Company Resources

• Bezos Earth Fund

Resources Mentioned

• The Ten-Day MBA by Steven Silbiger
• Task Force on Climate-related Financial Disclosures (TCFD)
• Inevitable Policy Response (Principles for Responsible Investment)
• Investor-led initiative Climate Action 100+
• Clean Energy Transitions Programme (International Energy Agency)
• Energy Transitions Commission
• Bloomberg New Energy Finance
• BP faces green protest over new climate goals (BBC)

Career Resources

• Planetary Boundaries Framework (Stockholm Resilience Center, Stockholm University)

Previous Climate Rising Episodes on Carbon Offsets

• How RMI Collaborates with Companies to Accelerate the Energy Transition

Guests

Climate Rising Host: Professor Mike Toffel, Faculty Chair, Business & Environment Initiative

Guests:
Paul Bodnar, Director of Sustainable Finance, Industry, and Diplomacy, Bezos Earth Fund

Transcript

Editor’s Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Mike Toffel:
This is Climate Rising, a podcast from Harvard Business School, and I'm your host Mike Toffel, a professor here at HBS. We're continuing to talk about corporate net-zero climate targets. In this episode, I'm talking with Paul Bodnar, Director of Sustainable Finance, Industry, and Diplomacy at the Bezos Earth Fund and formally global Head of Sustainable Investing at BlackRock. I'll ask Paul about how the investment community is approaching the complex maze of climate change and company's priorities and how investors can influence the direction of corporate climate action. I'll also ask him how his trifecta of time in the private government and nonprofit sectors has shaped his investor perspective and what others can take from that experience. Here's my interview with Paul Bodnar from Bezos Earth Fund. Well, Paul, thank you so much for joining us here on Climate Rising.

Paul Bodnar:
It's great to be here. Thanks for having me.

Mike Toffel:
Let's start with an introduction. What's your current role and organization?

Paul Bodnar:
I'm the Director for Sustainable Finance, Industry, and Diplomacy at the Bezos Earth Fund.

Mike Toffel:
And how did you get there to the Bezos Earth Fund, and that's such an interesting title to have that collection of topics. I wonder if you'll unpack that for us a little bit.

Paul Bodnar:
I studied arms control in college. And then I stumbled on climate change and I realized that climate change is the wickedest problem in international relations. But when I graduated from college, it wasn't the best time to work in the policy realm. The US was just in the process of walking away from the Kyoto Protocol. There wasn't a lot of climate policy happening. This was back in 1999, 2000. So I realized that the most interesting work to be done in this space was actually in the private sector. And I started a company based in Budapest, which is where I was born. That was one of the first carbon trading and environmental finance companies in Europe. Now, I had no training to do this, so I read a book called The 10-Day MBA, which I still recommend, not of course, as an alternative to a degree from Harvard Business School, but needs must.

And I started a company that was really trying to monetize the benefits of reducing emissions from industrial projects and use them to finance those projects. did that work in China with cement, steel, chemicals and other industries. And then ended up in the Obama administration when it finally came time to do climate policy and the world set off to negotiate a new climate agreement. So I was very fortunate to be involved in that process as the US lead for climate finance in the UN negotiations and later at the White House with a broader role focused on energy and climate. Then spent some years at the fabulous nonprofit RMI, formerly known as Rocky Mountain Institute. And then just before joining the Earth Fund, went back to the private sector and spent two years as the global head of sustainable investing at BlackRock.

Mike Toffel:
Wow. So, a really interesting journey, both in private sector, then the public sector, then the nonprofit sector, then the private sector, and now back in the nonprofit sector. So let's take you back, let's say one step to BlackRock where you were the global head of sustainable investing. And if you can talk a little bit about the language of sustainable investing and ESG environment, social and governance investing and climate. And really climate will be the main part of our conversation, but I thought it would just be helpful to understand how these differ from an asset manager's perspective like BlackRock.

Paul Bodnar:
That is a really great question because the market is in the process of untangling these concepts right now, and they've been politicized as well here in the United States. So I think if you look at it from an asset manager perspective, originally, ESG was the category of information additional to that which you would find in financial statements. So it used to be the case that if you were a stock picker on Wall Street, back in the '50s and '60s. you'd review information about companies based on their financials, you might read the news. And eventually folks figured out that there was this category of extra financial information that was nonetheless financially material for affecting security selection decisions in an investing context.

