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The Actuary The magazine of the Institute & Faculty of Actuaries

BlackRock urges investors to rethink climate risk vulnerability

Investors are consistently underpricing the potential impacts of climate change on their assets, and need to reassess their vulnerability to an increasing number of risks.

Rising property damage predicted ©iStock
Rising property damage predicted ©iStock

That is according to a report published yesterday by BlackRock, which said it is unclear how investors incorporate climate risks like rising sea levels into their analysis.

In an “important next step” for investors, BlackRock leveraged 160 terabytes of data using new tools to demonstrate the potential impact on different asset classes.

For example, it found that New York City is facing rising sea levels of up to three feet by the end of the century, exposing more than $70bn (£53.5bn) of property to potential losses.

“Advances in data sciences allowed us to more precisely assess the investment implications of climate-related risks,” said Brian Deese, BlackRock global head of sustainable investing.

“Asset-level analysis is key for investors. The risks posed by more frequent and severe weather are not fully reflected in the price of many assets, including US utility equities.”

BlackRock said investors in utility stocks are quick to sell out of these names following an extreme weather event, with stocks down 1.5% on average over the ensuing 40 days.

However, these stocks recover quickly while the true economic losses are still being calculated, suggesting that investors are focused on headline risk rather than climate risks.

The world’s largest asset manager also predicted that a rising share of municipal bond issuance is set to come from regions facing climate-related economic losses.

It expects more than 15% of the current US S&P National Municipal Bond Index to compromise of highly populated metropolitan statistical areas within a decade.

These are likely to suffer average annualised climate-related economic losses of up to 1% of GDP during that time, with 58% of metropolitan areas set to suffer similar losses by 2080.

ClientEarth climate lawyer Joanne Etherton said: “BlackRock’s recognition of the scale of climate-related financial risks facing the economy today should be a thunderbolt for investors.

"Investors who fail to heed the warning may be exposing themselves to lawsuits.”

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