Getting physical: assessing climate risks By BlackRock Investment Institute

A series of recent extreme weather events — from hurricanes and wildfires in the U.S. to heat waves in Europe and floods in Japan — have put a spotlight on climate-related risks. We offer a new set of tools for assessing such risks to portfolios.


Mapping the damage

Estimated climate-related impact on U.S. regional GDP, 2060-2080

Sources: BlackRock Investment Institute, with data from Rhodium Group, March 2019. Notes: The map shows the projected GDP impact in 2060-2080 on U.S. metropolitan areas under a “no climate action” scenario. Climate changes are measured relative to a 1980 baseline. The analysis includes the effect of changes in crime and mortality rates, labor productivity, heating and cooling demand, agricultural productivity for bulk commodity crops, and expected annual losses from coastal storms. It accounts for correlations across these variables and through time — and excludes a number of difficult to measure variables such as migration and inland flooding. See Rhodium Group’s March 2019 paper Clear, Present and Underpriced: The Physical Risks of Climate Change for further details on its methodology. Forward-looking estimates may not come to pass.

Advances in climate and data science now allow us to gauge the likely overall economic impact of climate-related risks on a localized basis. To illustrate, the heat map above shows that 58% of U.S. metro areas will likely suffer annualized GDP losses of 1% or more by 2060-2080 under a “no climate action” scenario. Among the likely losers: Arizona, the Gulf Coast region, and coastal Florida.


Here are our key findings:

  • We show how physical climate risks vary greatly by region, drawing on the latest granular climate modeling and big data techniques. We focus on three sectors with long-dated assets that can be located with precision: U.S. municipal bonds, commercial mortgage-backed securities (CMBS) and electric utilities.


  • Extreme weather events pose growing risks for the creditworthiness of state and local issuers in the $3.8 trillion U.S. municipal bond market. We translate physical climate changes into implications for local GDP — and show a rising share of muni bond issuance over time will likely come from regions facing economic losses from climate change and events linked to it.


  • Hurricane-force winds and flooding are key risks to commercial real estate.Our analysis of recent hurricanes hitting Houston and Miami finds that roughly 80% of commercial properties tied to affected CMBS loans lay outside official flood zones — meaning they may lack insurance coverage. This makes it critical to analyze climate-related risks on a local level.


  • Aging infrastructure leaves the U.S. electric utility sector exposed to climate shocks such as hurricanes and wildfires. We assess the exposure to climate risk of 269 publicly listed U.S. utilities based on the physical location of their plants, property and equipment. Conclusion: The risks are underpriced.



Brian Deese – Global Head of Sustainable Investing

Ashley Schulten – Head of Responsible Investing, Global Fixed Income

Philipp Hildebrand – Vice Chairman

Isabelle Mateos y Lago – Chief Multi-Asset Strategist, BlackRock Investment Institute

Peter Hayes – Chief Investment Officer of the Municipal Bond Group, Global Fixed Income

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