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BlackRock Commentary: Climate transition – a driver of returns

Jean Boivin, Head of the BlackRock Investment Institute together with Elga Bartsch, Head of Macro Research, Vivek Paul, Senior Portfolio Strategist and Carole Crozat, Head of Thematic Research, all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

We are incorporating the effects of climate change – and of the climate transition – in our return assumptions, as we believe avoiding climate-related damages will help drive growth and improve returns for risk assets. We see climate-resilient sectors as potential beneficiaries of a “green” transition, and are strategically overweight DM equities as they are skewed toward these sectors.

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For illustrative purposes only. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise – or even estimate – of future performance. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream and Bloomberg, February 2021. Notes: The chart shows the difference in U.S. dollar expected returns over the next five years from February 2021 for four sectors of the MSCI USA Index in our base case of a “green” transition (policies and actions taken to mitigate climate change and damages, and to limit temperature rises to no more than 2 degrees Celsius by 2100) vs. a no-climate-action scenario. The estimated sectoral impact is based on expected differences in economic growth, corporates earnings and asset valuations across the two scenarios. Professional investors can access full details in our Portfolio perspectives  and CMAs website.


We see climate change and efforts to curb it having major economic implications in the decades to come. The base case underpinning our updated capital market assumptions (CMAs) reflects a “green” transition to a low-carbon economy, with a gradual phasing-in of carbon taxes, green infrastructure spending consistent with the IMF’s recommendation, and subsidies on renewable energy. If none of these actions are taken to mitigate climate change, we estimate a cumulative loss in global output of nearly 25% in the next two decades. Our updated CMAs are driven by sectoral views, with exposure to climate risks and opportunities a key determinant. We see technology and healthcare benefiting the most from that perspective, and carbon-intensive sectors with less transition opportunities such as energy and utilities lagging. See the chart for estimated return assumptions of four sectors in our base case vs. a no-climate-action scenario. Climate is just one driver of asset returns. Other drivers such as valuation could be more powerful over the short term, as evidenced by energy’s strong performance so far this year.

Our updated CMAs are an important step in BlackRock’s journey of making sustainability core to our investment process, as highlighted in CEO Larry Fink’s annual letter. The journey started long before this year. We had laid down the case for sustainability as a driver of asset class returns in Sustainability: the tectonic shift transforming investing, and have developed new tools to assess physical risks to assets caused by climate change. We already experience the effects of climate change in our daily lives, in the form of extreme weather events and rising temperatures. Capturing the financial implications is not easy, but it cannot be ignored. Projections around climate change are highly uncertain. This is due to the complexity of modelling the dynamics and myriad dependencies between climate, carbon emissions, and economic variables. We are in uncharted territory. Systematic acknowledgement of the inherent uncertainty is therefore crucial, and is a key consideration when we consider the portfolio implications.

We refine our CMAs to include an important and often underappreciated return driver – climate change. This flows in to our CMAs through 3 channels: 1) the macroeconomic impact; 2) the repricing of assets to reflect climate risks and exposures, and; 3) the impact on corporate fundamentals. First, macro variables such as GDP growth will be different in a world that is transitioning to a low-carbon future, meaning traditional risk premia for all asset classes will change, in our view. Second, we don’t believe market prices yet reflect the coming “green” transition, meaning assets poised to benefit may have a higher return during the transition. Third, climate change and the efforts to address it will impact the profitability and growth prospects of companies, creating winners and losers.

The bottom line: We believe the transition toward a world with net-zero carbon emissions should reward companies, sectors and regions that adjust, and penalize others. These effects are now reflected in our climate-aware return assumptions. On a broad asset class level, we see DM equities positioned to capture the potential opportunities from the climate transition, at the expense of high yield and some emerging market debt. The composition of DM equity indexes is more skewed toward less carbon-intensive sectors such as tech and healthcare; equities also can better capture potential opportunities arising from the “green” transition, given that bonds have more limited scope for capital appreciation, in our view.

Market Updates

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Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, February 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI Emerging Markets Index, MSCI Europe Index, MSCI USA Index, Bank of America Merrill Lynch Global High Yield Index, the ICE U.S. Dollar Index (DXY ), Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index, J.P. Morgan EMBI index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

Market backdrop

U.S. 10-year Treasury yields hit the highest levels in nearly a year. Nominal yields have been climbing since September, but the magnitude has lagged that of the rise in inflation expectations during the period. Inflation-adjusted yields remain deep in negative territory – in line with our new nominal theme. U.S. stocks came under pressure as Treasury yields rose. We still believe the new nominal will support equities and risk assets over the next six to 12 months.

Week Ahead

  • March. 1 – Manufacturing purchasing managers’ index (PMI) for Japan, China, the euro area and the U.S.
  • March. 3 – Services PMI for Japan, China and the U.S.;  euro area composite PMI
  • March. 4 – U.S. factory orders
  • March. 5 – U.S. nonfarm payrolls; China’s annual National People’s Congress session starts

U.S. nonfarm payrolls data will be in focus. Economists polled by Reuters expected February’s nonfarm payrolls to increase by 110,000 jobs, after a modest gain of 49,000 in the previous month. Global PMI data will also help shed light on the restart status, especially in the services sector where activity has been muted.

BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 1st, 2021 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

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