'Climate is King' Says BlackRock; Companies Must Now Address Risk

The world’s largest asset manager is stepping up pressure on companies to address how climate risk will affect its portfolios. In a recent post on its website, BlackRock said it believes climate risk is a “systemic issue” and that corporations should be compelled to develop disclosure standards. It also suggested that those standards should be calibrated to meet the needs of each market and should ideally be “globally consistent” as well.

The London-based company, which controls $5.1 trillion in assets across the world, has published two papers through its BlackRock Institute to help guide companies in addressing climate risk. The Price of Climate Change – Global Warming’s Impact on Portfolios gives a no-nonsense rundown of what a changing climate can mean to industries and why companies need to factor extenuating issues into their disclosure statements. It points out that climate risk doesn’t just mean rising sea levels in coastal areas, but governance issues (such as happened in New Orleans during Hurricane Katrina) and underemployment problems due to access or weather conditions.

Its paper on Adapting Portfolios to Climate Change anticipates the impact of the Paris Agreement and a rising tide of regulations that are designed to help keep global warming below the 2-degree Celsius mark.

“We believe climate factors have been under appreciated and under priced,” the authors say – a factor that could change as the impacts of climate change becomes more prevalent.

“The world is rapidly using up its carbon budget,” and “the sums at risk are enormous. The damage from climate change could shave 5-20 percent off global P annually by 2100,” according to a report written for the UK government in 2006.

To offset that impact, the Institute advises, companies need to remember that climate has a potential say in the wealth of a portfolio.

“Climate is king … Our research suggests there can be little downside to gradually incorporating climate factors into the investment process — and even potential upside.”

The Financial Stability Board Task Force on Climate-related Financial Disclosures, of which BlackRock is a participating member, has also published a set of recommendations framed around four core elements of business: governance, strategy, risk management, and metrics and targets. BlackRock said it plans over the upcoming year to engage with companies most at risk from climate change. In doing so, it hopes to encourage companies to adopt the framework as a guide to managing climate risk factors.

This week the Trump administration announced that it was considering dropping climate change from environmental review processes. The news follows on the heels of his announcement that methane coal restrictions put in place by the Obama administration will be reversed. https://www.bloomberg.com/news/articles/2017-03-14/trump-said-to-drop-climate-change-from-environmental-reviews

In keeping with BlackRock’s recent announcements, Vice Chairman Philipp Hildebrand urged the Trump administration to reconsider its moves to repeal regulations put in place by his its predecessors. His comment came following the announcement by Trump that he would be meeting with financial officers from the banking sector to consider repealing some banking regulations.

"Rolling back regulation at this point with this much liquidity in the system strikes me as a very bad idea," he said. “We learned that in lesson in 2004.”

He agreed there might be room for some loosening of regulations, but it needed to be handled carefully, a point that JP Morgan Chase International Chairman Jacob Frenkel conceded.

“It would be [a] great mistake to throw the baby out with the water tub,” Frankel warned.

Let’s see if Trump can take the same advice when it comes to global warming regulations. With some 17 Republicans vowing this week to fight climate change, the topic of global warming may be less a partisan issue than before.