Jane: [00:00:01] Welcome to the LSEG Sustainable Growth Podcast. I'm your host, Jane Goodland, and I have the pleasure of talking to a range of experts about the issues which sit right in the middle of sustainability and finance. So today we're lucky enough to have Helen Lees-Jones with us. She's the Co-Head of Sustainable and Transition Solutions at BlackRock, which as we know is the largest investment manager in the world. So, they're very well placed to talk about transition investing that we're diving into today. So, we're going to look at what it is and why investors are doing it. So let's speak to Helen.
Jane: [00:00:37] So, Helen, thank you so much for joining us on the podcast today. I can't wait to get into the conversation because you've got a very, very cool job title working for one of the well, actually the largest asset manager in the world. So, who better to talk to about transitioning, than yourself? But let's talk about how you got to where you are today in terms of your role, walk me through, how you got there.
Helen: [00:01:00] Thanks, Jane. And firstly, thanks so much for having me on the program today. It's been great to meet you. You are a titan of this industry, so I've learned a lot from you. When it comes to my background, I started at BlackRock around 12 years ago. That was after six years in private wealth management. And when I joined BlackRock, I was head of strategy for the retail business, COO for the retail business. And then in this current position, Head of Corporate Strategy and Co-Head for our Sustainable and Transition Solutions group. And I think it's fair to say that over the last four years, the strategic topic number one for most asset managers has been the mainstreaming of sustainable and now more recently transition investing. So, in my job and heading corporate strategy for the region, it's been really incumbent on me to really immerse myself in this space. And so, throughout my tenure in corporate strategy, I've spent a huge amount of time really studying and thinking through what the transition to a low carbon economy looks like and obviously responding to regulatory change like SFDR. So, as I said, since the end of last year, I became co-head of our Sustainable and Transition Solutions group and this is quite a unique role within BlackRock where we're really responsible for helping drive and design the firm's sustainability and transition strategy. We're driving cross-functional change, we're supporting client and external engagement, and we're really partnering with our investment teams on product ideation. And given that everything that we do at BlackRock is putting our clients at the heart of our strategy, this has really just been a natural extension of my role on the corporate strategy side.
Jane: [00:02:23] And I'm sure you're very, very busy because the interest in everything sustainability and finance has absolutely really skyrocketed in recent years. Now, I wanted to kind of pick up on something that BlackRock published quite recently, which is the report outlining some mega forces, which I like that word actually, because we all know about mega trends. But perhaps you can tell us about what a mega force is and give us an idea how the transition to a low carbon economy fits into into that picture.
Helen: [00:02:52] So as many of your listeners will know, BlackRock is a global diversified investment manager and a technology provider. So, we're ultimately here to help our clients achieve their financial goals. And our role within that is really as a fiduciary and that's really core to what we do because the money we manage is really not our own. It belongs to our clients. And many of those clients make their own asset allocation and portfolio construction decisions. So, in order to help our clients achieve those goals, we're really focused on research. And recently our investment institute identified that we're really in a new macro regime, and it's characterized by persistent supply constraints, which is leading to tighter monetary policy and greater market volatility. And our research leads us to believe that the investment opportunities in this economic environment are going to look really different to those in the past. So, as you said, we've identified these mega forces and in this new macro regime and of course, asset returns, we see these mega forces really shaping the future. So, what are these five mega forces? Well, the first one is digital disruption, like artificial intelligence. The second is the rewiring of globalization, driven by geopolitics. The third is the transition to a low carbon economy. The fourth, aging populations. And five, a fast evolving financial system. So, our role, when we think about this transition to a low carbon economy and the whole role of sustainable and transition investing is really alongside these other mega forces and alongside other capital markets trends. So, the work we've been doing is really to help understand how these major structural trends are going to shape the economy, how they're going to shape markets, what it's going to do to asset prices and how that's going to change the choices we offer in terms of investment products, technology, and stewardship to help our clients achieve those goals.
Jane: [00:04:37] I'm really kind of interested about the interconnectivity between these forces because actually, I think they're all connected with each other, aren't they? So, this is also about kind of looking at the future, but also the dynamics between the forces and actually, presumably, this is not just about the future. This is about the present because portfolios have been impacted by all of these things right now.
