BlackRock’s Thematics and Sectors team believe that as this transition unfolds, a number of the beneficiary sectors, beyond renewables, may have been overlooked and now present attractive potential alpha generating opportunities.

The BlackRock BFM Brown to Green Materials Fund invests in companies related to materials that are essential for the low carbon transition and opportunities created by decarbonising materials supply. The materials sector includes metals and mining, cement, chemicals, steel, and construction materials.

As the transition to a low-carbon economy unfolds, the investment team believes that companies in these industries that are decarbonising are expected to benefit from a re-rating as their sustainability risks decrease, resulting in these companies commanding higher multiples. The investment team expect these companies to benefit from lower operational costs and lower decarbonising capital requirements versus higher carbon peers.

The Fund will adopt the ‘Sustainability Improvers’ label under the UK’s Sustainable Fund Disclosure (SDR) regime. To qualify for the label, in complement to an objective of maximising total returns, the Fund targets a pre-defined sustainability objective to invest in assets that have the potential to improve environmental sustainability over time, determined by the potential of those assets to meet a robust, evidence-based standard.

The Fund will apply BlackRock’s proprietary ‘SDR Improver Assessment’ methodology to the companies in which it invests in. This methodology ensures that a minimum of 70 per cent of the Fund’s total assets are invested in equity securities that contribute to the Fund’s sustainability objective and its use of a SDR sustainability improvers label.

The Fund will be managed by Evy Hambro, Olivia Markham and Hannah Johnson in BlackRock’s Thematics and Sectors team, who manage the BGF Brown to Green Materials Fund. The investment team has been managing natural resources portfolios since their formation in 1991 and thematic portfolios since 2001.

Evy Hambro, Global Head of Thematic and Sector Investing at BlackRock says:

“We are targeting what we believe to be an overlooked segment of the value chain for lower carbon technologies. Companies which are high emitters today, but that have credible plans to decarbonise, could offer a significant investment opportunity. As the theme broadens out even further, these companies leading emissions intensity reduction efforts in their industries could benefit from a first mover advantage as the low-carbon materials market develops.

“This strategy has been designed to provide clients with exposure to the Brown to Green Materials theme, recognising that what could drive share prices from here, and what could make a positive difference to the world, is what happens moving forward rather than what’s already happened.”

Olivia Markham, CFA, Managing Director and Portfolio Manager at BlackRock says:

“Materials companies that best navigate the ‘Brown to Green’ transition could benefit from a re-rating in the valuation multiples the market is willing to pay for them. We expect global adoption of lower carbon technologies will drive stronger-than expected demand growth for materials required faster than anticipated, and this will result in higher materials prices and better-than-expected earnings for producers.”

The BFM Brown to Green Materials Fund has an ongoing charges fee (OCF) of 0.92 per cent for its D share class.

The firm writes that the new Fund meets the growing demand seen from UK wealth clients, building on a similar strategy, the BGF Brown to Green Materials Fund, launched in June 2023 for European investors, which has seen assets grow to ~ USD78 million. In the first year of the fund’s launch, there have been a number of highlights:

·        88 per cent of the portfolio is invested in companies on track with some or all of their decarbonisation goals.

·        76 per cent of the portfolio is invested in companies with targets to reduce emissions intensity by over 20 per cent in the medium-term.

·        6.4 per cent reduction in emissions intensity has been recorded on average from 2022 to 2023, as measured across portfolio holdings.

The Aviva Investors Carbon Removal Fund will invest directly in both nature-based and engineered carbon removal solutions that can provide high integrity carbon removal credits as part of a blended portfolio.  It has been seeded with an initial commitment from Aviva’s Investment, Wealth and Retirement business.

The fund has been designed to provide access to investments such as afforestation and restoration projects across areas of peatland and mangroves, as well as commercial forestry, venture capital and private equity-based nature tech, and alternative carbon removal companies.

Beyond carbon removal credits and low-carbon investments, the Fund will also seek assets and projects that can provide measurable co-benefits, such as biodiversity enhancement, species protection and reintroduction, improved water quality, employment and public access.

The launch of the fund coincides with publication of ‘Navigating nature: Opportunities for the investor of tomorrow’, a research paper which outlines why nature-related risks and opportunities should matter to investors, how investors can identify and engage with nature-related issues, and what actions Aviva Investors is taking to deliver investment outcomes whilst supporting global nature goals.

