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Partner Insight: Assessing the investment opportunities and risks within transition investing

clock • 7 min read
Ewa Jackson, BlackRock
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Ewa Jackson, BlackRock

BlackRock’s Ewa Jackson dissects the challenges and opportunities facing investors as the world transitions towards a lower-carbon economy.

As the global energy transition becomes more important for financial markets, interest in the sustainable investing market has surged - in the first half of 2023, sustainable funds attracted cumulative inflows of US$57bn with almost all flows in Europe.1 This has brought assets under management to more than £3.1trn, or almost 8% of total global assets under management.[1] 

But as interest grows, so do clients' demand on how the transition to a low-carbon economy will impact portfolios. We spoke to Ewa Jackson, Managing Director of Sustainable & Transition Solutions, on the challenges and opportunities of energy transition investment, and where she feels the asset management industry is heading.

What is transition investing?

While at a high-level, transition investing is simply investing that tracks the global shift to low-carbon economies, in practice it encompasses a wide range of assets.

Jackson explains that BlackRock considers transition investing through four key lenses: Preparing for, being aligned to, benefiting from, and/or contributing to the shift to a low-carbon economy.

‘Preparing for' is investing in assets well-positioned for the transition. An example could be a company outperforming its peer group in reducing its emissions intensity.

‘Aligning to' involves investing in assets on a decarbonisation pathway that is aligned to an industry accepted low-carbon scenario e.g. EU Paris-aligned benchmarks.

‘Benefiting from' is investing in assets that provide key inputs necessary for decarbonisation that will benefit from the macro economic trends offered by the transition to a low carbon economy.

‘Contributing to' is investing in solutions such as wind farms that will mitigate emissions in the real world.  

Jackson explains: "It's our objective to provide our clients choice and customisation to identify solutions that align with their objectives, wherever their priorities are in the transition."

The pace of change

There are challenges at each level. For example, taking stock of the transition to a low-carbon economy is appreciating that not all sectors and regions are moving at the same speed. Often there is an interplay of factors from renewable energy, government policy, and sectors such as transportation that is defining the shape of the transformation across the globe. In so many cases, this speed of transitions is underestimated.

Indeed, BlackRock's research2 suggests financial markets have not yet fully priced in the shifting sources of revenues and profits driven by the transition, leaving room for potential investment opportunities. 

Investment opportunities await

While progress has been made on the global energy transition, government policies, technological advancement and changing consumer preferences indicate that further development lies ahead.2 We believe there will be a reallocation of capital towards assets and solutions that align with the transition, creating potential opportunities for investors.

It is here that there could be opportunities in real assets says Jackson, particularly infrastructure.

Ewa Jackson highlights that the International Energy Agency expect capital investment in the energy sector to surge to US$4trn per year by 2030.4 This will be to help facilitate wind, solar, hydrogen pipelines, and grid infrastructure. Over the next 30 years, she says, we believe this focus will extend to clean hydrogen, carbon capture, and low-carbon aviation fuels.

RISK: Any forward-looking statements/estimates may not come to pass.

Managing risks

However, while there could be opportunities on the horizon, there are also risks that investors, who often act as fiduciaries responsible for maximizing financial returns for their beneficiaries, must consider. These investment risks include credit risk, market risk, and sustainability risks such as climate risk. To combat these risks, investors may need to set a roadmap to reducing emissions with both short-and-long-term targets.

Another key aspect of managing investment risks associated with the transition to a low-carbon economy is engaging with companies to help ensure they are assessing material risks and the opportunities relevant to shareholders.

Jackson explains that they have seen a growing number of investors wanting to participate in voting decisions and exercise greater oversight over their investments. As a result, BlackRock has been offering tools like BlackRock Voting Choice5 on select eligible funds to empower investors.

Jackson is keen to emphasise that the transition to a low-carbon economy is not running a linear path. For all regions and sectors to be included, engagement as well as flexible, customised allocation strategies will be essential. After all, simply reducing emissions in investment portfolios will not solve the climate change challenges. Investment in companies across all components and stages of the transition will be necessary to the collective and global goal.

Listen to the full audiocast here. 

[1] Source: Morgan Stanley Institute for Sustainable Investing, 30 August 2023

[2] Source: Tracking the low-carbon transition, BlackRock, 31 July 2023.

[3] Source: Managing the net-zero transition, BlackRock, 27 February 2023

[4] Source: International Energy Agency, 31 October 2021.

[5] Empowering investors through BlackRock Voting Choice, BlackRock, 30 June 2023.

 

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

ESG Investment Statements: This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.

The environmental, social, and governance ("ESG") considerations discussed herein may affect an investment team's decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Infrastructure securities Investment in securities and instruments of infrastructure companies can be affected by the general performance of the stock market and the infrastructure sector. In particular, adverse economic or regulatory occurrences including high interest costs in connection with capital construction programmes, high leverage, changes in and/or costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy conservation policies and other factors can affect the value of infrastructure securities. Investing in infrastructure securities is not

equivalent to investing directly in infrastructure and the performance of these securities may be more heavily dependent on the general performance of stock markets.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

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