BlackRock issued its views on the rocky road and big opportunities that lie ahead in the transition to a low carbon economy. In the document, the firm says
“A massive reallocation of resources lies at the heart of the transition to a net-zero world…
A gradual and orderly transition will help mitigate pressure points that could disrupt economic activity and drive up inflation, in our view. This will allow time to make the necessary investments, phase out carbon-intensive activities, redeploy workers, and develop new technologies to power the net-zero economy…
The transition won’t happen overnight, and the world will need to pass through shades of brown to reach shades of green.”
During last year’s COP26, BlackRock CEO Larry Fink presented a framework for the transition from brown to shades of green. I wrote about it here. The company continues to believe in that approach:
“Investment in fossil fuel and energy-intensive sectors will be needed to enable the transition, in our view, even in ambitious scenarios to reach net zero by 2050. Case in point: The IEA’s net-zero 2050 scenario envisions $360 billion per year of ongoing capex in oil and gas fields this decade to meet demand in the transition. These fuels are needed to reduce (dirtier) coal usage and require capex during the transition’s early stages after years of under-investment. We see potential opportunities in oil and gas companies with solid transition plans… We believe natural gas will play an important role in the transition given its lower carbon intensity compared with other fossil fuels. Gas remains controversial because it contributes to global methane emissions. Its longer-term role is unclear as renewables and battery storage costs keep dropping.”
One aspect of ongoing investment in fossil fuel operations that isn’t discussed often is the need for on-going spend in facility/process maintenance and safety measures. If those expenses are cut too deeply or too rapidly, industrial operations can become a significant safety hazard to the community on-site and beyond its borders and lead to increased employee injuries/fatalities. Pollution prevention systems, monitors/alarms and critical process equipment must remain in top operating condition in order to prevent catastrophic events. Employees need on-going training and reinforcement about the priority of safety measures rather than worrying about cost cuts.
What This Means
For BlackRock’s holdings (ahem, essentially every U.S. publicly traded company), the firm is offering clear insights on where business risks and opportunities may lie right now. Further, it colors how the firm may look at climate information that is presented to them, and could be an indication about what engagement strategy they may choose – if any. This would be good reading for anyone working on climate matters for their company
Another aspect – perhaps subtle – is BlackRock’s explicit acknowledgement of business fundamentals (e.g., revenue) in new opportunities, not just what I call sprinkling ESG fairy dust on stock. Discussions about the business value of ESG has too frequently focused on share value/capital markets to the exclusion of linking it to a company’s operating basics like revenue and cash flow. Maybe BlackRock can help redirect attention to fundamentals.