Low-carbon transition is rewiring energy systems – and portfolios
Taking advantage of the change requires investors to have a view on where costs are landing, where technologies are heading, and how the dynamics between different components of the value chain are evolving.
INVESTORS face a new regime. On the surface, it is characterised by greater macroeconomic and market volatility. Looking deeper, it is driven by what investors can understand as “mega forces”.
These are big, structural changes that will unfold over decades, shape long-term growth and inflation, and prompt shifts – some sudden, some gradual – across economies, sectors, and businesses.
We are tracking five such changes: ageing populations and demographic divergence; digital disruption and the advent of artificial intelligence; growing geopolitical fragmentation; fast-evolving changes in financial architecture; and finally – the low-carbon transition and resulting reallocation of capital as the global energy system is rewired in many parts of the world.
The low-carbon transition isn’t a single trend but rather a complex series of structural shifts in energy, materials, food and land usage towards a lower-carbon world. We anticipate that it will move at different speeds across regions and sectors, and the Blackrock Investment Institute’s Transition Scenario estimates that the adoption of low-carbon energy sources could jump as the relative cost decreases.
It could spur an average of US$4 trillion per year of capital investment, with low-carbon sources such as solar and wind making up 70 per cent of the world’s energy mix by 2050, almost twofold of the current status quo. In Asia, low-carbon energy sources are estimated to constitute over half of its energy demand by 2050, with the region’s energy sector capital expenditure doubling to over US$2 trillion per year by 2050, according to Blackrock.
Across the whole portfolio, from public to private
As investors decide what the transition means for their financial goals, they are increasingly looking at opportunities – both highcarbon and low – in terms of their whole portfolio.
A Blackrock survey of 200 global institutional investors found that a majority indicated a preference for a whole-portfolio approach to transition investing. Ninety-eight per cent responded that they already incorporate a transition investment objective across their portfolio, and some 56 per cent anticipated increasing their allocations to transition strategies over the next one to three years, including across private markets.
From an investor point of view, private markets can help provide targeted exposures to different sectors while addressing a variety of objectives, including generating income, capital appreciation, or mitigating risks.
For companies, they can provide faster, more flexible financing than public markets and also extend capital to businesses that cannot otherwise access them.
Although sometimes viewed as a single investment option, private markets span different sectors, geographies, investment styles, and risk appetites. There is no one type of private asset and the key is recognising the differences and choosing the right option for an investor’s needs.
Infrastructure: where transition and private markets intersect
While the low-carbon transition will impact nearly every asset class, it is particularly meaningful for infrastructure.
Stubbornly high inflation, along with the recent volatility in stock and bond markets, has revealed the strengths of many infrastructure investments. Being essential to the economy and our daily lives, infrastructure offers cash flows that are less tied to economic cycles than other asset classes.
Many infrastructure assets often have long-term, inflationlinked contracts that can span decades, which can help provide ballast in a volatile environment. But what does this look like in practice as the interplay of different policies, technologies, as well consumer and investor preferences drive this rewiring of energy systems?
In Asia, which accounts for nearly half of global emissions and where 80 per cent of primary energy consumption is reliant on hydrocarbons, policy tailwinds, growing cost competitiveness, and investor demand are creating opportunities that span the full value chain.
Take, for example, power generation, which is often a starting point for investors with transition investing objectives as it is a carbon-intensive sector. In South-east Asia, policies are increasingly supportive of renewable power sources.
The Philippines is working towards 3.6 gigawatts (GW) of capacity allocated to commercial operation in both 2024 and 2025, rising to 4.4 GW in 2026. Thailand has set an objective of 30 per cent renewable capacity by 2037. Malaysia’s renewable-energy generation goal stands at 31 per cent by 2030, and 70 per cent by 2050.
These policy tailwinds set the stage for private capital to find opportunities, ranging from power generation to storage, transmission, and ultimately consumption.
In parallel, we have seen a trend of stronger public-private finance partnerships that bring together governments, corporates, and other market participants to accelerate the flow of capital into emerging market climate infrastructure.
In the last year, a unique blended finance strategy announced in 2018, that combines public, private, and philanthropic financing, backed solar projects in Thailand, the Philippines, and Malaysia. This type of investment can support building of additional capacity, improving access to electricity, providing jobs, or meeting emissions reduction or energy independence goals.
Beyond renewables, opportunities can be found not just along the value chain, but also within its different component parts. Take, for example, batteries and other energy-storage systems. These are becoming more essential as the pace of electrification accelerates.
The value chain of the battery itself can reveal potential opportunities from mining to refining to manufacturing, and through deployment in vehicle charging and energy-grid support, as well as recycling and second-life applications.
The implications may literally be massive – our climate infrastructure investment teams have deployed capital into what is slated to be the world’s largest battery energy storage system. A gridscale lithium ion battery outside Sydney, Australia, that will cover the equivalent of 19 football fields, it will store power, buffer supply shocks, stabilise the electricity grid, and provide reliable electricity through periods of peak demand.
And as the opportunity set itself is expanding, digital infrastructure is emerging as an important component of the energy system as well. There is growing demand for fibre broadband to connect people to high-speed Internet, cell towers to transmit mobile data, and data centres to store newly created data. From this emerges a growing need for green data-centre facilities, including across Asia, that incorporate state-of-the-art cooling technologies and on-site rooftop solar platforms.
Today, we manage US$138 billion in transition assets and this continues to grow. While the transition to a low-carbon economy is an investment opportunity, it’s also a lens through which to look at investing and risk.
The transition itself is so large that taking advantage of it requires investors to have a view on where costs are landing, where technologies are heading, and how the dynamics between different components of the value chain are evolving. While the transition affects the example of infrastructure more directly, and often first, it’s important to take a whole-portfolio view towards it.
Investors also need to be able to navigate the wide range of economies, cultures, languages and regulations across markets – for instance, in Asia, which is especially diverse. Having a local presence is key to understanding and capturing the unique opportunities available while managing the risks.