Sustainable investing: Toward a cobweb free future

Charlie Reid, a founding member of the BlackRock Renewable Power team, began worrying about climate change at least 15 years ago and spent years at both various investment banks and philanthropic foundations working on clean energy finance. At one point, for example, Charlie was visiting a 200MW solar project in Queensland, Australia near a coal mine. “The panels were covered with cobwebs of dust from the mine,” he says. “It was the perfect image of the conflict between new renewables and the old fossil regime.”

Now, there is a tectonic shift to sustainable investing underway globally. It brings challenges to investors, especially those who incorporate alternatives into their portfolios. But, this is a moment that BlackRock Alternative Investors (BAI) has been preparing for over many years.

The BAI team is deploying capital across a variety of asset classes from early-stage venture, infrastructure, private equity and debt to multi-strategy approaches, all supported by a platform-wide framework for integrating material ESG factors across the alternatives investment life cycle, as outlined in our inaugural sustainable investing report.

Perhaps some of the most exciting allocations will come from our infrastructure and real estate teams, while others will come from our joint initiative with Temasek, Decarbonization Partners. Below, we discuss the opportunities and challenges with Asia-based investors from the BAI team.

Recently, investors based in Australia, Hong Kong, and Singapore from both BlackRock and Temasek met (in appropriately carbon light fashion) virtually to discuss the opportunities in a world where new technologies are making sustainable investment ever more attractive.

Risks vs rewards in sustainable investing

This is a major departure from the past. Not long ago, there was at least a perception that to be guided by principles of sustainability came at the expense of returns. Today, though, the greater problem lies in ignoring such considerations, making risk adjusted returns increasingly compelling.

“Financial markets are providing lots of capital and for lots of different risk profiles,” says Ed Winter, a member of the BlackRock Infrastructure team, who recently moved to Singapore from London. “And governments can play a role in reducing the cost of capital and in mobilizing capital more quickly by stabilizing revenue streams. Historically this has been in supporting wind and solar investments but increasingly it is being utilized to support the deployment of newer decarbonization technologies such as hydrogen, carbon capture and storage, batteries and sustainable aviation fuels.”

Not long ago, investors rightly concerned themselves with political and regulatory risk. Today, though, a combination of growing awareness of global vulnerability and technology advances have reduced such potential pitfalls substantially, according to Charlie.

To take one example, in any renewable power project historically, site acquisition is a major challenge, particularly in land constrained markets. But flying over lakes in North Asia, it occurred to Charlie that, beyond offshore wind programs, floating solar could provide a technological solution to such thorny issues, whether on lakes or over canals. This has the additional advantage of shading precious water resources to reduce evaporation losses. Our most recent investment that uses this technology is in Taiwan where over one million solar modules have been installed for projects invested by BlackRock Real Assets, including one of the market’s leading floating solar projects on the Xinwen reservoir. BlackRock Real Assets is now developing a large-scale portfolio of both floating solar and offshore wind projects in South Korea to help them navigate to a net zero future.

Indeed, the progress is such that while governments may need to play a catalytic role in the beginning, the price of renewables has come down so swiftly that subsidies are no longer essential, making projects ever more commercially sensible for private sector capital.

Regulatory risk has also come down – albeit slowly in some cases. “Governments need to understand the regulatory framework,” says SuetChee Chiong, a member of Decarbonization Partners team, a joint initiative between BlackRock and Singapore’s sovereign wealth fund Temasek. “It can be a challenge for them to change their mindset, especially in emerging markets where there is more vertical integration, and the market is less free. In spheres such as power, for example, governments now understand that power price agreements must be long-term and offer predictable cash flows to be attractive to investors.”

Transition finance opportunities

One area of focus for BlackRock is building the infrastructure for tomorrow’s world. Any potential purchaser of an electric vehicle, whether two, three or four-wheeler has ‘range anxiety' because often there are sequence issues. For example, to buy an EV, you must have charging infrastructure, but that has often lagged. Recently, BlackRock Real Assets invested in an Australian EV charging provider, which offers the charging service for free as it makes money from selling advertising on screens attached to the charging infrastructure.

Meanwhile, Yan Yang who has a private equity investing mandate out of Hong Kong, is focusing on everything impact-related ranging from EV power battery technology to biotech innovations, in part reflecting his training as a medical doctor. With the regulatory support, the region offers many attractive opportunities to make a real difference thanks to the deep talent pool and well-established value chain.

To listen to their discussion is to imagine the possibility of a world where planes are propelled by biofuels and ships by liquefied natural gas, which is critical to the energy transition and decarbonizing the transport industry. Ed is especially intrigued by potential retrofitting of marine fleets to reduce the carbon footprint of marine operations and developing vessels that can transport carbon dioxide or are fuelled by ammonia will be critical to support a net zero world of the future. Additionally, through their investment in a leading LNG transportation company, Ed sees increasing opportunities to support the development of floating liquefied natural gas vessels to support further afield gas resource and deploying floating regasification and storage vessels to support the intermittency of renewable power and decarbonization energy and industrial activities across the world.

Energy efficiency is a key topic of which the team is investing into, such as the investment in a leading UK owner, operator and installer of smart meters. Here smart meters are bringing meter technology into the digital age, enabling customers to more closely monitor energy consumption and carbon footprint, as well as democratizing the choice of energy supplier at a click of the button.

Given its scale and global mandate, BAI can identify the most attractive opportunities worldwide. “We live in a two-speed world,” adds Charlie. “While we deploy more capital in the OECD markets, we are one of the few investors with an appetite for emerging markets where there is more risk and less capital.” That also means going earlier stage than in the past to earn the sort of risk adjusted returns that the firm targets.

With the support of investors from BAI, we can tip the balance toward a cleaner, cobweb free future. “I have seen many clean energy targets which were considered outlandish at the time,” he adds. “But they have largely been met or exceeded."