Vish Hindocha:

Hello and welcome to another episode of the All Angles Podcast. In this episode, I'll be talking to Shari Friedman, managing director at Eurasia Group covering climate and sustainability. In this very wide-ranging conversation, we talk about Shari's interests and how she got to her current position, starting with the Kyoto Protocol, some time in her garden making biofuel, and then ending up sort of talking to policymakers and major asset owners and CEOs around the world as to how they're contemplating and mitigating things like climate change risks, plastic pollution, biodiversity loss and water risks. We also talk about what it takes to move hearts and minds in this space and the kinds of changes that will be needed. I hope you gain as much from the conversation as I did, and please let us know if there are any topics that you would like to cover by emailing the team at allangles@mfs.com.

VO Disclosure:

The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as an offer of securities or investment advice. No forecast can be guaranteed. Past performance is no guarantee of future results.

Vish Hindocha:

Shari, welcome to the podcast.

Shari Friedman:

Thank you, Vish. It's so good to see you.

Vish Hindocha:

It's great to see you too. Shari and I first encountered each other really on some client events last year that MFS and Eurasia Group participated in, which we might talk about, but Shari has been involved in this field of sustainability for 25 years plus from a wide variety of perspectives that she's going to explain in just a second, and I think operates a really fascinating intersection of policy and the impact it has on Eurasia Group's clients and financial markets. So, before we dive too much into that, Shari, I was wondering if you would give our listeners a brief sort of potted history of your background, going all the way back to the beginning, and sort of how you got to the seat that you occupy now.

Shari Friedman:

Yeah. So, it has been really varied. I feel like if you had a visual, you'd have climate and sustainability at the center of a spoke, and then you have all these different applications on how you look at climate and sustainability. So, starting off, I mean, I started off just being so interested in politics that I joined the federal government and joined looking at climate change. Frankly, honestly, back then, the science wasn't as clear as it is now. The science was pretty clear, but there was still — my feeling of it was like — look, if climate change is going to happen or if it's not, everything that we do to prevent climate change is probably a good environmental choice, regardless. So, let's go for it. This was back in the early '90s. And so, I joined the Environmental Protection Agency. From there, we were figuring out where the United States could land vis-a-vis the brand-new UNFCCC, the Framework Convention on Climate Change. Then I joined the negotiating team for Kyoto and on the CDM.

So, it kind of was all on this policy and negotiating. It was really interesting. And then I went from there into finance and I started working for private equity, which also was really fascinating. And I kind of stuck on the finance track, worked for an asset manager, worked for an international finance for a multilateral development bank, the International Finance Corporation. And the Eurasia Group kind of came full circle back into politics, taking all these different pieces. And I will say in the middle, I started a biodiesel business. And not that many people know this piece, but I started off making biodiesel in my backyard.

I bought a VW, this VW diesel car, and my neighbor and I decided we were going to make biodiesel in our backyard. And I thought, it's so easy to do this. It's disgusting, by the way. You're covered in oil. But I thought, this is so interesting and not easy to do. Why are all of our buses and all of our city equipment run on regular diesel? Everybody should just be crabbing their local waste oil, adding some lye and methanol and shoving it into the buses.

And so, I started a business called SmartFuel and I partnered ... We had a pilot project in Philadelphia. And it was really interesting. And then, frankly, what happened is I started to having kids and I couldn't have two babies at the same time.

Vish Hindocha:

I'm fascinated. I know nothing about biodiesel, so I'm fascinated by this. So, are you supposed to be covered in oil in your garden? Is that part of the process or is that just something that you came up with?

Shari Friedman:

Right. Well, I didn't purposefully pour the oil on top of me, but what you're doing is if you do it, you can either get virgin oil, but we were taking it from our local restaurant called Mark's Kitchen. So, we'd go in the back with our buckets and we'd take it out. And then what you have to do, you got to strain out all the French fries and the chicken chunks and you strain all those out so you've got a more pure amount of oil, and then you heat it up, the oil up, and then you add methanol and you add lye and you titrate it. But this process of straining the oil is really messy, and there's no way you escape without smelling like a big French fry at the end.

Vish Hindocha:

Excellent. I knew about the Kyoto agreement and your role in the negotiating team, which is obviously amazing. I knew about venture and I knew about some of your other roles. I didn't know anything about your entrepreneurial streak in biofuel. So maybe we'll come back to that towards the end. So, Shari, maybe just, if you could give a little background for listeners that may be unfamiliar with Eurasia Group, so talk to us a little bit about where does Eurasia group as a whole operate, and then I would love to just dive into your particular area after that and some of the things that you are focused on.

