BLACKROCK INVESTMENT INSTITUTE
Transition to a low-carbon economy
The transition to a low-carbon economy – one of the five mega forces that we track – is set to spur a massive reallocation of capital as energy systems are rewired.
Explore this interactive page, including recent reports on climate transition and financing the transition in emerging markets. Click the button below to learn more about our framework for tracking the transition.
Q: Jessica, what factors or areas do you think are most important and impactful when you consider the energy transition going on around the world?
JESSICA TAN: So, I think there are three main factors, technological innovation, consumer preferences, and government policies. And these three really reinforce each other. So, technological innovation, as technology gets better, a lot of the end products get cheaper, right, so take batteries for example. Over the last decade they’ve gotten almost 80% cheaper, and as things get cheaper, consumers want to buy it more. So, think electric vehicles. So, as they’ve gotten cheaper, more consumers have purchased them. We actually think that by 2030, 40% of new car sales will be in EVs.
And of course, there are a bunch of government policies out there, the Inflation Reduction Act in the US, the Green Deal in the EU, and all of these also help make these technologies cheaper through time. And we think that as technologies get cheaper and more convenient, consumers will buy them. So, take for example, cell phones replacing landlines. We think the same thing will happen with lower carbon solutions.
Q: And how do you see this impacting portfolios? What do investors need to know?
JESSICA TAN: Yes, I think this is one of the most exciting opportunities in investing today. So, for example, we see about 2 trillion of capital going into the energy system alone. We think that number is actually going to increase to 4 trillion by midcentury. And so that’s an incredible amount of money going into these new technologies. That means investment opportunities. But of course, not all investment opportunities are the same. There could be risks.
For example, what is the offtake risk? That just means if you produce the energy, who is going to buy it, for how long, and at what price? At the same time, what about political risk? We just talked a lot about these, the IRA, or a REPowerEU, or the Green Deal in Europe, what happens if those change? And so, all of these things just mean there are a lot of opportunities, but also a lot of risks to study and manage, just like in other investment opportunities.
Q: Jessica, in your conversations with investors, what are some of the areas they are most excited to capitalize on?
So, we actually see interest across the board. We see a lot of interest in index, in liquid active, and in private markets, and let me just double click on that a little bit more. In private markets, in particular, we’re seeing a lot of interest in technological innovation, in particular, in Series C or D, where there’s less technology risk, it’s more proven technology, but companies looking for capital to scale up.
Likewise, we see a lot of investor interest in infrastructure. So, to build the technology of tomorrow, this is going to require projects that are hundreds of millions, often billions of dollars to construct, and that’s a lot of infrastructure opportunity. Now within that, I think what’s interesting is we see opportunities across the entire energy system. So, we see opportunities with incumbents in oil and gas, on, you know, whether it’s pipelines or carbon capture. We see opportunities, certainly in renewables, in wind and solar, and we see a lot of opportunity across electrifications, so think batteries and charging stations.
Q: Jessica, are there ways to think about diversification in the face of such a huge trend?
JESSICA TAN: Yeah, so I think diversification is important no matter what you’re studying, and it’s certainly true when it comes to transition investing. So, you have to think about having great building blocks, but you also have to think about things from a whole portfolio perspective. And that’s why at BlackRock we spend so much time on data, analytics, and research, and we’re able to leverage that as well as 600 experts who focus on sustainability and transition, to study these opportunities and the risks throughout the entire portfolio.
Positioning portfolios for the transition with Jessica Tan
Head of Global Product Solutions, Americas
A massive reallocation of capital
The transition to a low-carbon economy is set to spur a massive reallocation of capital as energy systems are rewired. We see the transition’s speed and shape driven by an interplay of policy, technology, and consumer and investor preferences.
Our research suggests a faster transition in developed economies than elsewhere, but inflationary pressures globally. The impact on portfolios – including in clean energy, infrastructure, electric vehicles and key minerals – depends on the timing and size of these shifts.
Pricing in structural shifts
Valuations of electric vehicle companies surged before pulling back in the past year even as their share of overall automobile sales keeps growing, according to the latest IEA estimates.
Tracking the transition
We have developed the BlackRock Investment Institute Transition Scenario (BIITS) to inform an assessment, on behalf of clients, of how the low-carbon transition is most likely to play out based on what we know and expect today – and the potential portfolio impact. We aim to track its evolution over time, similar to how we plan to track other mega forces.
We expect tipping points when the relative costs of low-carbon technology fall below those of incumbent sources and when barriers to adoption are low. These tipping points arrive at different times across regions and sectors, resulting in an uneven and multispeed transition, in our view.
We see faster transitions in developed markets than emerging markets because of lower costs of capital, a greater share of easier-to-decarbonize sectors and more stable total energy demand.
Emerging markets are pivotal to the global transition to a low-carbon economy but face a shortfall in investment relative to developed economies. Reforms to plug that shortfall could present both opportunities and risks for investors, in our view. Learn more:
We see opportunities as investors pay more attention to climate resilience as an investment theme. Climate resilience refers to the ability to prepare for, adapt to and withstand climate hazards and to rebuild better after climate-related damages. Learn more:
Growth and inflation
We expect inflationary pressures in coming years as higher energy prices combine with increasing capital spending — though this effect may dissipate over time as low-carbon technology costs decline.
We see the growth impact dominated by physical climate damages – and expect this to bolster climate resilience to those damages as a key investment theme. The impact on portfolios depends not only on the timing and size of these shifts but also when markets price them in. Electric vehicles are a case in point, as the chart above shows.
Investment implications
We see opportunities across the energy system — high-carbon and low — to get in front of shifts before markets. The BIITS offers investors a compass to help navigate the transition’s risks and opportunities. It’s our clients’ choice whether to use it in their investment processes. We recognize views on the transition differ.
Grabbing the wheel: putting money to work
The new regime of greater volatility is full of opportunities. Seizing them requires a dynamic and selective approach that blends the economic outlook with mega forces and more.