And that got to be lumped together under this strange combination of terms called environmental, social and governance. And the purpose of using this information was to make better investment decisions, better risk adjusted performance, not to think about necessarily social or environmental objectives, but just investors like to have as much information as they can about the companies that they're thinking about investing in. And lo and behold, if you're thinking about investing in a services company, you might want to know whether its employees are happy or not. If you're investing in an industry that uses a lot of water, you might want to know whether a company is water intensive or not. And any company, you might want to know how well governed it is relative to best practices. So this information is originally used to improve risk adjusted return. But as sustainability became a rising concern in society and in the minds of individual investors, it got conflated a little bit with the quite different objective of trying to advance sustainability outcomes through one's investing practices.

So if you are an investor, your utility function may have more than risk adjusted return in it, and you might be using ESG information to improve risk adjusted return, but you might have that other objective, which is, look, I want to put my money to work in a way that doesn't promote x, y, or z objective or does promote x, y, or z objective. So as the topic of sustainability became more complicated, more important, the data sources more available, these terms like ESG and sustainability began to be conflated in ways that legitimately caused concern. And I would say the market began to sort itself out a little bit better in the last few years. But of course, as you would expect, there began to be more regulatory attention to this and clean up on both sides of the Atlantic, for example, in quite different ways.

And then about a year and a half ago, ESG also became a political artifact, and in that process it became disconnected from these market-based debates about terminology and fund labels and how do you use ESG data. It became more of a part of a broader polarized political dialogue, in the United States. So, in all of this, the role of climate risk became more and more apparent in the financial sector because just to state it simply, climate risk will reshape the global economy, whether it's managed successfully or not. If it's not managed successfully, then we're going to have accelerating climate impacts, which will reshape the economy and portfolios regardless of what portfolio you have. If it is managed successfully, it will be because we have remade the global economy through a project of unprecedented scale and scope and speed.

Either way, if you're an investor, climate risk is going to change your portfolio and the way you think about things. So investors came to understand climate in particular as a matter of science and economics, not as a matter of values or ideology. And so I think whereas ESG continues to be a very hot button political issue, I think you'll find that most financial institutions, including asset managers are very firm in their understanding of climate risk, in particular, other environmental or social issues, not as far along in being nailed down as financially material investment factors.

Mike Toffel:
And so when we talk about risk, climate risk, a lot of times you hear it broken down into transition risk and physical risk, is that the breakdown that you use as an asset manager and an advisor to clients and your colleagues?

Paul Bodnar:
Yes. That's generally how the industry and its primary standard setting efforts like the TCFD, the Task Force on Climate-related Financial Disclosures, have thought about it. So, as I mentioned, there's physical risk, which is the impact of climate on the economy, and then there's transition risk, which is if you like, the impact of the economy on the climate and particularly efforts to respond to mitigate climate change on the economy. So if you are in a carbon intensive business like oil and gas, or previously automotive, and the world is trying to push beyond fossil fuels, then that will materially affect your business, and that's transition risk. There's been a little bit of a disconnect between the goals that the world has set for decarbonization and net-zero by 2050 on the one hand, and the scenarios that folks are creating to guide investment decisions that relate to physical risk.

Mike Toffel:
In a way they are partial substitutes in the sense that the more governments respond by imposing phase outs on fossil fuels like bans on internal combustion engine vehicles or pricing carbon through carbon taxes or cap and trade or other type of technology forcing regulations, the more that society moves in that direction, some of that sting of the physical risk will be somewhat diminished. I think we're well past the time where anyone thinks we can avoid physical risk. I mean, if you look outside the door almost anywhere you live now you're seeing already the manifestations of the physical risk coming to bear. So there is already some sense of this partial substitution, the more transition risk we actually encourage through mitigation policies, a bit less severe physical challenges we'll face. But it sounds like you're noting there's other disconnects beyond people's failure to recognize even that or are you going in different direction?

Paul Bodnar:
Yeah, so you're absolutely right. However, there is a significant time lag. So if you look out the window and see the climate impacts of today, what you're seeing is the emissions of 1990 or 1995.

Mike Toffel:
Yeah.

Paul Bodnar:
One shudders to imagine the climate impacts associated in 30 years with the emissions of today. So this is not a disaster movie, we can't turn off all the emissions and then the ice glaciers come back and everybody's happy again. There's a significant time delay built into the climatological system. That means that action we take today is not necessarily going to have an impact until one or more decades in the future. And some impacts like seawater temperature increase will continue for hundreds or thousands of years. But you're absolutely right that the actions we take today on the mitigation side can reduce the physical risk that we face tomorrow.

