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Portfolio > Alternative Investments > Real Estate

Investors Underestimate Climate Risks: BlackRock

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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.

Municipal Bonds

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.

The report says Miami’s current annual GDP losses already exceed 1%, and are projected to grow to an annualized 4.5% of GDP by century’s end.

Commercial Real Estate and CMBS

Hurricane-force winds and flooding are key risks to commercial real estate, according to the report.

Since 1980, the median risk of a building that backs a commercial mortgage-backed security being hit by a Category 4 or 5 hurricane today has risen by 137%, and BlackRock projects a 275% increase in the risk of Category 5 hurricanes between now and 2050.

The analysis found that more than four out of five commercial properties tied to CMBS loans hit by recent hurricanes were located outside official flood zones. This means they may have lacked insurance coverage, and makes it critical to analyze climate-related risks on a local level.

New York City faces rising sea levels of up to three feet by 2100, exposing more than $70 billion of property to potential losses.


Aging infrastructure leaves the U.S. electric utility sector exposed to climate shocks such as hurricanes and wildfires. BlackRock assessed the exposure to climate risk of 269 publicly listed U.S. utilities based on their plants’ physical location, property and equipment, and concluded risks were underpriced.

According to the report, investors in utility stocks are quick to sell out following an extreme weather event; stocks fall by 1.5% on average over the ensuing 40 days.

However, these utility stocks recover quickly while the true economic losses are still being calculated. This suggests that investors focus on headline risk rather than assessment of utilities’ vulnerability to climate-related weather events.

BlackRock found that the most climate-resilient utilities tended to trade at a slight premium to their peers. It said this gap may become more pronounced over time as weather events become more extreme and frequent.


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