The Sustainability Shift: The Impact on Energy Investment

Achieving “net zero” by 2050 will require a shift in the global energy mix, from both a supply and consumption perspective. This has implications for portfolio allocations and alpha generation but there are diverse perspectives on the emergent risks and opportunities related to this shift. We recognize leveraging those diverse perspectives, deep market expertise, and collaborative intelligence across multiple disciplines are essential to forming differentiated investment insights. As such, we convened a group of energy experts from BlackRock’s active investing platform across multi-asset, equities, fixed income, and alternatives to discuss the intersection of energy, investing, and ESG.

Contrary to the notion that tackling climate change comes at a net cost to the global economy, we expect that mitigating climate-related damages will help prevent economic deterioration and improve risk-asset returns. We see the “green” transition to a carbon-neutral world rewarding companies, sectors and countries that adjust and penalizing others.

We therefore advocate a nuanced approach to investing in both traditional oil and gas and renewable energy companies, with opportunities and risks varying over different time horizons. We note that commodity fundamentals play an important role at the macro level, while the unique asset portfolios and quality of individual companies’ transition plans are essential at the micro level.

Powering ahead

Traditional energy has been an unloved sector in recent years. 2020 was particularly challenging as COVID-19 lockdowns drove the sharpest decline in oil demand since World War II. While the rebound in oil demand and associated performance of energy stocks has lagged the broader market recovery, we believe short- to medium-term demand for oil will recover as the global economy returns to “normal”. We also note that Chinese demand has not yet peaked, and demand from India is expected to grow as its economy industrializes and its population grows.