Helen: [00:04:48] Exactly. And so, as we're thinking about these mega forces, what we're really trying to do is put this information as much information as possible on all of these trends in the hands of our clients and in the hands of our portfolio managers. So, in the case of the low carbon transition, we have energy, climate and macroeconomic models all merged into one to give our fundamental investors insights, to give them bottom up research alongside their own, to help them really think through what are the transitions’ tipping points, things like falling technology costs and sticking points. Things like supply chain bottlenecks. We really want them, to your point, Jane, to track them in real time. So, this is happening now, but it's also happening in the future. So, we're constantly updating our thinking and taking all of these data points and putting them into our view of how we think the transition is likely to unfold.
Jane: [00:05:45] So let's take this into a more specific direction so and think about what we actually mean about transition investing. Help us understand what this is in the context of the broader sustainable investing, for example, so can you help us kind of work through that one?
Helen: [00:06:05] Sure. And we can certainly give you our sense of what it is at BlackRock. As you said, this space is evolving. It's still in its infancy in terms of an industry definition, but the way we look at it is really there are four things, but there are really four things that we think are contributing to the transition. So, the first thing is really looking at investing in assets that are preparing for the transition. So those are things that are focused on improving and or leading on mitigating GHG emissions within their industry, in either their business operations or their business models. So let me bring that to life for a second. An example there might be a company that outperforms its peers in reducing emissions intensity or deploying more CapEx into low carbon solutions. So that's the first one preparing for transition.
Jane: [00:06:49] If you were looking at those sorts of let's look at companies for, you know, that might go into that first box. Isn't it difficult to identify those types of companies? Because how easy or difficult is it to know how much CapEx a company is investing in, I guess, transition aligned activity? Because isn't that really hard to know? And how do you find that stuff out?
Helen: [00:07:14] It's a great question, Jane. And I think everything that we're doing as investors is based on information that is available. And as we know in this space, information is increasingly becoming more available as more frameworks and more disclosure happens in the industry. And obviously what we've seen over the last few years as many more globally focused template aligned ways of companies allowing them to disclose their own corporate strategies, their own plans, their own transition plans. And within those you will see specific reference to CapEx plans or other emissions target reduction. And so, what we're doing is very much focused on that public disclosure of information that corporates are putting out there. Obviously, some corporates, particularly the larger ones, are more advanced than others. And so, what we try and do is really understand as much information as we can get our hands on in order to be able to categorize a product in this way.
Jane: [00:08:02] And then presumably that's really important that that happens globally, right? Because portfolios, if you're thinking about these themes, I guess you would tend to think about them globally or at least internationally. And so, disclosure, in different regions then becomes a really important asset for investors, right?
Helen: [00:08:20] Yeah. And I think what we're focused on is ensuring that as an ecosystem, as a global industry, there is as much consistency as possible in order to be able to have that comparability across the landscape. And as we know, you and I know this market is still evolving and different levels of disclosure exist. But we believe that over time this is going to become easier to compare and contrast as we have more global frameworks like TCFD is one example.
Jane: [00:08:45] Yeah. Okay. So that was bucket number one. Sorry. We went on a little journey around the houses there, but let's come back down to what's the group two within your transition investing landscape?
Helen: [00:08:55] So the second one is those companies or assets that are aligned to a specific decarbonization pathway. And that may be something that is industry standard, or industry accepted in that specific sector. So, let's take an easy example here. We take anything that might be Paris-aligned as a benchmark within an index product as being aligned to the transition. The third one is benefiting from the transition. So that's those assets where they provide those key inputs really necessary for decarbonization to happen. And ultimately, we think those corporates will benefit from macroeconomic trends offered by the transition. So, let's take a good example here. It's very topical. A company that produces lithium as one example, it's a key input into electric vehicle batteries. And we would really see a lithium producer or miner as a company benefiting from the transition to a low carbon economy. And be patient. There's one final one contributing to investing in solutions for interim low carbon alternatives. So that might be something like a wind farm or a grid scale battery as one example, and that's really to help mitigate those emissions in the real world. So, we look at it in this round of different factors of contributing to preparing for being aligned to or benefiting from the transition to a low carbon economy.
