More

    Raw materials: Investing in the Shift from Brown to Green

    Share post:

    CAPITAL AT RISK – The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

    This is markteting material

    - Partner Message -

    The transition to a low-carbon economy requires a material revolution in the energy landscape. It is evident that materials contribute to the global emissions problem, but they are also a critical part of the solution. The world needs wind turbines, batteries for electric vehicles (EVs) and solar panels, and metals and materials are essential building blocks for such low-carbon technologies. As demand increases and companies actively work to reduce their carbon footprints, investors could be presented with a unique investment opportunity.

    Based on current energy policies the demand for these minerals is expected to more than double by 2040, according to the International Energy Agency (IEA)1. The IEA also expects that current demand could even triple should governments’ stated environmental pledges be put into effect, and potentially grow by a factor of five if governments strictly adhere to the IEA’s 2050 net-zero pathway.

    There is no guarantee that any forecasts made will come to pass.

    Source: BlackRock Investment Institute and IEA, December2022.
    Note: The chart shows the IEA’s estimates of demand – under three scenarios – for selected minerals in 2040 vs. demand in 2020. The three scenarios include: “stated” – which consider how energy supply evolves without additional steering from policy makers by 2040; “sustainable” -announced pledges that take into account climate commitments made by governments up to early October 2021 by 2040; and “net-zero2050” – capacity additions needed by 2040 to meet the goal of achieving net zero emissions by 2050. This information should not be relied upon by the reader as research, investment advice or a recommendation.

    Given the extractive industry’s large carbon footprint, there is a danger that moving away from fossil-based energy may simply shift the emissions problem towards the point of production.  For example, while the electrification of vehicles does help to significantly reduce their in-use (Scope 32) Green House Gas (GHG) emissions, the total lifecycle emissions of EVs include those of the electricity used to charge them as well as the materials and energy used in their manufacture.  The greening of electricity generation is already well underway, so there now needs to be a greater focus on decarbonising the extraction and production of the materials used in making EVs and their batteries.  Demand for metals and rare earth elements essential to power grids and renewable energy technologies is expected to grow as the low-carbon transition accelerates.  This may represent a potential opportunity for investors interested in capturing this growth opportunity while helping to finance the global transition.

    Alongside the growth opportunity are the potential gains from the re-rating of high GHG emitting companies as they implement greener practices. Utilities, materials, and energy firms are among the sectors exhibiting the highest emissions3. With the materials sector being key to the low carbon transition, it could represent a convincing combination of alpha drivers. BlackRock has pinpointed three types of companies belonging to the universe of companies which will benefit from the transition to a green economy (the ‘brown-to-green’ investment universe):

    1. Emissions reducers: producers aiming to reduce their GHG emissions over time.
    2. Enablers: firms providing materials or technologies to support this emissions reduction.
    3. Green leaders: companies that are leading the field in lower-emission materials production.

    While many of the raw materials needed by the renewable energy sector are relatively plentiful3, there is a lack of cost-effective, high-quality projects to develop these resources and bring them to market4. Unless this shortfall is addressed, certain materials such as copper could soon run into supply issues. The IEA estimates that cumulative capital investment of $360-450 billion in critical minerals will be needed by 20501, with more than half of that amount needed for copper alone.  Bridging this financing gap by focusing on the emissions reducers, enablers and green leaders may represent potential investment opportunity.  The shift towards renewable energy generation such as wind and solar requires more copper than the incumbent fossil fuel powered grids.

    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security in particular. Forward looking estimates may not come to pass.

    Copper required per unit of power capacity (Tonnes per megawatt)

    Source: BHP analysis, August 2023.

    The growth in output from the materials industry must be accompanied by a wide-ranging effort to reduce the sector’s carbon footprint.  According to IEA figures, materials extraction and production accounted for 17% of global GHG emissions in 2022, a share that is expected to grow as other sectors abate their emissions and demand for raw materials continued to grow apace.  What can steel producers do to move from ‘brown’ to ‘green’ value chains?  The first stage of a decarbonisation process can involve the introduction of renewable power sources, waste heat recovery and the recycling of energy-rich gases.  Steel manufacturers can also invest in higher-quality raw materials to improve production efficiency.  The second stage implies a partial transition towards low-carbon technologies such as biomass or hydrogen within furnaces, as well as carbon capture, use and storage (CCUS) technology to further reduce remaining GHG emissions.  The third and final stage that steel producers aim for is a complete transformation of their value chain. This would typically require major capital investment in green hydrogen power or the electrification of furnace technology.

    In the utilities sector, companies pivoting away from fossil fuels toward renewables have seen an uptick in their valuation multiples6, suggesting a positive trajectory that could be mirrored in higher-carbon sectors like European steel. While many steel manufacturers have begun this journey towards greener production methods, the copper industry is languishing behind. Although copper is essential for the transition of the energy sector and their related power grids, the number of copper mines currently operational may not be sufficient to meet demand.  There is therefore a pressing need for new investment and the return potential for new projects in this space may prove to be considerable. The current stock and growth in the number of battery-powered vehicles predicts an increase in the need for battery recycling in the near future. This means that investors could also benefit from these emerging needs, where specialist firms are already benefiting from rapid growth in demand.

