Climate Investing: What it is, What’s Propelling it, and Where to Start
The following content is sponsored by iShares by BlackRock.
Climate Investing: What it is and Where to Start
Across all sustainability issues, 88% of global investors rated the environment as the number one priority. Clearly, investors are recognising the urgency of climate change and the need for related investing strategies.
In this graphic from iShares by BlackRock, we define climate investing, the forces giving it momentum, and how investors can begin to implement it in their own portfolios.
What is Climate Investing?
Climate investing involves selecting sustainable strategies where climate risks and/or opportunities are key considerations. This helps investors align their portfolios with the transition to a low carbon economy.
What’s Propelling it?
There are a number of long-term structural forces accelerating the shift to climate investing.
- Extreme weather damage: In 2020 alone, damages from natural disasters hit $210 billion—the highest amount ever recorded.
- Global climate regulations: Around the world, 134 countries have made a carbon neutral pledge.
- Clean energy innovations: Renewable energy is getting cheaper, with production costs of solar photovoltaic technology falling 89% between 2009 and 2019.
- Favourable investor sentiment: Almost two-thirds of people in 50 countries believe climate change is a global emergency.
In response to this momentum, the number of companies disclosing on climate change has almost doubled in the last five years. This transparency can enable investors to make more informed decisions.
How Can Investors Navigate This Fast-moving Transition With ETFs?
New products with climate considerations are helping investors with the transition, and one widely available vehicle is Exchange Traded Funds (ETFs). In fact, annual inflows into global sustainable ETFs have grown substantially.
| Year | Annual Inflows |
|---|---|
| 2016 | $1.4B |
| 2017 | $4.1B |
| 2018 | $6.8B |
| 2019 | $29.3B |
| 2020 | $87.8B |
In 2020, inflows into sustainable ETFs were 63 times higher than they were in 2016. ETFs are a useful tool because they offer the transparency investors need to pursue specific financial and climate goals.
The Three Climate Investing Approaches
Within sustainable ETFs, there are a range of funds that incorporate climate considerations. To bring clarity to this space, BlackRock has categorised climate investing into three key approaches:
- Reduce exposure to carbon emissions or fossil fuels. For example, this could involve minimising or eliminating companies that have high carbon emissions relative to their sector peers.
- Prioritise companies based on climate risks and opportunities. In practice, this could mean increasing the weighting of companies based on their commitments to align with Paris Agreement temperature goals.
- Target climate themes and impact outcomes. For example, an investor could invest in a specific sustainable activity or project, such as clean energy.
“We believe that the biggest potential benefits will accrue to the global investors who are quickest to ready their portfolio for the new era of climate investing.”
—Manuela Sperandeo, EMEA Head of Sustainable Indexing at BlackRock
No matter an investor’s approach, iShares believes that they can help catalyse the shift to sustainable investing.
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