The first is macroeconomic inputs, including GDP growth, where the firm derived its assumption of an additional 25% in economic growth. The company believes that climate sustainability will cause changes in existing risk premiums in all asset classes.
Next, BlackRock considered how sustainable assets would be repriced—the premium investors are willing to put on sustainable assets instead of those involved in the emission of carbon dioxide and other greenhouse gases. Previous BlackRock research found that investors, on average, plan to double their allocation to sustainable assets over the next five years, and that will mean a declining cost of capital for sustainable assets, allowing them to provide higher returns than their peers. The company argued that these higher returns are not yet reflected in asset prices.
“It occurred to us that sustainability and climate [are] not fully in the prices; neither is the capital reallocation phenomenon that is starting and will continue,” said Boivin. “That means this will be a driver of returns, not a drag on returns. The moment you realize that this is the case, it becomes a central asset allocation question and not a question of what you exclude, but it’s about how you construct a portfolio.”
Finally, the developers of the new capital market assumptions considered fundamentals—the costs and opportunities that each company faces in contending with climate change. BlackRock examined the way certain companies were positioned to adapt to the net-zero transition. Climate sustainability should impact profitability across sectors, said BlackRock, and will impact other variables like credit default and downgrade assumptions.
While there is still a lot of uncertainty about the actual costs and benefits of battling climate change, BlackRock thinks there is enough known about climate-related input within environmental, social and governance investing (ESG) to predict some likely measurable impacts. Other areas of the ESG spectrum, like corporate governance and social responsibility, remain important, but their impacts are more difficult to measure, the company said.