Race to net-zero
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.
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.
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 sim¬ple, 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.
Chart
Title: European investors lead the charge towards more sustainable portfolios
Flows into sustainable ETPs as a percentage of total flows into EMEA-listed equity exposures, 2021 year to date
Source: BlackRock and Markit, as at 15 September 2021. Past flows into global ETPs are not a guide to current or future flows and should not be the sole factor of consideration when selecting a product.
Figures are in US dollars, unless stated otherwise.
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.
