BlackRock Investment Institute reported Thursday that investors are underpricing the effects of climate-related risks, including more frequent and intense extreme weather events, and need to reassess asset vulnerabilities.
The report presents new tools and data to show potential climate-related risks for different U.S. asset classes. Working with Rhodium Group, BlackRock leveraged 160 terabytes of data to assess these risks facing specific asset classes at present and under several future climate scenarios reaching out to 2100.
Many investors recognize that climate-related risks are growing, and understand the importance of integrating climate-related risk factors in the investment process, according to BlackRock. Until recently, however, most have not had access to data showing the potential effects at the asset level of both direct physical risks and indirect economic impacts.
“The combination of advances in data sciences, including geolocation data and climate modeling, have allowed us to more precisely assess the investment implications of climate-related risks,” BlackRock’s global head of sustainable investing Brian Deese said in a statement. “Asset-level analysis is key for investors.”
The report shows how physical climate risks vary greatly by region, focusing on three sectors with long-dated assets that can be located with precision.
According to the research, extreme weather events pose growing risks for the creditworthiness of state and local issuers in the $3.8 trillion U.S. municipal bond market.
Within the next 10 years, some 15% of the current S&P National Municipal Bond Index (by market value) would be metropolitan statistical areas experiencing likely average annualized climate-related economic losses of up to 0.5% to 1% of GDP.
By 2080, an estimated 58% of U.S. metro areas will likely suffer GDP losses of up to 1% or more, with less than 1% enjoying gains of similar magnitude. The New York City region is expected to face annual losses equivalent to about 1% of GDP by late century.
Florida will be most affected, with Naples, Panama City and Key West annually losing 15% or more of GDP, mostly because of coastal storms.