Investors are under-pricing the impact of climate-related risks

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Leveraging advanced data and analytics a new report by BlackRock examines the physical risks associated with climate change.

According to a new report by the BlackRock Investment Institute. Investors are underpricing the impact of climate-related risks, including more frequent and intense extreme weather events, and need to rethink their assessment of asset vulnerabilities.

While the physical manifestations of climate change are clear, including rising sea levels, and more intense hurricanes, wildfires and droughts, how investors incorporate these risks into their analysis is not.

The report, Getting physical: Scenario analysis for assessing climate risks uses new tools and data to articulate the potential impact on different U.S. asset classes, marking an important next step as investors increasingly recognize the importance of integrating climate-related risk factors in the investment process.

Many investors recognize that climate-related risks are growing. However, until recently, most investors did not have access to data showing the potential impact at the asset level of both direct physical risks and indirect economic impacts as well. Working with Rhodium Group, BlackRock leveraged 160 terabytes of data to assess these climate-related risks facing specific asset classes, both today and under a range of future climate scenarios reaching out to 2100. Specific findings of BlackRock’s research include:

key findings:

  • Physical climate risks vary greatly by region, drawing on the latest granular climate modeling and big data techniques.
  • Extreme weather events pose growing risks for the creditworthiness of state and local issuers in the $3.8 trillion U.S. municipal bond market. Physical climate changes have implications for local GDP — and show a rising share of muni bond issuance over time will likely come from regions facing economic losses from climate change and events linked to it.
  • Hurricane-force winds and flooding are key risks to commercial real estate.  Based on recent hurricanes hitting Houston and Miami finds the analysis found that roughly 80% of commercial properties tied to affected CMBS loans lay outside official flood zones — meaning they may lack insurance coverage. This makes it critical to analyze climate-related risks on a local level.
  • Aging infrastructure leaves the U.S. electric utility sector exposed to climate shocks such as hurricanes and wildfires.  The analysis reviewed exposure to climate risk across 269 publicly listed U.S. utilities based on the physical location of their plants, property, and equipment. Conclusion: The risks are underpriced.

BlackRock has long believed that sustainability-related issues – including climate-related risks – have real long-term financial impacts, with increasing relevance in the investment process.

In addition to incorporating sustainability considerations across their investment platform, BlackRock currently manages a broad suite of dedicated sustainable investment solutions, ranging from broad ESG strategies to thematic and impact strategies that allow clients to align their capital with the low-carbon transition and the UN Sustainable Development Goals.

BlackRock also manages one of the largest renewable power funds globally. With deep expertise in alpha-seeking and index strategies, across public equity and debt, private infrastructure, commodities, and real estate, BlackRock continues to build scalable products and customized solutions across asset classes that support no-carbon, low-carbon, and energy transition solutions.

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General Disclosure: 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 to adopt any investment strategy. The opinions expressed are as of April 2019, and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.