Shari Friedman:

Sure. So, Eurasia Group, it's named Eurasia, which is more of a historical piece of it, but it's a global geopolitical risk group. And every time I say that to people, their eyes glaze over. They're like, what does that even mean? But what it basically is, is, and the whole firm has gone through a lot of evolution, but at the core, big multinational companies that work across a lot of regions need to understand what is going on politically, what is going on ... where are the political wins moving? And so, this could be in just one country, if there's nobody looking after that in one country, but a lot of times you want to understand the country, then you want to understand the dynamics between countries, and you want to understand how some of these big geopolitical shifts that are going on are going to affect your business.

And so, we have experts in China, in the United States. We've got experts in all of the Asian countries, in Africa, globally. So, people who are diving deep into the country and then stepping back and talking to each other to understand how this is affecting different companies. We deal a lot with financial institutions, but there really isn't a sector that we don't cover. So, we've got cement companies and fuel companies and every kind of company that you might imagine that would need to be tracking geopolitical trends. And I think the easiest way to understand this is when Russia invaded Ukraine, there was a lot of fallout. It was affecting fertilizer companies, it was affecting oil companies, it was affecting renewable energy companies. It was affecting anybody who used energy, which is anybody. And so, you had to understand what is about to happen, how long is this going to go on? Where are the markets going to be moving? And that's what we advise companies on in general.

Vish Hindocha:

Amazing. And Shari, your role, again, I described it, and I think your official title is Managing Director of Climate and Sustainability, and I know that covers all manner of sins. What are you focused on today? What are the kinds of topics that are piquing your interest?

Shari Friedman:

There's different trends that go across all of the countries, and these include supply chain, includes energy, includes geotechnology and it also includes climate and sustainability. So, for climate and sustainability, we take a look at the trends and the regulations that are coming up and the policies that are coming up and how that is going to affect companies. And a lot of these trends are not actually political. And I think, Vish, you're in the center of one of them, which is the financial markets and how the financial markets are treating climate and sustainability. Some of it's political and policy based and some of it's actually being led by the financial institutions themselves and how they're looking at risk and how they're looking at information they need on climate and sustainability. But as we look at this, the climate was really the one that globally was a leader in how people are thinking about this as a material impact to their company.

So, we don't look at things that we think are important environmentally, we might in our own free time, but at work we're looking at the environmental trends that are affecting our client companies materially as their bottom line. And the ones that we really focus on are our climate, of course, biodiversity. Plastics is a big up and coming one that people are going to be needing to pay attention to. There's going to be legislation around there. Water, we're looking at separately, but really also overlaps with almost everything. The impacts of climate change have water implications, biodiversity has water. You use water when you make plastics. It underlies all of it. And then we're also looking at climate litigation and how that's popping up, and environmental litigation in general. So, those are the places that we believe are affecting companies that companies need to be paying attention to.

Vish Hindocha:

Amazing. So, you mentioned the plastics as one that you think people should be increasingly aware of. It's super interesting. There's so many parallels here between our work, and this is what's always been fascinating to me about when I get to swap notes with you, Shari, about, because as you know, and as the listeners might know, MFS is obsessively sort of much more of a fundamental long-term and more bottom-up oriented. We certainly have macroeconomic thinkers and people that think a little bit top-down, but generally speaking across our complex, we are really interested in real economy kind of companies and entities and sovereigns operating in that space and how do we analyze it, and we sort of build up from the bottom up. And so, again, having a different perspective from yourselves has been super powerful, I think, to us as we've sort of swapped notes on that because, as you said, to have a view on a cement company or any kind of commodity company or an energy company has to involve some level of understanding of where global markets and global policy is going.

Shari Friedman:

Absolutely.

Vish Hindocha:

So, there's lots of parallels. And as we think about sustainability or even, I often draw analogy with technology, there are some of these things that cut across sector teams, which is how we're naturally more organized. So, we need to think horizontally across them. So, there's so many parallels, I think, in terms of our day job, in terms of how we think about things across our organization. And we've actually done quite a lot of work on plastics, as you mentioned in the financial ... how do we think about that from different players and different industries sort of interacting together for the last sort of couple of years. So, I'm really interested in your take on plastics. It's not something that we've ever really discussed before, but what's your take on plastics? Why do you think people should be paying more attention to it? What do you think are some of the unknowns for most listeners around the issue of plastics?

