Mapping climate-related risks
<b><span lang="EN-US">By: Richard Turnill, BlackRock’s Global Chief Investment Strategist.</span></b>
<strong>Key Points</strong>
<ul>
<li>We share our research on the potential impact from climate-related risks on three markets, aided by advances in data and climate science.</li><li>The European Central Bank kept its policy unchanged and signalled the potential for more dovish moves. Crude oil prices hit five-month highs.</li><li>The market will scrutinize this week’s Chinese economic data for any signs stimulus measures are starting to boost activity.</li></ul>
<strong>Mapping climate-related risks</strong>
A spate of recent extreme weather events — from hurricanes and wildfires in the U.S. to heat waves in Europe — has put a spotlight on climate-related risks. Yet climate-related portfolio risks have been hard to pinpoint – until recently. Advances in climate and data science now allow us to assess the financial risks – on a localized level.
<strong>Chart of the week</strong>
<strong>Estimated U.S. GDP impacts under “no climate action” scenario, 2060-2080</strong>
<img class="aligncenter size-full wp-image-138403" src="https://www.cover.co.za/wp-content/uploads/2019/04/image001.png" alt="" width="783" height="410" />
Sources: BlackRock Investment Institute, with data from Rhodium Group, March 2019. Notes: The map shows the
projected GDP impact in 2060-2080 on U.S. metropolitan areas under a “no climate action” scenario. Climate
changes are measured relative to a 1980 baseline. The analysis includes the effect of changes in crime and mortality
rates, labor productivity, heating and cooling demand, agricultural productivity for bulk commodity crops, and
expected annual losses from coastal storms. It accounts for correlations across these variables and through time —
and excludes a number of difficult to measure variables such as migration and inland flooding. See Rhodium Group’s
March 2019 paper Clear, Present and Underpriced: The Physical Risks of Climate Change for further details on its
methodology. Forward-looking estimates may not come to pass.
We can now analyze direct physical risks such as probabilities of flooding and hurricane-force winds — on a granular level across the U.S. Researchers across BlackRock have used data from <a href="https://rhg.com/impact/climate-risk/" data-saferedirecturl="https://www.google.com/url?q=https://rhg.com/impact/climate-risk/&source=gmail&ust=1555668764006000&usg=AFQjCNHzEJsYDYW0gPELOiVOWTl4QjstwA">Rhodium Group</a> to estimate potential direct financial damages, as well as indirect effects such as the impact of rising average temperatures on crop yields or labor productivity. The heat map shows projected changes in regional economic activity under a “no climate action” scenario assuming ongoing use of fossil fuels. The risks are asymmetric: Some 58% of U.S. metro areas would see likely gross domestic product (GDP) losses of 1% or more by 2080, with less than 1% set to enjoy gains of similar magnitude, we estimate. The biggest likely losers: Arizona, the Gulf Coast region and coastal Florida.
<strong>Investing implications </strong>
The potential losses from a changing climate are not baked in, as suggested by our recent publication <em><a href="https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/physical-climate-risks" data-saferedirecturl="https://www.google.com/url?q=https://www.blackrock.com/us/individual/insights/blackrock-investment-institute/physical-climate-risks&source=gmail&ust=1555668764006000&usg=AFQjCNFtdu0Zl0HnJeQrhu8RGlzBz1VY7Q">Getting physical</a></em>. Decisive actions to curb carbon emissions could mitigate the damage. But the vulnerabilities revealed in our evolving research, led by BlackRock’s Sustainable Investing and Global Fixed Income teams, can help investors get a better handle on physical climate risks. The risks are especially relevant for physical assets with long lifespans. It is why BlackRock’s research first focused on three sectors with long-dated assets that can be located with precision: U.S. municipal bonds, commercial mortgage-backed securities (CMBS) and electric utilities.
Our early findings suggest investors must rethink their assessment of vulnerabilities. Climate-related risks already threaten portfolios <em>today</em>, and are set to grow, we find. Take the potential impact on the creditworthiness of U.S. municipal bond issuers: A rising share of issuance in the $3.8 trillion market is set to come from regions facing climate-related economic losses, BlackRock’s research shows. Within a decade, more than 15% of the current S&P National Municipal Bond Index by market value would come from U.S. regions suffering likely average annualized losses from climate change of up to 0.5% to 1% of GDP, we estimate. Climate risk is also a growing concern for CMBS owners. To illustrate, we overlaid Rhodium’s hurricane modeling onto the roughly 60,000 commercial properties in BlackRock’s proprietary CMBS database. The median risk of one of these properties being hit by a Category 4 or 5 hurricane has risen by 137% since 1980, we found. Lastly, we assessed the exposure to climate risk of 269 publicly listed U.S. utilities based on the location of their plants, property and equipment. A key conclusion: Vulnerability to weather events is underpriced in U.S. utility equities. This leaves owners of such securities exposed to temporary price and volatility shocks.
We plan to extend our analysis across global markets, asset classes and sectors as data availability improves – from the early focus on U.S. assets. The key takeaway: Climate change is increasingly a risk that investors cannot afford to ignore. Integrating insights on climate-related risks is important for investors in all asset classes and regions, and can help enhance portfolio resilience, we believe.
<strong>Week in Review</strong>
<ul>
<li>The European Central Bank kept its policy unchanged and signaled the potential for more support for the weak eurozone economy. Minutes from the Federal Reserve’s latest policy meeting confirmed the patient stance adopted by policy makers.</li><li>China’s new bank loans in March grew more than expected, reflecting ongoing stimulus efforts. Chinese exports beat expectations but imports remained subdued. Crude oil prices rose above $70 a barrel for the first time in five months, supported by output cuts led by the Organization of the Petroleum Exporting Countries (OPEC) and sharp drops in Venezuela’s production.</li><li>The U.S. threatened tariffs on $11 billion worth of European Union (EU) products, the latest escalation in a 15-year fight over government subsidies to plane makers. The EU responded by preparing a list of retaliatory tariffs. The EU agreed to extend the UK’s Brexit deadline to Oct. 31.</li></ul>
<img class="aligncenter size-full wp-image-138404" src="https://www.cover.co.za/wp-content/uploads/2019/04/image002-5.jpg" alt="" width="884" height="333" />
<strong>Week Ahead</strong>
<table width="0">
<tbody>
<tr>
<td width="20%">Date:</td>
<td width="80%">Event</td>
</tr>
<tr>
<td width="20%">April 16</td>
<td width="80%">U.S. industrial production; a two-day U.S.-Japan trade talks concludes</td>
</tr>
<tr>
<td width="20%">April 17</td>
<td width="80%">China industrial production, retail sales, Q1 2019 GDP; Indonesian general election</td>
</tr>
<tr>
<td width="20%">April 18</td>
<td width="80%">U.S. retail sales</td>
</tr>
</tbody>
</table>
A string of Chinese economic data will be in focus this week. The market is looking for signs of a pickup in the country’s economic activity, as China’s stimulus package starts to feed through into the economic data. We are increasingly confident that Chinese growth is likely to reaccelerate from this quarter onward, as the credit impulse (the year-on-year change in credit growth) turns positive and fiscal stimulus gains traction. We see a turnaround in China as likely to lift growth globally, particularly in Asia.
<strong>Asset class views</strong>
Views from a U.S. dollar perspective over a three-month horizon
<img class="aligncenter size-full wp-image-138405" src="https://www.cover.co.za/wp-content/uploads/2019/04/image003.png" alt="" width="831" height="790" />
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