But what I would say is that the world's obviously very focused on trying to achieve net-zero by 2050 in line with a goal of holding warming to 1.5 degrees centigrade above pre-industrial levels. And that is the right goal in scientific terms, but we are not making nearly enough progress towards that goal. And if you look at the graphs that show you the rate of decrease that we would need to achieve on an annual basis in global emissions in order to stay below 1.5 degrees in terms of the carbon budget that's implied that we have left to work with, you'll see this discontinuity between the current path we're on and the path we need to be on. And that discontinuity grows sharper every year. If we had started this project in earnest 20 years ago, reducing global emissions, we might've gotten away with a couple percentage points of annual decline.

But because we didn't, we now need to achieve something like 8% or more annual decreases in CO2 emissions in order to hold 1.5 degrees within reasonable probable reach. And by comparison, global emissions fell by something like 6% in 2020, a year in which we put the global economy in an induced coma due to COVID.

Mike Toffel:
Yeah.

Paul Bodnar:
And yet everybody is rightly focused on trying to hold that goal within reach. But if you are an investor and you have a big portfolio and you have invested in climate analytics and you're trying to understand the most likely pathway for emission reductions, you need to have a model that links up a model of the transition with a model of physical risk. And the problem we have today is that investors generally don't have these tools. If you look at the most commonly cited scenarios that even the financial sector uses on decarbonization, they're organized around the attainment of a temperature goal, meaning, the International Energy Agency has produced a net-zero, 1.5 degree compliant scenario.

Well, they will tell you in great detail exactly what needs to be true in 2025 or 2030 or '35 in order for the world to be on track for 1.5 degrees. The problem is that normative model, a model of the world as it should be gets easily confused with a forecast and it is not a forecast. So if you're using that kind of a model to guide your investment decisions on the transition side, you'd better be using a different model on the physical risk side because actually we're not headed to 1.5 degrees, we're headed to well north of two degrees at the moment, if not closer to three degrees. And so what the financial sector's learning right now is that it's got to be able to have transition risk and physical risk models that talk to each other as opposed to the current practice, which is where they're largely disconnected.

Mike Toffel:
And the lack of those models seems widespread. It's not just an investor's perspective, it's also operating company's perspectives where they have to make, in some cases, some long-term R&D bets about what the world will look like both from a carbon pricing perspective and from a physical risk perspective. And as I talk to more managers in those roles, it's increasingly clear to me that they lack the tools that they need to make smart decisions too. So, despite all of this big data revolution and a lot of interesting AI tools coming out, there's still lots of work that needs to be done to really put these models into action and really track things in a way that creates error bars narrow enough to actually make some decisions. Otherwise, lots of combinations are possible and people can throw up their hands and go, well, I guess, the best we can do is that next year is going to look like this year. And I think no one thinks that actually, but it seems like that's the default.

Paul Bodnar:
Yeah. And if you are in this space and you're looking at a climate scenario or emissions model, ask yourself always, is this a model of the world as it should be or a model of the world as it's likely to be? And if you're finding yourself looking at the latter, you're in luck, because as you say, there aren't a lot of them available. There's a great project called the Inevitable Policy Response, charmingly titled, which is one of the very few publicly available scenario tools that tries to look at the difference between what ought to be true if we're on track for climate goals that the world has agreed on and what is currently likely to happen and shows you in fine detail the difference between those two. So, in other words, if you were to enumerate the top 10 or 20 specific variables that determined whether the world was or wasn't on track to 1.5 degrees, what would those be?

They would include things like the date of Chinese coal phase out or the track record of tropical forest management or internal combustion passenger vehicle phase out dates. And they do a great job of illustrating the difference between what's currently on track, let's say in the G20 on something like the internal combustion phase out versus what would need to be true if we were on track for 1.5 degrees. And sometimes the difference is stark and sometimes it's surprisingly small, which is encouraging because that means we can push a little bit harder and get on track in that particular area.

Mike Toffel:
So let's take this conversation back to the investors' perspective. Investors create portfolios of assets based on their expectation of the future. We've just described how predicting the future both in the physical risk side and transition risks is quite complicated and difficult to do each much less their interaction. How does that lead asset managers to actually make credible claims that they're working in this space? Are they basically technology bets? And when you're thinking about a company, for example, in an automotive, you're thinking, well, who's doing a lot of work to make sure that their vehicles and the technology behind their vehicles will be successful in a wide range of scenarios where we're seeing some phase outs of internal combustion engines policies announced in Europe and even in the US, but perhaps not in other parts of the world. There's a great uncertainty about how quickly charging infrastructure will be deployed, especially in rural places and especially in poorer places around the world. How is an investor to think about sorting through different automotive companies, just as an example, to try and fix ideas? Let's choose an industry.

