Transition finance a ‘mega force’ for investors, says BlackRock

BLACKROCK is marshalling its resources to help investors who wish to deploy capital into the low-carbon transition theme, which its chairman Larry Fink said is “top of mind’’ for many clients.

The world’s largest asset manager, with roughly US$9 trillion under management, has put together a transition investing platform, with assets under management (AUM) totalling more than US$100 billion and spanning public-market portfolios, private-market funds and transition deals.

The funds on the platform are all BlackRock’s. Private banks are able to access the platform, but availability of the funds will depend on jurisdiction. The company has begun fundraising for the fourth vintage of its climate infrastructure franchise – investing in transition-enabling infrastructure, including wind, solar and battery storage.

It has also rolled out the BlackRock Investment Institute Transition Scenario (Biits) framework. Biits draws on proprietary models, powered by the company’s own Aladdin technology, to deliver a forecast of how the low-carbon transition would likely unfold across technologies, sectors and regions.

Biits is positioned as a “compass” to help investors navigate the risks and opportunities. Over time, a “scenario engine” will be launched to enable clients to get more granularity. BlackRock found in a recent survey that 56 per cent of global institutional investors expect to increase their allocations to transition strategies over the next one to three years.

BlackRock Investment Institute deputy head Alex Brazier said: “We believe this is the first time a fiduciary has given its investors the ability to try and map out different aspects of the way the economy is changing, as a result of this mega force.

“(Biits) is a view of what seems most likely to actually happen in the economy globally and regionally, given the way the technology, policy and preferences are shaping up... We’re able to think about what that means for profits, investment flows, and how that’s likely to affect interest rates and central banks...

“We see tipping points being reached reasonably soon, particularly in developed markets and in automotive. But we see sticking points – for example, sources of finance in emerging markets. And we see sticking points in the transition in heavy industry, because the technology isn’t there yet to shift the production structure.”

Fink, in his letter to shareholders earlier this year, said transition finance offers some of the most attractive investment opportunities in the years ahead. “It is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy, and we don’t know the ultimate path and timing of the transition. Our job is to think through and model different scenarios, to understand implications for our clients’ portfolios,” he said.

BlackRock has been advocating greater disclosure and asking questions about how companies plan to navigate the energy transition, he added. “As minority shareholders, it’s not our place to be telling companies what to do. My letters to CEOs are written with a single goal: to ensure companies are going to generate durable, long-term investment returns for our clients.”

BlackRock Investment Institute’s latest mid-year outlook publication points to transition finance as a megatrend, alongside artificial intelligence, geopolitical fragmentation and ageing populations, among others. It expects the low-carbon transition to involve a “massive reallocation of capital as energy systems are rewired”.

“We expect inflationary pressures in (the) coming years as higher energy prices combine with increasing capital spending – though this effect may dissipate over time as low-carbon technology costs decline... The impact on portfolios depends not only on the timing and size of these shifts, but also when markets price them in,” it said.

Last year, BlackRock set up Transition Capital, a unit within its private markets business, to facilitate the sourcing of opportunities across asset classes and geographies. It also set up a transition capital investment committee to bring together the most senior investors across the group.