TRANSITION THEMATICS

<Omar Moufti>

Thematic investing is about looking towards the long-term and orienting portfolios towards the big structural changes that will define our era. With that in mind, our BLK Investment Institute has named the transition to a low-carbon economy as one of five mega forces that we see as structural shifts bringing significant changes in profitability across economies and sectors:

 

In 2022 alone, $1.1 trillion of capital was committed to low-carbon energy supply investment solutions, crucial to bringing us closer to a low-carbon transition.²

 

To help assess how this transition is most likely to play out, we’ve developed the BlackRock Investment Institute Transition Scenario also known as BIITs. Manuela, thanks so much for joining me today. You’ve worked closely with the team on the development of BIITS. Can you tell us a bit more about what it is and how it can help clients?

 

<Manuela Sperandeo>

Sure and thanks Omar it’s great to be here. BIITS is a research-based, analytical forecast on how the low-carbon transition is likely to unfold. It’s built on a suite of proprietary models, with inputs that include climate policy and technological innovation, to ultimately give granular forecasts on how we believe the transition will progress across sectors and regions, and this can be used as a compass to help investors navigate the transition’s risks and opportunities.

 

We see the transition happening at a different pace in different regions and sectors of the economy. Let me give you an example, when looking at specific sectors, power and buildings are transitioning at a faster pace due to an increase in the use of electricity over fossil fuel, what we normally speak to as electrification, in the transport sector we think heavy-duty commercial vehicles will likely be slower in the transition, vs passenger vehicles, due again to technological viability and costs.

 

However, one thing is clear: the transition to a low-carbon economy represents a historical investment opportunity.

 

<Omar Moufti>

So how are we integrating the insights from the BIITs framework into tangible investment solutions for clients?

 

<Manuela Sperandeo>

So when we think about transition investing, we define it as, ‘investing with a focus on preparing for, being aligned to, benefitting from but also contributing to the transition to a low-carbon economy’. So the first two probably what most investors think as first as part of their core allocation. For example, those companies that are improving and/or leading on mitigating greenhouse gas emissions, or those investing in portfolios or assets on a decarbonisation pathway that is aligned to an industry accepted low carbon scenario. But there are also a number of exposures that stand to benefit from or contribute to the transition, and I think that’s where thematic ETFs could offer clients additional investment choices and opportunities.

 

² Assets includes securities and issuers.

 

³ Such key inputs are also capable of being used for non-transition purposes.

 

<Omar Moufti>

Yes, I totally agree.

 

The insights from BIITS have really helped us to ensure that we have solutions to capture potential opportunities across the whole transition landscape.

 

In EMEA, for thematic ETFs we see four areas for the transition: that’s clean energy production, transportation, essential metals, and finally energy storage.

 

So starting with the energy segment, the highest source of historical emissions⁵ it’s about shifting power production from hydrocarbons to renewables.

 

Moving downstream from here, this shift to renewables requires investment in energy storage, given the nature of the availability of solar and wind energy.

 

Further downstream, we see a massive change occurring in mobility & transportation, with a focus on electric vehicles.

 

But as we adopt these technologies, there is going to be a tremendous impact all the way upstream, on the quantity and type of materials a transitioning economy requires. So in the same way the 20th century was built on hydrocarbons, the pathway to a low carbon economy—one characterised by deep electrification—will be metals and materials intensive, from copper, to lithium, to cobalt and other essential metals.

 

So if we look at lithium which is an important metal in the production of electric vehicles and energy storage. It’s expected that demand will increase 10-fold between 2022 and 2050 in a net zero scenario.⁶ By the end of this decade, it’s expected that 95% of lithium demand will stem from batteries, up from just 30% in 2015.⁷

 

Pop up disclaimer: There’s no guarantee that any forecasts made will come to pass.

 

Another example is copper. Electric vehicles require nearly 2.5x the amount of copper used in internal combustion engine vehicles across electric motors, batteries, and charging infrastructure.⁸

 

Now these are big numbers. However, the supply for a range of these essential metals is expected to face challenges over the coming years and this can make for an attractive investment backdrop.

 

<Manuela Sperandeo>

Thanks Omar, some compelling statistics, the opportunities are broad, not just in terms of sectors but also geographies.  We think that combining the insights of the BIITS research with the implementation options of our transition investing platform can truly provide a compass to help investors navigate the risks and opportunities associated with a low carbon transition. I look forward to seeing how our Thematics ETF range continues to develop to meet clients’ needs in this space. 

 

¹ BlackRock Investment Institute (BII), Investment Perspectives: Tracking the low-carbon transition, Page 9, as at 31/07/2023.

 

² Bloomberg NEF Global Low-Carbon Energy Technology Investment Surges Past $1 Trillion for the First Time, 26 January 2023.

 

³ Assets includes securities and issuers.

 

⁴ Such key inputs are also capable of being used for non-transition purposes.

 

⁵ IEA CO2 Emissions 2022 published March 2023.

 

⁶ IEA Critical Minerals Demand dataset March 2022.

 

⁷ McKinsey & Company. Lithium Mining: How New Production Technologies Could Fuel the Global EV Revolution, as at 04/12/2022.

 

⁸ S&P Global, ‘The Future of Copper - Will the looming supply gap short-circuit the energy transition?’, as at 31/07/2022.