are their stakeholders? How are they making decisions? Are they really trying to appease their shareholders? And I think the Europeans definitely were, you know, encouraged by many of their stakeholders, shareholders as well as those in the markets where they’re living and working in, to really push forward into becoming, you know, clean energy companies.  

And so when you have oil and gas companies trying to compete with the NextEras of the world, which have a much lower cost to capital, when they’re building their, you know, power plants, it’s very hard for a company like a BP or a Shell to compete with a NextEra, right? So I think when you think about, you know, the returns and what shareholders want, again, this goes back to innovators dilemma, to an extent. It’s about how am I—you know, shareholders are saying, well, are you—are you returning the cash flows that I deserve and, as a shareholder, my business? And so I think at the broad level, that’s why we see—we saw such a divergence—have seen such a divergence in the returns of the U.S. versus the Europeans. 

But, you know, the jury’s still out. I think that it is still early days for the transition to see who is—who are going to be the winners. But I can tell you that, you know, the Oxys of the world are both investing in the future and they’re also doubling down on their core business. And, you know, most of that value creation is coming from the well efficiencies that they’ve been able to achieve through that Anadarko acquisition. So if you dig into the details, you really do see that the core business of the oil and gas companies is still driven—is still driving the value creation potential.  

KISSANE: Excellent. All right, one more question before we go to our audience and those on Zoom.  

So, Mark, as David and Kassia point out in the article, that there’s going to be a need of a quadrupling of investment in order to get to about the 4 trillion mark, as forecasted by Goldman Sachs. So do you see—do you see that that—maybe not hitting that 4 trillion per year mark, but do you see over the next the next five years that there’s going to be a significant increase above and beyond where we are right now in investment in decarbonization? 

WIEDMAN: It’s happening. So I’m going to give our—everybody’s got their own numbers. Here are our numbers. A slightly more humble horizon of—by the end of the decade we expect that the energy system broadly will require about $3 ½ trillion of capital investment per year. That’s up from about 2.2 (trillion dollars) at the beginning of the decade. All of that increase is in some way about decarbonization. So we’re talking about 1.3 trillion (dollars) of extra capital. A hundred percent of that money’s coming. 

You’ve got—if you are a—if this is—again, coming from clients, they’re interested in investing in these long-dated cash flows in what they see is an almost unstoppable force in every market around the world, which is the simple efficiency that you can achieve through lower carbon production of electricity. That is a huge amount of where that capital will go. I think the question that, essentially, I’m trying to wrestle with—got to mix it up a little bit, can’t agree with everything. So we got to mix it up a bit. I was trying to take your point before— 

VICTOR: You’re completely wrong. 

WIEDMAN: Yeah, exactly. (Laughter.) Good, exactly. But you were talking about over-weighting the familiar. So I think there’s two ways of looking at this. On the—so I think where you’re right, David, is actually that if we want to figure out how to crack what you guys are calling deep decarbonization, which sounds like deep tissue massage. Is how do we crack this in molecule-intensive industries, in manufacturing, aviation, shipping? Really hard to put batteries and run them around the world for a ship. All those, I actually think that deep research and actually technologies that haven’t been invented, probably actually a role for government there.  

But I would say the number-one thing that government can do is get out of the way. Which is the 1970s environmental strictures that the West, Japan, and developed markets all imposed are the principal obstacle today to rapid decarbonization. This is an awkward thing to say, but every time that we see litigation that blocks improvements to the grid, or linking up low carbon energy sources to uses, that is actually perpetuating carbon emissions. And that’s a struggle, because we actually haven’t resolved it.  

In Denmark what they did is they tried to put at parity existing environmental concerns around preservation of natural resources, et cetera, on parity with decarbonization. So they actually changed their environmental laws. And we have to look in most of Europe, the United States, and Japan at how do we actually level the playing field? Because we can argue about where to put the incentives, et cetera. The key thing is, if you can’t build it, it doesn’t matter. And that’s the biggest challenge I think that we see in our own portfolio companies, is how they get to work is they’re blocked in litigation and licensing regimes. And it’s in—it’s not just here. It’s all over the world.  

VICTOR: Tremendous space for innovation in how do we cite things in ways that that respect frontline communities but also build stuff? That’s going to be incredibly important. 

