Investors can no longer ignore climate change, and they should incorporate climate awareness into their investment analysis, says the BlackRock Investment Institute(BII).
In a new publication, “Adapting portfolios to climate change,” BII details increasing climate-related market risks in four areas:
- Technological advances in power production, storage and consumption that are undermining existing business models,
- Regulatory efforts focused on curbing carbon emissions and improving energy efficiency,
- Increasingly frequent extreme weather events, and
- Social pressures for greater climate awareness in corporate operations and institutional investment practices.
“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.”
BII also suggests several ways for investors to be “climate conscious”.
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. BM