Jane: [00:10:10] I think that's really interesting, actually. And thanks for taking us through that because I think it's quite natural for people to think about the investment opportunities arising from transition to low carbon economy as being the straightforward, renewables or batteries. That's I mean, I don't know about other people, but I think it's kind of normal to go straight there. But actually, the whole value chain is an important aspect in terms of thinking about the suppliers to all of those organizations. And also, your first two categories in terms of the preparing for and the aligned, they all have a role to play in the transition as well. So, it's not just about the benefit is or the solution providers. So that's useful. And I think from a portfolio construction perspective, then that is probably music to clients’ ears, right? Because actually it creates a lot of bandwidth to be able to build resilient portfolios, which actually are not necessarily just focusing on just a single part of the market. Right? You get more diversity if you're thinking about transition as a continuum. So good. Understood. Brilliant. I guess what I'm kind of curious to know is what does this look like in practice? Is this actually happening? Is it across different asset classes? What does it actually look like in a portfolio? I did see something that in one of your recent pieces about a client survey that you've done that is actually, I was staggered by the results. So perhaps you can share a little bit of that and tell us how this is manifesting.
Helen: [00:11:36] Absolutely. Well, I think, as you said, there isn't really a one size fits all approach, right? So, our clients range from anything from financial advisors all the way through to large pension funds, sovereign wealth funds. And each of them has really unique needs, objectives, time horizons. So, we're seeing a lot of different ways in which the transition is being considered by our clients. And you referenced the survey that we've just done of 200 global institutional investors, and we asked a number of questions around how they were thinking about the transition, what their views were in terms of actual investment allocation. And we actually found that 56% of those clients were intending to increase their allocations to transition strategies over the next 1 to 3 years.
Jane: [00:12:19] That is massive.
Helen: [00:12:20] And this is a global average figure. And so obviously there are some regions which are perhaps a little bit more advanced. Europe, I think, has spent a little bit more time considering this. But we're certainly seeing globally that institutional investors are seeing that this is something that from both a risk management but also an investment opportunity perspective that can't be ignored.
Jane: [00:12:39] Yeah, it's a really good point, actually. This this whole thinking about. sustainability issues more generally, but also transition to low carbon economy as possessing both risk and opportunity from an investment perspective, and I think it's quite again, it's quite easy for us to only think about either risk mitigation or the upside. And actually, I think the perfect situation is a blend of both. So, what does that look like in a portfolio in terms of, if you've got, for example, a theoretical, you know, very large corporate pension scheme, for example, what are they actually doing to embed transition investing in their portfolio?
Helen: [00:13:15] Yeah. A great question. I mean, let's take your example of a corporate pension fund. You know, there are really three things that we are hearing from clients most, as you said The number one is around how we think the transition will unfold. What's our best estimate based on all of the inputs that we have at our fingertips, and what are the risks to my portfolio? So, there's a large degree of searching for some answers, using data analytics and research to really analyse portfolios. We have a number of tools available to us, whether it's our Aladdin platform, a carbon x ray capability, which is really focused on assessing a client's portfolio and looking at how well aligned it is to their specific goals, whatever they may be. The second question we have is really what are the biggest investment opportunities? How do I play this theme in active? What does it look like from an index perspective? Should I play a broad based private markets portfolio or something much more targeted on energy and infrastructure? So, this question around how do you maximize investment returns in a portfolio is a criteria number two. And then third, and I think probably the hardest one and why this transition is a complex task is for those clients who have made a net zero commitment by 2050 and they want to know how do I execute on this commitment? How do I go from this commitment that I've made to implementing it in a multi-billion dollar portfolio? And so, this question around, I'd like to be sustainable. I'd like to have a transition theme. I obviously need to consider my fiduciary responsibility to deliver financial performance and returns in my portfolio. Managing all of those different inputs is something that we're working with our clients on to really understand how do we calibrate; how do we model their portfolio? And we do a lot of portfolio analytics to help them think through different scenarios around supplementing or replacing certain categories, themes, securities, issuers in order to meet some of those portfolio objectives. And as you said, those objectives are really different based on their starting point.
Jane: [00:15:10] You talked about the first stage of really sort of getting underneath the skin of the objectives etc. It sounds like you spend lots of time and invest time in talking to clients and really understanding the motivations? What role does education play, and do we have enough education out there for the financial sector to really grasp the nettle here?