Shari Friedman:

I think the first thing to note is when we're talking about plastics, we're not talking about the plastics that create lighter cars. Some of the infrastructure plastics are not what the target is, it's really plastics pollution. And so, I think that the way that people have thought about this traditionally is really in terms of recycling and reuse. And I think there's a big dichotomy in the conversation going on right now about plastic pollution elimination, like disposable plastic elimination and recycling. And I think there's going to be a place for both but following that is going to be really important. And backing up over to why we think this is important, you track this as policies start coming out and there's always a lot of international chatter and there's been a lot of international chatter about plastics. And so, you have to know where is this going to fall out?

Is this going to be something that you really have to track or is it going to be something that people like to take positions on and make pledges on? But what we're seeing is internationally the movement to create a plastics target and plastics reduction is in a really accelerated pace. There's going to be a conversation that's going to be going on in May for an international plastics treaty. And now, if that happened just on its own, that would be one thing. But that's coupled with on-the-ground policies that we're seeing. We're seeing plastics bans coming out locally, we're seeing them coming out from countries. We're also seeing increased focus on some of the solutions, so chemical recycling. And just one quick note on chemical recycling is that there's different pieces of disposable plastic again. So, as you talk about disposable plastic, you have the non-disposable plastic and then the targeted disposable plastic.

Some of that is already easily recyclable. And then there's a part of it that you just can't recycle, like some of the plastic packaging. The more flexible plastic packaging can't be recycled. So, then there's a process called chemical recycling and that's gotten a lot of attention recently to be able to reduce it. However, there are issues with chemical recycling. There's pollution, it's very energy intensive. And so, the question in where this comes out is going to be, is that going to have a role or is there going to be a sufficient amount of reduction of some of these harder to recycle plastics? And I'm interested, Vish, to hear your take on it. Where do you think this is ... What are you guys looking at?

Vish Hindocha:

So, the way that we tried to break the problem down, and I think you captured so much of it really, really well, is sort of there's four sections for us. So, there's the producers of plastic, and some of those are the chemicals companies, there's the packages, then there's the consumer staples companies. So again, if we're thinking here about, typically, single use plastic or other single use forms of plastic, as you said, in production of vehicles for example. And then you think about waste and recycling. So, you think about the sort of life cycle of plastic. And actually, what we had discovered is not many people, maybe because it sort of cuts across multiple traditional sectors in the investment industry, have sort of followed that chain all the way through.

So, we actually did a lot of work between 2019 to 2021 trying to map that and we got really good on understanding the data, where the research and development is happening, what's the role of virgin plastic versus recycled plastic? How many times can you use recycled plastic? What's the role of chemical recycling versus other types of mixed-use recycling, for example? Where is it going to be cost-effective, not cost-effective for different organizations to do it? And again, across the MFS complex, thinking about materiality, not in terms of financial materiality per se, but also materiality of MFS ownership. We tend to have a good size ownership of consumer brands products.

So, some of the classic brands that people will be very familiar with, MFS may own in some size. And so, understanding those material risk to ownership positions that we have in our client portfolios, but what could that mean for the brand value of that organization or potentially upside as well in terms of being ahead of the curve. If there is an international plastics treaty that starts to bite on this and starts to raise costs, what is the supply chain fragility, for example, of some of those entities that we may own? And understanding potential range of outcome risk and things that may not already be baked into the data.

So, for us, it's sort of analytical edge to think about it in that way as well as to make sure that we have access to high quality data and high quality insights into things that you don't just get off the shelf. And so, that actually took us into some really, really interesting places with some of those big consumer brands companies, with some of those waste and chemical recycling companies, with some of those packaging companies in terms of really understanding the full supply chain, up and down, and where the pressure points might be.

Shari Friedman:

I mean, I think there's two other pieces in plastics, and I know you don't want to spend this whole time in plastics, but there is a differentiated response in industrialized countries and developing countries. And so, when you're talking about the recycling supply chain, it's really dependent on a very solid stream of waste collection, which isn't always available in every country. And when I used to work on your side of the equation when I was working for the International Finance Corporation, we were trying to finance the whole recycling chain — and it's very fragmented with a lot of different actors — and pulling that together from scratch or where it's not a full loop is really complicated in a lot of countries. So, I think as we start to talk about the solution areas, it's important to note that it's very differentiated. And so, in some places, bands might be the way to go and in other places you might end up just being able to create a full closed loop.

