Best Fixed Income ESG research – BlackRock's Getting Physical

Channels: ESG

Companies: BlackRock, Rhodium Group

People: Ashley Schulten

Getting Physical: Scenario analysis for assessing climate-related risks reveals the climate-related risks that pose a threat to the economies of many US state and local bond issuers.

Produced by BlackRock and independent research firm Rhodium Group, the paper highlights that a rising share of US metropolitan statistical areas (MSAs) will likely be hit by climate change in the coming decades.

"Until now, the evaluation of climate risk had focused more on transition and regulatory risk than the actual physical impact of extreme weather events," says Ashley Schulten, head of BlackRock's global fixed income responsible investing team.

"By employing a rigorous, data-based evaluation ... we were able to develop a framework that allows our investors to better assess climate-related risks on an individual asset level, which is crucial because the impact of climate change is going to be felt differently by investors and assets depending on the region they're located in."

Within a decade, more than 15% of the current S&P National Municipal Bond Index will come from MSAs suffering likely average annualised economic losses from climate change of up to 1% of GDP, according to the report.

The paper shows how physical climate risks vary greatly by region, drawing on the latest climate modeling and big data techniques. BlackRock focuses on three sectors with long-dated assets that can be located with precision: US municipal bonds, commercial mortgage-backed securities and electric utility bonds. Hurricanes pose a threat to the finances of southern US states; rising sea levels make coastal real estate vulnerable; and power plants in the Southwest have exposure to extreme heat, it notes.

"We expected some of these risks to be underpriced in the market by investors and that's ultimately what we found," Schulten says.

"What was interesting is the impact of climate change on regions outside of official flood zones and low-lying coastal areas ... This is a sign that current protections such as insurance may not be adequate and bolsters the need for analysis of climate risks on investments at a local level."