The world’s largest asset manager wants to turn the financial opportunity in climate sustainability into quantifiable measures.
New York-based BlackRock today released its first “climate aware” capital market assumptions. With these, the firm declares that the transition to green energy will boost the economy and maintains that sustainable asset classes will be more likely to outperform than their peers.
In a press conference Thursday, the BlackRock Investment Institute argued that an orderly transition to “net zero” carbon emissions in energy and transportation could result in an economic output that’s 25% higher over the next two decades than it would be if no action were taken to prevent climate change at all.
While it stops short of naming sustainability as an investment risk premium or factor in the analysis of a company, BlackRock has come very close to describing it as one that stands aside a company’s size, quality and growth.
“Last year, we put out the view that climate risk is investment risk,” said Rich Kushel, head of BlackRock’s portfolio management group and a member of BlackRock’s global executive committee. “That was based on a two-part investment thesis, the first being the impact from sustainability in general and that climate risks weren’t being fully recognized by the market.” The second part of the thesis, he said, is “that there would be a significant reallocation of capital towards issuers that sustained positive sustainability characteristics and away from those that had negative characteristics.”
“Our view was that both of those things would be reflected in asset prices over time, and because of that, we spent last year making notable changes in the way we manage money,” Kushel said.
Sectors like technology and health care are poised to outperform sectors like energy and utilities, BlackRock reasons, since they have relatively lower exposure to climate risk. The spread in performance between the sectors that are best aligned with net-zero emissions goals and those that aren’t could be as large as 7%, according to the company.
Thus, BlackRock is pivoting its long-term estimates of risk and return to favor more developed market equities at the expense of high-yield and emerging-market debt, since developed market equity indexes contain larger weights to sectors like health care and technology and developed economies will be less vulnerable to the risks of a transition to a net-zero economy.
“We think that the climate transition will be a persistent driver of returns,” said Jean Boivin, head of the BlackRock Investment Institute.
For its new assumptions, BlackRock considered climate costs at three separate levels.