Investing In The Next Generation Of Environmental Tech Breakthroughs

Maskot/DigitalVision via Getty Images Key Takeaways Cutting-edge environmental technologies are here: Mounting breakthroughs from electric vehicles to carbon capture combined with increasing demand and affordability are helping drive growth for environmental technologies. Public and private actions towards carbon reduction: Over $1.3 trillion USD has been allocated by governments towards clean energy investment support since 2023. While over 9000 corporations signed up for the race to zero campaign, which prioritizes cutting global emissions in half by 2030.1,2 Early-stage technologies are driving innovation: We believe investors may benefit from exposure to ETFs designed to invest in a broad basket of nascent environmental technologies such as pollution reduction, energy efficiency, and breakthroughs in transportation and power. The Key Drivers Of Next Gen Environmental Solutions We see three key reasons why next-generation environmental technologies will be increasingly important in our economy: First, governments and companies around the globe have made ambitious climate commitments to reduce emissions, and have passed legislation such as the Inflation Reduction Act which designated nearly $400B towards clean energy technologies and electric vehicles.3 Countries representing nearly 90% of the world economy now have net-zero commitments.4 The private sector has also made commitments, with over 37% of the world’s largest publicly traded companies announcing carbon reduction targets.5 However, the private sector is not just making commitments, they are also following through with their wallet. For example, in 2023, climate-tech companies raised over $50 billion in venture capital and private equity funding.6 Companies know that meeting these commitments requires leveraging environmental technology breakthroughs across areas such as green transportation, renewable energy and energy efficiency, which have the potential to significantly offset the growth of greenhouse gas emissions. Second, the shift toward renewable energy has accelerated in some markets amidst a global focus on energy security. For example, Germany announced plans to accelerate their transition to renewables, bringing forward their target for 100% renewable power by 15 years, to 2035.7 New government policies around the globe will lead to annual clean energy investments of more than $2 trillion by 2030, a 50% increase from today’s levels.8 Finally, consumers are reporting increased interest in sustainable products. Whether it’s buying electric vehicles, installing cutting-edge solar panels on their roof or installing smart meter technologies in their home to reduce energy usage, consumers may continue to turn towards environmentally friendly technologies and products. Levels of consumer interest in sustainable products Chart description: First Insight and the Baker Retailing Center at the Wharton School of the University of Pennsylvania’s findings are based on survey studies of a targeted sample of > 1,000 consumers in the U.S., fielded in 2021. 68% of the consumers say that they are willing to pay more for sustainable products, while 72% of consumers say that sustainability is a very or somewhat important purchase consideration. (Source: “The Sustainability Disconnect Between Consumers & Retail Executives”, First Insight, Inc., The Baker Retailing Center at the Wharton School of the University of Pennsylvania, Jan 2022.) The Potential Benefits Of Getting There Early If investors are looking to gain access to environmental technologies, they may want to consider focusing on companies whose products and services are in the early stages of adoption. Later-stage products and companies are typically larger and more mature, and already found in broad equity benchmarks such as the S&P 500. For example, rewinding the clock to 2010, when renewable energy’s share of US electricity generation was 10%. Fast forward 10 years and renewable’s share doubled to 20%.9 During this timeframe, the S&P Global Clean Energy Index outperformed the S&P 500 energy index by 74%!10 We believe accessing environmental technology companies ahead of their acceleration in adoption could benefit investors, as the transition becomes more fully priced. Renewable energy share of U.S. electricity generation Chart description: Chart showing that renewable energy’s share of US electricity generation has doubled – from 10% in 2010 to 20% in 2020. (Source: Deloitte Insights. “Renewable transition separating perception from reality”. September 21, 2021.) 2010 – 2020 Outperformance of S&P Global Clean Energy Index vs. S&P 500 Energy Sector (%) Chart description: Chart showing that the S&P Global Clean Energy Index has outperformed the S&P 500 energy index by 73% from 2010 to 2020. The S&P Global Clean Energy Index returned 67% while the S&P 500 energy index returned -7%. (Source: Morningstar, returns from 1/1/10 to 12/31/20.) Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual Fund performance. For actual fund performance, please visit www.iShares.com or Investment Management & Financial Services | BlackRock. Click to enlarge Key Breakthroughs In Environmental Solutions Below, we highlight eight themes that could shape the future of environmental technologies,11 whose potential opportunity may be significant. Click into each of these themes to learn more. 1. Green Transportation Did you know? Electric trains emit 20% to 35% less carbon per passenger mile than a diesel train.12 The green transportation theme refers to companies involved in the provision of sustainable transportation products and services such as electric vehicles (EVs) or charging stations. Solid-state batteries are demonstrating key advantages over the more commonly used lithium-ion batters, including higher energy storage density, longer life, and faster charging. Lithium-ion batteries tend to start degrading after 2,000-3,000 charges, whereas solid-state batteries can be charged up to 10,000 times before noticeable degradation.13 The big picture: EVs could represent 60% of new car sales by 2030,14 up from 10% in 2022.15 2. Renewable Energy Did you know? 99% of all U.S. coal plants are more expensive to continue to run than new renewable, and moving energy generation to local renewables could drive more than $589 billion of investment in energy communities across the U.S. while saving customers money.16 One of the criticisms of solar energy is its reliance on the whims of the sun. This becomes an issue for power grids reliant on solar as the most efficient energy storage systems can only store a charge for one to five days. However, recent breakthroughs in a technology called “molecular solar thermal energy storage” (MOST), relies on a very thin chip that can store solar energy in liquid form, for up to 18 years, significantly improving the reliability of solar-powered energy sources.17 The big picture: As the transition unfolds, there may still be a large runway for renewables given fossil fuels still supply around 80% of the world’s energy.18 3. Energy Efficiency Did you know? Energy-efficient appliances could save U.S. households up to 25% on their utility bills, amounting to over $2,200 annually.19 The energy efficiency theme seeks to reduce waste or usage, and traditional heat pumps have plenty of room for improvement. Traditional heat pumps move energy from the outside to heat or cool a home, which is 2-to-3 times more energy efficient than burning fossil fuels to warm the same space. New, innovative heat pumps leverage renewable energy sources to power the heat transfer, reducing emissions by 50% or more.20 The big picture: Global energy investment is set to exceed $3T USD for the first time in 2024, with two-thirds going to clean energy technologies and infrastructure.21 4. Water Did you know? Over 2 billion people live in areas exposed to extreme water stress.22 The water theme is focused on areas such as water efficiency technology or water treatment services. For decades, traditional water meters measured the flow of water for businesses and residential homes, to track usage and properly bill customers. Smart water meters leverage technology to track usage in real-time, enabling early detection of irregularities in usage, alerting clients to any issues before they become widespread. The big picture: The Environmental Protection Agency has funded $22 billion towards clean water funding in the U.S., with a total of over $50 billion to upgrade America’s water infrastructure, representing the largest investment in clean water in America’s history.23 5. Green Buildings Did you know? Residential and commercial buildings represent nearly 40% of CO2 emissions in the U.S. and 80% of U.S. buildings that will be in use in 2050 are already built.24 Retrofitting existing infrastructure with new technologies will be key to reducing emissions. The green building theme refers to the design, building and retrofitting of existing physical infrastructure to produce lower emissions. Solar panels have been placed on rooftops for a long time, (the White House first installed 32 solar panels in 1979).25 Solar inverters are the latest breakthrough in solar technology. Solar inverters convert electricity from a solar panel into the same current as what a grid requires,26 and are now being leveraged inside glass windows and walls for modern green building construction. The big picture: The global green building materials market is projected to grow from $474 billion USD in 2024 to $1.2 trillion USD by 2032.27 6. Pollution, Prevention, And Reduction Did you know? Air pollution was a contributing factor to 7 million deaths per year.28 This theme targets companies whose products and services are involved with reducing pollutants emitted or capturing previously emitted pollution. For example, traditional carbon capture technology retrofits existing industrial plants so that chemicals can prevent CO2 from being emitted at the source.29 The next innovation is direct carbon capture, which relies on chemical reactions “to pull carbon dioxide out of the air”, including carbon which was released years ago.30 The big picture: In 2023, the U.S. announced $1.7 billion USD for carbon capture demonstration projects and an additional $1.2 billion USD for direct air capture hubs.31 7. Resource Efficiency Did you know? Our economy consumes 100 billion tons of material each year and wastes over 90% of that material.32 Resource efficiency companies support a circular economy, and their products and services enable activities such as recycling or resource recovery. As the electrification of transportation continues, recycling precious metals from batteries has become increasingly important. Traditional recycling methods, called pyrometallurgy, required melting down the batteries and burning off the plastic to extract the precious metals, emitting toxic gases.33 New recycling technologies involve a chemical process which allows fresh lithium to be added to the battery, to return it to full charging capacity.34 The big picture: The circular economy, an economy that