Climate change is an investment risk, says BlackRock

Climate change risk has arrived as an investment issue, according to the world’s largest institutional investment manager.

With Paris summit looming, there will be 'regulatory risk' ahead of extreme weather risk

Pricing climate risk

8 years ago
Duration 5:49
Featured VideoEwen Cameron Watt of BlackRock Investment looks at how the investment community as dealing with climate change issues

Climate change risk has arrived as an investment issue, according to the world's largest institutional investment manager.

BlackRock Inc., with $4.5 trillion US under management, has begun watching carbon risk on all its portfolios.

In a new report, it warns a raft of new rules to curb carbon emissions out of the climate change summit in Paris may have a significant effect on investment returns in the years ahead.

This so-called "regulatory risk," meaning the impact of climate change regulations, is an impact that all corporations will be seeking to manage, says Ewen Cameron Watt, global chief investment strategist for the BlackRock Investment Institute.

"Climate change is creating increased levels of corporate risk and that risk could well feed into substantive loss in the future," he said in an interview with CBC's The Exchange.

Long-term asset owners worry about "stranded" assets, such as coal or oil that may have to be left in the ground to keep the world from warming by two degrees Celsius, the level at which we can expect a big increase in catastrophic weather events, according to the BlackRock report.

But that's not the only concern – there is the impact on the insurance industry of paying for repairs after extreme weather and the potential for growth among clean-energy companies.

Carney's climate change study mocked

Six months ago, Bank of England governor Mark Carney had to defend to British lawmakers his decision to ask the central bank to study the economic risks of climate change.

He also took a ribbing from critics internationally, including here in Canada.

But in the intervening months, three new climate change indexes, which measure carbon exposure to individual companies, have been developed for the Toronto and New York markets.

In addition BlackRock partnered with FTSE to create a Fossil Fuels Index Series that excludes companies linked to extraction and sale of fossil fuels.

 Watt says big institutional investors are taking a spectrum of approaches to carbon risk.

"At one end there's people saying look, this is going to take a very long time beyond my investment time horizon and at the other end people who say we believe passionately that taking a positive attitude toward the environment is part of out fiduciary duty," he said.

Oil and gas not necessarily a loser

Most investors fall between the two extremes, but are looking at internal mechanisms to dial down risk on their portfolios, he added.

"Efforts to mitigate climate change will produce winners and losers — but maybe not always the obvious ones," the BlackRock report concludes.

"The oil industry and energy-exporting countries may look like losers, yet low-cost operators should do fine as de-carbonization will likely be gradual."

Watt said he was confident that Canada would make the necessary transitions to a low-carbon future, because of a level of government commitment and the huge potential for renewable energy.

"The bigger the carbon footprint to start with, the greater the mitigation effort can be," he said.

At the same time, BlackRock is seeking companies who are studying their climate change risk and factoring it into long-term plans.

Good governance in this area tends to go with good overall corporate governance, he said.