BlackRock Investment Institute: Tackling climate change will provide a financial boost, not a net cost

BlackRock's insights arm is forecasting that the net-zero transition could create a cumulative output gain of almost 25% by 2040, if delivered in an "orderly" fashion.

The BII whitepaper charts particular opportunities in sectors like renewable energy generation, technology and healthcare

The BII whitepaper charts particular opportunities in sectors like renewable energy generation, technology and healthcare

The figure is the headline of the BlackRock Investment Institute’s (BII) latest Capital Market Assumptions whitepaper, which provides updated information on trends in low-carbon investment and climate risk disclosure, before providing predictions in these fields.

According to the paper, many economic projections regarding the low-carbon transition have overstated the net costs and understated the net benefits by failing to factor in the full extent of risks – be they physical (extreme weather events, sea-level rise) or transition-related (changing policies, changing market demands). This is despite the trend towards disclosure in line with the Task Force on Climate-Related Disclosures' (TCFD) recommendations. 

It states that, if these risks are properly priced in, businesses and governments will be able to deliver a more “orderly” net-zero transition that minimises upfront costs and maximises benefits. Bodies that take note now could see a cumulative output gain of 25% by 2040, relative to taking no climate mitigation or adaptation action. The BII said in a statement that it “believes that tackling climate change will drive significant economic improvements over the coming two decades and that the commonly held notion that it has to come at a net cost to society is wrong”.

“Climate risk is investment risk, yet there are also significant investment opportunities in the transition to a net-zero economy,” the head of the BII Jean Bovin said. “By quantifying those opportunities, we can build portfolios that benefit from exposure to the transition, which is an integral part of our fiduciary duty to clients.”

The whitepaper acknowledges that some sectors are better-placed to undergo an uptick in financial performance and growth amid the low-carbon transition, simply because they are lower-carbon and their value chains are less exposed to climate risk at present. According to the document, the likely beneficiaries in changing investment trends for the next five years include technology and healthcare. The likely laggards include power and utility firms, especially those which draw a large proportion of turnover from fossil fuels.

The whitepaper is intended to be used as a “building block” for BlackRock’s approach to portfolio designs and requirements, so measures detailed could soon become mandatory for companies in the firm’s holdings.

BlackRock itself recently published new expectations for the energy companies in its portfolio. It is urging these businesses, along with those in heavy industry and other high-emitting sectors, to disclose the full extent of their emissions and set credible emissions targets in line with climate science.

The firm notably took voting action against 53 companies on climate grounds in the first half of 2020, including ExxonMobil and Air Liquide. It has stopped short, however, of changing its exclusions policy, despite criticism of its decision to continue investing in businesses that draw revenue from coal.

UK-specific forecast

When it first advised the UK Government on the costs and benefits of transitioning to net-zero by 2050, the Climate Change Committee (CCC) forecast net costs of 1-2% of GDP.

However, in light of rapidly falling costs in sectors like offshore wind generation, the CCC has now changed its forecast to 0.5-1% of GDP.CCC representatives stated, in events held to mark the launch of the Sixth Carbon Budget advice, that costs are likely to be on the lower end of this spectrum if its recommendations are followed.

The Sixth Carbon Budget advice outlines how the UK could deliver 78% reduction in absolute emissions by 2035, against a 1990 baseline. In comparison, the original Climate Change Act was headlined by an 80% reduction in emissions between 1990 and 2050. The UK Government is yet to formally respond to the advice.

Sarah George



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