Adapting portfolios to climate change

Investors can no longer ignore climate change, says the BlackRock Investment Institute (BII) in a new publication, “Adapting portfolios to climate change”

Key highlights

• We detail how climate change presents risks and opportunities through four channels: 1) physical: more frequent and severe weather events; 2) technological: advances in batteries, electric vehicles or energy efficiency; 3) regulatory: subsidies, taxes and energy efficiency rules, and; 4) social: changing consumer and corporate preferences.
• The longer an asset owner’s time horizon, the more climate-related risks compound. Yet even short-term investors can be affected by regulatory and policy developments, technological disruption or an extreme weather event.
• We show how all asset owners can — and should — take advantage of a growing array of climate-related investment tools and strategies to manage risk, search for excess returns or improve their market exposure.
• We detail what many see as the most cost-effective way for governments to meet emissions-reduction targets: policy frameworks that result in realistic carbon pricing. These would incentivize companies to innovate and help investors quantify climate factors. We see them as a scenario investors should prepare for.

Warming paths

Scenarios for global temperatures, 2010-2100

The speed of the energy transition is key to assessing climate risks and opportunities. Most countries have submitted plans to reduce carbon emissions in so-called intended nationally determined contributions (INDCs). The aim is to limit global warming to less than two degrees Celsius (2°C) above pre-industrial levels – the threshold where many scientists see irreversible damage and extreme weather effects kicking in.

Yet the INDCs are just a first step, as the chart above shows. No action at all or current policies would lock in much more severe warming. Slow action would mitigate regulatory risk in the short run, but raise the possibility of extreme weather events. These events, in turn, could prompt more drastic policy actions down the road. The bolder the policy action taken today, by contrast, the greater the “transition risk” for industries and assets due to fast technological and other changes.

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