Investors can no longer ignore decarbonisation and the repricing of assets that will occur as a result according to new analysis from the BlackRock Investment Institute.
The analysis suggests that climate-driven positive repricing has already occurred in “greener” sectors while “browner” sectors have repriced negatively.
“Increasing investor preferences for sustainable assets are leading to a great repricing that has a lot of room to run, in our view,” the firm said.
To identify the repricing phenomenon, BlackRock said it had removed common drivers of returns and the impact of factors like momentum and growth to isolate the cost of capital and measure how it is being affected by changing investor preferences for sustainable assets.
“Relatively green sectors such as tech repriced positively (left chart) in 2020 whereas browner ones such as utilities showed the mirror image (right),” BlackRock explained.
In 2020, the firm outlined a “tectonic shift toward sustainable assets” with capital flowing away from less sustainable assets and towards those on the other end of the scale.
“Our new analysis shows the repricing effect is real and growing, as it was negligible in the period 2016-19,” said BlackRock.
“We see 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.”
However, browner assets such as energy stocks may still stage rallies moving forward according to BlackRock.
“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,” the firm said.
“There will be periods when browner assets outperform, and we see investment opportunities in low-cost oil and gas producers leading decarbonisation within their sectors.”
BlackRock said that withholding capital or indiscriminately divesting from browner sectors would be “counterproductive” to decarbonisation, aligning with comments from CEO Larry Fink last month that companies would need to “pass through shades of brown to shades of green” in order for the transition to net zero to be successful.
“Divesting from entire sectors – or simply passing carbon-intensive assets from public markets to private markets – will not get the world to net zero. And BlackRock does not pursue divestment from oil and gas companies as a policy,” Mr Fink said in a note to CEOs.
