By Alex Brazier, Mark Hume, Vivek Paul, Laura Segfredo & Christopher Weber from the BlackRock Investment Institute
- The transition towards a decarbonised economy is underway. It will involve a massive reallocation of resources.
- BlackRock’s fiduciary role includes helping clients navigate the net-zero transition and position portfolios to seize opportunities, be resilient to the risks – and drive returns.
- Investing in high-carbon companies with credible transition plans can give investors exposure to the transition and help mitigate the impact of its bumps.
As an asset manager, our fiduciary role includes helping our clients navigate the net-zero transition and position portfolios to seize the opportunities, be resilient to the risks, and drive returns.
We see an investment case for assets linked to the transition. First because – though current policy isn’t sufficient to achieve net zero by 2050 – we think the transition could accelerate as tech develops, societal preferences shift and the human and economic cost of climate change becomes clearer.
Second, we don’t think markets have fully priced the transition yet. We posited in 2020 that markets would, over time, value assets of companies better prepared for the transition more highly relative to others.
We found that some of that repricing had already happened, but we believed there was more to come. That belief is reinforced by recent research suggesting our early estimate of the total repricing might have been too conservative.
Investors can get exposure to the transition by investing not only in ‘already-green’ companies but also in carbon-intensive companies with credible transition plans or that supply the materials, equipment and services needed for the transition. Commodities are a prime example: demand for some transition-critical minerals is expected to grow quickly.
Investors may also wish to mitigate the portfolio impact of possible supply constraints: if high-carbon production falls faster than low-carbon is phased in, it could mean shortages and high prices for high-carbon outputs that economies can’t yet function without. So high carbon exposures can give exposure to the transition and help weather shocks.
We are already seeing green sectors post better relative returns to brown sectors – and think it has room to run.
Past performance is no guarantee of current or future results. Forward looking estimates may not come to pass. Sources: BlackRock Investment Institute, with data from the Center for Research on Security Prices, February 2022. Notes: To estimate climate-driven repricing, we attribute historic returns to two drivers: cashflow news and discount rate (DR) news. We then identify the DR news associated with climate change using carbon emission intensity (CEI) as a proxy. To isolate the DR component of returns, we apply the standard decomposition formula of Campbell (1991) using a standard factor model of expected returns (which embed well-known predictors such as value, momentum and quality). Attribution to climate scores is then given by forecasting regressions of DR news on a measure of CEI. Sector returns are MSCI US Sector index- weighted averages of stock-level returns. Green represents the technology sector, the most “green” in our work, whereas the utilities sector is the most “brown” in the repricing. The 2016-2019 bars represent the total repricing over this period; and the 2021-2025 expectation is the cumulative repricing we expect over that period.The estimate is highly uncertain and is based on factors including risk premia effects in other long-run transitions such as demographic trends, market pricing of green bonds, and investor survey data on how much return they would be willing to give up to for more sustainable assets. See Sustainability: the tectonic shift transforming investing of February 2020 for details.
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