And the other piece, I think, that I'm sure you're looking at also is the opportunities, and you touched upon this a little bit, but the opportunities to be using non-plastic materials, whether that's biomaterials, whether it's substituting a more recyclable material, like aluminum instead of plastic, there's a lot of different ways to look at this and then there's the companies that are building the infrastructure for the recycling, and then there's the opportunities there. So, it's a lot of different moving parts as you very, very clearly laid out in the whole scheme.

Vish Hindocha:

It's funny, we've been looking at, in Africa for example, to your point on fragmented versus being able to get to a closed loop type situation. And an undercurrent of this podcast and this whole series has been the need to understand the nuance and the complexity that underlies often some of these things. So, we can talk about plastics and plastic waste and plastic pollution and there is some core principles there as to how many times can you use a piece of recycled plastic, for example, and what the ultimate solution might be. But then you get into what is the actual waste collection and how is that different in, for example, the UK versus Europe versus the US versus Africa. And the answer is it's dramatically different in terms of where you have centralized waste collection versus very decentralized and fragmented waste collection and therefore, what the most cost-effective solution might be?

So again, as you peel back the onion, there's more and more complexity underneath there. But Shari, as you mentioned, I don't want to spend all the time ... but that's fascinating, just given that you flagged that one area. Another area that you flagged was biodiversity, and this, I'll be totally honest, is an area very, very close to my heart and has been for a long period of time. I'd love for you to just explain your perspective or Eurasia Group's angle on biodiversity, why it's important and where you think the conversation might be going.

Shari Friedman:

Yeah. So, biodiversity, it feels like it's drafting climate. When you have bicycle riders and one is up front and the other ones are drafting behind, so the one up front's hitting all the headwinds and climate basically had to hit all the headwinds to explain to the world that understand that there's a fundamental underlying systemic risk to companies from an environmental outcome, which is a really different conversation from this reputational risk. If you're just solving for reputational risk, you're trying to avoid the big bad things from happening. But if you actually have to understand how an environmental impact or how a policy to mitigate an environmental impact can systematically affect your business, it's a whole big mind shift. And that took a really long time with climate. And then biodiversity, it's the same thing. So, it's taking a bit for people to understand this, but if you are an ag company, if you are a clothing company using cotton, if you are a beverage company, a beverage manufacturing company, if you are a retail company that has any of those things in your supply chain, if you are a mining company, all of these things are going to be affected by biodiversity loss or by the policies that mitigate biodiversity loss.

And so, for example, I mean I think it's hard to talk about it in the abstract because the biodiversity piece isn't really so obvious, but biodiversity loss will mean a loss of pollinators and a loss of pollinators means a shift in agriculture and a shift in agriculture is going to affect everything that I just noted. Then the policies to try to mitigate that are going to affect things like mining, which then of course affect how we get all of our materials. So, it's a really complicated issue to address. And the reason that I say that it's drafting climate is that this idea that it's going to be affecting our economy, whether we want it to or not, whether we create policies on it or not, is starting to get understood. And the movement around it is coming really rapidly. It's far more quick than climate.

I mean, I've been working on climate for now 30 years, and the last five years have been really rapid, but the first 25 years were so slow. And I mean, as you said, Vish, you've been looking at this for a long time, so maybe you're like, wow, this is really fast, but it feels like from the moment that the globe started to look at this in the same way that it did climate, the place that we're getting to right now is so much faster. And you asked about what companies need to be paying attention to and the first thing is that they're going to be needing to disclose their biodiversity risks in a similar way to climate risks. And this is already coming out, I think it was two days ago, the TNFD, the Taskforce on Nature-Related Financial Disclosures, just came out with a new draft. And this is the guidelines on how you disclose the impact of biodiversity on your financial bottom line, both on the policy and on the impact side.

So, the rapidity that this is going to be hitting companies is big. And I think, in your world, you start to see the pension funds going, oh my gosh, we need to be ... the asset owners start saying they're the long-term thinkers, we need to be paying attention to this. And then they ask the asset managers and then the asset managers ask the companies and then everybody has to start paying attention. What do you think? How are you seeing this?

Vish Hindocha:

I think to your point, people are talking a lot about polycrisis, and this is, I think, one of them or a confluence of factors here. I think climate change, natural capital loss and degradation is impacting the real economy's ability to produce, whether it's food or productive capital, and it will start to impact and already has started impacting, if you're paying attention to some of the geopolitics and some of the movements around the world, social issues, inequality issues, and it's impacting and it's sort of creating this vicious circle. So, I think policymakers are paying increasing attention because the IPCC came out with an interesting report last year. It was the first time I saw that they'd drawn this sort of, in my mind, a triangle between climate change, social inequality and biodiversity loss or natural capital loss. And it was a recognition that you can't solve for one point of that triangle and ignore the other two because you are optimized to the wrong outcome. You have to thread the needle between all three.

