'There is no template' for green transition investors, BlackRock's Wei Li says
In their annual shareholder letters, the CEOs of two of the largest financial institutions in the U.S. included climate change as a central issue for investors.
The costs of climate change are becoming more apparent, BlackRock (BLK) CEO Larry Fink and JPMorgan Chase (JPM) CEO Jamie Dimon noted, be it from disaster events like flooding and wildfires or from the investments needed to shore up resilience and transition the economy toward renewable energy.
Those risks are becoming increasingly harder for market watchers and investment professionals to ignore.
"For years now, we have viewed climate risk as an investment risk," BlackRock's Fink wrote. "Finance is not immune to these changes. We’re already seeing rising insurance costs in response to shifting weather patterns."
Dimon also called attention to these risks, placing an emphasis on the balance between energy supply concerns in the near term and the consequences of not acting quickly enough to halt global warming.
"The window for action to avert the costliest impacts of global climate change is closing," he wrote in his annual letter to shareholders. "At the same time, the ongoing war in Ukraine is roiling trade relations across Europe and Asia and redefining the way countries and companies plan for energy security. The need to provide energy affordably and reliably for today, as well as make the necessary investments to decarbonize for tomorrow, underscores the inextricable links between economic growth, energy security and climate change. We need to do more, and we need to do so immediately."
BlackRock and JPMorgan have faced scrutiny for financing the expansion of fossil fuels, the biggest driver of the climate crisis. At the same time, they have also encountered a growing backlash over their engagement with climate change and their consideration of environmental factors as part of a risk analysis framework commonly known as ESG — environmental, social, and governance investing.
As banks and asset managers become a new front in the climate discourse — and an important lever in the energy transition — they will need to navigate these challenges and unforeseen disruptions, as was the case with the COVID-19 pandemic and the invasion of Ukraine.
"As we think about this net zero transition, this net zero journey, there is no template," BlackRock Global Chief Investment Strategist Wei Li told Yahoo Finance Live (video above). "We have never done this before, so as we think about what that means for macro outlook and inflationary forecasts, we do believe that it represents a series of supply shocks that we also need to kind of protect our portfolios against."
Li said that BlackRock has embedded climate risk into its forecasts and strategic asset allocation, which "underpins our strategic sectorial preference for the likes of technology and health care."
She also pointed to dynamics in the energy markets in 2022, where energy outperformed as the Russia-Ukraine war sent oil prices soaring, but renewable energy also performed well.
When Russia cut the supply of natural gas to Europe, it tested the net-zero resolve of many nations that looked to burn coal and import gas from other places to meet their energy needs. Simultaneously, Europe deployed a record amount of solar, wind, and battery technology. The number of heat pumps installed globally grew by 11% last year.
Still, the energy transition is still in its early stages. As the Department of Energy has stressed, the U.S. is in the era of "deploy, deploy, deploy," meaning that other supply shocks have yet to unfold, particularly as surging demand for renewables comes up against shortages of materials and skilled workers.
Market participants would be wise to prepare for that, according to Li.
"This is one of the reasons that we believe that inflation is likely going to settle at a level that is higher than the pre-pandemic level," she said, "which is also why we believe that inflation protecting your portfolio, especially over the longer term horizon, is critical."
Read the latest news on the climate crisis from Yahoo Finance
Read the latest financial and business news from Yahoo Finance
Follow Yahoo Finance on Twitter, Instagram, YouTube, Facebook, Flipboard, and LinkedIn
