Portfolio Adjustments Can Help Mitigate Risks; Research Shows Potential for Climate-Related Excess Returns
Investors can no longer ignore climate change, says the BlackRock Investment Institute (BII). A swelling tide of climate-related regulations and technological disruption makes it vital to incorporate climate awareness into investment analysis.
In a new publication, “Adapting portfolios to climate change” the BII details increasing climate-related market risks in four areas:
“We believe climate risk factors have been under-appreciated and underpriced because they are perceived to be distant,” said Ewen Cameron Watt, BII Senior Director.
“However, perceptions are changing as governments and businesses are grappling with how best to combat climate risk. The pace of change and the contours of the transition to a low-carbon economy may create risk for some portfolios. But, investors who understand these issues will be able to exploit the opportunities resulting from these developments.”
There are many ways investors can incorporate climate awareness into their portfolios. For investors who are actively selecting securities, BII suggests incorporating tools and processes to systematically integrate environmental metrics into their research process, including fossil fuel usage, water consumption and carbon intensity.
Once assets owners understand their exposures, they can make informed decisions about how best to deal with this risk. Many are choosing to optimize their portfolios by re-weighting their holdings away from climate risk.
Opportunities are developing to generate climate-related “alpha,” or performance in excess of the market, the BII says. For example, the report highlights an evolving climate scoring approach that is being developed by BlackRock’s Scientific Active Equity team to help climate-proof portfolios.
The team’s research has found that U.S. companies with better climate scores tend to be more profitable and generate higher returns on assets.
“Assessing climate risk has transitioned from a discussion reflecting investors’ values to an analysis of the risks and opportunities,” said Deborah Winshel, BlackRock Global Head of Impact Investing.
“An awareness of climate-related issues makes investors more informed and better risk managers. As regulatory and technological changes unfold, investors who anticipate these issues will be more likely to deliver competitive performance over the long term.”
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About the BlackRock Investment Institute
The BlackRock Investment Institute provides connectivity between BlackRock’s portfolio managers, originates research and publishes insights. The Institute’s goals are to help BlackRock’s fund managers become better investors and to produce thought-provoking content for clients and policy makers.