KISSANE: Excellent. Thank you. All right. So now I invite all of you here, as well as our guests over Zoom, to ask a question. Please state your name, your affiliation, keep your question brief. If you want to direct it to someone specifically, please let us know. OK, taking first question here in New York. And by the way, this is—this conversation is on the record. Don’t all jump at once. OK, right there in the back. Thank you. 

Q: Thanks very much. Adam Wolfensohn, Encourage Capital. 

A question for Kassia. Your portrayal—and hello. (Laughs.) Your portrayal of oil and gas companies as not wanting to be the last man standing in the oilfield and being well-positioned to, you know, transition, because they’ve got the capital base, is a little bit different than my view of them, I would say. And I just would love to hear your view, if you are an investor seeking to do brown to green from investment capital, and that you would therefore think that these might be good stewards of capital towards that. I look at the history of them, and I see, you know, just decades of failure trying to do this, right? (Laughs.)  

And BP solar, Shell solar, Total’s efforts, et cetera, et cetera, et cetera. And that even today their efforts are really dwarfed by their investments in E&P, you know, well beyond a kind of reasonable net-zero future, when you look at where they’re investing in terms of, you know, dollars. And that it still feels like a bit of a sham to me in terms of what they’re doing. So defend—I’m overstating it. I’m overstating it. But just for the purpose of, you know, push back, and why is this time different with oil and gas companies? Thank you.  

YANOSEK: Yeah, thanks, Adam. It’s good to see you. 

So I think it’s a—it’s a nuanced answer to your question, because I think it’s difficult to put all the oil and gas companies in one bucket, and they all have the same strategies. In fact, I actually think it was Dan Yergin who wrote a piece not too long ago that said, you know, for the first time in, like, a really long time we have seen a huge divergence in the strategic positioning of the oil and gas sector. And I’ve written about this too, and I certainly see it in my client base. That, you know, there are some who are going to say, you know what? And there are some of those who I know are not investing in carbon capture and storage are just stating—are waiting around and saying: You know what? I’m just going to be the second or third mover. So there are some of those folks that I doubt you would be investing in. 

Those, I would say, are often the more independent, probably, you know, not publicly traded, because they don’t have to answer to their shareholders. But I think with the larger companies there is a desire to have a long-term—you know, they have long-term forecasts. They have ten-, twenty-year plans. And they have—you know, Exxon has an activist in their stock. So they have to react. And they have folks on their board that are certainly helping them and helping Darren with his strategy. And he was at COP-28. I saw him there talking about how he’s transitioning Exxon to be a technology company.  

So I think there is a change in some of these majors. I think also their talent base is changing. Many of the kind of, you know, middle managers that are, like, I’m going to do what I do, and I’m going to—I’m a driller, and I’m a driller for life, those folks are retiring. And so we are going to see, I think, a change in both the competencies, the talent, just like we are in our—you know, in our economies today. We’re seeing a real change in the talent base and the preferences. We’re seeing that in the companies. And we’re also seeing I think, you know, some real investment in where are they—again, if they have a competitive—they see themselves having a competitive advantage in some place, they’re going to be investing in that area. 

Just getting back to one thing in our article, though, because I do think that if you were to say: Who’s actually thinking about innovative financing models, and maybe investing off balance sheet because their shareholders don’t actually care about, you know, or want to see value—or, see value yet in, say, direct air capture. But they’re actually investing, you know, with private capital. Those are the folks that I would pay attention to, those that are thinking about new ways of innovating with partnerships so that they can actually transition. But the transition is going to take a long time. It’s not going to happen overnight.  

VICTOR: We also have a—we also have a lot of companies that are second guessing whether government’s serious. You know, one of the big differences between the United States and Europe is the carbon price in Europe, and thus competitiveness concerns, and thus border measures are emerging. And, you know, I don’t know whether this country is going to be able to have a nationwide carbon tax. A little skeptical about that. Hard to win office saying you’re going to raise energy prices. But without a clear regulatory incentive, or a carbon tax, or something like that, the demand side of the picture is not there. And so this is not only going to happen by trying to push string through a hole. 

WIEDMAN: I think that’s really important. Adam, I was going to emphasize that asking—you have to separate. In the brown to green world that they write about there are so many sectors of the economy that can be decarbonized without breaking the business model. So take Holcim for example, with the building materials manufacturer. They’ve got a plant outside of Zurich where they’re working to basically decarbonize between 30, 50, 70 percent the concrete and cement that they use through a combination of some filler, recycled concrete, and actually better design in how the concrete is applied. Because generally the way we build it, it’s not like dinosaur bones. It’s just like, thunk. So you can get to 70 percent decarbonization with a brand name on concrete, which is kind of cool. Charge a premium for that. That’s really interesting. 