Helen: [00:15:35] One of the great privileges of the role that I've had over the last four years is that I've met so many incredible experts in this field, whether it's climate scientists, whether it's sustainable investors, whether it's people from the policy sphere and think there is a vast array of knowledge out there. And what's really exciting to see is the industry and the ecosystem working together, brainstorming on how this could look. And so, I think there is a wealth of information out there. I think the harder task, Jane, is how that relates to your specific situation. So, taking principles, policy, regulation, investment incentives like USIRA or the Green Deal and saying, okay, well, what does that mean for my portfolio specifically? And so, the time we spend with our clients is taking all of that insight and expertise that we have across our own firm and really working with them across whether it's Investment institute research and our Sustainable Investment research team alongside our Investment Institute colleagues on a broader macroeconomic scene, whether it is within our Sustainable and Transition Solutions group. And we have an amazing team of experts within our team here who have got deep industry knowledge, who have been practitioners for a long time. And then we have your more traditional investors, your CIOs and other investors who are also learning and taking all the data and analytics that are becoming available and putting those into portfolios. So that education, I think, is critical. To your question, is there enough, I think that that standardization that you mentioned at the beginning around being able to all be evaluating similar attributes for there to be common standards and taxonomies that are globally relevant, I think there is obviously more to do there and that's to be expected. The world is moving at different paces. Different regions are seeing different areas of expertise. We know the EU has a big focus on being the world's first sustainable continent, and so it's really a strong focus in this region. But I think one of the great benefits of BlackRock as a global investor is that we are really trying as hard as we can to bring as many insights as we can in a distilled and analytics focused way to our clients to help them really think about what that means to their portfolio specifically. So, it really does become quite a bespoke and one on one engaging conversation based on a client's starting points and objectives.
Jane: [00:17:47] Yeah, think I can imagine a somewhat or seemingly simple question from a client saying, how do we reflect this in our strategic asset allocation actually turning into a huge, several month long project of actually working that through in reality? So, this is not a quick fix or easy win necessarily, is it? This is probably like an evolution over time of portfolios about how they pardon the pun, transition from today to something which is more aligned with the transition to the low carbon economy. So, and also just want to touch on asset classes as well. So, is this mega force of that we're talking about today, is this permeating across different asset classes? Are you thinking about that in the round?
Helen: [00:18:31] Well, absolutely now think it is a whole portfolio question, especially as clients overlay more of these perhaps top down aspirations like a net zero target their corporate or pension scheme level. And so, it's very hard to achieve that if you're not looking at your whole portfolio. I think what would observe from what we've seen so far, however, is that the allocation to sustainable or transition strategies has been relevant to the macroeconomic environment as well. So, over the last five years we've been in more of an equity market. Now we're moving much more into a cash and fixed income market. But I would say the prevalent and ongoing trend that we're seeing is that the participation in private markets is really where we're seeing a huge amount of activity and investment. And obviously, in order to make the transition happen, private markets will play a really pivotal role, particularly in the energy transition. And we've seen a number of different opportunities for clients today. But we're also taking the really long term view on what we think the next big trends are going to be tomorrow. And we really think that this intersection between sustainability and infrastructure is going to be one of the biggest investment opportunities in alternative asset management over the years to come. So, we've really seen that energy financing of the transition, a dominant theme already, particularly in infrastructure investing, and we think that's going to continue. But we do see that over the next ten years there's going to be a heavy focus on things like rolling out infrastructure for low carbon transport, things like charging stations to catch up with the demand we're seeing in electric vehicle purchasing. Over the next 30 years, we really see things like clean hydrogen and carbon capture, low carbon aviation fuels as major breakthrough investment opportunities. So, the private market space has really been, I would say, the area in which we've seen so much real world activity. But there are really examples across the board, whether it's Paris-aligned benchmarks and green bonds in our ETF and index platform, whether it's transition readiness or climate action strategies, future of transport, circular economy on the active side and as I've said in private markets, decarbonization solutions across private equity, infra renewable power has really been a big area of focus. So, it's tended to be across the whole portfolio. But I think one of the next opportunities for the industry is really to think through not only how these asset classes play individually, but how we combine them all to think about that whole portfolio approach that clients are now having to hit based on those net zero targets that they've made.
