Newsletter: BlackRock Worries about Climate Change. Trump Doesn’t.

The French Treasury, the Banque de France and the French Prudential Supervision and Resolution Authority (the equivalent of the SEC) released a joint report on climate risk in the banking sector. The report, required under Art. 173, maps the transmission channels of physical risks to financial impacts on banks (see figure) and outlines areas of further work to better understand the French banks’ exposure, especially through their client portfolio.

The report asserts that immediate exposure seems to be limited due to good insurance coverage of assets in banks’ portfolios, but recommends studying scenarios where insurance coverage for natural disasters might become more expensive or unavailable. Furthermore, the report highlights the need to better understand the risk embedded in potential pockets of vulnerabilities, e.g. in emerging countries or locally for SMEs, as well as model the local economic impacts from climate change and indirect macroeconomic effects on corporate credit risk.

France joins multiple other countries in addressing concerns of financial climate risks. Recently, Geoff Summerhayes, Executive Board Member of the Australian Prudential Regulation Authority, delivered the financial regulation group’s first major speech on climate change at the Insurance Council of Australia’s annual forum in Sydney. The Deputy Governor of the Bank of Canada, Timothy Lane, also gave a speech on their growing climate change concerns, warning that global warming could cost Canada as much as $43 billion a year.

Learn more about tools and methodologies to assess climate risk exposure in financial portfolios.

The Executive Order (EO) signed by President Trump on March 28 aims to unravel many critical components of U.S. climate policy, mandating Federal agencies to rewrite the Clean Power Plan, lift a moratorium on federal coal leasing and remove the requirement that federal officials consider the impact of climate change and integrate the social cost of carbon when making decisions. The EO opens the door to years of litigation as a number of the regulations it seeks to remove are mandated by law, as is for example the EPA’s obligation to regulate greenhouse gas emissions.

The EO also rescinds a previous Executive Order from the Obama administration, EO 13653, that directed federal agencies to plan and prepare for the impacts of climate change, and to support communities across the nation in their effort to improve preparedness and resilience. EO 13653 was the driving force behind critical efforts from NOAA, NASA, HUD and others, including the Climate Data Initiative, the Climate Resilience Toolkit, and many other outreach and engagement program from the US Global Change Research Program (USGCRP). The rescission of EO 13653, coupled with the threat of deep budget cuts for the agencies that support climate science and adaptation programs, puts at threat the very tools and resources communities across the US rely on for vulnerability assessments and adaptation planning.

A research note from our colleagues at the Rhodium Group highlights the long term impacts on US emission trajectory from the Trump EO. Their modeling shows that the US might still meet its 2020 target due to the policy inertia as well as low gas prices, but that US emissions would stay flat after that, falling well short of the reductions needed to meet the US’s commitment to the Paris Agreement. Previous research from the Pacific Northwest National Lab (PNNL) showed that even if all countries met their Paris commitment, the world would still fall short of meeting a 2 degre target. The odds of keeping global warming under 2 degrees dropped further with the policy direction set by the Trump administration.

For investors and corporations concerned over climate risk, the Trump administration worsens the outlook for both physical risk and energy transition risk. On the one hand, the EO may indirectly cause an increase in the frequency and severity of expected physical impacts from climate change, by failing to reduce GHG emissions. On the other hand, the reality of climate change could prompt a policy reversal by a new administration in 4 or 8 years, triggering an accelerated energy transition with an increased risk of a market shock for energy-intensive industries compared to a more gradual decarbonization.

Listen to the recording of a panel discussion held at the 2017 Climate Leadership Conference on March 1, 2017 on “The Changing Landscape of Climate Risk Disclosure.” The panel featured:

• Laline Carvalho, S&P Global;
• Tim Dunn, Terra Alpha Investments LLC
• Emilie Mazzacurati, Four Twenty Seven
• Mardi McBrien, Climate Disclosure Standards Board
• Richard Saines, Baker McKenzie LLP

Panelists shared how they are responding to the new regulatory context, challenges and opportunities arising from understanding climate impacts on business and markets, and expectations for further developments.

BlackRock made headlines on climate risk again as it announced that enhanced climate risk disclosures will be an area of focus for its investment stewardship team. The world’s largest asset management firm, with $5.1 trillion under management, holds stock in most major US companies, and has been consistently stepping up its engagement on climate change and pressing the corporate leadership from companies it invests in to hold a long-term view of value creation and strategy.

BlackRock specifically announced it will encourage companies to adopt the reporting framework laid out by the FSB Task Force on Climate-related Financial Risks, giving a major market boosts to the TCFD recommendations. BlackRock pointed specifically to oil producers and mining companies, but also to real estate companies, which might hold properties exposed to sea level rise.

Why is the financial sector failing to tackle climate risks? The drivers are complex and deeply embedded into the core of how financial markets function. 2° Investing Initiative, with support from the Generation Foundation, has been exploring in great depth the systems, processes and culture that stand in the way from long-term thinking on financial markets. They recently released two reports, “All Swans Are Black in the Dark” and “The Long and Winding Road” examining why the global finance sector is failing to tackle climate risk (depicted above from a presentation from 2dii, and also summarized in an excellent Green Biz article).

The reports find that analysts and credit ratings are focusing their forecasts on the short-term, 3-5 years out, and continuing to ignore long-term financial risks and opportunities such as those from climate change, the energy transition and disruptive low carbon technologies. This leads to widespread asset mispricing and a major blindspot for potential black swan events. The reports also find that even long term investors, like pension funds, only hold assets on average for 2-3 years, removing the incentive for analysts to look at the long term risks and opportunities for underlying assets.
The reports emphasizes the importance of current efforts to address short-termism and the lack of climate risk analysis, in particular the Task Force on Climate-Related Financial Disclosures (TCFD) and BlackRock.

Join Four Twenty Seven CEO Emilie Mazzacurati and Director of Advisory Yoon Kim, PhD at a symposium on “Climate Risk and Investment: Framing Private Challenges and Opportunities.” The conference, organized by ProAdapt, will takes place on April 20, 2017 in Washington, DC and host a discussion of common challenges and emerging investment opportunities in climate resilience with thought leaders and practitioners.

Emilie will join a panel on “Climate Resilience and Emerging Tools for Financial Institutions,” exploring climate risk from the perspective of financial institutions, as well as emerging models, analysis and metrics to quantify climate risk and identify opportunities to invest in resilience. The event is organized by ProAdapt, a program of the Multilateral Investment Fund of the Inter-American Development Bank, in partnership with the Nordic Development Fund.

Download the Symposium agenda