The challenge for oil and gas companies is you’re going straight at their core business. Yes, they can say they’re energy companies. They’re oil and gas companies. They may be good at handling carbon, but they’re in that industry. And so I would say actually instead of trying to tame oil and gas companies the attention really has to be on reducing demand for what they produce. And that’s the fundamental issue because, for those of you on the video who’s giving me a thumbs up, we’re making progress. (Laughter.) But, like, the biggest piece, it’s the demand management. And that is the biggest, I think, question mark that long-term investors in oil and gas see. Which is like, hmm, looks like demand actually is going to be here for a very long time.  

KISSANE: Hmm. A lot of analysts are looking at that. We have a question that we’re going to take over Zoom. 

OPERATOR: We will take our next question from Dee Smith. 

Q: Thank you very much. Dee Smith, president of Strategic Insight Group, and talking to you from Fort Worth, Texas. So in the oil patch. 

It’s been a very interesting conversation. But one thing I haven’t heard mentioned is methane. And since this is about the green revolution, it seems like we should have some discussion about methane since it’s an extremely powerful and important greenhouse gas. Thank you.  

KISSANE: Thank you, Dee. Do we have—yeah, David’s going to take that question. 

VICTOR: Yeah. I think that’s exactly right. And especially if you’re worried about the speed of warming then these shorter-lived, but very potent pollutants like methane, not only methane, are a bit contributor. So the industry has known for a long time how to have essentially zero leaks. It has taken, for the most part, the industry too long to make pledges to go to essentially zero. We saw the beginning of that in the final communique at COP-28. Too long. But this is an area where, with the right incentives, technological change has really helped. It’s now possible to monitor fields real time, identify the leaks, plug them, and so on. That’s the industrial methane side. 

I’m actually pretty encouraged, at least for large firms that are held accountable, that we’re going to—we’re going to solve that problem very, very quickly. There are other sources of methane, in particular from agriculture, where it’s going to take longer. Not because the technologies don’t exist there, but the management problems are more serious, the industry is much more disorganized. You know, cows vent and methane from both ends. You can help solve the methane problem by eating less beef. I don’t think that we’re going to solve it completely that way. But we’re making progress on the methane question.  

KISSANE: Thank you. We’re going to take a question right there in the back. Hi. 

Q: Nat Keohane from C2ES. Hi, all. Great, great conversation.  

I have a question primarily for Mark but also, Kassia and David, would be interested in your thoughts. And it’s about what, you know, commonly known as sort of the ESG backlash, right? So, Mark, you talked about—I mean, it’s great to hear so many of your clients saying we really want to be investing in the clean energy transition. David and Kassia, you’re writing about private equity making these—you know, making these investments. I see—my organization works with companies like Holcim, like Dow. We work with KKR. So we see that. We see that real interest on the investment side. And yet, we have this growing pushback. We also have banks on our business council that are stepping back from their—or changing their pledges, because they want to work in Florida and Texas.  

And so I’m curious about, A, sort of how worried—how worried should we be? Is this going to blow over? Is this here to say? And, B, how should we think about—given that there is, I think, certainly on the E part here, the environment part, there is a very strong—as you all have said—a very strong investment piece, a very strong reason to be investing in the clean energy transition. How do we do a better job, those of us who are thinking about this for a living, of making that case and pushing back against the pushback? Thanks. 

WIEDMAN: Thanks, Nat. (Laughter.) So I think—how worried should we be? Not very. I think fundamentally, most of what you read about in the media about all the drama around ESG is largely symbolic, totemic conflict with very little practical impact. When I talk to the CEOs of industrial and energy companies, when I talk to investors—institutional investors, I see tremendous interest in discussing, engaging on, and actually doing stuff in the transition—more than four years ago. So not less, more. Everywhere, including in Kassia’s homeland, Texas. (Laughter.) So it is everywhere in the world there’s tremendous energy. In fact, Houston is probably one of the—probably the clean energy center of the world. So I think we’re actually seeing—in the actual lived work, we’re seeing lots and lots of activity with clients and with companies. 

