Race to net-zero

By: Karim Chedid, EMEA EII Investment Strategy at BlackRock

Quick read

• We see climate risk as investment risk: investing sustainably isn’t just about expressing values, it’s about gaining exposure to assets likely to benefit from the transition to a low-carbon economy – and minimising exposure to those most at risk.
• Sustainability remains one of investors’ biggest priorities, with money being added at a record pace: the US$110B¹ of inflows into global sustainable ETPs year to date has already smashed 2020’s record levels.
• The breadth of available sustainable offerings provides opportunities to better align portfolios with the transition to a net-zero economy, through varying degrees of ESG integration.

Climate risk as investment risk

We see climate risk as investment risk. The narrowing window for governments to reach net-zero goals means that investors may need to start adapting their portfolios sooner rather than later. We are in the opening stages of a tectonic shift toward sustainable investing, the full consequences of which have yet to be priced in by markets. Along the journey, we expect outperformance from assets that are likely to benefit from the transition to a low-carbon economy, including the tech sector and commodities like copper.

When investors re-risked following the coronavirus shock, many seized the opportunity to get back into core exposures with more sustainable investments, whether by reducing exposure to high carbon emitters or firms lagging in their forward-looking commitments, or by prioritising exposure to companies demonstrating a commitment to transition. As the real economy shifts towards a decarbonising model, companies and governments may face regulatory, reputational, technological and legal risks. We believe entities that are transitioning faster will be better placed to meet these challenges.

Global sustainable investment inflows

Allocation to sustainable assets has remained a central theme so far this year, as public and political focus sharpens on the journey to net-zero. Securing net-zero carbon emissions by the middle of the century was a core goal of COP26, alongside encouraging developed countries to mobilise at least US$100 billion annually in climate finance. This persistent top-down attention has also been reflected in bottom-up analysis: 150 S&P 500 companies referenced environmental, social and governance (ESG) issues in second-quarter earnings calls, matching the record set in the previous quarter.

Money has also been added at a record pace: the US$110B of inflows into global sustainable exchange-traded products (ETPs) so far this year has already surpassed the record US$86.5 billion added across the whole of 2020¹. As of August 2021, assets under management in 2,300+ global ESG funds had doubled year on year to reach a record US$1.7 trillion² – representing a rate of growth three times higher than that of non-ESG funds over the same period.

Sustainable investment opportunities

The breadth of the sustainable offerings available today across asset classes provides opportunities to better align portfolios with the transition to a net-zero economy. This can involve varying degrees of ESG integration: from sim­ple, low-cost solutions for investors to avoid controversies without altering their investment approach to best-in-class products that offer stringent criteria to identify those firms with the very highest commitment to ESG.

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Source: ¹BlackRock and Markit, as of 31 October 2021. Past flows into global ETPs are not a guide to current orfuture flows and should not be the sole factor of consideration when selecting a product. ²EPFR, data as of 21September 2021.

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ESG Investment Statements
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