The price of climate change: global warming’s impact on portfolios – BlackRock

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Climate change is gaining traction as a global policy initiative, a key risk factor and an emerging investment theme, according to the BlackRock Investment Institute (BII) Australian strategist, Steve Miller. 

In the lead up to next month’s UN Conference on Climate Change in Paris, the BII looks at the likely impact of climate change on investors and investment outcomes, and the winners and losers in the race to reduce carbon footprint.

“Even if you are skeptical of global warming and its causes, no one should ignore that significant regulatory, economic and technological factors make this a major investment issue,” Mr Miller said.

“Investors, corporations and governments are focusing on the risks and opportunities, as well as how best to tackle the challenges that are arising. These profound changes have the potential to affect asset prices in all areas for a long time to come.” 

Dr Joanna Nash, research analyst in BlackRock’s global Scientific Active Equity team said: “Our research has shown a link between reducing carbon intensity (as measured by carbon emissions divided by sales) and improved firm productivity. 

“We believe that if firms take a holistic view of the way they operate their businesses, it is a mark of operational and management quality. We are now looking to extend this same line of research to firms that are improving their water usage.” 

Key conclusions are highlighted below, and the full report is available at: https://www.blackrock.com/au/intermediaries/literature/market-commentary/blackrock-price-of-climate-change-global-warming-impact-en-au.pdf  

Highlights

Climate change risk has arrived as an investment issue. Governments are setting targets to curb greenhouse gas emissions. This may pave the way for policy shifts that we could see ripple across industries. The resulting regulatory risks are becoming key drivers of investment returns. 

The momentum behind mitigating climate risk in portfolios appears to be building. Long-term asset owners worry about extreme loss of capital and/or ‘stranded’ assets (write-downs before end of their expected life span). Do securities of companies most susceptible to physical and regulatory climate risks already trade at a discount to the market? BlackRock has not observed such a discount in the past – but could see one in the future. 

Global insurers have led the way in pricing natural disaster risks. A huge US storm in 1992 (Hurricane Andrew) almost wiped out the industry, leading to a revolution in how it underwrites risks through an influx of capital, use of big data and increased capital requirements. Other industries may need to catch up. 

BlackRock views environmental, social and governance (ESG) excellence of asset owners as a mark of operational and management quality. It means responsiveness to evolving market trends, resilience to regulatory risk, and more engaged and productive employees. 

Divesting from climate-unfriendly businesses is one option. The biggest polluting companies, however, have the greatest capacity for improvement. Engagement with corporate management teams can help effect positive change, especially for big institutional investors with long holding periods.

Climate change related data can be used to measure physical and regulatory environmental risks, to mine for alpha opportunities or to reflect social values in portfolios. As examples, the report analyses the carbon intensity of an insurer’s corporate debt portfolio and points to research that ties improving carbon efficiency to equity outperformance. 

Securities markets are evolving to include emissions trading and green bonds, enabling investors to limit carbon exposures in portfolios and direct capital to projects that reduce emissions. Putting a price on carbon emissions is key for determining the value of energy-intensive industries. Carbon prices are mostly driven by policy and currently offer little incentive to force emitters into palliative action and consumers to switch to non-fossil fuels.

Efforts to mitigate climate change will produce winners (potentially China and India as fossil fuel importers) and losers – but maybe not always the obvious ones. The oil industry and energy-exporting countries may look like losers, yet low-cost operators should do fine as de-carbonisation will likely be gradual. Assets that may benefit from a transition to a low-carbon economy include renewable infrastructure debt and equity. BlackRock also likes selected companies specialising in energy efficiency and clean technologies.

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BlackRock

Deb Johnson

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Cynthia Ng

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