Boat surrounded by icebergs

Global warming is real. What does that mean for thematics?

Climate change is one of the biggest challenges faced by our generation. This challenge is providing opportunities for investors in the world of thematics.

Watch as Rob Powell, Head of Thematic and Sector Product Strategy at BlackRock, speaks with Citywire Asia on climate change, its implication on long-term investment themes and how investors can access these opportunities.

What impact does climate change have on trends around sustainable energy, transport and the circular economy?
So clearly, climate change is one of the biggest challenges faced by our generation. If we don’t act fast, then we could get to a point that would be disastrous. The good news is that this challenge is providing opportunities for investors. If we look at three of the key industries which are driving the problems within climate change so, energy, transportation, industrial waste. We see huge opportunities for companies that are delivering solutions in the space. So, if we come to the energy sector and think about sustainable energy solutions, the International Energy Agency believe that US$40 trillion worth of capital is going to be allocated to sustainable energy companies that are delivering a lower carbon transition over the next 20 years or so , providing huge opportunities for investors. If we look at transportation, another area which is significantly contributing to global greenhouse gas emissions, there’s huge amounts of policy coming through across the world, not just in Asia and Europe, also in the US, which is really promoting the use of electric vehicles over internal combustion engine vehicles, which clearly are contributing massively to greenhouse gas emissions at the moment. Then finally, if we look at the waste that we produce as a global population and our current consumption model, which is very much linear. Where we are taking things from the Earth, we’re making them into products, we’re using those products and then, we’re throwing those products away, we believe this is a very unsustainable way to consume. The circular economy advocates for a change in that consumption model, where we have products that are made to be remade. There’s much more of a focus on recycling and we use things that are regenerative by design. We think that there’s a huge opportunity for investors to allocate capital to this space as the global waste crisis takes hold.

How does that affect investment opportunities?
So, climate risk is investment risk and we believe that portfolios that are implementing climate into their asset allocation decision-making are going to stand apart over the long-term, but one of the biggest challenges, when it comes to thematic investing, is translating a theme into an investment portfolio. So, at BlackRock, we’ve invested heavily into the research process that goes behind all of our thematic products. We’ve launched our own thematic thinktank called the BlackRock Research Investment Group or TRIG and it’s TRIG’s responsibility to research new themes and then to define the investment universe for a theme. This isn’t like investing in European equities or global equities, where you have a very strict definition of where you have to invest. We have to define the investment opportunity for each one of our themes. So, investing in that research process is incredibly important when it comes to investing thematically. We want to provide our clients with a purity of exposure to the theme, which enables them to benefit from the largescale disruption that we believe is playing out.

How can investors access sustainable themes?
So sustainable themes are thematic products that share three common characteristics. Firstly, they’re designed to provide targeted exposure to structural growth. So, we’re looking for disruption across all of these portfolios or a permanent change in the current economic environment. We believe that that disruption is playing out on a global basis. So, all of these funds will be unconstrained. They can invest wherever the opportunities within the theme are most prevalent. Secondly, they’re all designed to advance an E, an S or a G factor and finally, they’re all designed to deliver outperformance over the long-term versus global equities. We believe that by investing in these largescale global disruptions the companies in which we’re investing can deliver above average earnings growth and therefore, enable these themes to deliver long-term outperformance.

How do you help investors add sustainable thematic satellites to their portfolios?
One thing is clear, which is that thematics as an allocation within client portfolios is increasing. We’ve seen a huge increase in the allocations to thematic funds since COVID. Unfortunately, many investors across the world were poorly positioned for the accelerated disruption that COVID afforded in things like virtual working and new disruptive technologies. Thematic funds can provide a solution there and we see three common approaches to allocating to thematics within portfolios. The first is a core satellite approach where investors will look to allocate to one theme in which they have high conviction and look to benefit over the long-term, from the potential return uplift of allocating to that satellite. The second is using a combination of thematic funds as a global equity replacement. So, taking an underperforming global equity portfolio manager, using a combination of themes to get exposure to disruption with relatively high correlation to global equities, thus replacing a global equity portfolio manager. Thirdly and this is something which is very much emerging, where we see clients starting their portfolios with thematics. So building thematics into the core portion of their portfolio. We see megatrends and thematic funds as high probability outcomes in a relatively uncertain world. Therefore, clients are taking the opportunity to start their portfolios with a very high conviction allocation in their core and then, designing their asset allocation around these long-term themes.

What makes your sustainable thematics fund standout?
So, at BlackRock we believe that there are three key things that makes our sustainable thematics range standout. The first is experience. We launched our first sustainable thematic fund back in 2001 so, have over 20 years of experience managing funds in this space. We think that really does count when it comes to sustainable thematics. Secondly, is our scale and depth of resource. We’ve got over 200 analysts that feed into our sustainable thematic fund platform and when you’re investing in new and nascent themes, having many different people thinking about the best opportunities in which we can invest really does make us standout. Then finally, the fact that we have both actively managed thematic funds and ETFs on one platform, gives us the potential to provide clients with unrivalled choice within the space. We can provide clients with exposure to sustainable themes at a fraction of the cost of traditional actively managed funds, in themes where we don’t believe an active manager is required to get the most out of the opportunities within the theme. Then, our active portfolio managers are truly held to account by the existence of our ETF platform. They have to be doing something truly active and deliver significant alpha for our clients, to be relevant.

1 Source, IEA, December 2020


Attractive opportunities

We see attractive opportunities for companies in the sustainable energy sector, transportation sector (especially around the use and promotion of electric vehicles), and circular economy.

Potential to deliver long-term outperformance

Investing in companies set to benefit from structural changes driven by Megatrends should drive potential out-performance versus global equities over the long-term.

Increase in portfolio allocations to thematic funds

Three approaches to incorporate thematic funds in portfolio: core/satellite, combination of thematic funds as global equity replacement, and building thematic funds into the core portion of portfolio.