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Getting physical: assessing climate risks

Getting physical: assessing climate risks
A series of recent extreme weather events — from hurricanes and wildfires in the U.S. to heat waves in Europe and floods in Japan — have put a spotlight on climate-related risks. We offer a new set of tools for assessing such risks to portfolios.

Mapping the damage
Estimated climate-related impact on U.S. regional GDP, 2060-2080

Estimated climate-related impact on U.S. regional GDP, 2060-2080

Sources: BlackRock Investment Institute, with data from Rhodium Group, March 2019. Notes: The map shows the projected GDP impact in 2060-2080 on U.S. metropolitan areas under a “no climate action” scenario. Climate changes are measured relative to a 1980 baseline. The analysis includes the effect of changes in crime and mortality rates, labor productivity, heating and cooling demand, agricultural productivity for bulk commodity crops, and expected annual losses from coastal storms. It accounts for correlations across these variables and through time — and excludes a number of difficult to measure variables such as migration and inland flooding. See Rhodium Group’s March 2019 paper Clear, Present and Underpriced: The Physical Risks of Climate Change for further details on its methodology. Forward-looking estimates may not come to pass.

Advances in climate and data science now allow us to gauge the likely overall economic impact of climate-related risks on a localized basis. To illustrate, the heat map above shows that 58% of U.S. metro areas will likely suffer annualized GDP losses of 1% or more by 2060-2080 under a “no climate action” scenario. Among the likely losers: Arizona, the Gulf Coast region, and coastal Florida.

Here are our key findings:

  • We show how physical climate risks vary greatly by region, drawing on the latest granular climate modeling and big data techniques. We focus on three sectors with long-dated assets that can be located with precision: U.S. municipal bonds, commercial mortgage-backed securities (CMBS) and electric utilities.
  • Extreme weather events pose growing risks for the creditworthiness of state and local issuers in the $3.8 trillion U.S. municipal bond market. We translate physical climate changes into implications for local GDP — and show a rising share of muni bond issuance over time will likely come from regions facing economic losses from climate change and events linked to it.
  • Hurricane-force winds and flooding are key risks to commercial real estate. Our analysis of recent hurricanes hitting Houston and Miami finds that roughly 80% of commercial properties tied to affected CMBS loans lay outside official flood zones — meaning they may lack insurance coverage. This makes it critical to analyze climate-related risks on a local level.
  • Aging infrastructure leaves the U.S. electric utility sector exposed to climate shocks such as hurricanes and wildfires. We assess the exposure to climate risk of 269 publicly listed U.S. utilities based on the physical location of their plants, property and equipment. Conclusion: The risks are underpriced.

A growing burden
Muni market share at risk of climate-related GDP losses, 2020-2100

Muni market share at risk of climate-related GDP losses, 2020-2100

Sources: BlackRock Investment Institute, with data from Rhodium Group, March 2019. Notes: We use the S&P National Municipal Bond Index to represent the muni market. The chart shows the estimated market value share of the muni market exposed to GDP losses of various magnitude through 2100 under a “no climate action” scenario. For example, roughly 20% of the market value of the current muni index is expected to come from regions suffering annualized average losses of up to 3% or more of GDP from climate change by 2060–2080. We use the upper bound of the 66%, or “likely,” range of losses to illustrate a plausible risk scenario.

Climate-related risks pose a threat to the economies – and creditworthiness – of many U.S. state and local issuers, our analysis shows. Our work with Rhodium Group shows a rising share of U.S. metropolitan statistical areas (MSAs) will likely be hit by climate change in the coming decades. Within a decade, more than 15% of the current S&P National Municipal Bond Index by market value would come from MSAs suffering likely average annualized economic losses from climate change of up to 0.5% to 1% of GDP. The impacts are projected to grow more severe in the decades ahead. See the A growing burden chart above.

Source: BlackRock

GLOBAL INSIGHTS

By:  By BlackRock Investment Institute

Apr 4, 2019

LINK:  https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/physical-climate-risk

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Investors underpricing impact of climate-related risks, says BlackRock

Investors must rethink their assessment of climate-risk vulnerabilities

Asset manager behemoth BlackRock warns that investors are underpricing the impact of climate-related risks and need to rethink their assessment of asset vulnerabilities.

The group, in a major piece of on-going analysis, asserts that 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 research indicates many US markets – particularly electricity utilities, commercial real estate, and municipal bonds – are consistently underpricing physical climate change risks to their business.

‘Our early findings suggest investors must rethink their assessment of vulnerabilities,’ the BlackRock report states. ‘Weather events such as hurricanes and wildfires are underpriced in financial assets, including US 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.’

Highlighting recent extreme weather events such as wildfires and hurricanes in the US and heatwaves in Europe, as well as rapid technological, social and regulatory change, BlackRock warns climate change poses ‘tangible risks to investment portfolios today, not just years in the future’.

‘The trend of rising average temperatures is boosting the frequency at which extreme weather events occur, as well as their intensity. These changes are affecting our economy today,’ states the report. ‘Investors who are not thinking about climate-related risks, or who view them as issues far off in the future, may need to recalibrate their expectations.’

BlackRock says recent beneficial developments in climate and data science have made it easier to analyze climate data effectively.

Brian Deese, global head of sustainable investing at BlackRock says: ‘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.

‘Many of our clients are long-term investors and, as a fiduciary, we are working to help them integrate ESG factors across an entire portfolio to enhance long-term risk adjusted returns with built-in resilience.’

And climate-related risks pose a threat to the economies – and creditworthiness – of many US state and local issuers, warns BlackRock.

Within a decade, more than 15 percent of the current S&P National Municipal Bond Index by market value would come from metropolitan statistical areas (MSAs) suffering likely average annualized economic losses from climate change of up to 0.5 percent to 1 percent of GDP.

Furthermore, 58 percent of US MSAs will likely suffer annualized GDP losses of 1 percent or more by 2060-2080 under a ‘no climate action’ scenario.

Florida would be hardest hit, with several towns and cities potentially incurring annual losses of more than 15 percent driven by coastal storms, BlackRock notes. Miami’s current annual GDP losses due to extreme weather already account for more than 1 percent.

The report also warns that hurricanes and flooding are key risks to commercial real estate, with nearly 80 percent of commercial properties in Miami and Houston tied to mortgages outside official flood zones, which means they lack insurance.

Other organizations have also been highlighting the issue: The World Economic Forum has cited extreme weather as the most pressing threat facing the global economy in 2019 and the UN has warned of major risks to food security.

Source: IR Magazine
By:  Andrew Holt
Reporter
LINK:  https://www.irmagazine.com/esg/investors-underpricing-impact-climate-related-risks-says-blackrock

 

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