Investors can no longer ignore the impact of climate change climate change on investment process, argues a new report from the New York-based BlackRock Investment Institute (BII).
“We believe climate factors have been underappreciated and underpriced,” the report says. “Yet this could change as the effects of climate change become more visible.”
Climate change presents market risks and opportunities, the report says, including the physical effects of more frequent, and more severe weather events, technological advances, regulatory changes and social impacts driven by changing consumer preferences and environmental activism.
“These factors can play out immediately (often the regulatory variety), in the medium term as economies transition to a lower-carbon world (often technological), and in the long run (often physical),” the report adds. In particular, the report recommends that investors should prepare for higher carbon prices, and their potential impact on portfolios.
BII research has found that there is no downside to gradually incorporating climate factors into the investment process, the report notes, and that there is potential upside. While it was once thought that considering environmental, social and governance (ESG) factors was inconsistent with maximizing financial returns, that is no longer the case.
“We believe financial fiduciaries now can — and should — integrate relevant ESG factors in their investment processes or principles,” the report says.
Regulators are starting to make environmental considerations an essential part of good corporate governance, and necessary for fulfilling fiduciary duties, the report notes.
“The UN Principles for Responsible Investment in 2015 called on regulators to ensure that fiduciary duty requires investors to take account of all ESG factors in their investment process. Many regulators have yet to take action, but signs of change are emerging,” the BII report says.