Climate-related market risks and opportunities
The BlackRock Investment Institute provides a roadmap for climate-savvy investing in our new paper “Adapting portfolios to climate change.” We detail how climate change presents market risks and opportunities, how these factors are likely to play out for long- and short-term investors, as well as how all investors can — and should — take advantage of a growing array of climate-related investment tools and strategies to manage risk, seek excess returns or improve market exposure.
We see climate change affecting investment portfolios in four areas: physical, technological, regulatory and social. Scientists believe global warming is leading to growing physical climate risks in the form of more frequent and extreme weather events, such as storms, flooding, droughts, and wildfires, as well as creeping rises in temperatures and sea levels over time.
Market Realist – What are the physical climate risks?
As we already saw in Part 1, there have been extreme weather changes in the last few years. Scientists believe that global warming could have added to the devastating El Niño effect worldwide. There were wildfires in Indonesia, typhoons in the Pacific, heavy rains and floods in South India, and flooding of the Mississippi River.
The above graph shows US billion-dollar disaster events from 1980–2015, according to the NOAA’s (National Oceanic and Atmospheric Administration) National Center for Environmental Information as of July 2016. The events include droughts, flooding, severe storms, tropical cyclones, wildfires, winter storms, and freezes.
The losses from extreme weather events over the past ten years have increased, as you can see in the graph. These losses pose a threat to agricultural companies (MOO) and companies located in geographically exposed areas. These events also cause damage to property and infrastructures.
What are the losses?
Damages from climate change aren’t limited to infrastructure. Temperatures have been rising, and the effect is not just in emerging nations (EEM). Developed economies (EFA) (DBEF) with better financial means and technology aren’t escaping the effects.
A 2014 study of US counties by Tatyana Deryugina and Solomon M. Hsiang stated that daily productivity falls 1.7% for each 1° Celsius (1.8° Fahrenheit) rise in average temperatures above 15° Celsius (59° Fahrenheit).
Disruption due to climate change can cause lost productivity. which ultimately harms industries such as trade, transportation, agriculture, fisheries, energy production, and tourism. Heath risks increase with a rise in temperatures and other climate-related changes, which ultimately hampers productivity. The physical effects of climate change vary from region to region and are hard to quantify. A more gritty modeling and assessment of geographic risks and opportunities is required.
Next, let’s take a look at climate-related risks and how they can be addressed through technology.