Asset management giant warns investors are vastly underestimating risks posed by climate change impacts today 'not just years in the future'
BlackRock, the world's biggest asset manager, has urged investors around the world to urgently rethink their assessment of climate risk after research found key industries in the US are vastly underestimating the economic dangers posed by the low carbon transition.
The investment giant, which manages around $6tr of assets worldwide, said it is currently undertaking major work with the help of independent research firm Rhodium to better understand and quantify the risks posed by climate change and the low carbon transition to the global economy.
Initial findings from that research were published yesterday, which BlackRock said suggested many US markets - particularly electricity utilities, commercial real estate, and municipal bonds - are consistently under-pricing physical climate change risks to their business.
"Our early findings suggest investors must rethink their assessment of vulnerabilities," the BlackRock Investment Institute report states. "Weather events such as hurricanes and wildfires are underpriced in financial assets, including US utility equities. A rising share of municipal bond issuance is set to come from regions facing climate-related economic losses. And many high-risk commercial properties are outside official flood zones."
It comes in the wake of a number of major climate risk alarm bells. The World Economic Forum named extreme weather the most pressing threat facing the global economy in 2019, while the UN has warned of major risks to food security, and US power utility PG&E filed for bankruptcy after incurring major losses during devastating California wildfires late last year.
Highlighting recent extreme weather events such as wildfires and hurricanes in the US and heatwaves in Europe, as well as rapid technological, social and regulatory change, BlackRock warned climate change posed "tangible risks to investment portfolios today, not just years in the future".
Volatile weather is already causing hundreds of billions of dollars-worth of damage globally each year, it said, with much of the exposure uninsured, while also having knock-on impacts on crop yields and labour productivity. Analysis by German reinsurer Munich Re in January estimated 2018 was the fourth costliest year worldwide for uninsured losses from extreme weather events, at £160bn.
"The trend of rising average temperatures is boosting the frequency at which extreme weather events occur, as well as their intensity. These changes are affecting our economy today," said the BlackRock report. "Investors who are not thinking about climate-related risks, or who view them as issues far off in the future, may need to recalibrate their expectations."
As part of the ongoing research, BlackRock and Rhodium Group generated 160 terabytes of data to build a "granular picture" of investment-relevant physical climate risks. This enabled them to assess direct physical risks to assets on a local level, both today and under different future climate scenarios through to the end of the century.
Such risks are "notoriously hard" for investors to grasp, in part due to incorrect perceptions that climate impacts are slow moving, but also because the risks are difficult to model due to inadequate data. Meanwhile, to fully understand a company's exposure, investors need to know the location of the firm's assets as physical climate risk varies hugely depending on location.
BlackRock said recent advances in climate and data science has made it easier to overcome these hurdles and properly analyse climate data effectively.
Brian Deese, global head of sustainable investing at BlackRock and President Obama's former climate advisor, described the analysis as a "breakthrough" because it brings together detailed local asset information alongside updated climate models and big data.
"The combination of advances in data sciences, including geolocation data and climate modeling, have allowed us to more precisely assess the investment implications of climate-related risks," said Deese. "Many of our clients are long-term investors and, as a fiduciary, we're working to help them integrate ESG factors across an entire portfolio to enhance long-term risk adjusted returns with built in resilience."
The research findings focus on three key US industries - power utilities, municipal bonds and cities, and commercial real estate - but BlackRock said it plans to extend the analysis across regions, asset classes and sectors as data availability improves.
Looking out to 2080, it forecasts 58 per cent of US cities and metropolitan areas will likely see GDP losses of up to one per cent or more due to climate change, with less than one per cent of regions set to enjoy gains of a similar magnitude. This, it said, would negatively affect the credit worthiness of state and local issuers in the $3.8bn US municipal bond market.
Florida would be hardest hit, with several towns and cities potentially incurring annual losses of more than 15 per cent driven by coastal storms, it said. Miami's current annual GDP losses due to extreme weather already account for more than one per cent.
The report also warned hurricanes and flooding were key risks to commercial real estate, finding that roughly 80 per cent of commercial properties in Miami and Houston tied to mortgages lie outside official flood zones, which means they lack insurance.
In the power sector, BlackRock assessed 269 publicly listed utilities, concluding that aging infrastructure is leaving power companies vulnerable to climate shocks such as hurricanes and wildfires. "We find some evidence that the most climate-resilient utilities trade at a premium," it states. "We believe this premium could increase over time as the risks compound and investors pay greater attention to the dangers."
As the world's biggest investor, BlackRock has endured criticism - and hoaxes - from climate campaigners who argue it is not working hard enough to shift its money away from fossil fuel companies. And while the firm's CEO Larry Fink has called on companies to take greater account of environmental social governance (ESG), he has been cautious on making explicit warnings about climate risk.
As such, BlackRock's recognition of the scale of climate-related risks facing the global economy in its report yesterday was welcomed by green groups as a significant moment.
ClientEarth climate lawyer Joanne Etherton said BlackRock's findings "should be a thunderbolt for investors". "The world's largest asset manager has now accepted that markets are consistently under-pricing physical climate risks - that means all investors should be taking a careful look at the models they are currently using and recalibrating their expected returns," she said. "This new research drives it home that climate change is posing tangible risks to investment portfolios today - not years into the future. Investors who fail to heed the warning may be exposing themselves to lawsuits."
Brewing giant has made SDG6 central to its water strategy, and is reaping the benefits as a result
Joint statement with institutional investors strengthens oil major's low carbon plans, but critics insist wider targets are needed
P&G set new target to reduce plastic use in European Fabric Care brands by 30 per cent by 2025
Flurry of ambitious new targets unveiled, as Climate Group campaign welcomes first two firms to join RE100, EV100, and EP100 initiatives