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Future-proofing a natural resources portfolio

sponsored by BlackRock |

Environmental, social and corporate governance (ESG) considerations are vital when investing in the Natural Resources sector. The Natural Resources investment team explain how ESG is integrated into their investment thinking.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

Efficient use of natural resources is at the heart of preserving the planet for future generations. Given these high stakes, we believe environmental, social and governance (ESG) considerations to be of critical importance for the companies in which we invest; perhaps more so than it is in any other sector.

As we see it, there is positive correlation between companies that behave responsibly, with an eye to the sustainability of their business and long-term investment performance. While there will be other factors involved, we actively engage with all the companies in which we invest to identify those with strong and/or improving ESG behaviour. Companies need to have robust controls in place to minimise the chances of environmental incidents, exhibit high corporate governance standards and ensure that local communities benefit from their activities.

Environmental

Digging mines and drilling for oil will inevitably have an impact on the local environment. Key is how companies manage this process, ensuring the benefits are appropriately shared among all stakeholders. The value wiped off the market cap of companies such as BP after the Macondo oil spill, and BHP and Vale, after tailings dam failures, highlights the direct link between environmental incidents and share price performance.

Social

We believe it is vital that natural resources companies maintain their social licence to operate. Companies need to maintain broad acceptance from their employees, stakeholders, local communities and the national government or risk regulatory intervention. These are companies providing critical services and infrastructure and are naturally high profile as a result. Our site visits to companies’ assets provide us with valuable insight into these issues, which often cannot be properly understood from company reports.

Governance

Good corporate governance is critical for natural resources companies. We draw on the expertise of the BlackRock Investment Stewardship team, actively engage with companies on a wide range of governance issues including board independence, executive compensation, shareholder protection and timely disclosure. One of the most famous examples of poor corporate governance was an energy company – with the Enron scandal in 2001. In this case, management hiding losses as part of an accounting fraud resulted in a $60 billion company being reduced to zero.

The shift to a low-carbon economy

The world is moving towards lower carbon solutions in a bid to tackle climate change. This will have a major impact on global commodity demand, and we recognise that we will need to be adept at positioning the Trust for these changes as they occur.

The move to alternative energy is already building momentum. The proportion of global electricity generation accounted for by solar and wind is set to rise sharply over the next 20 years. It accounted for 84% of new energy capacity in 2018 (1).

Meanwhile, the rise of electric vehicles will eventually be a headwind for global oil demand. The International Energy Agency predicts there will be around 300 million electric vehicles on the road by 2040, cutting oil demand by around 3.3 million barrels per day (2).

But we see electric vehicles as a longer-term problem for oil and do not expect peak oil demand until the 2030s. Oil and traditional energy equities have room for at least one more up-cycle in our view, although companies will need to adapt ahead of time, or risk structural decline.

These changes will bring opportunities in new sectors. For example, the electric vehicle theme will drive demand for certain commodities used in the batteries, such as lithium, cobalt and nickel.

Finally, it is worth considering that more investors are factoring ESG criteria into their investment process. This means companies neglecting these areas will find themselves with fewer and fewer natural buyers, which in turn will put pressure on their share prices. The robust inclusion of meaningful ESG analysis into our investment process is both a vital risk management tool and, in our view, a route to more sustainable long-term returns.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

International Renewable Energy Agency (Irena), April 2019

Reuters, November 2019

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

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Trust Specific Risks

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 than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.

Mining investments: Mining shares typically experience above average volatility when compared to other investments. Trends which occur within the general equity market may not be mirrored within mining securities.

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Important Information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The BlackRock Energy and Resources Income Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

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