give incentives to reusing products rather than extracting new resources,35 is expected to grow 78% from 2021 to 2030.36 8. Sustainable Agriculture, Food & Forestry Did you know? Agriculture accounts for approximately 10% of U.S. GHG emissions.37 Plant-based meat was first introduced into our lexicon in the 1970s, but lab-grown meat is earlier in its adoption. Lab-grown meat is grown from cells harvested from an animal. One tissue sample taken from a cow can create up to 10,000 kg of meat, meaning 150 cows could feed the entire global population without slaughtering a single animal!38 The big picture: By 2050, there will be over 9 billion people on the planet, and food production will need to increase by 70% to meet growing demand.39 (Learn more about investing in food innovation and ag tech.) A Different Way To Invest In Environmental Tech With popular equity benchmarks such as the S&P 500 index lacking material exposure to environmental tech themes such as renewable energy, green transportation, and energy efficiency,40 a thematic investing strategy that delivers exposure to multiple environmental tech themes. For example, the Morningstar Global Emerging Green Technologies Select Index targets innovative companies with >25% revenue exposure to the eight themes listed below. Caption: Table reflects holdings in Morningstar Global Emerging Green Technologies Select Index as of December 2023. Subject to change Emerging green technology category Weight in Morningstar Global Emerging Green Technologies Select Index Green transportation 22% Renewable energy 34% Energy efficiency 17% Water 7% Green buildings 9% Pollution prevention and reduction 5% Resource efficiency, technologies, and services 4% Sustainable agriculture, food, and forestry 0% Click to enlarge Source: Morningstar. Holdings as of December 2023. Weights reflect holdings in Morningstar Global Emerging Green Technologies Select Index. Click to enlarge A Different Way To Invest In Environmental Tech The index is specifically focused on capturing companies whose products/services are “emerging green technologies”, defined as being in the innovators through early majority stage of the Rogers adoption curve,41 which means at least 50% of the product’s adoption has yet to occur. Roger’s Innovation Adoption Curve The %’s reflect the % of consumers which have adopted a product. Chart description: The chart is an illustration of the Roger’s innovation adoption curve, which measures the cumulative rate at which a population adopts a product or service over time. The adoption stage is determined by assessing the total addressable market and market share (e.g., EVs represent Early Adopters stage). (Source: Morningstar Global Emerging Green Technologies Select Index.) Ways To Access Environmental Tech Investors looking to access emerging environmental technology companies may want to consider ETFs that hold pure-play firms across the full value chain of environmental technologies, targeting themes such as green transportation or clean energy. Conclusion Sixty-eight years after the first ever piece of federal air pollution legislation,42 the world has transitioned to an era of increased focus on the environment, impacting all areas of the economy. As governments, companies and consumers attempt to lessen their environmental footprint, a wide swath of environmental technologies could be positioned to benefit, and investors may benefit by holding a diversified basket of names which provide pure-play access across the full value-chain of environmental innovation. Footnotes 1 International Energy Agency, “Government Energy Spending Tracker”. As of June 2023. 2 United Nations Framework Convention on Climate Change, “Race to Zero Campaign”. As of June 2024. 3 BlackRock, “Investment Implications of U.S. transition policy”. As of January 2023. 4 Climate Action Tracker “Net Zero Target Evaluations”. As of November 2023. 5 Accenture “Destination Net Zero”. As of November 2023. 6 Bloomberg, “Over $50 Billion Flow to Climate-Tech Startups in a Stormy Year”. As of February 2024. 7 Bloomberg, “Germany brings forward goal of 100% renewable power to 2035”. As of 2/28/22. 8 International Energy Agency, World Energy Outlook. As of October 2022. 9 Statista, Energy Information Agency, Bloomberg New Energy Finance, “Cumulative capacity of non-hydro renewable energy in the U.S. from 2008 to 2020”. 10 Morningstar, returns from 1/1/10 through 12/31/20. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. 11 These eight themes are outlined by the Morningstar Global Emerging Green Technologies Select Index. 12 QZ.com, “Tanzania’s new electric rail will help it cut emissions”. As of 7/5/22. 13 AZO CleanTech, Owais Ali, “Revolutionary new electric vehicle battery charges in 3 minutes and lasts 20 years”. As of 7/6/23. 14 International Energy Agency, “By 3020 EVs represent more than 60% of vehicles sold globally, and require an adequate surge in chargers installed in buildings”. As of September 2022. 15 WSJ, William Boston. As of 1/16/23. 16 Forbes “99% of U.S. Cola plants Are More Expensive Than New Renewables”. As of January 2023. 17 Economist, 6/20/22, “Data point: a breakthrough in storing solar power”. 18 IEA “The Energy world is set to change significantly by 2030”. As of October 2023. 19 National Renewable Energy Laboratory, “Energy Saver, Tips on Saving Money & Energy at Home”. As of 3/20/23. 20 Natural Resources Defense Council, “Driving the market for heat-pumps in the northeast”. 