BlackRock adds pinch of climate transition to market views
In the words of Rich Kushel, its head of portfolio management group, BlackRock is “not giving up” on returns. It rather provides clients with a new dataset – climate-aware capital market assumptions - and a new return driver, the transition towards a net-zero carbon emission economy. The reallocation of capital towards sustainable assets having already started, the US asset management giant is thus refining its long-term views with a climate twist. “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,” said Jean Boivin, head of the BlackRock Investment Institute that delivers the firm’s macro-economic stance.
During a press briefing, Boivin observed that very few economic forecasts embedded climate risks and opportunities since the task is hard provided the lack of measurement, standards and data available. Hence, BlackRock’s “climate-aware” capital markets assumptions “represent our best assessment based on what we know now,” said Boivin, adding they will evolve over time and that improved impact measurements will help the manager to understand where opportunities lie in the transition and which companies are facing challenges.
25% gains sought over the next two decades
The BlackRock Investment Institute estimates an orderly transition to a net-zero-emissions world could result in a cumulative output gain of nearly 25% over the next two decades, provided macro-economic changes (e.g. regulation) will occur and that sustainability remains unpriced fairly in assets valuations. In short, the updated CMAs include climate costs and benefits at three levels: macroeconomic inputs, including GDP; the price investors are willing to pay for sustainable assets; and the way companies are positioned for and may adapt to the green transition.
Concretely, the climate tilt has made BlackRock favouring developed markets equities, while trimming high yield and emerging markets debt allocation. “Our preference for DM equities has become stronger, at the expense of high yield and some EM debt. Why? The composition of DM equity indexes better aligns with the climate transition, with large weights of technology and healthcare companies, less vulnerability to transition risks and lower carbon intensity. Equities also can better capture potential opportunities of the green transition, as bonds are capped in their capital appreciation,” explained the firm. Boivin however specified the manager is “adjusting somewhat” and “not reversing” its EM allocation with the sustainability angle.
'We cannot rule out exuberance'
The new climate-aware BlackRock’s CMAs are also the story of winners and losers sectorwise as highlighted by Simona Paravani-Mellinghoff, global CIO of solutions within BlackRock’s multi-asset strategies & solutions business, highlighting a green premia for sectors that are the best positioned for the transition. Best- and worst-aligned sectors to the transition could see a yield spread as much as 7%.
Surveyed on whether markets face a sustainable bubble, Boivin acknowledged questions emerge as to a possible drift from fundamentals but he said the move towards net-zero carbon economy is a clear, persistent one that will spread over years. “Pricing could start to get ahead of the transition as it is a slow transition. We cannot rule out exuberance happening in certain pockets or in ways of expressing sustainability,” he said.
On the possible inclusion of other criteria, rather on the social and governance side, to its assumptions, BlackRock stated that if it recognises the importance of social and governance concerns, “there is greater consensus on the impact and measurement of environmental factors.”