I think in Europe broadly sustainable investing, and that 90 percent means some form of greening of the economy, is becoming a bit of a default from a regulatory and industry perspective for all new investments. So you’re seeing that tilt. Not in the United States. But I think fundamentally instead of fighting a religious war, it’s actually much better to focus on where money is to be made. And there is a policy framework in place that’s supportive. There’s consumer shifting this way. And we have technology that endlessly is marching, as you guys talk about your paper, actually endlessly towards making this a profitable enterprise. And that’s the place to focus.  

As opposed to—where I think you can get into trouble is saying, I’m doing this—particularly for asset managers, which is different than a bank. For an asset manager, the thing we can’t do is say, we’re going to do this because it’s good for the world, with Kassia’s money. That we can’t do. And that was actually the reason we recently had to transfer our membership in Climate Action 100 to a European entity. The main reason we did that was the mission had changed from disclosure to a commitment we were doing this with all of our assets. And, unfortunately, as an asset manager, I don’t have that authority.  

We’ve got—2020, we had 100 billion (dollars) of sustainably oriented assets. We have 700 billion (dollars) today. That shift is clients who said, OK, now do something with my money. But the other 9.3 trillion (dollars), it’s their money. And you really can’t—and that’s where I think actually you can get into trouble. So I’d say basically, don’t be too worried. This is largely totemic conflict. The money is still moving. And focus on the actual investments in the actual real economy impact, as opposed to theater.  

KISSANE: Excellent. Thank you. We’re going to take another question over Zoom. 

OPERATOR: We will take our next question from Marsha Vande Berg. 

Q: Hi. Thank you very much. Marsha Vande Berg in San Francisco. And I’m the lead on a project focusing on India. It’s with the Institute for Competitiveness in India, and also Stanford University.  

And my question is for Mark. And it takes off on the comment about emerging markets versus developed markets. And I’m curious as to your thoughts on the outlook for India to attract foreign capital to projects that will advance the decarbonization. The country has the world’s largest population and has an outsized use of coal. Their national goals are to be carbon free by 2050. And the conundrum is how to achieve economic growth and do it sustainably. So I wonder what it looks like for institutional investors looking at the risk profile of investing into India. Thank you.  

KISSANE: Thank you, Marsha. Mark. 

WIEDMAN: Two separate questions embedded there. The first is our outlook on decarbonization in India. Very positive. Outlook for foreign capital in India, question mark. On the decarbonization piece, the primary driver is the desire of the Modi government to reduce the drain on the current account from having to buy coal and oil from the rest of the world. So that is leading to rapid buildout of solar. They have lots of sun, for obvious reasons. Lots of solar, and an electric grid to support that, all of which will reduce the need for imports of hydrocarbons. So that’s clear. When you go there, you see the Reliance Group has built out a solar field twice the size of Manhattan. Gigawatts of production. All that is happening. 

For foreign investors, that’s a little trickier. It’s something we’re working on. So I’d say it’s interesting, but not obvious how—certainly in public markets, it’s basically impossible. In private markets, that’s an open question. And we’re trying to actually sort that out right now.  

VICTOR: Yeah. And I’d just add to that, I think it’s going to be very, very hard for a long—for the foreseeable future for significant foreign capital to play a role there. But there’s lots of other sources of capital. One other thing to watch out for, which is the grid. Quite often the grid is seriously dysfunctional. And so the Indian solar market is one of the most vibrant solar markets, competitive solar markets in the world. Heavily biased in the direction of off grid, or decoupled, or partially decoupled systems, precisely because the grid—so many of those grid systems, which are state owned, are deeply dysfunctional, financially bankrupt, and won’t be good grid system for the foreseeable future.  

KISSANE: Thank you. OK, we’re back here in the room. Do we have another question? Right there, thank you. 

Q: Hi. Bill Spindle from Cipher, a news organization that covers the energy transition. 

All these numbers are great. Really encouraging that there’s progress. But if you really stack it up against the carbon budget, it’s woefully, woefully short of the speed that it needs to go at. I feel like in the last couple of years we’ve seen all sorts of institutions, the asset management industry, the world development banks, pushing their institutions. Saying, let’s push our institutions as far as we can push to make progress here. And I feel like they’ve all bumped up into some of the things Mark was talking to, limits on what their institutions can do. Do you see any signs that there’s a broader, deeper rethinking of the system in a way that could actually speed this up to the speed it needs to go to really get to our goals? Or you just feel like that’s just not on the horizon and we’re going to have to do the best we can, which is a lot of progress? 

