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

BlackRock |Apr 04, 2019

Leveraging Advanced Data and Analytics New Report Examines the Physical Risks Associated with Climate Change on Municipal Bonds, Commercial Real Estate and U.S. Utilities

Integrating Sustainability Factors into Investment Research Process is Critical to Risk Management

New York, April 4, 2019 – 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.

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