Clear, Present and Underpriced: The Physical Risks of Climate Change
We partnered with BlackRock, the world’s largest asset management company, in conducting a physical climate risk assessment for their US municipal bond, commercial real estate, and electrical utility holdings.
Climate change is here and exposing individual assets, industries, and entire regional economies to new risks. Heat waves, hurricanes, high tide flooding, and other extreme weather events have become more severe—and more costly. Investors have been slow to understand and respond to these physical climate risks, and their economic and market implications. With new data and tools, better risk management is possible.
As “climate risk” has entered the mainstream investment lexicon, most of the attention has focused on the financial implications of transitioning to a lower-carbon economy. Physical risks remain hard to quantify. Historically-calibrated statistical models used by investors, insurers, corporate risk officers, and government planners to assess the likelihood of extreme events can significantly underestimate actual risk, both now and in the future. And investors need asset-level risk information to effectively incorporate into portfolio construction and management. Such data has been hard to come by.
Recent advances in econometric research, data processing, and scalable cloud computing make a rigorous, evidence-based, asset-level accounting of physical climate risk possible. Rhodium Group has partnered with BlackRock, the world’s largest asset manager, in identifying how these risks impact financial performance. Our approach provides a granular assessment of physical climate risks at the asset, portfolio, or industry level. This includes damage to fixed assets, like buildings and property, labor force disruptions, falling crop yields, rising energy demand, and other impact categories.
Our scenario-based analysis draws on 21 global climate models to map the bounds of future risks, aligning with recommendations from the Task Force on Climate-Related Financial Disclosures. Rhodium Group’s approach, drawing from an ongoing collaboration with climate scientists, economists, and data engineers in the Climate Impact Lab, accounts for the probability of multiple extreme events occurring across locations and through time in any given simulation. We can conduct these assessments under a range of different greenhouse gas emissions scenarios.
This detailed, actionable information is firmly rooted in peer-reviewed science. This includes our high-resolution probabilistic temperature and precipitation projections, sea level rise projections for individual tide gauge sites, tropical cyclone modeling, and our evidence-based estimates of the impact of changes in the climate on property and infrastructure, agricultural production, energy costs, labor productivity, and rates of mortality and crime in the US. In the months ahead, Rhodium Group and its research partners will expand coverage to include additional geographies and impact categories.
Read our full report for a detailed explanation of our methodology. The Blackrock Investment Institute’s report can be found here.