ESG: The majority of climate risk repricing 'is yet to occur,' strategist says

·Assistant Editor
·3 min read

Climate change has been called a consequence of the world's largest market failure

But as flows into ESG assets accelerate, it has led some to question whether or not sustainable investors are merely buying into a cycle of hype.

According to a new note from BlackRock that draws on a survey of 175 clients in Europe, the Middle East, and Africa, analysts “see no evidence of a sustainability 'bubble'” and that sustainable assets have room to run as markets reprice climate risks.

Repricing assets to include climate risks “is a phenomenon that markets have woken up to in the last couple of years,” Vivek Paul, BlackRock Investment Institute UK chief investment strategist, said on Yahoo Finance Live (video above). “We believe though, crucially, that the majority of that repricing is yet to occur.”

Paul also added that “while there will always be the odd company that might be overvalued, systematically, we believe we're far from any sort of notion of bubble territory.”

A bar chart from BlackRock compares climate repricing and the dot-com bubble.
Climate-driven repricing relative to the dot-com bubble. Photo: BlackRock

The 'tectonic shift' in climate repricing

Paul previously predicted that as climate repricing evolves, there will be a "tectonic shift" in capital being allocated to combat climate change. 

“Fast forward to today and we believe that there is strong evidence that the dynamic is real and is affecting prices right now,” Paul said in the BlackRock note. “The cost of capital for securities perceived to be greener is falling, and vice versa. Yet, although this effect is now statistically significant, most of the repricing is still to come.”

This dynamic appears to be playing out in uncertainties over the green energy transition. For instance, Stephen Schork, principal adviser at the Schork Group, previously told Yahoo Finance that oil prices will fundamentally shift higher because “capital goes where it's welcome, stays where it is well-treated, and clearly, capital is not welcome in the fossil fuel industry.”

At the same time. while pressures are ratcheting up to address climate change with financial firms joining net-zero pledges, many large banks like J.P. Morgan continue to underwrite fossil fuel projects.

HUNTINGTON BEACH, CA - OCTOBER 05: A surfer rides a wave at the Huntington Beach pier with an oil rig and Catalina Island in the background in Huntington Beach, CA on Friday, October 5, 2018. (Photo by Paul Bersebach/Digital First Media/Orange County Register via Getty Images)
A surfer rides a wave at the Huntington Beach pier with an oil rig and Catalina Island in the background in Huntington Beach, CA on Friday, October 5, 2018. (Photo by Paul Bersebach/Digital First Media/Orange County Register via Getty Images)

“In our view, the ESG journey is continuous," Ursula Marchioni, head of BlackRock Portfolio Analysis and Solutions, EMEA, stated in the BlackRock note. 

Marchioni explained that while some investors are "future-proofing" portfolios through specialized products to achieve specific aims, others are embedding sustainability more broadly into all aspects of their investment process.

“We expect that this latter approach — in which sustainability is seen as a core part of strategic asset allocation design — will emerge as the more prevalent one over the next 12-24 months,” Marchioni wrote.

When it comes to constructing climate-aligned portfolios, though, two major challenges have emerged: measuring sustainability profiles and measuring the impact of sustainability on risk and return.

That doesn't seem to be slowing down the demand for sustainable assets, however.

“We believe leaning into greener assets, all else equal, is likely to be [a returns] enhancer over the period of the transition that we're going to see,” Paul said.

Grace is an assistant editor for Yahoo Finance.

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