Materials set for multi-trillion dollar role in the low-carbon transition

Evy Hambro and Olivia Markham of the Thematic & Sectors team at BlackRock talk about the increasing importance and growth potential of materials companies across the transition to a low-carbon economy, and how they may offer investors an untapped source of alpha.

The transition to a low-carbon economy may potentially have wider – and more profitable – implications for investment portfolios than many people realize.

Beyond visions of green, open landscapes peppered with wind turbines, or buildings wrapped in lush vegetation, various technology, policy and societal preferences are reshaping and accelerating the shift to a lower carbon economy. Within it, the role of raw materials and other components required to create the necessary infrastructure and clean energy cannot be overlooked.

Critical minerals reflect some of the new opportunities emerging for investors. With renewable power, electric vehicles (EVs) and battery storage, for example, the demand for the required copper, rare earth elements, aluminum, lithium and cobalt, is estimated to at least double by 2040.¹

More broadly, there is a historic investment opportunity stemming from the low-carbon transition. According to the International Energy Agency (IEA), an average of USD $2.2 trillion has been invested annually in the energy system over the past decade² and this is estimated to grow to USD $4 trillion average annual spend through 2050.³

Within these scenarios, the influence of materials may be contrary to popular perception. At first glance, cement and steel seem to contribute to the problem. Every day, they account for 31% of the world’s greenhouse gas (GHG) emissions⁴. The situation is particularly acute in Asia Pacific – where a recent joint UN agency report found that collectively, the 49 countries in Asia and the Pacific were responsible for more than half of global GHG emissions in 2020⁵.

But these same companies are also critical to the solution. Put simply, wind turbines, solar panels and EVs wouldn’t exist without minerals like copper and lithium to help build them. Plus, in producing the materials that are essential to a low-carbon transition, the companies are simultaneously striving to reduce the intensity of their own emissions.

With this in mind, BlackRock’s Evy Hambro and Olivia Markham look at how “greening” traditionally “brown” industries is becoming a compelling investment case.

What is the role of materials as part of the low-carbon transition?

At BlackRock, we define transition investing as: “Investing with a focus on preparing for, being aligned to, benefitting from and/or contributing to the transition to a low-carbon economy.”

Materials are key ingredients to this evolution, with greater recognition needed for the role they will play.

In order for the low carbon transition to happen, materials companies must supply the materials required to build lower carbon technologies, whilst simultaneously focusing on reducing their own emissions intensities.

Within the sector, we see companies that are high carbon emitters today developing what we see as credible⁶ plans to reduce their emissions intensity over time – with actions such as switching from diesel to electric mining trucks or adopting lower carbon steel furnaces. 

Looking ahead, we expect materials companies to increasingly be part of the conversations around sustainability-focused mandates.

So is it a myth that low-carbon economies will be led solely by renewables, EVs, and recycling?

In our view, as BlackRock's Thematic and Sectors team, clean energy is certainly a key part of the low-carbon transition, but it is only one piece of the puzzle.

In addition to this, there are three broad groups of materials-related businesses that are also integral to the low-carbon transition and that together, form the Brown to Green Materials theme.

Firstly, there are “emission reducers”. These are materials companies with what we see as credible⁶ plans to reduce emissions intensity over a planned period. A good example is a large-cap European steel company⁷ which has plans to achieve net zero scope 1 and 2 emissions by 2050.

Secondly, there are companies we define as “enablers”. These businesses either supply materials required for lower-carbon technologies or enable materials companies to reduce their emissions. Among various examples is a US-based lithium producer⁷ which generated around two-thirds of its revenues from lithium production in 2022; and with EVs estimated to account for 69% of lithium demand by 2025, this will grow.

The third type of company is “green leaders”. These are materials firms which are leading in their particular sub-industry in terms of producing lower-emission materials. One of the largest European aluminum and renewable energy companies⁷ fits this category, being in the first quartile for the MSCI Carbon Emissions Score within the aluminum industry.

Why are these types of materials companies of potential interest to investors?

We believe this theme has the potential to deliver outperformance versus broader equity markets over the long run, for some key reasons.

One of the alpha drivers stems from the fact that, in our view, emission reducers – or companies which are decarbonizing in industries such as metals and mining, cement and construction – are expected to benefit from a re-rating as their sustainability risks decrease. In turn, with a higher multiple, they should become more valuable to own over the longer term.

Meanwhile, enablers, as companies producing transition metals, are poised to benefit from stronger-than-expected earnings growth if the adoption of lower carbon technologies exceeds expectations.

On this point, we can find many examples of disruptive technologies that have vastly exceeded consensus expectations due to the S-shaped nature of their adoption curves. Using the example of copper for EVs and renewables, even at consensus expectations, demand is expected to be around 4.8x higher in 2030 versus 2022⁸.

Will this be a long-term opportunity? What happens once these materials companies are considered “green”?

Those materials businesses which, like the “green leaders”, spearhead the reduction of emissions intensity in their respective industries, are likely to see persistent advantages as the market for low-carbon materials develops, in our view.

BlackRock’s Thematic and Sectors team expects these companies to benefit from lower operational costs and reduced decarbonizing capital requirements versus higher carbon peers.

Further, the rapidly growing demand for clean energy technologies such as EVs and battery storage, electricity networks, solar photovoltaic technology, wind and hydrogen, requires millions of tonnes of minerals – anywhere from around 15 million tonnes under the IEA scenario to meet stated decarbonization policies by 2040, to just over 40 million tonnes if the target is to reach net zero by 2050.⁹

Mineral demand for clean energy technologies in IEA scenarios, December 2022

This level of demand for materials reinforces the extent and scale of the transformation already underway in terms of how energy will likely be sourced in the coming decades. Yet we believe the market might be underestimating the pace at which renewables are displacing fossil fuels amid global efforts to decarbonize.

We expect to see trillions of US dollars allocated to the clean energy transition and this will create structural demand growth for the materials required over the coming decades. Based on this analysis, it is our view that investors who choose to position their portfolio in line with these shifts can capture a significant investment opportunity.¹⁰