Personally, and again, curious on your take, I think that's what policymakers will increasingly be paying attention to because, again, I have the great privilege of talking to clients all over the world and if you are in a developing economy and you are a central banker in a developing economy that is somewhat reliant on commodities, understanding climate change is really important and you are likely to suffer impacts of physical and transition risk on climate. But you also have to balance that with the social inequality issues and some of the natural capital loss issues that many of those economies are facing and food security and energy security issues that many of those economies have faced, as you said, since, for example, the invasion of Ukraine that has put an even more stress fracture on some of those already quite fragile ecosystems.

So, all of that is now sort of bubbling up to the surface and collectively, there's a consciousness that is realizing, whether it's from policymakers to asset owners and investors and individuals who then influence people like ourselves who then influence companies or the other way around. Companies are proactively recognizing, as you said, if you're making coffee and you think that 90% of the farms in West Africa are now desert-ified and you're unable to grow cocoa or coffee beans on those as you once did, that's actually a systemic and structural issue that you are going to ... we're going to have shortages or you're going to have to figure out a different way to grow and supply your demand base. And that's, again, something that, as investors, we have to be paying attention to. It's just an obvious thing. If we are interested in owning a company for a long period of time, we have to understand how they treat the communities in which they operate, the natural resources on which they rely, as well as the other material fundamental risks that we have to think about.

So, again, to us it's a natural inclusion in a long-term investing framework. I suppose where I struggle, and I'll put this question to you, Shari, on climate ... And I agree, it's been very rapid and I like the drafting analogy. On climate, we had quite a clear scientific consensus and quite a clear sort of, I call it a common currency. CO2e is a kind of common currency measure and it's super convenient for investors because you can roll it up by sector or industry or portfolio and you can think about ... and there's clear definitions around scope 1, scope 2, what that means, how you measure it. My sense is, and the TNFD is trying to do a kind of heroic job, I think, of trying to frame it by industries back to that nuance or understanding the differentiation between different geographies, industries and sectors. My sense is, having spent a lot of time in biodiversity and natural capital loss, that that's going to be an incredibly hard metric to achieve. We're not going to be able to measure this using one very simple metric and, generally, I'm not sure we're ready for that level of complexity. So, again, just your perspective on that, you're probably closer to it than I am. How are people thinking about that? Or do you agree or disagree with that perspective?

Shari Friedman:

I totally agree with you. There's not going to be a carbon equivalent, a GWP, which is a global warming potential, where you can take all the greenhouse gases and put it into one metric. It's going to be various different metrics. And I think you're already seeing this. As you say, the TNFD already started to pull it apart. To me, it reminds me of those loaves of bread. You can get a loaf of bread where it's made up of a lot of different loaves, but it's all in one loaf, so you pick it apart into ... That's what this feels like. Biodiversity loss is one big loaf of bread, but it's made up of individual different types of things and you can't compare them. You can't compare a metric of biodiversity lost from water discharge into a river and the biodiversity loss that that causes with mining and what that might cause ... It's going to be completely different compared to what you might see on an agricultural pollinator loss. It's all going to be different.

And so, the TNFD has divided this up into different sections, as you noted, and I think that's going to remain. And I think that they will remain as being able to identify the different pieces of biodiversity loss in their own understandable metric. One of my colleagues, Franck Gbaguidi, is our lead on biodiversity and he spends a lot of time with our clients walking through which type of biodiversity loss might be material for each individual client. Because not every client is going to have to care about every single type of biodiversity loss. People are going to need to focus on which one affects them either as the biodiversity loss or as the policy to mitigate the biodiversity loss. So, it will be very separate, I think.

Vish Hindocha:

That's amazing. Thank you. I really appreciate that. And it's an area, I think, that's got so much more mileage to go. I'm always saying to people that I don't think best practice has yet fully emerged in really anything in sustainability yet, certainly not climate change, even though we're down the track. And this is another one that I think is really exciting because there's so much more to come, I think, in terms of clarifying our thinking collectively as an industry and as a real economy in terms of how we understand and bring some of these things into our model.

