BlackRock: ‘Don’t ignore climate risks in portfolios’
Investors can no longer afford to ignore the threat of climate change. The window to position their portfolios accordingly “may be shrinking”, says BlackRock, the largest money manager in the world.
“Climate risk is investment risk, and the narrowing window for governments to reach net-zero goals means that investors need to start adapting their portfolios today, in our view”. This is according to a new report authored by Wei Li, Global Chief Investment Strategist at the BlackRock Investment Institute, and others at the firm.
The report was published just days after the United Nations’ Intergovernmental Panel on Climate Change (IPCC) said it was still possible to limit global warming to 1.5C if rapid action was taken to slash emissions caused by industries, such as natural gas.
BlackRock notes that accelerated climate action will result in transition risks being more rapidly priced in by financial markets. This is in addition to financial risks arising from the shift to net-zero emissions, such as changes in corporate business models.
On the other hand, a slow transition will likely give rise to “accelerating physical risks”. This means more frequent and severe extreme weather events.
Which sectors will be affected?
The asset manager says that climate-resilient sectors, such as technology and healthcare, will likely benefit most from a “green” transition. On the other hand, carbon-intensive sectors with fewer transition opportunities, such as energy and utilities, will likely lag.
However, certain commodities, such as copper and lithium, are likely to see increased demand from the drive to net-zero emissions.
“The tech transition has already begun in some key sectors such as utilities and autos, and as the window to achieve net zero by mid-century narrows, we expect policy levers to be pulled harder – and this could result in a steeper transition. We believe doing nothing about climate change in portfolios is no longer an option.”
Further, financial markets “underappreciate the profound changes coming”.
In this context, BlackRock favours developed-market equities and the technology sector.
Considering environmental affairs and sustainability is ‘a stand-out opportunity’
In a separate report, Bank of America’s Merrill unit says that environmental sustainability is one of four stand-out investment opportunities moving forward.
“We expect climate change to remain a major global theme over the coming years as all signatories to the Paris Agreement pursue their national decarbonisation goals,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
And with China’s technological prowess on the rise, “the US and Europe will look to enhance their competitiveness with new investment in areas such as semiconductors, networking equipment, advanced materials and component suppliers for electric vehicles, solar energy, wind power and battery storage”.
Funding needed for developing countries
South Africa’s Minister of Forestry, Fisheries and the Environment, Barbara Creecy, says that various sectors will need to undergo a transition as the country tackles climate change.
Amid this shift, “we must ensure that those involved in the vulnerable sections of our society and economy do not carry a disproportionate burden for climate change and its mitigation”.
“Significant long-term financial resources, at concessional rates, will be needed to introduce new technologies and open up significant new job creation opportunities so that our country joins others who are benefitting from the green technological transition across the world”, Creecy says.