The worlds largest investor says a $3.8 trillion market faces growing climate-change risk

climate changeMike Hutchings/Reuters

  • Climate change threatens an increasingly large part of the $3.8 trillion US municipal bond market, the asset manager BlackRock warned.
  • The firm analyzed the economic impact that climate-change-related risks — like flooding and hurricane-force winds — could have at a local level in the coming years.
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BlackRock, the world’s largest asset manager, is doubling down on its view that investors in the US don’t yet fully appreciate the just how disastrous an economic impact climate change could have at a time when environmental, social, and corporate governance investing is garnering mainstream attention.

“Climate-related risks already threaten portfolios today, and are set to grow, we find,” strategists at the BlackRock Investment Institute wrote in a report this week, homing in on threats the massive US municipal bond market could face as the planet warms.

“A rising share of issuance in the $3.8 trillion market is set to come from regions facing climate-related economic losses,” the strategists said of the municipal bond market’s creditworthiness.

States, cities, counties, and other government bodies issue municipal bonds — often called “munis” —  to fund projects like building schools and highways. The muni bond market works in a similar fashion to the US Treasury market in the debt instruments it offers investors, but it does so on a smaller scale. Another key difference between the two markets is the interest paid on muni bonds, which are generally exempt from federal taxes.

BlackRock estimates that within a decade more than 15% of the S&P National Municipal Bond Index by market value will come from regions in the US “suffering likely average annualized losses from climate change of up to 0.5% to 1% of GDP.”

So how did BlackRock arrive at its projections? The firm dug into data from the research provider Rhodium Group to assess the “direct” financial damage that could come from events like flooding and hurricane-level winds, along with more “indirect” damage like the impact of rising temperatures on crops and labor productivity.

Researchers at the firm highlighted expected shifts in economic activity under a “no climate action” scenario that assumes the ongoing use of fossil fuels.

Estimated U.S. GDP impacts under a 'no climate action' scenario between 2060 and 2080, according to BlackRock.BlackRock Investment Institute

“The biggest likely losers: Arizona, the Gulf Coast region and coastal Florida,” they wrote.

The risks across the country are asymmetric, the firm found. Under this scenario, about 58% of US metro areas would lose 1% or more of gross domestic product by 2080.

BlackRock CEO Larry Fink has in recent years come out as a proponent of corporations using a social-responsibility framework in their decisions. In Fink’s annual letter to investors released earlier this year, he called on business leaders to more actively address societal issues. 

Elsewhere in the asset manager’s report out this week, the strategists added that climate change was “increasingly a risk that investors cannot afford to ignore.”

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