Markets are still in the early stages of pricing in the effects of the net zero transition, according to a new publication by investment giant BlackRock, with the global shift to low-carbon production methods likely to drive volatility and inflation over the next several years.

In its 2022 Midyear Outlook, “Back to a Volatile Future,” BlackRock expresses its view that the prolonged period of steady growth and inflation is over, and that investors should position for long-term volatility and higher inflation triggered by the pandemic and exacerbated by the Russian invasion of Ukraine.

BlackRock suggests that in the coming years, “the transition to reach net zero carbon emissions by 2050 is likely to create a sectoral shakeout similar to the pandemic,” as the shift from high carbon to zero carbon production methods will drive supply shortages and high prices for carbon-intensive outputs still required by the economy.

The publication presents “positioning for net zero” as one of its three key investment themes (alongside ‘Bracing for volatility,’ and ‘Living with inflation’), arguing that the market has yet to fully price in the climate transition, which could see acceleration driven by technology development, shifting societal preferences, and as “the human and economic cost of climate change becomes clearer.”

BlackRock presents several ways for investors to gain exposure to the net zero transition, including investing in “already-green” companies that are likely to outperform less sustainable ones, as well as in carbon-intensive companies with credible transition plans, and in suppliers of transition-related materials, equipment and services, such as transition-critical minerals. While sustainable assets are expected to generate a long-term return advantage, transition-driven shortages and high prices for some needed carbon-intensive products implies that “high carbon exposures can give exposure to the transition and help weather shocks,” according to the report.

Click here to access BlackRock Investment Institute’s 2022 midyear outlook.