Investors Underappreciate Climate-Related Risks in Their Portfolios – BlackRock Report

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, according to a new
report by the BlackRock Investment Institute.

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 ” [www.blackrock.com/physicalclimaterisk]
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.

“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 Brian Deese,
Global Head of Sustainable Investing, BlackRock. “Asset-level analysis
is key for investors. We find that the risk posed by more frequent and
severe weather events such as hurricanes and wildfires are not fully
reflected in the price of many assets, including U.S. 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.”

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:

Municipal Bonds

• Within a decade, more than 15% of the current S&P National Municipal
  Bond Index (by market value) would comprise metropolitan statistical
  areas (MSAs) suffering likely average annualized climate-related
  economic losses of up to 0.5% to 1% of GDP.
• Looking out to 2080, an estimated 58% of U.S. metro areas will likely
  see GDP losses of up to 1% or more, with less than 1% set to enjoy
  gains of similar magnitude.
• The New York City region faces annual losses equivalent to roughly 1%
  of GDP by late century.
• Florida will be affected the most, with Naples, Panama City and Key
  West seeing likely annual GDP losses of up to 15% or more, mostly
  driven by coastal storms.
• Miami’s current annual GDP losses are already more than 1% and
  projected to grow to an annualized 4.5% of GDP by the end of the
  century.

Commercial Real Estate and CMBS

• The median risk of a building that backs a CMBS bond being hit by a
  Category 4 or 5 hurricane today has risen by 137% since 1980.
• BlackRock is projecting a 275% increase in the risk of category 5
  hurricanes between now and 2050.
• More than 80% of properties tied to CMBS loans affected by recent
  hurricanes in Houston and Miami are outside official flood zones.
• New York City is facing rising sea levels of up to three feet by the
  end of century exposing more than $70 billion of property to potential
  losses.

Utilities

• Investors in utility stocks are quick to sell out of these names
  following an extreme weather event, with stocks down 1.5% on average
  over the ensuing 40 days.
• However, these stocks recover quickly while the true economic losses
  are still being calculated, suggesting that investors are focused on
  headline risk rather than assessing utilities’ vulnerability to
  climate-related weather events.
• BlackRock has generated a climate-risk exposure score for every U.S.
  utility based on a plant-by-plant assessment of physical risk, and
  finds that the most climate-resilient utilities tend to trade at a
  slight premium to their peers. This gap may become more pronounced
  over time as weather events turn more extreme and frequent.

A firm-wide commitment

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.

“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,” said
Deese.

In addition to incorporating sustainability considerations across our
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.

About BlackRock

BlackRock helps investors build better financial futures. As a fiduciary
to our clients, we provide the investment and technology solutions they
need when planning for their most important goals. As of December 31,
2018, the firm managed approximately $5.98 trillion in assets on behalf
of investors worldwide. For additional information on BlackRock, please
visit www.blackrock.com |
Twitter: @blackrock | Blog: www.blackrockblog.com |
LinkedIn: www.linkedin.com/company/blackrock.

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