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Clean and Green Investing For A Low-Carbon Economy

By: Jeff SpiegelKaren Schenone, CFASarah Kjellberg

Key Takeaways

  • Transforming the global economy to be less dependent on fossil fuels requires more use of renewable energy sources.
  • Investors may find opportunities in the innovations and the funding of projects to reduce carbon emissions.
  • ETFs can help investors target shares of renewable energy-related stocks to provide the potential for long-term growth and green bonds to directly fund environmental projects.

Extreme weather events are calling attention to the costs of climate change and creating urgency around transforming the global economy — a monumental undertaking that could triple annual investment in clean energy by the end of this decade.1

This summer has seen forest fires first sweep across the Western U.S. and Canada, then Southern Europe, while floods inundated parts of Northern Europe and Central China. Recent ecological shocks follow a record year for weather-related damages in 2020.2

The scientific consensus is that the global economy needs to quickly become less carbon-intensive to avoid continued extreme and catastrophic impacts.3 Transitioning away from fossil fuels, which now account for about 80% of the total energy supply, will require major investments in new technologies, infrastructure, and projects designed to reduce the threat.4 By one estimate, meeting current carbon-reduction targets could require installing the equivalent of the world’s current largest solar park every day for the rest of this decade.5

Given the magnitude of the changes we foresee, long-term investors may find opportunities in the technologies and innovations that create renewable energy sources or reduce the carbon intensity of energy production.

The role of renewable energy in reaching net zero

To help spur the economic transformation, governments and companies are pledging commitments to become “net zero.” Net zero is about reducing greenhouse gas emissions so that over time we can achieve an overall balance between emissions produced, and the emissions removed from the overall atmosphere. So, for every ton of greenhouse gas emitted into the air, a ton needs to be taken out. More than 125 governments around the world and more than 1,000 companies have made or are preparing to make net zero commitments. We expect that number to go up.

Attaining net zero will require huge investments, changes in business models, and innovation. Major energy producers say that oil production likely peaked in 2019, and the race is on for cheap, clean ways to produce electricity.6 To reach net zero emissions by midcentury, annual clean energy investment will need to more than triple by 2030 to around $4 trillion.7

Both stocks and bonds will be important to financing the transition to a sustainable, low-carbon economy, and exchange traded funds (ETFs) are a convenient way to target companies and issuers at the forefront of driving the transformation of the energy systems that underpin the global economy.

Accessing renewable energy in the stock market

We believe more and increasingly restrictive climate-related policies and growing consumer preferences are likely to spark breakthroughs in renewable energy, which should have knock-on effects that enable scaled production and widespread adoption.

Despite the investment potential for renewable energy, conventional stock benchmarks do not capture renewable energy in a meaningful way. For example, the S&P 500 Index — a common benchmark that represents the U.S. stock market — includes just 0.6% direct exposure to clean energy companies.8

For broader access to renewable energy, investors may want to look instead to stock indexes that straddle conventional classifications, including size, and region, to better reflect the realities of renewable energy innovation.

clean energy weighting vs traditional sectors in the S&P 500 index

Considering green bonds

Bond markets are playing a key role in helping fund environmental projects through the issuance of green bonds.

Green bonds are issued by governments, government agencies, and companies. What makes them unique is that proceeds are exclusively applied toward new and existing green or environmental projects. Such projects include climate adaption, sustainable water, or pollution prevention and control. Investing in green bonds allows investors to fund projects meant to deliver a measurable environmental impact in their fixed income portfolio.

The green bond marketplace has grown markedly since the World Bank issued the first of its kind in 2008.Despite uncertain market conditions in 2020, green bond issuance hit a record $270 billion and last year the total size of the global marketplace eclipsed $1 trillion.10

use of proceeds for global green bonds issued in 2020

Summing it up

BlackRock believes we are in the beginning stages of a transition to a low-carbon economy that is creating historic opportunities and risks that are not currently captured in financial markets.

Investors looking to capitalize on long-term growth opportunities may want to consider introducing clean energy stocks and green bonds to pursue both financial and environmental outcomes into their portfolios. ETFs offer affordable, convenient and diversified access to securities related to renewable energy.

1 International Energy Agency, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” (revised 3rd version) July 2021.

2 Munich Re NatCatService database (as of March 30, 2021).

3 Intergovernmental Panel on Climate Change (IPCC), 2021: Climate Change 2021: The Physical Science Basis.

4 International Energy Agency, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” (revised 3rd version) July 2021.

5 Ibid.

6 New York Times, “For Shell, Oil Is Past Its Peak,” Feb. 12, 2021.

7 International Energy Agency, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” (revised 3rd version) July 2021.

8 BlackRock, Morningstar (as of Aug. 10, 2021). Clean energy companies defined as those that are constituents of the S&P Global Clean Energy Index and the S&P 500 Index.

9 Climate Bonds Initiative, “Record $269.5bn green issuance for 2020,” Jan. 24, 2021. According to the World Bank, its green bond issuance in November 2008 “created the blueprint for the market.” This issuance was the first to define criteria for eligible green bond projects, and the first where investors received assurance, through a second party opinion provider, that eligible projects would address climate change.

10 Climate Bonds Initiative, “Record $269.5bn green issuance for 2020,” Jan. 24, 2021.

Originally Posted on August 24, 2021 – Clean and Green Investing For A Low-Carbon Economy

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Diversification and asset allocation may not protect against market risk or loss of principal.

The Fund’s green bond investment strategy limits the types and number of investment opportunities available to the Fund and, as a result, the Fund may underperform other funds that do not have a green bond focus. The Fund’s green bond investment strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds with a green bond focus. In addition, projects funded by green bonds may not result in direct environmental benefits.

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