Paul Bodnar:
Sure. Well, first is that investor interested in simply tracking the likely pace of change in that particular sector and getting it right, or is that investor trying to accelerate the pace of change in that sector? What is their underlying objective? This is what we talked about earlier, having clarity on what your investment objective is. So you could have an impact investor who wants to invest in the automotive value chain with a view to both making money, but also to accelerating the rate of decarbonization in that sector. Or they could just be saying, look, I invest in the automotive sector and the automotive sector is going through the largest structural change in a hundred years and I just need to get it right. I just need to know whether the companies that do it faster are going to be more profitable or less profitable, all else equal.

So, the first thing starts with what your objectives are, but the auto industry is a great example because it shows you that as an investor you can be interested in two things and you ultimately need to make them work together. The first is a measure of climate performance, as I call it, meaning, is a particular auto companies stated goal of reducing its scope one, two, three emissions primarily through its vehicles that it produces, on track with whatever commitment that it has made or that it should make based on its share of emissions in the economy or pursuant to a national goal. So how would you map out that company's future emissions' path as it has committed to achieve or it's on track to achieve and assess it, right? So you might say, gee, company X is a laggard, right, and therefore I won't invest in it, or anybody who thinks of themselves as a climate forward investor or a sustainable investor shouldn't invest in this company because its pace of decarbonization is too slow.

That is when you hear about transition metrics or transition investing, that's mostly what folks are talking about is they're constructing measures or proxies for the speed of decarbonization and assessing whether a company is or is not doing its share or what folks think that company should be doing. So, that's useful information, but ultimately what investors are interested in is not just climate performance but financial performance.

Mike Toffel:
Yeah.

Paul Bodnar:
So, indeed, if auto company X commits to no longer invest in new internal combustion vehicle architectures starting in 2030, and another one commits to stop working on internal combustion engine innovation today, which of those two companies is going to be more profitable? That's what investors want to know, and they can just be very hard headed about that without thinking about the climate performance normative aspect. They can say, well, I think that this company actually that's going faster is going to win greater market share.

I think that that company is correctly betting on the availability of charging infrastructure, whereas the slower company is being too cautious and it's going to lose market share. So these two measures of climate performance and financial performance, I think sometimes they're looked at separately, but the really sophisticated investment managers will start to try to combine those data sets so that when you have a new piece of information like blue chip company X decides to dramatically accelerate its rate of decarbonization, your portfolio management software will be able to tell you whether its stock is under or overvalued depending on how you crunch all the numbers and variables that I just described.

Mike Toffel:
Yeah. And then there's an interesting connection also to the strategies that companies announce in terms of their R&D and their product portfolio and the efforts then they make to shape policies to make that strategy successful. And we had a long time in the US where whether climate change is even a real thing, then we shifted to, it's a real thing, but maybe humanity hasn't had the influence that people think they do to now in some quarters' consensus. But what's interesting to see is the auto companies have shifted, at least what they're saying publicly to agree to phase outs of internal combustion engines, at least in some cases and at least in some sectors, which suggests to me that they are going to also shift some of their political conversations to try and make sure that the infrastructure gets subsidized and gets built.

And that of course, as you were noting earlier, when you think about climate performance and financial performance, there's this other lens that's a little more difficult to observe, which is what's their political strategy to try and ensure or bolster the odds of success for both their climate performance and financial performance? It's difficult in many countries, including the US, to really witness those conversations of what are they lobbying for and where's the money flowing and which candidates are they supporting? But it nonetheless has a bearing on the financial viability of companies. But I imagine investors don't have as good eyes on that as they might on other things.

Paul Bodnar:
This is an increasing focus for especially activist investors to understand and call for the disclosure of lobbying activities by companies. This is a common subject of shareholder resolutions. And if you look at an initiative like Climate Action 100+, which is a joint initiative of a number of nonprofits and investors to try to focus on the climate performance, I would say more of some of the largest and most significant carbon emitters in the market, this is definitely one of the areas of focus. So if you had to pick a few variables to track as a shareholder of the company that you're invested in, this would be one of them, right?

Which is no matter what the company is saying, what is it actually doing to influence its operating environment on the policy side, because we all know that climate action is so policy dependent in most sectors. Another variable that's increasingly in focus is compensation and whether executive compensation in these companies is linked to climate goals or sustainability goals more generally. And the ultimate one I would say for a sector like automotive or oil and gas is not what the company says it's going to do, but tracking its capital expenditure. Most of the assets in the global economy that emit carbon are long life capital assets, whether you're talking about power plants or cement plants or automobiles or container ships or airplanes.