WIEDMAN: Well, fifteen years ago we were on track for four or five degrees Celsius warming above preindustrial levels. We’re now on track to maybe 2 ½, 2.8 degrees. So that’s not that’s—not two degrees, which is what everyone’s talking about, or 1 ½ degrees, that COP—all these COP meetings always keep 1.5 alive. The world was warming 1.48 degrees last year—we’re in an El Niño year, so a little bit hotter than usual. So those goals are not—those goals—if that those are the goals you’re talking about, those goals were never achievable because they were set by global committee collectively with nobody individually responsible. You know, if we all agreed to diet collectively would be thrilled about ourselves and then we would not be successful. (Laughter.) 

So, but the real measure of progress is against baseline. And that’s, I think, very encouraging. But it does tell us that we’re in for a lot of climate change. And people who believe these two-degree goals, in that sense two degrees has gotten in the way because we’ve not grappled adequately with what do we need to do for resilience and investing in resilience, how do we do that? That’s a different meeting. We’ll come—be thrilled to come back and have that meeting. But I worry that people somehow think that the geophysicist that said: This is the carbon budget, this is the goal, and after that goal the world falls off a cliff, there are certainly tipping points out there. We don’t know where they are, and the probability of crossing them rises as the world warms. But I think we actually should be a lot more optimistic when we measure it in a responsible way. 

YANOSEK: Maybe I’ll add one other thought. David and I have written a lot about technology. And I think what I’ve learned in my twenty-five years in the sector is not to—is you don’t want to bet against technology. Our article that we wrote in 2010 was called The Crisis in Clean Energy. And it was basically how wind and solar was going to fall off a cliff once the ITC and the PTC went away, because 80 percent or 90 percent of the returns to the investors were coming straight from those tax credits. What we saw over the course of the past fifteen years was that costs came down, as we talked about earlier, supply chain costs. You know, and the solar efficiency costs really improved.  

And so when we think about our modeling at McKinsey, kind of looking at 2040-2050, we do take into consideration that there are going to be technological improvements that bring down the cost of these technologies. We don’t know what those tipping points may be. We don’t know. It’s not going to be a straight path. And we are certainly going to see climate change. But I guess I would just say, from an optimistic standpoint, is that we have always in history seen the—you know, when technology—when people invest in technology, things do happen. And there are tipping points.  

And that’s—you know, that’s across clean technology. It’s also across dirty technology. I mean, the shale revolution was a technological improvement that finally took hold and really changed the game globally for the oil market. So I think that that’s something that we always have to keep in our minds, that that’s out there and that’s going to be changing our energy systems in the next fifteen, twenty years.  

KISSANE: Great. I think we have one more question on Zoom. Thank you. And then we’ll come back here. 

OPERATOR: We will take our—we will take our next question from Paasha Mahdavi. 

Q: Hello. Paasha Mahdavi from the University of California at Santa Barbara. 

And I have a question about mandatory climate disclosure laws. We have the EU, the CSRD in place, California’s SB 253 and 261, and, of course, the SEC’s long-anticipated rule. My question is, are these going to change where investments are flowing? Or is that already baked in, in that shareholders are already asking for these kinds of things of individual companies? You know, that is are these kinds of rules going to be redundant and perhaps, at worst, an example of what Mark, you know, noted as government getting in the way? Or is there an actual kind of market for lemons problem here, where there are firms that are not providing enough information about risks to their investors? Thanks.  

KISSANE: Thank you, Paasha. Is there anyone that specifically you want to answer that question? Mark. 

VICTOR: Do you want to—because I want to talk about this on the physical risk side, but do you want to talk about it? 

WIEDMAN: So I’d say that we are broadly supportive of—let me start off with what we want. We want companies to disclose material risks. If they are exposed to significant risks because carbon prices might be imposed or because consumer preferences could change, that’s something we’d like to disclose on some form of consistent basis. So scope one and two, and, where material, scope three are useful information for at least some of our investors as they build portfolios. So we’ve got lots of clients who build index strategies that are actually tilted towards lower carbon companies. They need that data. So if a company wants that client’s capital, I suggest they disclose. And, by the way, the vast majority of large companies do. So it’s already there, primarily. 

In terms of, however, of a significant barrier for capital flowing, I think this is not a big topic that gets discussed. Most companies that are trying to attract capital because they have a lower carbon footprint for whatever they do are very loud about it. So I don’t think this is a particularly big issue, if I were ranking it as a regulatory—nor is it a huge constraint. It’s not that hard for companies to calculate their scope three emissions. The real challenge is—I will come back to it, it’s really boring. It’s permitting and licensing and other forms of development blocks, are the main place that government attention is required, policy attention. That’s the number one thing we need to do to actually unblock the demand, the financing. It’s all there, at least as I see it for, let’s say, the next ten years. And then we can reconvene in 2034 and talk about what’s the next big problem. 