Shari Friedman:

And can I just say something about that before you ... Because I totally agree. You had touched upon this earlier that there's a lot of different pieces. All of a sudden, we've got climate and then you're like, wait a minute, and now I've got to think about biodiversity and, hold on a second, water, really? And wait a minute, I also have to think about plastics. Are you kidding me? Why? I can't imagine these are all really important. But I think that one of the things that we're seeing is that the environmental consciousness came as people were looking really far out there at what is about to happen if we don't mitigate behavior. And behavior was mitigated, I think, on the margins, but by and large, we've kept the same way of extracting, using, producing, throwing out, and we're coming up to where this model is bumping up against some of our environmental barriers. So, we're seeing actual impacts that people were saying we are going to see.

I can empathize with existing CEOs who are sitting there saying, I have to . . . we've had this model over here and all of a sudden, I've got to start thinking about all of these all at the same time. And I agree with you, Vish, that they do all have to be considered at the same time, not all in the same weighting. For certain companies in certain moments in certain regions, you're going to have a different weighting of all of them and a different way of addressing all of them, which in some ways makes it more flexible, which is better, and in some ways makes it more complicated because you have to know more about what's going on in the different regions, in the different places. But I think, as we start thinking about the solutions, some solutions are going to be weighted more heavily in a biodiversity solution with maybe do no harm in all the others and some will be more weighted in other areas. So, I just think it is yes to everything, but not all at the same weight all at the same time, all in the same region.

Vish Hindocha:

Yeah, no, I totally agree. And again, that lends itself if you have a team of . . . We have a team of 315 investors and Eurasia Group has this, as you mentioned at the beginning, a span of people that can think about the nuance, the subjectivity, the complexity, the dynamism that they're seeing in their particular zone. But like you, I have deep empathy for the asset allocators, the CEOs, the asset owners and other people that don't necessarily have those resources. And hopefully, this podcast is one way that we try and reach out and sort of share some of the thinking around in different organizations. So, I appreciate that. I'd love to know, Shari, there's so much complexity and there's so much, quite frankly, depressing news out there. I'd love to know what's one thing that sort of excites you? What's one great white hope? You're not quite in your garden covered in biodiesel oil anymore, but what are you excited about? What do you think is exciting at the moment?

Shari Friedman:

There's kind of two different answers on that. What I find exciting, I think there's certain technological pieces that I hear about all the time. I think people are really focusing on it, which gets me to this other piece before I even go down to that technology rabbit hole. One of the things that gives me hope is that over these 30 years that I've looked at climate, like I said, it was like nothing, nothing, nothing, and all of a sudden, some major step changes as people started to take it seriously, and some of those step changes I could not have predicted. I call it the transformation wild card. And I believe that we will have a few more transformational wild cards.

I think that the pressure, like for example, one of them I think was when Greta Thunberg came on the scene and she started ... Everybody was like had their blinders on and everybody knew what was about to happen, but she was like, hello, world is actually burning. And she mobilized an entire generation who then was very hard to not pay attention to, which really made everybody, I think, shift their thinking on what was happening and create a level of urgency.

I think the other one, in your world is Mark Carney. When Mark Carney was like, all right, we talked about this earlier, when he started to say, this is not something, climate change is not something we should be doing out of the goodness of our hearts. Preventing it is not a charitable act. This is going to cause a systemic risk to our financial system because nobody's accounting it in their longer term business models. And so, there's going to be a moment where this is going to cause a financial breakdown as nobody's thinking about these risks. And that caused everybody to put it into their bottom line and look at it as the good and the bad that their company is doing. And I use those phrases, it's a judgment phrase and I don't mean it as a judgment, but the things that could cause global warming and the way that your company could be affected all of a sudden became a financial decision. And that was transformational. That was another step shift.

And so, to me, I feel like those were step shifts, and as the IPCC report showed us, it's not sufficient. We're still on a pathway for climate to exceed the 1.5 threshold. I think if they said that if all the fossil fuel infrastructure that is currently in place continues to exist and produce at the point that it is, we go toward 2 degrees. So that's just with existing infrastructure. So, we're not there, but I believe that we will see additional transformation. There's enough pressure that there will be some other transformational wild cards that happen because it's just historically we are seeing that happen faster. And I think that's going to happen in climate, I think it's going to happen in biodiversity, definitely in water. Wherever you see this pressure coming in where there's nowhere to go, you're going to start to see these wild cards. What do you think? I'm curious.

