?? Climate Investing: What it is and Where to Start ??

Across all sustainability issues, 88% of global investors rank the environment as their top priority. This statistic highlights the growing recognition among investors of the urgent need to address climate change through dedicated investment strategies. In this guide, based on insights from iShares by BlackRock, we break down climate investing, explore the forces driving its momentum, and provide a roadmap for investors to get started.

?? What is Climate Investing?

Climate investing focuses on choosing sustainable investment strategies where climate risks and opportunities are key considerations. This approach enables investors to align their portfolios with the transition to a low-carbon economy, balancing both environmental impact and financial return.

?? What’s Propelling the Shift?

Several long-term structural forces are driving the accelerated shift toward climate-conscious investing:

1. ??? Extreme Weather Damage

• In 2020, natural disasters caused $210 billion in damages, the highest amount on record.
• As climate-related risks increase, more investors recognize the financial urgency of sustainable strategies.

2. ?? Global Climate Regulations

• Today, 134 countries have pledged to achieve carbon neutrality.
• These regulatory commitments provide a clear signal to investors of the need for climate-aligned portfolios.

3. ?? Clean Energy Innovations

• Renewable energy is becoming more affordable, with the cost of solar photovoltaic technology dropping by 89% from 2009 to 2019.
• Clean energy investments offer both environmental benefits and growth potential as innovation continues.

4. ?? Favorable Investor Sentiment

• Globally, almost two-thirds of people across 50 countries view climate change as an urgent issue.
• This sentiment drives demand for investment products that reflect a commitment to sustainability.

In response to these forces, company climate disclosures have nearly doubled over the past five years. Enhanced transparency helps investors make informed decisions regarding climate risks and opportunities.

?? Navigating the Transition with ETFs

As the demand for climate-conscious investments grows, Exchange Traded Funds (ETFs) offer an accessible solution for investors. ETFs provide transparency and flexibility, allowing investors to pursue both financial and climate goals. The surge in annual inflows to sustainable ETFs reflects this trend:

YearAnnual Inflows (USD)2016$1.4 Billion2017$4.1 Billion2018$6.8 Billion2019$29.3 Billion2020$87.8 Billion

By 2020, inflows into sustainable ETFs were 63 times higher than in 2016. This growth underscores the rapidly rising interest in ETFs as a tool for climate-aligned investing.

?? The Three Climate Investing Approaches

BlackRock categorizes climate investing within ETFs into three primary approaches, each with unique goals and strategies:

1. ?? Reduce Exposure to Carbon Emissions or Fossil Fuels

• This approach involves minimizing or excluding companies with high carbon emissions.
• Goal: Lower portfolio exposure to industries heavily reliant on fossil fuels.

2. ?? Prioritize Companies Based on Climate Risks and Opportunities

• This approach increases the weight of companies aligned with Paris Agreement temperature targets.
• Goal: Enhance portfolio resilience by focusing on leaders in climate preparedness.

3. ? Target Climate Themes and Impact Outcomes

• This thematic approach allows investors to fund specific climate-positive initiatives, like clean energy or sustainable agriculture.
• Goal: Directly support sectors that are pivotal to climate action.

“We believe that the biggest potential benefits will accrue to the global investors who are quickest to ready their portfolio for the new era of climate investing.” — Manuela Sperandeo, EMEA Head of Sustainable Indexing at BlackRock

?? Building a Climate-Conscious Portfolio

Starting with climate investing doesn’t mean sacrificing financial goals. By choosing a tailored approach and leveraging tools like ETFs, investors can achieve both sustainability and financial growth.

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