Rachel Koning Beals
Sitting out an orderly energy transition could mean forgoing economic growth potential of 25% over the next two decades, the world’s largest fund manager, BlackRock, said Thursday.
Through the BlackRock Investment Institute (BII), the company updated its Capital Market Assumptions (CMAs), which it uses to build its portfolios. BlackRock /zigman2/quotes/207946232/composite BLK -0.48% overseas an estimated $7 trillion-plus across markets.
“Climate risk is investment risk, yet there are also significant investment opportunities in the transition to a net-zero [emissions] economy,” said Jean Boivin, head of the BlackRock Investment Institute.
Companies and investors risk miscalculating risks to the companies they hold, such as rising sea levels or extreme weather, if they don’t factor in climate change. And they risk missing out on growth opportunities if they don’t take climate-change mitigation seriously, for instance accounting for a shift to lower carbon output, the expectation for tighter regulations and for greater spending on infrastructure.
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.
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.
BlackRock CEO Larry Fink in his annual shareholder letter out earlier this year urged companies to disclose how their business model will be compatible with limiting global warming to no more than 2 degrees Celsius above preindustrial averages, and eliminating net greenhouse gas emissions by 2050.
Technology /zigman2/quotes/207444675/composite XLK -2.24% and health care /zigman2/quotes/205918244/composite XLV +0.44% will be notable sectors to invest in over the next five years because of their relative lower exposure to climate risk, the team said, whereas energy /zigman2/quotes/206420077/composite XLE +0.69% and utilities /zigman2/quotes/206645117/composite XLU +1.11% could lag.
As for asset classes, the firm prefers developed market equities as the expense of high yield and some emerging market debt.
During a media call, the BlackRock team defended their controversial investment in select global coal miners, saying that active management excludes this fossil fuel but indexes may include exposure.
Rich Kushel, head of the firm’s portfolio management group and global executive committee member, said BlackRock won’t exclude fossil fuels out of hand but will provide investors alternatives if the want investments free of all traditional energy.
Kushel said BlackRock management believes it can be better positioned to influence company boards and other decision-makers if they are active investors in those companies, and that can include fossil fuel concerns.