VICTOR: Yeah, and I guess I just add briefly, I know we’re short on time, I’m a little worried about congestion. There are not so many different rules that at some point we’re going to have kind of a thicket of rules. But to me, the big disclosure problem right now is actually on the physical impacts of climate change. Three quarters of infrastructure in this country is financed at the state and local level. They raise money on the debt markets. There’s to this day still almost no relationship between the physical exposure of people borrowing money—the physical exposure to climate change and what they tell those borrowers. And that’s for a bunch of reasons that are well understood—tax preference and so on. But we need to help that industry get its act together.  

Q: You’re basically saying disclosure around, for example, municipal bonds? 

VICTOR: Yeah. But the industry is governed by committees of insiders and has no incentive to change its behavior. 

KISSANE: OK. We will take one more quick question here. Does anyone have a quick question that they’d like to ask? Yes, thank you.  

Q: As a quick follow up, just around permitting reform— 

KISSANE: Do you want to say your name and— 

Q: Sure. Evan Kaufman from KKR. 

And want to just refocus the conversation. Mark had a great example of, in the Nordics, kind of how they were approaching accelerating some of the different permitting issues. To the other panelists, if you had the ear of DOE and the president today, what would be some concrete policy recommendations that you would give to essentially accelerate some of these different challenges on permitting reform? 

YANOSEK: (Laughs.) I mean, it’s challenging because so much of the of the system is gummed up in the state and local challenges when it comes to permitting. And so, you know, when you’re trying to site transmission lines across state lines, across ISOs, that can be really—it can be really difficult. And that’s where, you know, you’ve got to have federal and state and local alignment. I don’t know what you would say to this. This is more your area, David. But I think that is going to be one of the biggest challenges that we’re going to see, given that we’re running up against some electrification and grid capacity constraints in the very near term. 

VICTOR: More my area because I’m in California. We don’t build anything. 

YANOSEK: Yes! (Laughter.) 

VICTOR: Let me say two things that I think could make a big difference. One—obviously, there’s all this attention to siting, and so on. How do we do those deals? One is the interconnection system. We need to get the state regulators together to change the way interconnection is done. One of the big barriers is the queue of projects trying to hook to the grid is huge. And the standards are really not the right standards for a modern responsive grid. The other thing we can be doing is investing more on the innovation side. We can do a lot with reconductoring transmission lines, HVDC, high voltage DC, undergrounding on rights of way that traditionally have not been used very much, like railroads, highways, and so on. So is it the first best solution if you were just an engineer and everyone got out of the way and the engineer was allowed to rule the world? No. But that’s not the world we live in. And so I think there’s a—there’s several areas where if we really focused on problem, I think we could make progress. 

KISSANE: Mark, do you want to add anything? 

WIEDMAN: I don’t know the right way to do it. It’s not my expertise. I would just say that if you want to have a policy action that will actually uncork decarbonization over the next five to ten years, the incentives are in place for money and businesses to get together. But they need to be able to put stuff in the ground. And so that is the number-one area. I don’t know how to do it. It’s not just a U.S. problem. It’s a global problem. This is in every democracy. Even in non-democracies they have the same issue. We’re going to actually have to figure out how do you get grid connections built more quickly, how you build the grid.  

Copper mines, OK? We’re going to have a shortage of copper. OK, if you have a long enough investment horizon, you can’t lose buying copper, because all this electrification requires copper. And the problem is, it takes ten years to build a new copper mine. Well, if you double demand, we have a problem. So all of this is—and the reason it takes so long is permitting and licensing. And so this is the question of how do we actually dig in and loosen those—listen, find a new way of balancing constraints, given other legitimate concerns. How do societies figure that? Number one policy frontier. It’s boring. It’s local. It’s not sexy. But it’s really important.  

KISSANE: OK. Well, thank you. Thank you very much. I’d like to thank Kassia, David, and Mark. Really fantastic conversation. Thank you all for joining us today. (Applause.) 

VICTOR: Thank you. 

WEIDMAN: Thank you. 

KISSANE: Everyone enjoy the very spring-like weather we’re having here today. 

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