And part of the problem that we have in driving towards 1.5 degrees is that these are sticky assets that are designed to be in service for a long time. And if we just did the math on how long the existing capital stock in the economy can be in service, we would discover that we need to retire a whole lot of it early. We would also discover that rate of capital stock turnover for industries like cement or chemicals or steel implies a rate of investment that these companies cannot finance through free cash flow alone. So take a simple example like cement, cement plants, let's say last an average of 40 years, that means in a given decade, you're turning over a quarter of the fleet.

Well, if you're trying to reduce greenhouse gas emissions by 45 to 50% this decade, you're implying double the rate of replacement of cement plants and not with incrementally better technologies, but with a completely different production process. And that's what's happening for automotive, right? You're ripping out the powertrain and replacing it with electric systems. You'd have to do the same for cement and steel and chemicals and aluminum and all the rest of it. That is a hugely capital intensive process, and your clue as to whether these companies are taking it seriously is to look at the share of their annual capital expenditure and see how much of it they're investing in these new technologies. This has become particularly controversial for oil and gas because even some of the oil majors that profess to be most focused on climate change still spend a relatively tiny percentage of their annual CapEx on alternative energy.

And every time they're spending CapEx on traditional oil and gas, again, they're locking in potentially new long life capital assets that will then need to be wound down, et cetera. just to give one final example, going back to the automotive case, you can stop selling new internal combustion vehicles in 2030 or 2035, but that is not the year in which the internal combustion fleet is off the road because vehicles last 15 to 20 years, and if they are no longer demanded in the United States, let's say they can get shipped to other countries and used there. So we have to stop thinking only in terms of the flows of green investment, we need to think of the stock of fleets, coal plant fleets, vehicle fleets, fleets of jets, and other emitting assets in the economy.

Mike Toffel:
So, who would you think of as producing some well-researched reports to keep track of all this? Are asset managers doing this work on their own? Are they relying on consultants or academics or government reports? How does one get up to speed on these types of issues?

Paul Bodnar:
Well, you can be sure that there's a lot of great proprietary research happening inside these institutions, but we do have the benefit of a lot of good publicly available work. I think the International Energy Agency’s work in the last five years or so has just become dramatically better and more detailed when it comes to the energy transition. And then you have some initiatives like the Energy Transitions Commission that produce fantastic work. So it's increasingly easier to keep track of this even though some of the most granular data as you would expect can sometimes be entirely proprietary or hidden behind paywalls as you would expect. One organization that does an amazing job in tracking this is Bloomberg New Energy Finance, but of course you have to get a subscription to access that data,

Mike Toffel:
Right, not a small investment that one can just do as a hobby, I've discovered. So let's talk a little bit more about this net-zero conversation. Some asset managers are touting the idea that they want their portfolios to be net-zero. So taking a page out of operating companies who say, we want to reach net-zero by a certain date by decarbonizing and doing other investments to reduce greenhouse gas emissions and buying offsets or other mechanisms to try and capture the rest. It's interesting to hear the same language of net-zero enter the discussions from an investor's perspective where they're not just trying to help track whether companies are going to achieve these goals, and depending on the investment goals that you mentioned earlier, is it about ESG and materiality and we're trying to make just better risk adjusted returns, or am I an impact investor trying also to try and bring about societal change and reduce carbon emissions?

Here we have portfolios that are marketing themselves as net-zero. Is that to attract some of these impact investors or is that to attract these ESG materiality concerned investors or both? Or is it trying to attract employees to their firm to have a portfolio that might be useful in recruiting in the fairly competitive marketplace for labor? What's behind it and how real is it?

Paul Bodnar:
Well, it's hard to speak generally about all asset managers, especially when you think about the pretty significant regional differences between Europe and the United States, for example, where financial institutions are subject to very different regulatory requirements and have different kinds of client bases. The reasons do vary as you suggest, and this is why it's really important to untangle what we mean by sustainable investing and why different kinds of clients are investors are interested in it, whether it's for risk adjusted performance or because they have a mandate in some cases, right?

So think of a university endowment, which the folks who manage the Harvard endowment like to be unconstrained and are targeting maximum returns. They don't necessarily want to be told that they can or cannot invest in x or y, but it may come to pass that the discussion on campus creates a mandate on certain investment managers not to invest in fossil fuels. Is that because of risk adjusted return? No. Is it because of impact? Not necessarily, it's just a mandate. I think in general, asset managers and pension funds and other asset owners are all struggling with the role that they should be playing in this story, and what can they do and what can't they do?

