The global economy is reshaping to meet the climate threat – is your portfolio ready?
For professional clients only
BlackRock believes that climate risk gives rise to both investment risk, and opportunity. That’s why the firm has made the integration of sustainability into its investment process a top priority.
By Manuela Sperandeo (pictured), Head of EMEA Sustainable Indexing, BlackRock – The idea that climate risk represents investment risk has moved from a novelty in the investment world to something approaching mainstream thinking in just a few years.
References to sustainability, including climate, on the quarterly earnings calls of the largest US companies have tripled over the past decade, and investors plan to double their sustainable assets under management, from 18 per cent to 37 per cent, within the next five years.¹
But while the momentum behind sustainability is remarkable, it is still the beginning of a long journey.
‘To put this in perspective, achieving such an objective will take the equivalent of at least 10 Marshall Plans per year for three decades.’³
An estimated USD50-to-USD100 trillion in capital investment is required to rebuild a ‘net zero’ global economy – one that emits no more greenhouse gas than it removes from the atmosphere by 2050.²
To put this in perspective, achieving such an objective will take the equivalent of at least 10 Marshall Plans per year for three decades.³
Such a drastic reshaping of the global economy to meet the climate threat will have major financial ramifications – and not just far in the future.
Investors may begin to see the effects of climate change in the years ahead, and valuation trends could be magnified over the coming decades by growing investor demand for sustainable assets.
We believe that the biggest potential benefits will accrue to the global investors who are quickest to ready their portfolios for the new era of climate investing.
Growth-seeking investors could find once-in-a-generation opportunities in the technologies that will be required to transform the economy.
Stricter climate policies and growing consumer preferences will spark breakthroughs in industries including renewable energy, which will have knock-on effects that enable scaled production and widespread adoption. A new crop of clean-energy companies is increasingly finding its way to public equity markets.⁴
These innovations couldn’t come at a more pivotal point. Today more than half of the world’s total GDP has a direct or indirect dependency on nature, which means all asset classes around the world could be impacted by the physical effects of climate change.⁵
To put this into perspective, there was a record USD210 billion worldwide in assessed damages from natural disasters in 2020 alone.⁶
We believe that investors who don’t consider the effects of climate change on the global economy and asset prices aren’t seeing the whole picture.
‘We believe that the biggest potential benefits will accrue to the global investors who are quickest to ready their portfolios for the new era of climate investing.’
Harnessing climate data
Gaining this insight however is getting easier. While it has been difficult historically to quantify the physical effects of climate change on investor portfolios, advances in climate and data science now enable investors to better model how steadily rising temperatures affect the frequency and severity of natural catastrophes, as well as potential investment exposure and vulnerability to such hazards.
In time, we believe the companies that are successful in responding to these threats by developing climate-oriented solutions and implementing better practices into supply chains, may be poised to capture additional market share.
For investors, until recently divestment was the predominant way to express climate-oriented objectives. But this is rapidly changing too. ETFs and index investing are bringing transparency and accessibility to this emerging segment.
There are now nearly 600 sustainable ETFs globally, up from around 30 a decade ago, and a growing number of which have climate-oriented considerations.⁷
At BlackRock, we have devised three distinct approaches to make climate investing easier. Investors can opt to reduce, prioritise or target their climate exposure dependent on their sustainability goals.
A three-pronged approach
Funds aimed at reduction, seek to limit a portfolio’s exposure to the highest carbon emitters which may apply fossil fuel related screens. These funds can be used as broad building blocks of a diversified portfolio.
Funds aimed at prioritising allocate capital based on a company or government’s commitments and actions to transition, such as setting science-based targets. These funds specifically integrate climate data into the investment process.
Finally, funds aimed at targeting, invest in a specific sustainable activity or projects that advance environmental purposes such as green bonds.
The increasing number of sustainable ETFs, including climate-oriented ETFs offer new and convenient ways for all investors to access innovative strategies. We believe the choice available is going to play a key role in the transition to a low-carbon economy by providing investors with the transparency they need to pursue their specific financial and sustainability goals.
¹ BlackRock Global Client Sustainable Investing Survey. July – September 2020. Respondents included 425 investors in 27 countries representing an estimated USD25 trillion in assets under management.
² Intergovernmental Panel on Climate Change (IPCC), “Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable Development,” in An IPCC Special Report on the impacts of global warming, 2018.
³ The European Recovery Program, or Marshall Plan, was a U.S.-sponsored, USD13 billion aid program designed to rebuild economies of 17 European countries between April 1948–December 1951. Adjusted for inflation in 2020 terms, the aid would amount to roughly $140 billion in 2020 USD. IPCC estimated in 2018 that 1.5°C-consistent climate policies would require a marked upscaling of energy system supply-side investments of between $1.6–3.8 trillion 2010 USD annually, on average, between 2016–2050.
⁴ Reuters, “Spanish energy companies to carry the torch for renewable deals,” March 1, 2021.
⁵ World Economic Forum, “Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy,” January 2020.
⁶ Munich Re, “Record hurricane season and major wildfires – The natural disaster figures for 2020,” Jan. 7, 2021; The National Oceanic and Atmospheric Administration (as of Jan. 8, 2021).
⁷ BlackRock analysis of Morningstar global data; (as of Dec. 31, 2020).
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