Climate risk is investment risk, which is why we’ve built Aladdin Climate

  • Alex Pollak

The practice of quantifying climate risk on individual investments and portfolios is still in its infancy, but is something at which we will all need to become adept.

When pension trustees approach us about becoming their fiduciary manager, it doesn’t take long before we’re discussing climate risk. Our changing planet is something we are all concerned about and trustees want to understand how the risks associated with this will affect the assets they manage on behalf of their members.

It is not surprising that climate change is on their radar. The UK is the first major economy to require its largest investors to report on climate risk, a duty that is expected to trickle down to smaller funds over the next few years.

But for many of the trustees I speak to, the desire to understand the climate risk they are running is about far more than compliance. It is about managing risk and ensuring profitability in a world where water stress, sudden hurricanes or a policy decision aimed at decarbonising the economy could have a serious effect on the bottom line.

Our investment conviction is that sustainability-integrated portfolios can provide better risk-adjusted returns to investors. So convinced are we of this stance that we have built new Capital Market Assumptions (CMAs), incorporating the opportunities and risks tied to climate change. These, in turn, are used to build the portfolios we design and implement for our clients.

Climate risk is now investment risk, and it is our job to make certain that the funds we manage aren’t taking on too much of it, as well as helping them to seize the opportunities afforded to those companies developing solutions to help us manage the climate crisis.

How Aladdin helps take the strain

As well as our new CMAs, one of the tools we use to help our clients understand and manage climate risk is Aladdin Climate, a new addition to our Aladdin risk-management software. Uniquely bridging climate science, economic scenarios, asset data, and financial models, Aladdin Climate enables users to understand physical and transition risks and opportunities embedded within their portfolios. These analytics are integrated into investor workflows to make climate risk actionable for the investment community.

These insights help to turn climate risk from something amorphous and hard to avoid into something quantifiable that allows trustees and fiduciary managers to take action with precision, rebalancing portfolios and selling down individual stocks if necessary.

Climate: Opportunities and Risks

The practice of quantifying climate risk on individual investments and portfolios is still in its infancy, but is something at which we will all need to become adept.

No pension fund can afford to ignore our changing world, or the fact that every company it invests in will need to adapt to the needs of a zero carbon economy.

Aladdin Climate marks a huge step forward for us at BlackRock, filling in the gaps in the data we need to help our clients to make informed decisions.

As we refine and expand our risk-management systems, we ensure our clients are ready for every eventuality. If climate is a substantial investment risk, then it requires a substantial amount of precise and focused data to mitigate it. With Aladdin Climate, we’re taking the first steps.

Alex Pollak
Managing Director