Jane: [00:21:03] Yeah. A personal favourite of mine, I suppose, is thinking about sustainability in infrastructure because that's where it gets very real. It's very easy for people to get their head around what that means in terms of thinking about electrification of transport systems or, water desalination. This is the real stuff. You can point to it. It's real. It happens. It makes a massive difference to the way whole countries and regions operate and support themselves. So great that we covered that. But this isn't straightforward, I'm guessing. So can you just share with us some of the key challenges that you see for transition investing and which may hamper more widespread adoption, for example.
Helen: [00:21:47] Well, I think you mentioned it a few minutes ago, Jane, when you were talking about what's the definition? I think it's really important to state that not all transition strategies are sustainable strategies and not all sustainable strategies are transition focused. So, for example, solar panels or wind turbines and clean energy technology development we would see as both a transition and a sustainable investment. But those investments that are really just focused on social outcomes but don't consider the transition to a low carbon economy as only sustainable. So, I think it's really important to ensure that we're not trying to blur multiple different concepts and being really specific. And that's why we've tried to outline very specifically what we mean by transition investing and how that looks on this continuum all the way from brown today to green tomorrow over this long time horizon, and to address the myriad different client needs and starting points that we're seeing. So, think point number one is really to ensure that when we are talking about and explaining what we're doing, that we have as much specificity as possible around what we mean by those different categories. And as this market evolves and develops, whether it's through regulation or industry standardization, that's going to be really critical. But I think with investing specifically, one of the things that we've done is launched our transition investment scenario and that really helps us understand it's called the BlackRock Investment Institute transition scenario. We call it the Beats.
Jane: [00:23:09] Snappy Title.
Helen: [00:23:10] But that, is this, this piece of research and modelling that we've done which takes all of these inputs out there. And that research that we've done that we launched in July, and we are taking it around our clients at the moment, it really calls out three specific challenges and opportunities that call out to this group. Firstly, transition is really unfolding at different speeds across sectors and across regions. So, you've got sectors like power and automotives within key regions, mainly in developed markets that are in the fast lane where we expect those tipping points in the near term to lead to large scale decarbonization by mid-century. On the other hand, you've got new areas emerging out of what we're seeing from the transition unfolding. Things like climate resilience has taken on a new focus. We estimate that extreme weather and other climate related physical damages could amount to more than 5% of annual GDP by mid-century. So that's a big number. And this, we think, is going to create new investment opportunities in climate resilience focused areas, things like efficient irrigation systems to support agriculture as those temperatures change and disrupt weather patterns so that that emergence of climate resilience as well as mitigation is something that we think is going to be an important factor to consider as part of the transition unfold. But perhaps the third and most important one, when we think about how this sits alongside those other mega forces and other themes, is that we do expect the transition to contribute to inflationary pressure over the next decade. And this is because we think on net, the transition is driving up energy costs in the near term. And so, when we look to 2030, we think some of those energy transition components are going to have an inflationary effect. But it's a little bit more uncertain as you go beyond 2030 because especially if innovation increases, some of those inflationary pressures may reduce and even reverse as low carbon energy comes online. So, I think as we said from our near-term inputs, we have the sense that the energy transition is contributing to inflation, but actually post 2030 dependent on how this transition unfolds, that may actually reverse over time. So those would be the three kind of areas that we would call out from our research on transition.
Jane: [00:25:26] That's really, really insightful. And I think it feels like this is a job of trying to gaze into a crystal ball a little bit because it's so much is unknown. But thank you so much for kind of setting it out so clearly for us, Helen, and giving us just an insight into some of the research that you guys are doing. It sounds fascinating and I want to get my hands on that scenario thing. Whatever the title is, it's very long.
Helen: [00:25:50] The Beats!
Jane: [00:25:52] But it's been lovely speaking to you. Thank you so much. And I just want to see what you guys do in the future because it seems like you're really at the forefront of this whole shift and the way that the financial sector can really lean in to the transition. So, thank you again for your time. I really appreciate it.
Helen: [00:26:09] Thanks so much for having me, Jane.
Jane: [00:26:14] So that's it for this week's episode of the LSEG Sustainable Growth Podcast, which I hope you found as interesting as I did a lot to get your head around in that episode. Thanks for listening. And if you're not already following us, then please do. And don't forget to rate us on Spotify, Apple Podcasts, or any other platform. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at fmt@lseg.com. That's all from me, but I hope you'll join us for another episode very soon.
