Institutional investors have been urged to take action to climate-proof their portfolios and to increase their investments into sectors and technologies that could help to de-carbonise the global economy, as new data reveals the mounting risks of inaction.
BlackRock, a global fund management company that oversees close to US$6 trillion in client assets, told investors that new methods of understanding and forecasting climate risks show that many in the financial sector have underestimated their exposure to the extreme weather events that are likely to result from global temperature rises.
“The combination of advances in data sciences, including geolocation data and climate modelling, have allowed us to more precisely assess the investment implications of climate-related risks” said Brian Deese, global head of sustainable investing at BlackRock. “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.”
US utility companies and real estate are particularly exposed, the firm said, with rising sea levels putting more than US$70 billion worth of property at risk in New York City alone.
BlackRock’s report shows that extreme weather events could have impacts across the financial markets, across many assets. Commercial mortgage backed securities, for example, are increasingly vulnerable to hurricanes. The risk of a building that backs one of these instruments being hit by a category four or five hurricane has gone up by 137 per cent since 1980, the firm said, while the risk of category five hurricanes in the US will increase by a projected 275 per cent between now and 2050.
Separately, the investment consulting firm Mercer warned that failing to limit global temperature rises to the threshold level of 2°C above pre-industrial levels would have severe impacts on investors’ returns, while investing in sustainable assets could help to protect their portfolios and offer access to new growth opportunities.
“This is clearly a fiduciary issue as it is about managing risk, Deb Clarke, global head of investment research at Mercer, said. “Asset owners should consider climate change at every stage of the investment process, from investment beliefs, policy and process to portfolio construction decisions.”
Global financial companies are increasingly articulating the risks to the global economy of climate change. BlackRock has emerged as a vocal supporter of sustainable investing, however some activists allege that the firm, like many of its peers, is not backing up its rhetoric with meaningful action.
BlackRock’s Big Problem, a coalition of NGOs that includes Amazon Watch, Friends of the Earth US and the Sierra Club, said in a statement after the fund manager’s announcement that BlackRock continues to be a major investor in coal and other hydrocarbons which contribute to climate change.
“These reports confirm the need to measure the scale of the climate risk facing our financial system,” the group said. “But without real action, risk disclosure alone does little good. If BlackRock truly cares about climate risk, it must use its shareholder power to push companies to do better as well as making fossil-free portfolios the default for its own investors.”