BlackRock’s Manuela Sperandeo and MSCI’s Mark Guirey discuss the vehicles that institutional investors can utilise to capture opportunities in the energy transition megaforce.
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The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.
Investors are increasingly looking to gain exposure to decarbonisation, which has emerged as a major investment area within the energy transition. Advancements in technology has helped to accelerate decarbonization in many sectors, with significant implications for asset valuations. It is also driven by regulatory requirements intended to help society move to a low-carbon economy. Investors seeking to navigate the risks associated with the energy transition, or capture opportunities by decarbonising their portfolios, are looking for climate or transition-related products that can sit at the core of their portfolios.
Manuela Sperandeo, global head of sustainable indexing at BlackRock, and Mark Guirey, executive director – head of UK&I asset owner and consultant coverage for MSCI, discuss how index investing and the greater availability of data are allowing investors to navigate a growing range of climate and transition-related risks and opportunities.
Energy transition drivers
For a number of investors, their preferences have shifted steadily towards solutions and opportunities presented by the energy transition. For some, this is driven by a desire to support the transition to a low-carbon economy; however, for many others, their interests are spurred by the potentially significant investment implications of such an economic transformation. The BlackRock Investment Institute recently called climate change and the transition to a low-carbon economy a “megaforce” – a structural change that is poised to create big shifts in profitability across economies and sectors.
BlackRock’s Sperandeo says institutional investors understand that the energy transition is as relevant for the way they consider investments for their portfolios as for their day-to-day lives.
“The importance of mitigating risks and capturing the opportunities associated with the transition are at the front of investors’ minds,” she says.
MSCI’s Guirey says more defined contribution (DC) providers are taking the impacts of climate change into consideration when they choose their investment objectives, supported by the increased availability of data.
“Investors are now more aware that there's an increasing amount of information out there. The market has greater transparency and consistency, in terms of data quality and breadth of coverage,” he says.
The increased availability and quality of data has allowed investors to develop informed preferences and assess where companies are in their energy transitions, Guirey adds.
He says the need to meet the sustainability preferences of investors has put pressure on companies to transform their business models.
Navigating risks and opportunities
Investors are increasingly taking a more holistic approach to navigating the risks and opportunities associated with the energy transition, according to Guirey.
He observes that increasingly public policy is an important aspect of combatting climate change; the impacts do not just affect individuals, they affect everybody.
“This isn't just a single DC pension scheme problem, or a single country problem. This is a global problem,” he says, adding we’re recognising the existential risk associated with climate change.
Guirey also says that a collective approach could help ensure capital had far more reach and would therefore be more likely to have a lasting impact than if investors acted independently.
“From the investment perspective, that means the role of capital, how capital can support the transition, and how it can be utilised to help the journey towards net zero.”
Sperandeo believes investors should be taking a whole-portfolio approach to address opportunities and risks, particularly during portfolio construction and implementation.
She says a core allocation to bonds combined with satellite allocations to listed equities could allow investors to take investment restraints, such as asset devaluation and regulatory risks, into greater consideration while ensuring decarbonisation is prioritised at the portfolio level.
The role of index investing
The European Union created the Paris-Aligned Benchmark (PAB) and the Climate Transition Benchmark (CTB) to support the transition to a low-carbon economy and provide investors with greater transparency.
Investors previously considered climate-orientated investments only be suitable as satellites in a core-satellite approach, Guirey says. Therefore, they were not offered to DC pension members as a default investment choice.
In recent years, investor demand and regulatory pressure to support the transition to net zero has, in turn, put pressure on fund managers to provide more solutions, he adds.
“Solutions are increasingly becoming available in the market. These include products following a rules-based methodology that aligns with either the CTB or the premise-aligned criteria of the EU taxonomy,” he says.
Sperandeo says investors working to decarbonise their portfolios are increasingly using products based on these benchmarks as core allocations.
“These funds have given investors the ability to construct a portfolio with a range of exposures to a predefined decarbonisation trajectory,” she says.
She adds that index investing has also become a popular among sophisticated DC investors who value the transparency, efficiency and consistency, across equity, fixed income and alternatives.
Investors have demonstrated an increased demand for sustainable index investing, as evidenced by the flows into index strategies on BlackRock’s Transition Investing platform.
“Our platform has over $100 billion in total transition-related assets, of which more than $50 billion is in indexed assets,” Sperandeo says.
Cutting through the data
While in the past a lack of data presented the biggest barrier to investing in the energy transition, investors are now debating whether they have too much data to navigate. Many complain that the volume of available data is overwhelming.
However, as a leading data provider, MSCI recognises the value of the data expansion while acknowledging that expertise needed to extract value from it. Guirey says each aspect of data answers a different question.
“The data exists because there's clearly demand for it. Every bit of data is potentially relevant. You have just got to know what question each bit answers,” says Guirey.
For example, he says data revealing that a high proportion of a company’s revenue comes from fossil fuels suggests risks from it making insufficient progress in its energy transition.
Conversely, a high proportion of clean technology revenue suggests a company has achieved desirable exposure to environmental and climate opportunities.
Next items on the sustainability agenda
Sperandeo and Guirey expect biodiversity to become a key focus area for many investors and product providers over the next one to three years.
“There will be a lot of demand in areas that are not captured today. Biodiversity consistently appears of interest to investors in surveys,” she says, “We look forward to translating that demand into product construction.”
Guirey adds that the topic of conversations with DC pension scheme members has shifted from general ESG concerns towards biodiversity.
Previously, conversations were dominated by differing views about the transition to a low carbon economy, he says. Now, biodiversity is becoming increasingly important as more investors begin to understand the material risks associated with nature loss, he adds.
“We can see it today. Deforestation, wildfires, high temperatures through Central Europe and the continuation of the ocean pollution are all having an impact. We all recognise these as major factors,” he says.
