(Credit: BlackRock)The climate transition presents a historic investment opportunity, one that will enable the continuation of a massive acceleration of capital towards companies better prepared to address climate risk, wrote BlackRock chairman and CEO Larry Fink in his annual letter to CEOs. Every management team needs to consider how this transition will affect their company’s stock, he wrote, warning that companies that are not actively preparing themselves for the transition to a “net zero” economy will see their businesses and valuations suffer.
The recent transition towards more sustainable investments — from January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019 — has been driven in part by the growing availability and affordability of sustainable investment options. “Not long ago, building a climate-aware portfolio was a painstaking process, available only to the largest investors. But the creation of sustainable index investments has enabled a massive acceleration of capital towards companies better prepared to address climate risk.”
Alongside the shift in investor behavior has come a shift in policy response to climate change. In 2020, the EU, China, Japan, and South Korea all made historic commitments to achieve net zero emissions. With the US commitment last week to rejoin the Paris Agreement, 127 governments – responsible for more than 60% of global emissions – are considering or already implementing commitments to net zero. This will have dramatic implications for the global economy, with no company being immune from a profound impact of the transition to a net zero economy, Fisk wrote.
As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders. Companies that are not quickly preparing themselves will see their businesses and valuations suffer, as stakeholders lose confidence that those companies can adapt their business models to the dramatic changes that are coming.
It’s important to recognize that net zero demands a transformation of the entire economy, Fisk wrote, requiring both technological innovation and planning over decades. “And it can only be accomplished with leadership, coordination, and support at every level of government, working in partnership with the private sector to maximize prosperity,” he said.
