The transition to decarbonize the world is happening, and ignoring the river of capital flowing to low-emissions companies, especially technology and healthcare, will be a missed stock-market opportunity, BlackRock says.
“Increasing investor preferences for sustainable assets are leading to a great repricing that has a lot of room to run, in our view,” the analysts said in a Monday note that highlights a simple bar chart showing a flip to “green” from “brown” — the latter a label namely for oil
and select utility
“This doesn’t preclude browner assets such as traditional energy stocks
from staging rallies at times,” the analysts said. “This is a feature of transition, we believe, as they can benefit from mismatches in supply and demand as the economy is being rewired to reach net-zero carbon emissions.”
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The analysts clarified that their comparison intentionally strips out common drivers of returns, such as news on earnings, or the impact of momentum and growth.
Instead, they isolated the cost of capital and measured how it’s being affected by changing investor preferences for sustainable assets. They valued the exposure of a company to the transition by measuring its carbon-emission intensity, or direct CO2 emissions as a share of enterprise value.
Shifting — “younger” — demographics that will support demand for a greener world were also counted.
And the findings? Relatively green sectors, such as tech, repriced positively (left chart) beginning in 2020, whereas browner ones, like utilities, showed the mirror image (right chart).
If this view is right, the analysts wonder, why have browner assets such as fossil fuel companies staged such a rally in the past year?
Context is key. The BlackRock view controls for factors not directly tied to the long-run transition, such as surging recovery demand for energy as businesses and services resumed after the darkest days of the COVID-19 shutdown. That bounce emerged simultaneously to a mix of geopolitical factors, most notably gas-giant Russia’s tension with the West over Ukraine, and because weather-related supply disruptions hit just as European inventories were low.
“‘The performance of traditional energy stocks tells you something about how the economy is currently wired. But it doesn’t say anything about where it’s going.’”
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“The performance of traditional energy stocks tells you something about how the economy is currently wired,” the analysts wrote. “But it doesn’t say anything about where it’s going.”
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The analysts repeated their previous view that the stock market would price in the sustainable shift faster than the sector would actually ramp up. And, they said, extra investment in renewables
has not yet kept pace with the reduction in capacity at traditional energy concerns.
“‘The green transition comes with costs and higher inflation, yet the economic outlook is unambiguously brighter than a scenario of no climate action or a disorderly transition.’”
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“The higher fossil fuel prices rise, the more competitive renewables become,” the analysts said. “The outlook for renewables is bright, and we also see lower-carbon fossil fuels playing a key role in ensuring continuity of affordable energy during the transition. The world will need to pass through shades of brown and green to reach net-zero by 2050, we believe.”
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The bottom line: BlackRock sees the transition driving a relative return advantage for greener sectors such as tech and healthcare over browner sectors such as energy for years to come, all else equal.
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“The green transition comes with costs and higher inflation, yet the economic outlook is unambiguously brighter than a scenario of no climate action or a disorderly transition,” the analysts said. “Both would generate lower growth and higher inflation.”
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