So fiduciary asset managers, their North Star is fiduciary duty. And in the United States, fiduciary duty is not defined as looking at the interests of your clients on aggregate and taking actions as a company, as an asset manager in furtherance of a societally defined goal. I think asset managers feel constrained in saying, look, this is not our money, this is our client's money, and if our clients choose to invest it this way, we will help them to invest it this way. But if we are a shareholder of an oil and gas company on behalf of a million people who hold tiny shares in an ETF, we can't presume that they want us to push that oil company to align its business strategy with 1.5 degrees, unless that strategy is also the one that's going to generate the most long-term shareholder value.

And so this struggle to figure out how you can play your part as a financial institution in the journey to net-zero while also being a fiduciary whose actions are determined ultimately by your clients, especially if you have these big aggregated products that are owned by millions of firefighters and nurses and people on the coasts and people in the heartland, and they don't have the same view about ESG, and you have one vote at the shareholder meeting of carbon intensive company X, how are you going to cast that vote? These are actually pretty serious dilemmas. One interesting development I would highlight is that some of the pension funds that have done the best job of scrubbing the carbon out of their portfolios, their finance emissions as the metric is sometimes called, right? So if you look at a pension fund's holdings and you look at the carbon emissions of all those companies and you multiply it by the percentage shareholding that the pension fund has in each of those companies, you get the simplest calculation of that pension fund's own emissions' footprint.

So a lot of pension funds and other institutional investors have been trying to reduce that footprint over time. The problem they've realized, though, is that's easy to do by, you can just sell your shares in oil and gas companies, someone else is going to buy those shares, but you yourself don't hold those shares anymore. The problem with that is that if you're doing that faster than the rate at which the actual economy is decarbonizing, then you may have scrubbed it out of your own portfolio, but that doesn't mean that you've actually caused anything good to happen except some marginal decrease in the price of that stock to a third party.

Mike Toffel:
Right.

Paul Bodnar:
And so some of these funds are adding back the ability to invest in carbon intensive companies to circumvent their own carbon reduction goals because they realize that they've lost the leverage as a shareholder to really have an impact on those companies. So they need to get back in the game of being the shareholder of carbon intensive companies and being an active shareholder that's trying to guide these companies towards net-zero. So it's just an example, to some extent, unforeseen side effect of being really good on climate. If you're a pension fund that's washed its hands of emissions and then you say, oh, wait a minute, actually, I need to be in that game because otherwise, who is going to be the shareholder of that carbon intensive company, if not me?

Mike Toffel:
Yeah. This reminds me a lot of the divestment movement conversations and the responses by administrations including at Harvard in the face of student pressure and some alumni pressure to divest from fossil fuels. And the initial response, one was, we don't want to take politics into our investment perspective, we want to just focus on financial returns. And then another response was, well, exactly as you described, if we sell off our holdings, then it robs us of the opportunity to engage and try and convince them to see the future the way we see the future.

And then the response to that from the activist community was like, well, A, are you even doing that? And B, are you having any influence if you try? And there's, I guess an allegation that that's a greenwashing defense to continue holding carbon intensive investments. And eventually, as you noted, Harvard and some other companies are increasingly getting away from fossil fuel investments, in particular. The idea of engagement is another question I wanted to ask you about from an investment management perspective, because two ways to come up with a net-zero portfolio or to decarbonize your portfolio, one is through the selection process, what you buy and what you sell. And then the other way, which of course is complimentary, it's you don't have to do one or the other, is more of an influence strategy.

And so we've seen more recently some activist shareholders getting surprisingly high votes on some of the shareholder activist proposals that they bring to annual shareholder meetings to ensure that companies are being a bit more transparent about their climate strategy, for example, or even in some cases, to try and lobby against some of the governance decisions, including who serves on the boards and who should serve on the board. And I think it's been quite interesting to see this transition of actual more people getting on board with these movements that are challenging management in the highest way possible, the most visible way possible, which is at the annual shareholder meeting. And I wonder if you have thoughts about that as do you see that trend as well, and is that the tip of the iceberg or is that where a lot of the actions actually happening in the influence strategies that we're talking about how investors can seek to influence corporate managers?

Paul Bodnar:
Well, I think that progress on that front has been pretty uneven. There are some years where these resolutions, the number that are filed and the percentage of them that succeed has gone up, and in the last couple of years it's actually gone down. There's certainly more and more attention, and maybe filings have increased, partly because I think the SEC made some ruling regarding what kinds of shareholder resolutions can be filed, so that increased the denominator. But what's been interesting is I think asset managers who represent their clients in the shareholding have also learned more and more about this difference that I mentioned earlier between the world as it should be, and the world as it's likely to be as an outlook.