Daniel McHugh, Chief Investment Officer at Aviva Investors, says: “We are incredibly pleased to bring this fund to market, which serves as another example of our ability to match investment expertise with product innovation. Investors have been consistent in calling for investment strategies that can deliver long-term performance whilst also helping them to align with net zero ambitions. We think our Carbon Removal Fund is truly at the forefront of how asset managers can best-capture these opportunities. This is a fund designed for investors with ambitious decarbonisation pathways in place and that are looking for ways to hedge against exposure to carbon pricing.”

Ashish Dafria, Chief Investment Officer at Aviva adds: “As one of the largest investors in the UK, Aviva has the opportunity and responsibility to actively create positive change, so we’re delighted to support the launch of the Carbon Removal Fund. It’s another example of our commitment to developing and supporting attractive investment opportunities in environmental initiatives. We recently funded peat restoration and woodland creation schemes and believe this new fund can help us do even more, making the most of the investment expertise of our Aviva Investors colleagues and their ability to find projects that can deliver long-term value for us as a business, and for the UK”.

Conforming with Article 9 under the Sustainable Finance Disclosure Regulation framework, the Fund will also have a global remit allowing it to invest across both temperate and tropical climates, something which Aviva Investors believes is critical to address given the climate investment adaptation gap that exists between developed and emerging markets around the world.

In March, Aviva Investors, along with partners PAR Equity, the Scottish-based forestry investment fund manager, and Scottish Woodlands Ltd, announced the first phase of peatland restoration had been completed as part of its ongoing project at Glen Dye Moor in Aberdeenshire, with approximately 172 hectares of degraded peat having been restored. The project is aiming to restore approximately 1,800 hectares of degraded peat in total as part of a woodland creation and peatland restoration scheme that could capture over 1.4 million tonnes of carbon over its lifetime.

Greta Talbot-Jones, Director of Natural Capital at Aviva Investors and co-Portfolio Manager of the Carbon Removal Fund, says: “Through our Carbon Removal Fund, we will be able to work directly with conservation groups, NGOs, specialist land managers and development partners. That is a vitally important element of this strategy as it should provide clearer, more direct and less diluted reporting lines from the projects we fund on how investment capital is being deployed, which activities that funding is supporting and where, and the impact it is having in terms of real-world outcomes. We are excited to combine our sustainability policy and private markets investment expertise in order to shape the portfolio.”

The firm writes that investors are currently facing difficulty navigating the risks that climate change poses to portfolio returns. In response, GMO writes that it has created a global strategy that seeks to address emissions risk while also harnessing opportunities that help mitigate climate change by seeking exposure to green products and services. The fund launch underscores GMO’s dedication to providing sustainable investment solutions.

The fund’s strategy is designed to deliver two key benefits for investors:

Climate Transition Risk Reduction: The fund aims to reduce total portfolio emissions, utilising GMO’s proprietary research into emissions risks embodied in company value chains. GMO’s Indirect Emissions Model addresses the shortcomings of reported scope 3 data, allowing the portfolio to target 50 per cent fewer total emissions than the MSCI ACWI ex Fossil Fuels Index.

Exposure to Climate Opportunities: The fund targets green revenues of at least three times higher than the benchmark, currently 27 per cent for the portfolio vs. 9 per cent for the benchmark, leveraging a green revenue data set that captures a wide range of green products and services across the investable universe.

“We believe Horizons’ dual objective of reducing total portfolio emissions and increasing exposure to climate opportunities is a unique and comprehensive investment solution in the sustainability space. The fund represents a low-cost systematic alternative to passive equity investment, avoiding the industry concentration risks and unintended factor exposures found in other offerings in the market,” says George Sakoulis, Head of Investment Teams and Lead Portfolio Manager on the GMO Horizons Strategy.

The GMO Horizons Investment Fund is a global portfolio reflecting the view that the world economy is transitioning to a lower carbon future and that this process will create opportunities for investors to seek excess returns. The fund seeks to capture these opportunities and mitigate related risks through reduced total emissions intensity (direct and indirect) and significant exposure to impactful climate solutions while controlling for exposure to ESG risks.

The GMO Horizons Investment Fund is a fully systematic and diversified solution that is designed to provide:

Materially lower total emissions than the MSCI ACWI ex-Fossil Fuels Index as measured using scope 1 emissions and GMO’s proprietary Indirect Emissions model, which estimates the indirect emissions embodied in end-to-end company value chains.

High levels of exposure to companies where revenue is derived from selling green products and services.

ESG risk mitigation via better ESG characteristics than the benchmark.