The world’s energy mix is changing, but the transition to renewables is a process that demands the
coordination of all stakeholders. Investing through an evolution such as this requires a nuanced
approach, says Mark Hume, Co-Portfolio Manager of the BlackRock Energy and Resources Income
Trust plc.
For more information on BlackRock Energy and Resources Income Trust and how to access the opportunities presented by the energy and resources markets, please visit www.blackrock.com/uk/beri
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.
The transition from fossil fuels to renewable energy sources is one of the greatest challenges faced
by policymakers today. Like any challenge, this brings both risk and opportunity for investors.
In June 2020, we started to incorporate companies specifically involved in the transition to a low
carbon economy in the BlackRock Energy and Resources Income Trust. This proved well-timed,
coinciding with increasing investor interest in the energy transition. A third of the portfolio is now
allocated to this area, but we have remained flexible in the allocation, increasing our weighting to
traditional energy companies in November, for example, as tailwinds for the sector emerged off
vaccine news.
We are often asked why we have not moved fully to become a fully ‘energy transition’ portfolio. We
outline the key reasons why we have chosen a more balanced approach, investing across the energy
mix.
Traditional energy companies have a role
Hydrocarbons today remain an important part of the energy mix and any transition will take time.
Infrastructure needs to be developed, for example, and the entire energy value chain will be
required to adapt to support a new energy mix while also ensuring reliability. The magnitude of this
transition will need to be managed and will take time.
The move to renewable energy sources is likely to be incremental, particularly in the early years. This
shift will, when combined with ever-changing macro-economic factors, have implications on
commodity fundamentals and price, and thus company valuations. The most recent World Energy
Report found that oil consumption declined by 8% in 2020 and coal use by 7% 1 . This includes the
profound impact of the pandemic and economic lockdowns. To most appropriately manage a
portfolio in such a dynamic sector it is important to have exposure to all parts of the energy mix.
Starving hydrocarbon companies of capital is not expected to be a responsible way to progress the
energy transition. Many of these traditional energy companies understand the imperative to
transition their business and have been important investors in renewable energy. For example,
leading energy companies have committed to become a zero-carbon business by 2050 and to
increase their renewable power generation capacity 20-fold over the next few years 2 . These
companies will need capital to deliver on this transition successfully and responsibly.
2020 was a critical inflection year for energy companies and this forced a high-grading of portfolios,
increase of operational efficiencies, and change in dividend policies. The improvement in the
commodity price environment since has amplified the impact of those decisions and now positioned
many companies in high cash flow generation mode. This increased cash flow is expected to enable
increased diversion of capital to renewables initiatives for many of these companies. As investors,
we are wary of greenwashing and rely on our analysis of a company’s balance sheet and its
disclosures to assess whether it is meeting its commitments to this increased allocation.
Investment balance
2020 was also a formative period for sustainable energy investment. The pandemic demonstrated
the urgency of having a better relationship with the planet. Companies with exposure to the energy
transition did extremely well, being seen by investors as high growth at a time when growth was
scarce.
2021, however, has brought new dynamics. Many of the traditional energy companies whose
valuations suffered in 2020 under the intense and rapid shift in fundamentals, and subsequently
price, that came with the global shutdown have seen a reversal in 2021. Some traditional energy
companies have emerged as ‘value’ companies, being supported now by more stabilized
fundamentals and stronger commodity prices.
Market sentiment can shift between high growth and value depending on a range of factors, such as
the economic backdrop or outlook for interest rates. A portfolio with exposure to both, and with
allocation flexibility, is well-positioned to navigate through fads and fashions and provide cushion
against volatility for investors.
The energy transition is multi-layered. We believe it is more productive to invest across the energy
complex, creating a rising tide, rather than limit ourselves to those already at the top.
For more information on this Trust and how to access the opportunities presented by the energy and
resources markets, please visit www.blackrock.com/uk/beri
This material is not intended to be relied upon as a forecast, research or investment advice, and is
not a recommendation, offer or solicitation to buy or sell any securities or financial product or to
adopt any investment strategy. The opinions expressed are as of June 2021 and may change as
subsequent conditions vary.
Sources:
1 IEA, October 2020
2 Financial Times, April 2021
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Exchange rate risk: The return of your investment may increase or decrease as a result of currency
fluctuations.
Emerging markets: Emerging market investments are usually associated with higher investment risk
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losses suffered when the value of the underlying investments fall.
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For more information on BlackRock Energy and Resources Income Trust and how to access the opportunities presented by the energy and resources markets, please visit www.blackrock.com/uk/beri
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