So, again, if you are representing millions of small shareholders in an oil and gas company who have holdings in an index fund, can you decide, question, that the world needs to get to 1.5 degrees, and therefore, you're going to boot out the directors of that company unless they change course, stop drilling for oil, and have a business strategy that's consistent with 1.5 degrees? That question is particularly sharp for oil and gas companies. It's a little bit easier when you get to derivative industries that are not actually in the business of making hydrocarbons, but it's a very difficult question. And again, if you are representing a broad group of shareholders who don't all have the same degree of enthusiasm for climate action, for example, the question that you need to ask as a fiduciary in the US context is, does this company have a strategy that will generate the maximum long-term shareholder value?

And that question is not necessarily the same as will it be compliant with 1.5 degrees or any other temperature goal? It's more like a version of, is this company's strategy designed to maximize its performance in the most likely operating environment in which it will find itself? And that question is about forecasts. So, it was interesting a few weeks ago, and I might be getting the details of this slightly wrong, but in the BP annual general meeting, there was a shareholder resolution called on BP to reverse its recent decisions to effectively weaken its climate targets, which BP did. And one of the two service providers that advises shareholders on how to vote called Glass Lewis recommended that shareholders not support this resolution criticizing BP for its climate targets, because that was a financially sound strategy for BP to pursue to weaken its targets because the world was not on track to net-zero by 2050.

And so why should BP's business strategy be on track to 2050 if the world isn't, because that's the market that BP sells into. And of course the whole thing is recursive and self-fulfilling when it comes to big oil companies, but I just thought it illustrated this point really clearly that folks are struggling to distinguish between the fact that this is a collective action problem and we all need to be working on it, and we all need to do the things that are necessary to make that future true. And yet when we're looking at individual investment decisions in the context of US law and fiduciary duty, we might not be able to make those decisions. And so one question that arises might be one for your colleagues at the law school to look at is do we have the correct interpretation of fiduciary duty?

If an asset manager looks at the world with its considerable research capabilities, and says, "Gee, if the world doesn't manage climate risk, then there's going to be a very significant erosion in economic growth, and those circumstances are going to have a material negative financial consequence for our clients on aggregate." If they conclude that, is there a form of fiduciary duty that flows from that conclusion, a fiduciary duty to clients on aggregate rather than just individual shareholders and individual companies showing up at individual annual general meetings? That I think is one of the most important specific legal questions related to net-zero in the US today.

Mike Toffel:
That's interesting. Now, even if hypothetically they found that there were, the problem still strikes me about discounting and the time horizons, and that suppose the answer is yes, but the vast majority of those consequences will really hit the economy in 30, 40, 50 years, and you have a normal discounting model. Those years get rounded to zero in current analyses. And so that's a whole other level of problem, which we won't have time to get into today. But even if we find an answer to yes, I'm not so convinced that that will be a meaningful move forward from the investment community making a difference. It brings back what you and I have both been saying, this whole conversation, which is the need for policy.

Paul Bodnar:
You're right, absolutely. And it's a very tricky question because one of the headwinds that sustainable investing faced in the last few years was the huge boost in traditional oil and gas and coal markets as a result of the post initial COVID supply shock augmented by Russia's invasion of Ukraine. And if you were a trader or a portfolio manager and you had under weighted oil and gas in your portfolio, either because it was an impact play or because you thought that these companies were going to underperform in the long term, you were losing out relative to colleagues who would've doubled down on these stocks. And so just the vibe and understanding on Wall Street was very much in favor of conventional energy because you could make more money by holding it than you could by letting it go at that point.

Mike Toffel:
I want to take advantage of the fact that you've worked in so many different sectors. You've worked in the nonprofit sector, in the private sector, in the government sector, and all the while in different dimensions of climate finance. And I wonder if you can summarize your experience on the different lenses you've been able to apply to climate finance and what led you from one sector to the other.

Paul Bodnar:
Sure. Well, my goal has been to be where the biggest impact is, and probably just the most interesting work. So when I left college again and I was interested in climate policy, that just wasn't the time to do it, right? 2001, US withdrawal from the Kyoto Protocol was not a priority of the Bush administration to put it mildly, but there was really interesting work happening in markets in the carbon market, in financial markets, and so I hopped across to that. When we came to start another policymaking cycle at the global level with the Copenhagen Accord, and then what became the Paris Agreement, that's where the really interesting work was in my view. So I hopped across to that for the better part of a decade. And once we concluded the Paris Agreement, I thought, again, now we're in a policy implementation cycle rather than a policy making cycle.

