Transition to a low-carbon economy

Q: Jessica, what factors or areas do you think are most important and impactful when you consider the energy transition going on around the world?

JESSICA TAN: So, I think there are three main factors, technological innovation, consumer preferences, and government policies. And these three really reinforce each other. So, technological innovation, as technology gets better, a lot of the end products get cheaper, right, so take batteries for example. Over the last decade they’ve gotten almost 80% cheaper, and as things get cheaper, consumers want to buy it more. So, think electric vehicles. So, as they’ve gotten cheaper, more consumers have purchased them. We actually think that by 2030, 40% of new car sales will be in EVs.

And of course, there are a bunch of government policies out there, the Inflation Reduction Act in the US, the Green Deal in the EU, and all of these also help make these technologies cheaper through time. And we think that as technologies get cheaper and more convenient, consumers will buy them. So, take for example, cell phones replacing landlines. We think the same thing will happen with lower carbon solutions.

Q: And how do you see this impacting portfolios? What do investors need to know?

JESSICA TAN: Yes, I think this is one of the most exciting opportunities in investing today. So, for example, we see about 2 trillion of capital going into the energy system alone. We think that number is actually going to increase to 4 trillion by midcentury. And so that’s an incredible amount of money going into these new technologies. That means investment opportunities. But of course, not all investment opportunities are the same. There could be risks.

For example, what is the offtake risk? That just means if you produce the energy, who is going to buy it, for how long, and at what price? At the same time, what about political risk? We just talked a lot about these, the IRA, or a REPowerEU, or the Green Deal in Europe, what happens if those change? And so, all of these things just mean there are a lot of opportunities, but also a lot of risks to study and manage, just like in other investment opportunities.

Q: Jessica, in your conversations with investors, what are some of the areas they are most excited to capitalize on?

So, we actually see interest across the board. We see a lot of interest in index, in liquid active, and in private markets, and let me just double click on that a little bit more. In private markets, in particular, we’re seeing a lot of interest in technological innovation, in particular, in Series C or D, where there’s less technology risk, it’s more proven technology, but companies looking for capital to scale up.

Likewise, we see a lot of investor interest in infrastructure. So, to build the technology of tomorrow, this is going to require projects that are hundreds of millions, often billions of dollars to construct, and that’s a lot of infrastructure opportunity. Now within that, I think what’s interesting is we see opportunities across the entire energy system. So, we see opportunities with incumbents in oil and gas, on, you know, whether it’s pipelines or carbon capture. We see opportunities, certainly in renewables, in wind and solar, and we see a lot of opportunity across electrifications, so think batteries and charging stations.

Q: Jessica, are there ways to think about diversification in the face of such a huge trend?

JESSICA TAN: Yeah, so I think diversification is important no matter what you’re studying, and it’s certainly true when it comes to transition investing. So, you have to think about having great building blocks, but you also have to think about things from a whole portfolio perspective. And that’s why at BlackRock we spend so much time on data, analytics, and research, and we’re able to leverage that as well as 600 experts who focus on sustainability and transition, to study these opportunities and the risks throughout the entire portfolio.