WORKING TOWARD THE NET-ZERO ECONOMY
Scientists attribute extreme weather events all over the world to a global warming trend. Since the late 19th century, the average global temperature has increased by 2 degrees Fahrenheit (1.1 degrees Celsius). 1 To reverse this phenomenon, scientists say we must reduce and maintain the average global temperature increase to 2.7 degrees Fahrenheit (1.5 degrees Celsius) above
To facilitate this worldwide effort, 200 countries have signed the Paris Agreement, an accord designed to reduce global warming. To ward off the most destructive effects of climate change, scientists say, carbon dioxide emissions worldwide need to be cut in half by 2030 and, by 2050, reduced to
"The future net-zero emissions economy is one many businesses and industries are looking toward, and this shift may have implications for portfolios."
How To Measure
The effort to reverse global warming is measured via “temperature alignment.” This is a
One approach to measuring temperature alignment is to weigh the role a single company plays in the economy today and evaluate its emissions trajectory plan by 2050. That data is then extrapolated to provide a picture of the overall global economy transforming at that same speed. The more aggressive the efforts to reduce emissions, the more favorable the global economic outcome.
While the looming threat of extreme weather remains ominous, the transition to
Each industry and market sector is expected to be affected by this transition. It is not just a matter of investing in green energy sources; every company will need to adopt
Unfortunately, the reverse may be true as well. Even
“In the past few years, companies with higher ESG [environmental, social and corporate governance] ratings exhibited higher average return on invested capital, compared to companies with lower ratings, according to data provider MSCI. This is in part because ESG pushes companies to look beyond the three- to
When it comes to investing, we generally talk about the risk of losing money due to market volatility, inflation, liquidity, concentration or default. Going forward, many asset managers believe the greater risk will be caused by climate change itself. In short, how much will it cost to continue restoring and rebuilding communities affected by extreme weather without implementing mitigation strategies to prevent these disasters?
Investors share the same risks as the securities they invest in. For example, companies bear the physical risk to assets and their ability to stay in business in the wake of changing weather patterns and natural catastrophes. Analysts also have identified a transition risk,which is the potential for
The greatest risk of loss may come from companies that continue to depend on producing or consuming fossil fuels longer than is feasible in the
In 2020, BlackRock conducted a survey of corporate and public pension plans, sovereign wealth funds, insurers, asset managers, endowments, foundations and global wealth managers. Among them, more than half (54%) considered sustainable investing to be a foundational consideration for analysis and decisions moving forward. However, an interesting caveat was how much opinions varied by region. Not so much in theory, but rather in how quickly they are integrating this investment strategy.
For example, 86% of survey respondents from the region of Europe, the Middle East and Africa (EMEA) were actively analyzing sustainability data, while those in
Percentage of respondents in each region who expressed that a commitment to sustainability is already, or will become, central to investment strategy.
Many of the portfolio strategies that institutional asset managers use to evaluate and select investment holdings also can be deployed by individual investors. Consider the following guidelines to align your investment allocation with the objectives for a
• Scrutinize issuers that present significant
• Reduce exposure to
• Incorporate sustainable sectors (e.g., clean energy, green bonds) as part of your asset allocation strategy; diversify investments among holdings
• Ensure your issuers and investments are meeting temperature alignment benchmarks by monitoring available data and published transition plans. Review this benchmark with the same rigor as traditional financial data.
• Use the power of citizen and shareholder vote to support legislators, board members and asset managers committed to investing in and supporting the transition to a
• Use the power of consumer spending to support companies actively transitioning to a
The trend of incorporating environmental, social and governance considerations into investment research and
As extreme weather events continue to wreak havoc on homes, businesses, major corporations and governments around the world, the individual levers of voting and spending habits could have a greater impact than ever before on household financial security and the future of the environment.
If you are interested in learning more about
1 Rebecca Lindsey and LuAnn Dahlman. Climate.gov. March 15, 2021. “Climate Change: Global Temperature.”
2 Seth Borenstein. Associated Press. Aug. 10, 2021. “‘Code red’: UN scientists warn of worsening global warming.”
3 Abnett and Valerie Volcovici. Reuters. Aug. 5, 2021. “Flurry of emissions pledges still not enough to meet global climate goals.”
4 BlackRock. March 2021. “Getting to Net Zero.” https://www.blackrock.com/us/individual/
7 Raymond James. 2021. “Why Choose Sustainable Investing?” https://www.raymondjames.com/
8 BlackRock. 2021. “Getting to Net Zero.” https://www.blackrock.com/us/individual/literature/
9 BlackRock. 2020. “Sustainability Goes Mainstream.” https://www.blackrock.com/us/individual/
12 BlackRock. 2021. “Getting to Net Zero.” https://www.blackrock.com/us/individual/literature/
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