BlackRock is not your average investment fund. With $4.9 trillion in assets, it is the biggest private investment fund in the world. Naturally, what it says, and more important, what it does, matters. In September 2016, it issued a report that, to put it mildly, may become a turning point in the annals of global investing and risk management. In unequivocal language, it said, “Investors can no longer ignore climate change. Some may question the science behind it, but all are faced with a swelling tide of climate-related regulations and technological disruption.”
From BlackRock itself:
Most industries lag insurers when it comes to properly accounting for and pricing risks of climate-related events. Many equity investors ignore climate risk, and credit investors and ratings agencies do not routinely assess it. Property markets often ignore extreme weather risk, even in highly exposed coastal areas. Most asset owners do not measure their exposure to potentially stranded assets such as high-cost fossil fuel reserves that may have to be written off if their use is impaired by climate change regulation. Who can blame them? There is little evidence that assets more susceptible to climate change and related regulatory risks trade at a discount to the market. A simple analysis of monthly returns in the MSCI World Index shows low carbon-intensive equities (those with the lowest carbon emissions by revenues as of 2014) have outperformed those with the highest carbon intensity over the past 20 years. Yet this outperformance vanishes after stripping out the impact of common return factors such as size and geography, we found. In other words, we found there has been no climate change risk premium for equities.
Yet this does not mean there will be no premium in the future. In fact, we think there likely will be one. Many countries are set to adopt carbon taxes or cap-and-trade (emissions trading) programs to help meet their INDC targets. Greater transparency on climate risks and exposures will likely lead to a gradual discounting of companies and assets exposed to climate risk — and increase the value of those most resilient to these risks.
Some asset owners are already divesting from carbon intensive equities, while others are ‘hedging’ their carbon exposure by investing in renewables, energy efficiency and clean tech. It can be costly to underestimate environmental risks. Just ask BP’s equity and debt holders.