Vish Hindocha:

I'm ever the optimist. I think we will get there. I'm less optimistic on some of the technology, but I think some of the thinking that is happening around how we really get to grips, practically, with behavior change and mindset and heart shift on some of these issues is really important. And like you, I think the transformation of building it more and more into financial models or into our fiduciary responsibility as long-term investors, as an example, is an important moment, is a kind of watershed moment, I think, where this has largely gone mainstream. So that's super interesting.

Shari Friedman:

I agree with you. Can I just say one thing on the technology? I agree. I don't think technology alone is going to save the day. I don't see how it can, because every technology you have, there's . . . We were talking about the tradeoffs. There's always a tradeoff on one technology to another. Alone it won't. So, I just wanted to put that out there.

Vish Hindocha:

I think as an enabler of the transition, I think I totally agree. Technology as an enabler or facilitator of what needs to happen or what is to come one way or the other is super important. Shari, a question for you. One thing that you would change in the financial services industry, if you could wave a magic wand and change one thing.

Shari Friedman:

That's a really good question. And I just want to preface it with the fact that I think that the financial industry has moved farther than policy. And it can only get so far out farther than policy because, ultimately, it's a money-making industry. And so, it can't start making decisions on what it believes should be. It has to make decisions on the physical and on the political landscape that we have. But that said, I think if I was going to change one thing, it would be . . . This might be so weedy that it's not a really great overarching answer. But I feel like in the financial industry, we have an understanding at the very, very top level of some of these risks that people need to be facing. And I feel like we have an understanding from the groups that look after these risks. And on some levels, you have it on the investment officer, but I don't feel like it's actually in many places.

I think, Vish, honestly, knowing MFS, I feel like it's far more integrated in your organization than it is in many. I think that it's still a separate thing, from what I can tell, and it's not as integrated, and there needs to be a more systematic integration of the understanding of all of these pieces as risks. And a lot of it gets to really training all those middle steps from the top down to the investment officers to ask the questions, because everybody works to their incentives. I mean, one of my favorite quotes is people don't change because they see the light, they change because they feel the heat. And every single investment officer, as we all do, we work toward our incentives. And so, if you're not asking the questions of the investment staff, what is this risk, how does it have to do with this risk, then you're not actually changing your firm systematically. And so that's what I would change is a more integrated understanding of the risks down every level of the financial institutions.

Vish Hindocha:

Great. Thank you. I love that quote. People don't change because they see the light, they move because they feel the heat.

Shari Friedman:

Mm-hmm.

Vish Hindocha:

Or hear the music. I don't know. We want them to move-

Shari Friedman:

Or hear the music.

Vish Hindocha:

I love that. Thank you for sharing that. Really interesting, and actually, I feel this with lots of my guests. Shari, you have talked about, you've had different seats in multiple locations. Looking at that same hub, as you described right at the beginning with different spokes, is there anything that you would point to, if I just limit you to one thing, one thing that you think has really sort of helped you as you've had to deal with adapting to change or to understanding, again, a very, very dynamic field? And you said it moved very, very slowly for a period of time and having patience with that, and then suddenly, you've seen this kind of exponential growth in interest and change in dynamism around this space. Anything that you would point to or any resource that you would share with our listeners in terms of something that's helped you deal with that change?

Shari Friedman:

Yeah. I mean, I don't know about dealing with the change, but just being a part of the change and how important it is right now, I think, and this might be specifically toward women, but I feel like it's about making sure that your voice is out there. And I think human beings tend to want to be right. You tend to want to be right before you say something. And I do think women more, this is something that happens more with women, that before you put yourself out there and act and have an opinion and get into the conversation, you want your ducks in a row. I do it too. And I feel like one of the things that has helped me is reframing everything to say all of us humans here are in this big ship and we're all trying to avoid large catastrophes. And everybody's voice. It's not about any one human individually being right. It's about all of us collectively sharing our thoughts and putting ourselves out there so that we can get the best understanding of what's out there and make sure that the information in our perspectives is considered inside of major decision-making.

And that's, to me, why this particular position is so interesting to me that my team, it's a lot of people sharing a lot of information. I think that we have one perspective, I think everybody's going to have a different perspective, but getting all of those out there so the big actors can know all these perspectives and make good decisions. But everybody's perspective is important. And I think that the main thing is making sure that nobody lets fear get in the way or perfectionism of moving this forward. We don't have enough time, frankly.

