BlackRock Investment Institute Sees Green Energy Transition Driving 25%i Cumulative Gain in Output by 2040
February 25 2021 - 11:00AM
Business Wire
Sustainable Asset Classes and Sectors Viewed
as More Likely to Outperform
Projected Sustainable Asset Returns Now
Reflected in BlackRock Investment Institute’s Capital Market
Assumptions
The BlackRock Investment Institute (BII) believes that tackling
climate change will drive significant economic improvements over
the coming two decades and that the commonly held notion that it
has to come at a net cost to society is wrong. BII sees higher
returns for certain asset classes and sectors due to their more
favorable positioning for a shift to a global economy with net-zero
greenhouse gas emissions. Today, BII is unveiling new Capital
Market Assumptions (CMAs), incorporating risks and
opportunities tied to climate change. BII’s CMAs are a building
block of portfolios the firm designs and implements for
clients.
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“Climate risk is investment risk, yet there are also significant
investment opportunities in the transition to a net-zero economy,”
said Jean Boivin, Head of the BlackRock Investment Institute. “By
quantifying those opportunities we can build portfolios that
benefit from exposure to the transition, which is an integral part
of our fiduciary duty to clients.”
Most economic projections do not yet factor in the potential
costs of any physical damage from climate change; the costs and
benefits of an energy transition; and the effects of policy
changes, including increased government spending on green
initiatives, associated with meeting the goals of the Paris
Agreement. By incorporating these considerations, BII estimates
that an orderly transition to a net-zero-emissions world could
result in a cumulative output gain of nearly 25% over the next two
decades, relative to no action being taken to prevent climate
change.
Sustainable Asset Premium
“While the global green energy transition will benefit economic
growth broadly, there are some asset classes and sectors better
positioned than others as we shift to a net-zero world,” added
Simona Paravani-Mellinghoff, Global CIO of Solutions within
BlackRock’s Multi-Asset Strategies & Solutions business. “We
expect investor capital will flow toward these more sustainable
assets, creating outperformance for green investments and
separating leaders from laggards.”
BII’s climate-aware CMAs imply that the likely sector
beneficiaries include technology and healthcare over the next five
years because of their relative lower exposure to climate risk,
whereas energy and utilities could lag.
At the broader asset class level, the updated CMAs reflect a
preference for DM equities at the expense of high yield and some EM
debt. The composition of DM equity indexes better aligns with the
climate transition, with large weights of technology and healthcare
companies, less vulnerability to transition risks and lower carbon
intensity. Equities also can better capture potential upside, as
bonds are capped in their capital appreciation.
Climate-Aware Framework and Implementation
Although the implications for portfolio construction will vary
based on client risk appetite and objectives, the updated CMAs use
a framework for incorporating shifting investor preferences on
sustainability into expected asset class returns.
BlackRock’s climate-aware CMAs account for sustainability by
focusing specifically on climate-related inputs within ESG. For
while there is wide recognition of the importance of social and
governance concerns, there is greater consensus on the impact and
measurement of environmental factors.
The updated CMAs include climate costs and benefits at three
levels: macroeconomic inputs, including GDP; the price investors
are willing to pay for sustainable assets; and the way companies
are positioned for and may adapt to the green transition.
“We’ve designed the climate-aware CMAs through the lens of
understanding how climate change and evolving global societal
preferences will impact asset returns across macro, repricing and
fundamental levels,” said Vivek Paul, Senior Portfolio Strategist
for the BlackRock Investment Institute. “From that framework we are
able to build new long-term asset class return expectations and
then consult with clients on portfolio design to help meet their
objectives.”
Despite uncertainty over the configuration of a
net-zero-emissions global economy, the green transition is already
underway and will play out over years, if not decades. BlackRock
will monitor key trends such as capital flows, policy developments
and technological advancements – and the way asset prices respond
to them – and look to evolve its framework as new information
becomes available.
BlackRock’s commitment to integrating climate considerations
into its long-term return expectations was highlighted in the
firm’s 2021 sustainability letter to clients. There is no
company that will not be profoundly affected by the transition to a
net-zero economy, and BlackRock believes climate-aware CMAs are an
important step toward improving investment decision-making and
portfolio design.
In February, BlackRock Investment Stewardship (BIS) also
published a new commentary, Climate risk and the transition to a
low carbon economy, which provided more detail on what BIS
would like to see in company plans for prospering in a low-carbon
economy.
About BlackRock
BlackRock’s purpose is to help more and more people experience
financial well-being. As a fiduciary to investors and a leading
provider of financial technology, we help millions of people build
savings that serve them throughout their lives by making investing
easier and more affordable. For additional information on
BlackRock, please visit www.blackrock.com/corporate
________________________ i Rests on a gradual phasing in of
carbon taxes, green infrastructure spending consistent with the
IMF’s recommendation, and subsidies on renewable energy
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Matt Kobussen Matt.kobussen@blackrock.com (646)
231-0599
Dominic Elliott Dominic.elliott1@blackrock.com +44 (20)
77431891
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