Investors may be increasingly aware that climate-related risks to their portfolios exist, but they aren’t adequately factoring them into their investing decisions, suggests new research from the BlackRock Investment Institute.
The report, which uses advances in data science to examine the detailed impact of physical climate risks, finds that investors are underpricing the impacts of these risks and extreme weather events — such as rising sea levels, intensifying hurricane activity, floods, droughts and wildfires. The report also suggests investors need to re-evaluate their vulnerability to these risks.
“Weather events such as hurricanes and wildfires are underpriced in financial 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,” the report says.
The report indicates that while utility stocks are typically hit hard in the immediate aftermath of an extreme weather event, they also tend to recover quickly, “suggesting that investors are focused on headline risk rather than assessing utilities’ vulnerability to climate-related weather events.”
BlackRock also reports that its analysis finds that the more climate-resilient utilities tend to trade at a slight premium, which, it says, may become “more pronounced over time as weather events turn more extreme and frequent.”
The report sets out its analysis of climate-related risks for specific asset classes under a range of future scenarios, starting in 2019 and projecting out to 2100.
Based on that analysis, the report forecasts a 275% increase in the risk of category 5 hurricanes between now and 2050. It finds the median risk of a building underlying a mortgage-backed security being hit by a Cat 4 or 5 hurricane has risen by 137% since 1980, and it says New York City is facing the prospect of a three-foot rise in sea levels, which could expose US$73 billion in property to potential losses.
The report also finds that 58% of U.S. metro areas will be facing annualized climate-related GDP losses of 1% or more by 2060-2080, with Arizona, coastal Florida and the Gulf Coast most at risk. Already, Miami is seeing annual GDP losses of more than 1%, and this is projected to grow to 4.5% by 2100.
Other cities in Florida, such as Naples, Panama City and Key West, are likely facing annual GDP losses of up to 15% or more, the report says, “mostly driven by coastal storms.”
BlackRock indicates that this analysis, which focuses on the U.S., is a first step, but that it plans to extend this work to different regions, asset classes and sectors as data to enable the analysis becomes available.
“Understanding and integrating these insights on climate-related risks can help enhance portfolio resilience,” BlackRock says. “Yet our early work already strengthens our conviction that sustainable investing is increasingly a ‘why not?’ proposition.”