The wailing you hear from the fossil fuel industry and many politicians these days when the conversation turns to addressing climate change goes like this, “It’s too expensive! It will bankrupt the economy! We should go slow and make certain we include coal, oil, gas, and nuclear and cow flatulence in the mix!” That’s not the message from BlackRock Investment Institute, however. Its leaders issued a Capital Market Assumptions whitepaper in February that begins with this rather startling assertion:
“The popular notion that tackling climate change comes at a net cost to the global economy is wrong, we believe. Avoiding climate-related damages will help prevent economic deterioration and improve risk-asset returns, in our view. We see the ‘green’ transition to a carbon neutral world rewarding companies, sectors, and countries that adjust and penalizing others.”
The report makes 4 main points:
- Most forecasters ignore the effects of climate change in their economic projections or long-term return expectations. We don’t believe this is right.
- Our return expectations – the building blocks of our strategic asset allocation – now reflect the impact of climate change on the investing landscape.
- This is an integral part of a series of actions that BlackRock is taking to prepare for a net-zero world.
- We see the transition to a more sustainable world helping growth and presenting an historic investment opportunity.
The report’s authors go on to say, “Climate change and efforts to curb it will have major economic outcomes…..not just far into the future but even in the next five years. Economic projections that ignore climate change are widely relied upon — yet are based on an unrealistic future scenario…..A commonly held notion is that tackling climate change has to come at an economic cost. We think that’s wrong.”
“We assume the global economy transitions to a lower carbon path consistent with Paris Agreement goals. The positive effect of this transition rests on a gradual phasing in of carbon taxes, green infrastructure spending consistent with the IMF’s recommendation, and subsidies on renewable energy. If none of these actions are taken to mitigate climate change, we estimate a cumulative loss in global output of nearly 25% in the next two decades.” (emphasis added)
BII goes to great lengths to warn readers its projections are just that — informed opinions that come with no guarantees. It cautions against relying on them and specifically require those who view its white paper to agree not to sue BlackRock if its estimates turn out to be wrong. Yet it feels confident there are two likely scenarios going forward. The first involves a transition to a low carbon economy in which policies to address climate change are enacted. The second is a business as usual approach that assumes no actions are taken to limit the economic harm from a warming planet. “We see a green transition as a positive for growth and risk asset returns,” says Natalie Gill, a portfolio strategist at BlackRock Investment Institute.
The message is clear. The world’s largest investment company believes there is money to be made by pursuing an orderly net zero transition that minimizes upfront costs and maximizes benefits. The alternative is to do nothing and perhaps suffer a decrease in global economic output of 25% over the next 20 years. The choice seems clear. The question now is, how many corporations and political leaders will put a shoulder to the wheel to promote a net zero transition and how many will choose to kick the can down the road. When BlackRock, which can hardly be accused of fomenting economic alarmism, says it’s time to look to the future and turn our backs on the past, maybe we should listen?