And so the interesting work was, again, on the impact side outside of government. So I've just tried to hop across to the crest of the wave where the most interesting work was taking advantage of something that's quite unique to the United States, which is the ease with which we can move across different sectors. When I met my colleagues and counterparts from other countries in the UN climate negotiations work on climate finance, they're usually career government employees, and there isn't that degree of mobility that you get moving from the private sector into government or back again, we have the advantage of that. I think it is a huge advantage for the United States, frankly, including in the governmental realm, is that we can have folks whose personal experience and knowledge is informed by their work in markets or in civil society.

Mike Toffel:
So let me ask a final question that we ask of all of our guests, which is that some of our listeners are considering dedicating their careers in somehow the intersection of business and climate change, might be in investing as we've been discussing today, where do you see the biggest opportunities for folks looking to get into that space, and what advice do you have for them?

Paul Bodnar:
I would say there are two areas of opportunity that I'm particularly excited about that are adjacent to the traditional focus on decarbonization and mitigation. One is on resilience. So, generally, investors have thought of adaptation finance as something that's a line item in a government budget, and "Oh, government's going to pay for a seawall" or something like that.

Mike Toffel:
Yeah.

Paul Bodnar:
In fact, if you like decarbonization as an investment theme, you're going to love resilience, sadly, because it is a growth industry, it is something that the world needs and is demanding and will demand over the decades to come. And unlike decarbonization, it doesn't come with a lot of fundamental policy uncertainty, particularly not in the United States. And yet we are doing a poor job of channeling capital into this area. And I'm talking about climate resilience solutions, basic things that households, businesses and governments need, technologies, services and products that governments, households, and businesses need to become more resilient, whether it's water pumps or air conditioning or engineering services or wildfire analytics or drought resistant seeds, the list goes on and on, that is a thematic growth industry.

But unless we can get entrepreneurs pointed in that direction, and unless we can get capital markets to focus on it, then the rate of innovation that we're going to be able to generate in the resilience area is going to be much smaller, and the total price tag for adapting to climate physical risks is going to be higher. So we have a chance to really make a dramatic difference, I think, on resilience by thinking of it through the lens of financial markets, but it requires reframing it away from this view as a government cost and into a thematic investment opportunity. And of course, we have to be super careful about the fact that these are costs that people bear unwillingly, right?

Mike Toffel:
Yeah.

Paul Bodnar:
I mean, we have screwed up the climate, and so it is also our responsibility to accelerate the solutions that are needed to deal with that, because resilience is not something that's going to go away no matter how fast we drive decarbonization in the next five or 10 years, let's say.

Mike Toffel:
Yep.

Paul Bodnar:
So that's one area. The other I'll just offer is I think we have an opportunity to apply the same rigor of an investment thesis to other environmental issues as we've applied to climate change. There's a fantastic framework, the Planetary Boundaries Framework, which I think provides a very good grounding for sustainable investing, not just for climate, but for issues like biodiversity, ocean plastics, air pollution, and that is we have a linear economic system, which is a take make waste system. We are discovering that the waste part of that system generates greenhouse gas emissions, which are concentrating in the atmosphere and rebound to affect the economy, and we care about that. So we're trying to deal with that side of the system, and we are hitting up against the planetary boundaries, in this case of atmospheric capacity to absorb CO2 without serious impact on the climate.

But that same framework can be applied to biodiversity, ocean plastics by looking at the take part of the equation and having the ability to value nature and natural capital, which I mean in an economic sense, not a financial sense. And being able to understand that when the economy, the take, the extractive part of the economy, was small relative to the size of the biosphere, this take make waste system mattered less than it does now when the size of the human economy is much larger and bumping up against boundaries, whether those are defined by biodiversity resources or oceans again, or air pollution or other criteria. So I think if you're a young professional looking in this field, you can take what we've learned from decarbonization and maybe be a pioneer in either climate resilience or other areas of ecosystem services and protecting and conserving nature. I think those are the really interesting boundaries from an investment perspective.

Mike Toffel:
Great. Well, Paul, thank you so much. We've had such a wide-ranging conversation about policy, about finance, about working across different sectors. Really appreciate your candor and your spending time with us here on Climate Rising.

Paul Bodnar:
It's been an absolute pleasure. Thank you.

Mike Toffel:
That was my conversation with Paul Bodnar, Director of Sustainable Finance, Industry, and Diplomacy at the Bezos Earth Fund.