    The nascent transformation of the materials sector could be greatly accelerated by concerted government action. Positive incentives like subsidies or tax credits can be accompanied by the pricing of GHG emissions via carbon taxes to create the right economic incentives for the market to shift towards the implementation of greener technology.  With the sensible application of such ‘carrot and stick’ measures, governments can help create the right environment for forward-thinking materials producers to flourish, thereby supplying a opportunity-rich sector for savvy investors.

     

    This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.

    Sources:

    1. International Energy Agency: Mineral requirements for clean energy transitions, December 2022
    2. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain. An organization’s value chain consists of both its upstream and downstream activities.
    3. Source: MSCI, May 2024.
    4. International Copper Association, 13 May 2023
    5. Goldman Sachs, Supply and Demand Forecast, 7 October 2023.
    6. Source: IBES, May 2024 

    This is marketing material.

    Disclaimer

    Risk Warnings

    Investors should refer to the prospectus or offering documentation for the funds full list of risks.

    Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

    Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

    Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

    Fund-specific risks

    BGF Brown to Green Materials Fund

    Concentration Risk, Counterparty Risk, Currency Risk, Equity Risk, ESG Screening Risk, Liquidity Risk

    Description of Fund Risks

    Concentration Risk

    Investment risk is concentrated in specific sectors, countries, currencies or companies. This means the Fund is more sensitive to any localised economic, market, political or regulatory events.

    Counterparty Risk

    The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

    Currency Risk

    The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.

    Equity Risk

    The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.

    ESG Screening Risk

    The Fund seeks to exclude companies engaging in certain activities inconsistent with ESG criteria. Investors should therefore make a personal ethical assessment of the Fund’s ESG screening prior to investing in the Fund. Such ESG screening may adversely affect the value of the Fund’s investments compared to a fund without such screening.

    Liquidity Risk

    The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.

    Important Information

    In the European Economic Area (EEA): this is issued by BlackRock (Netherlands) B.V., authorised and regulated by the Netherlands Authority for the Financial Markets.  Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

    BGF Funds: BlackRock Global Funds (BGF) is an open-ended investment company established and domiciled in Luxembourg which is available for sale in certain jurisdictions only. BGF is not available for sale in the U.S. or to U.S. persons. Product information concerning BGF should not be published in the U.S. BlackRock Investment Management (UK) Limited is the Principal Distributor of BGF and may terminate marketing at any time. In the UK subscriptions in BGF are valid only if made on the basis of the current Prospectus, the most recent financial reports and the Key Investor Information Document, and in EEA and Switzerland subscriptions in BGF are valid only if made on the basis of the current Prospectus, the most recent financial reports and the Packaged Retail and Insurance-based Investment Products Key Information Document (PRIIPs KID), which are available in the jurisdictions and local language where they are registered, these can be found at www.blackrock.com on the relevant product pages. Prospectuses, Key Investor Information Documents, PRIIPs KID and application forms may not be available to investors in certain jurisdictions where the Fund in question has not been authorised. Investors should understand all characteristics of the funds objective before investing, if applicable this includes sustainable disclosures and sustainable related characteristics of the fund as found in the prospectus, which can be found www.blackrock.com on the relevant product pages for where the fund is registered for sale.For information on investor rights and how to raise complaints please go to  https://www.blackrock.com/corporate/compliance/investor-right available in in local language in registered jurisdictions.

    For investors in Finland

    The prospectus (in English language) and PRIIPs KID (in Finnish language) are available at BlackRock (Netherlands) B.V. and also from www.blackrock.com/fi available in Finnish and English. BlackRock may terminate marketing at any time. Investors should understand all characteristics of the funds objective before investing, if applicable this includes sustainable disclosures and sustainable related characteristics of the fund as found in the prospectus, which can be found www.blackrock.com on the relevant product pages. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in English.

    For investors in Norway

    The prospectus and PRIIPs KID are available at BlackRock (Netherlands) B.V., Stockholm branch, Malmskillnadsgatan 32, 111 51 Stockholm, Sweden and also from www.blackrock.com/se available in Swedish and English. Investors should read the PRIIPs KID before making an investment decision. BlackRock may terminate marketing at any time. Investors should understand all characteristics of the funds objective before investing, if applicable this includes sustainable disclosures and sustainable related characteristics of the fund as found in the prospectus, which can be found www.blackrock.com on the relevant product pages. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in English.

    BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

    Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

    This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

     

    For investors in Sweden

    The prospectus and PRIIPs KID are available at BlackRock (Netherlands) B.V., Stockholm branch, Malmskillnadsgatan 32, 111 51 Stockholm, Sweden and also from www.blackrock.com/se available in Swedish and English. Investors should read the PRIIPs KID before making an investment decision. BlackRock may terminate marketing at any time. Investors should understand all characteristics of the funds objective before investing, if applicable this includes sustainable disclosures and sustainable related characteristics of the fund as found in the prospectus, which can be found www.blackrock.com on the relevant product pages. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in English.

    BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

    Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

    This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

     

    For investors in Denmark

    Danish FSA risk labelling: Yellow.

     

    © 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners.

     

     

     

    Image courtesy of NordSIP
    - Partner Message -

    Nordsip Insights

    From the Author

    Related articles