INVESTING WITH CLIMATE IN MIND

Ways to gain climate exposure in a portfolio.

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.

WHAT IS CLIMATE INVESTING?

As climate considerations become more important to portfolio construction, investors may want to consider aligning their portfolios with the transition to a low carbon economy through direct climate approaches, which allocate capital based on climate risks and opportunities, or indirect approaches, such as reducing capital allocated to high carbon emitters.

Three approaches to climate investing:

Climate objectives

For illustrative purposes only. The above list is not exhaustive but represents various ways investors can take approach investing for climate change, both directly and indirectly.


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REDUCE

WHAT THESE FUNDS DO

Reduce exposure to carbon emitters which may apply fossil fuel related screens.

USE CASE: BROAD BUILDING BLOCKS
Funds that can be used as broad building blocks of a diversified portfolio.

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PRIORITISE

WHAT THESE FUNDS DO

Prioritise investments based on a company or government’s commitments and actions to transition.

USE CASE: BROAD BUILDING BLOCKS
Funds that can be used as broad building blocks for diversified portfolios that integrate climate data into investment processes.

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TARGET

WHAT THESE FUNDS DO

Target investments in a specific sustainable activity or directly tied to projects.

USE CASE: TARGETED EXPOSURES
Funds that can be used to invest in a specific sustainable activity, such as clean energy, or investments directly tied to projects that advance environmental purposes, such as green bonds.

CLIMATE INVESTING TERMS



Incorporating financially material environmental, social, and/or governance information into investment research and decision-making, based on the conviction that sustainability-integrated portfolios can provide better risk-adjusted returns to investors.



Gases that trap heat in the atmosphere, such as carbon dioxide, methane, and nitrous oxide. Emissions result from a variety of human activities (e.g., energy generation, transportation, industrial processes).

Source: Greenhouse Gas Protocol, 31 March 2021.



List of issuers that present significant climate-related risk, with a combination of the following attributes:
• high carbon intensity today
• poorly positioned for the net zero transition
• low reception to our investment stewardship engagement



Engagement with public companies to promote corporate governance practices that are consistent with encouraging long-term value creation for shareholders. Engagement and voting provide shareholders an opportunity to express their views.



Reducing nearly all human-caused emissions and balancing out remaining emissions with carbon removal (e.g., restoring forests, carbon capture and storage). A global net zero commitment establishes an aggregate timeline for achieving the well below 2°C target called for in the Paris Agreement. Many country and corporate net zero commitments target 2050, consistent with global targets to avoid catastrophic outcomes from climate change.



International agreement to keep the increase in global average temperature to well below 2°C above pre-industrial levels while endeavoring to limit warming to 1.5°C, the scientifically backed threshold to prevent the most destructive effects of climate change. Each country must determine, plan, and regularly report on the contribution that it undertakes to mitigate global warming.

Source: United Nations Framework Convention on Climate Change, 31 March 2021.



Increased risk to companies’ assets and activities caused by the direct impact of changing weather patterns and natural catastrophes.



Targets adopted by companies to reduce GHG emissions are considered “science-based” if they are in line with what the latest climate science says is required to meet the goals of the Paris Agreement. The Science Based Targets initiative (SBTi) is a collaboration between CDP, World Resources Institute (WRI), the World Wide Fund for Nature (WWF), and the United Nations Global Compact (UNGC) that champions science-based target setting as a powerful way to boost companies’ competitive advantage in the transition to the low-carbon economy.

Source: Science Based Targets initiative, 31 March 2021.



Temperature alignment reflects how closely aligned a business, government, or portfolio is to a 2050 net zero economy. Temperature alignment is a forward-looking measurement. In other words, it is measured by looking at emissions today as well as the potential of the emitter to reduce their emissions.



Impact of the transition to a low-carbon economy on a company’s long-term profitability (i.e., decreased profits for energy).

Source: BlackRock, 31 March 2021.


INSIGHTS

A SEA CHANGE IN GLOBAL INVESTING

Integrating climate into portfolios with ETFs.

SFDR: A BRIEF OVERVIEW



The EU Regulation on sustainability-related disclosures in the financial services sector (“SFDR”) was published in December 2019 Sustainable Finance Disclosure Regulation and forms part of the EU Sustainable Finance Action Plan. The aim of the regulation is to harmonize disclosure standards, creating a common framework for investors to consider a fund’s sustainable credentials and compare funds with respect to their environmental, social and governance (ESG) risks and sustainable investment objectives.


Funds fall into Article 8 or 9 under SFDR:

  • Article 8: Products that promote environmental or social characteristics and underlying investments, follow good governance practices.
  • Article 9: Products that have sustainable investments as an objective and underlying investments, follow good governance practices.


SFDR is EU-wide legislation and is being widely embraced by investors as the new standard for reporting on and offering sustainable products.



BlackRock has developed its approach to classification to meet the requirements of the Sustainable Finance Disclosure Regulation (SFDR) implemented in March 2021. BlackRock classified all funds as Articles 8 or 9 based on our interpretation of the classification. As further EU guidance and legislation is published and implemented — including the Regulatory Technical Standards (RTS) — this approach will evolve.