Transition to a low-carbon economy

The transition to a low-carbon economy is set to spur a massive reallocation of capital as energy systems are rewired. We see the transition’s speed and shape driven by an interplay of policy, technology, and consumer and investor preferences.

Our research suggests a faster transition in developed economies than elsewhere, but inflationary pressures globally. The impact on portfolios – including in clean energy, infrastructure, electric vehicles and key minerals – depends on the timing and size of these shifts.

Valuations of electric vehicle companies surged before pulling back in the past year even as their share of overall automobile sales keeps growing, according to the latest IEA estimates.

We have developed the BlackRock Investment Institute Transition Scenario (BIITS) to inform an assessment, on behalf of clients, of how the low-carbon transition is most likely to play out based on what we know and expect today – and the potential portfolio impact. We aim to track its evolution over time, similar to how we plan to track other mega forces.

We expect tipping points when the relative costs of low-carbon technology fall below those of incumbent sources and when barriers to adoption are low. These tipping points arrive at different times across regions and sectors, resulting in an uneven and multispeed transition, in our view.

We see faster transitions in developed markets than emerging markets because of lower costs of capital, a greater share of easier-to-decarbonize sectors and more stable total energy demand.

Emerging markets are pivotal to the global transition to a low-carbon economy but face a shortfall in investment relative to developed economies. Reforms to plug that shortfall could present both opportunities and risks for investors, in our view.

We see opportunities as investors pay more attention to climate resilience as an investment theme. Climate resilience refers to the ability to prepare for, adapt to and withstand climate hazards and to rebuild better after climate-related damages. Learn more:

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We expect inflationary pressures in coming years as higher energy prices combine with increasing capital spending — though this effect may dissipate over time as low-carbon technology costs decline.

We see the growth impact dominated by physical climate damages – and expect this to bolster climate resilience to those damages as a key investment theme. The impact on portfolios depends not only on the timing and size of these shifts but also when markets price them in. Electric vehicles are a case in point, as the chart above shows.

We see opportunities across the energy system — high-carbon and low — to get in front of shifts before markets. The BIITS offers investors a compass to help navigate the transition’s risks and opportunities. It’s our clients’ choice whether to use it in their investment processes. We recognize views on the transition differ.