21 International Energy Agency, “World Energy Investment Overview 2024”. As of June 2024. Forward-looking estimates may not come to pass. 22 UN, SDG 6, accessed on 3/5/23 Statista “Where Water Stress Will Be Highest by 2050”. As of March 2024. 23 White House “Fact Sheet: Biden-Harris Administration Announces Nearly $6 Billion For Clean Drink Water”. As of February 20, 2024. 24 Environmental and Energy Study Institute, “Buildings and Built Infrastructure”. As of July 2024. Forward looking estimates may not come to pass. 25 Scientific American, David Biello. As of July 2024. 26 Energy.gov, “Solar Integration” 27 Fortune Business Insights “Green Building Materials Market Size Share & Industry Analysis”. As of June 2024. 27 Fortune Business Insights “Green Building Materials Market Size Share & Industry Analysis”. As of June 2024. 28 World Health Organization “Concept Note: Second Global conference on air pollution and health”. As of June 20, 2024. 29 Congressional Research Service. As of November 2021. 30 World Resources Institute, May 2022, “6 things to know about carbon capture”. As of 5/2/22. 31 International Energy Agency, “Carob Capture, Utilization, and Storage”. As of April 2024. 32 Circularity Gap Report, 2022. 33 Science.org, “A dead battery dilemma”. As of 5/20/21. 34 Annual Reviews, Knowable Magazine. “What will it take to recycle millions of worn-out EV batteries”. As of 9/21/22. 35 UN Conference on Trade and Development, “Circular economy”. As of 3/6/23. 36 Deutsche Bank “On track for a circular economy?” As of August 8, 2024. Forward-looking estimates may not come to pass. 37 Resources for the Future. “Agricultural Greenhouse Gas Emissions 101”. As of September 8th, 2023. 38 Harvard University Graduate School of Arts and Sciences, “(Meat) pie in the sky? – When will our appetite for lab-grown meat be satisfied?” As of March 20, 2022. 39 IBM, “The benefits of sustainable agriculture and how we get there”. As of 3/24/21. 40 As measured by the 1.57% overlap between the Morningstar Global Emerging Green Technologies Select Index and the S&P 500 index. As of 7/31/2024. 41 The Rogers adoption curve measures the cumulative rate at which a population adopts a product or service over time. The curve was popularized by Everett Rogers in his 1962 book, “Diffusion of Innovation”. 42 EPA.gov, “Evolution of the Clean Air Act”. Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries. The Fund’s environmental, social and governance (“ESG”) investment strategy limits the types and number of investment opportunities available to the Fund and, as a result, the Fund may underperform other funds that do not have an ESG focus. The Fund’s ESG investment strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards. In addition, companies selected by the index provider may not exhibit positive or favorable ESG characteristics. Sustainability risk is an inclusive term to designate investment risk that relates to environmental, social or governance (ESG) issues. Sustainability risk around environmental issues includes, but is not limited to, climate risk, both physical and transition risk. Risks related to social issues can include, but are not limited to, labor rights and community relations. Governance-related risks can include, but are not limited to, risks around board independence, ownership and control, and audit and tax management. These risks can impact an issuer’s operational effectiveness and resilience as well as its public perception and reputation, affecting its profitability and, in turn, its capital growth and ultimately impacting the value of holdings in the Fund. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. Technologies perceived to displace older technologies or create new markets may not in fact do so. Companies that initially develop a novel technology may not be able to capitalize on the technology. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Actively managed funds do not seek to replicate the performance of a specified index, may have higher portfolio turnover, and may charge higher fees than index funds due to increased trading and research expenses. This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision. The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial professionals for more information regarding their specific tax situations. The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Bloomberg, BlackRock Index Services, LLC, Cboe Global Indices, LLC, Cohen & Steers, European Public Real Estate Association (“EPRA® “), FTSE International Limited (“FTSE”), ICE Data Indices, LLC, NSE Indices Ltd, JPMorgan, JPX Group, London Stock Exchange Group (“LSEG”), MSCI Inc., Markit Indices Limited, Morningstar, Inc., Nasdaq, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), Nikkei, Inc., Russell, S&P Dow Jones Indices LLC or STOXX Ltd. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above. Neither FTSE, LSEG, nor NAREIT makes any warranty regarding the FTSE Nareit Equity REITS Index, FTSE Nareit All Residential Capped Index or FTSE Nareit All Mortgage Capped Index. Neither FTSE, EPRA, LSEG, nor NAREIT makes any warranty regarding the FTSE EPRA Nareit Developed ex-U.S. Index, FTSE EPRA Nareit Developed Green Target Index or FTSE EPRA Nareit Global REITs Index. “FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license. © 2024 BlackRock, Inc or its affiliates. All Rights Reserved. BLACKROCK, iSHARES, iBONDS, LIFEPATH, ALADDIN and the iShares Core Graphic are trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners. iCRMH0924U/S-378015 This post originally appeared on the iShares Market Insights.

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