Businesses cannot escape the pervasive nature of climate related issues; so says BlackRock, the world’s largest asset manager, with approximately $5 trillion under management and an unquestionable commitment to economic development through capitalism.
The BlackRock Investment Institute issued “Adapting Portfolios to Climate Change” in September 2016. The Report acknowledges skepticism regarding climate change science, but insists that this skepticism should not keep investors and asset managers from developing realistic strategies in the face of the physical, technological, regulatory and social risks.
Challenges and Opportunities
The Report acknowledges how climate change issues can affect important business decisions and outcomes. The key areas that the Report identified are:
- Potential effects of more severe weather and other consequences of a higher global temperature, especially for ongoing asset management and preservation.
- Investment opportunities for infrastructure associated with lower carbon energy production and delivery.
- Increased risks to investments in fossil fuel activities, due to increased regulation and technological developments spurred by the desire for lower carbon emissions.
- Investment opportunities created or enhanced due to increased subsidies for “sustainable” energy and decreased subsidies for fossil fuels.
BlackRock’s Key Conclusions
A few components of the Report that I found significant:
- The Report appears to accept the accuracy of the Climate Action Tracker estimates of the relationship between carbon emissions and increased global temperature.
- The Report stated: “We believe climate factors have been underappreciated and underpriced.”
- The Report concludes that investment must be “climate aware” and that investing with a conscious goal of mitigating climate change may also provide superior returns.
Asset Management Must Include Assessment of Physical Risks Related to Climate Change
In discussing the Climate Action Tracker estimates, the Report indicates the challenges to reducing emissions to levels needed to keep the global temperature from rising more than 2°C above pre-industrial levels by 2100, as advocated by the Paris Agreement. In fact, the Report indicates that even if all pledges and intended nationally determined contributions from the Paris Agreement are met, the 2°C goal will not be met, and warming will be in the range of 2.4-2.7°C. Moreover, if current policies remain in effect, the Report indicates temperature increases in the range of 3.3-3.9°C. Logically, this means that BlackRock’s asset managers, and any company or government that accepts these estimates as reasonably accurate, should be developing asset protection strategies based on the strong possibility of a trend that will result in global temperatures increasing by more than 2°C by 2100.
Climate Considerations Will Continue to Affect the Regulatory and Subsidy Landscape
Companies must make investment decisions in light of expected regulatory developments, even if the companies do not agree with the regulations. This will require continuous monitoring of governmental developments in numerous jurisdictions. Companies subject to multiple jurisdictions should expect that regulatory provisions will conflict, due to diverse governmental policies related to climate change. Companies will need to develop workable policies in light of conflicting regulation. They also need to identify market trends, including those influenced by changing energy related subsidies and regulations, in order to maximize investment value.
For a copy of the Report click here.