Vish Hindocha:

Yeah, I agree. And I was thinking about this as you were responding earlier to sort of things that you could change in the finance industry and not getting too far ahead of policy, because I think you're right. We operate within certain rules of the game and those rules of the game are dictated by policy. I guess a question or a challenge that I could imagine some people would have is the financial services industry or the financial industry is a sort of systemically important industry. Does it do enough to, and lobby is probably too strong a word, but does it do enough to inform or to influence positive and constructive change into the future rather than be a kind of passive recipient?

And I know that actually Eurasia Group is doing something in this space in North America and thinking about actually what those connections might be. So, perhaps we'll have you on in a future episode to talk about some of those developments at Eurasia Group and how you're trying to actually bridge that gap between some of the industries, not just the financial services industry, obviously, but some of the other systemically important industries that you serve and how that connects with decision-makers, policymakers to make sure that we're all connected and understanding the different perspectives. I think that's a super powerful point.

One of the transformational wild cards that we have on this show is that I asked a previous guest a secret question to throw you away. So, I have an envelope on my desk given that we're doing this over Zoom, Shari, that I'm going to open and ask you a secret question, if that's okay, from a prior guest. And so, I don't know what this question is. So, I'm going to read it out. What is the most important collective mindset shift that's needed and how will we get there or make it? I feel like, I'm buying you a bit of time, but I feel like you've answered some of this already in terms of that integration mindset. For example, you talked about getting a voice out there just now. So, we've touched on this a little bit, but . . . So, I'll read the question again. What do you think is the most important collective mindset shift that's needed and how will we get there or make that shift?

Shari Friedman:

I think the biggest shift that's needed is understanding that the world has, the earth has physical boundaries that are non-negotiable. And I feel like a lot of times people say to me, do you think that the UN is going to change the 1.5 target? It doesn't really matter if the UN changes the 1.5 target. It's a physical boundary by which we can't politically negotiate our way out of. Either we exceed it or we don't, and if we exceed it, there are consequences. And so, I think getting ourselves into the mindset that we are now pushing up against these and there's no way to get around that. And I think that once that, if that mindset shifted to the idea that, and there's a great . . . I'm going to forget her name, but there's something called Doughnut theory. You know Doughnut theory?

Vish Hindocha:

Yeah, Kate Raworth. Kate Raworth.

Shari Friedman:

Yes. Says it better than I can. But it's that idea that we have this boundary and we're pushing against it. So, I think this is, to your point, Vish, that behaviors are probably going to need to change. I don't know what that's going to look like. But that to me is going to be the mindset when people understand that that will then move the behavior changes.

Vish Hindocha:

I agree. I agree. Kate Raworth, and some longtime listeners of the show will know that I'm a huge fan of Doughnut economics and Kate Raworth. And she talks about sort of the ecological ceiling. So as Shari is describing, there are some natural limits and there are sort of nine of them that the Stockholm Research Institute came up with. But then there's also social floors that we want to protect as well. And the sort of just and safe space for humanity to operate in that model is actually somewhere above the social floor and somewhere beneath the ecological ceiling, if that makes sense.

And actually, it's something that the World Economic Forum and the UN and the other people have started to really take into account and actually, cities around the world are taking into account. I think Amsterdam has sort of adopted some Doughnut economics models. So, it's well worth paying attention to that as a sort of paradigm shift, I think, in how economics is evolving to really take into these things into account, which will then sort of feed future policymakers and thinkers and business leaders and owners in terms of what we actually pay attention to.

Shari Friedman:

Mm-hmm.

Vish Hindocha:

Listen, Shari, all that's left for me to do is thank you deeply. We're very grateful for your time and for your insight today. It's been fascinating talking about . . . Because we started with sort of plastics and moved on through to biodiversity and then we are now talking about seismic and structural paradigm shifts in our industries and with policymakers. So, we covered the full gamut. But thank you so much for spending your time with us today. We really, really appreciate it.

Shari Friedman:

Oh, it's been my pleasure. Thank you so much, Vish, for having me.

Vish Hindocha:

So that was Shari Friedman. I thought it was really interesting how she talked about what really moves people, the fact that people don't move because of light, but because of heat. I thought it was interesting how she brought that back in to things about models, whether it's Doughnut economics, ecological ceilings. But one thing I've always been impressed with Shari is just how practical she is in her wisdom and her insight in terms of what this really takes to move. And like I mentioned, Eurasia Group and MFS and many other people are working really, really hard on thinking about how the financial services industry has a role as an agent in terms of the future, in terms of helping policymakers and decision-makers make good, informed choices. So, a lot more to come.

Thank you again for your time today and for listening to this conversation. Let us know at allangles@mfs.com if you would like to hear anything else on some of these subjects.

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