Climate Risk is Investment Risk
“Climate change has become a defining factor in companies’ long-term prospects… Climate risk is investment risk…”
- Larry Fink, CEO of BlackRock, the largest asset manager in the world, in his 2020 letter to CEOs [1]
Global warming is the greatest long-term threat to both our nation and all other nations in the world. [2] For years, U.S. national security agencies have been warning our country that global climate change has even become a significant threat to our national security. [3]
What does this mean to you? The income you generate from advising your clients will become more dependent upon your knowledge of the danger global warming possesses to the wealth of your High-Net-Worth/Ultra-High-Net-Worth (HNW/UHNW) clients. Your ability to steer clients away from business sectors projected to suffer the worst economic effects as well as advise clients on “green” investment opportunities will become critical to building and maintaining your role as the trusted adviser.
As a Financial Advisor, you need to be aware that significant environmental damage associated with global warming is already happening. For example, the icecap in the Arctic is melting, causing a rise in sea levels. The U.S. National Oceanic and Atmospheric Administration (NOAA) reports ocean levels increased over one inch between 2006-2015. These rising ocean levels are already affecting low lying areas in Florida, Louisiana, Virginia, and other coastal states. [4]
Scientists project ocean levels could rise between one and two feet by 2100. What does this specifically mean to you as a Financial Advisor? Writes Larry Fink in his 2020 letter to CEOs, “Will cities… be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds?” For clients relying on their municipal bond portfolios for income, perhaps they will soon need a climate risk review of their portfolios.
40% of Americans live in “high population-density coastal areas, where sea level plays a role in flooding, shoreline erosion, and hazards from storms (NOAA).” [4] The location of cities and counties and states issuing municipal bonds will soon become a critical measure of risk.
To protect themselves from rising sea levels, cities located near oceans and major rivers will be compelled to spend hundreds of billions on flood prevention infrastructure. Designing and building these complex projects isn’t a problem that belongs to the distant future. The problem is here, now. Construction in New York City will soon begin on the most expensive water control infrastructure project yet planned.
As designed, this complex flood control system will protect 2.4 miles of New York’s East Side, including the financial district. [5] New York City will spend $1.5 billion on this project alone. Additional protective infrastructure costing in the billions will follow. New York can afford it. But what about other coastal cities?
While global climate change is a complicated and dangerous threat, I take solace from this quote from a speech made by one of America’s greatest novelists, William Faulkner. Few American novelists, besides Faulkner, have understood the good and evil within humans. “I believe that man will not merely endure: he will prevail.” [6]
Despite all dangers and threats we face, I am confident Americans will overcome the problems being created by global climate change because American ingenuity is part of our national DNA.
The best example I can give is Apple Computer. Steve Jobs, then 16, and Steve Wozniak, then 21, first met in 1971. They became immersed in what was then a counterculture of computer geeks in Southern California. In 1976, they founded Apple. By the late summer of 2020, Apple had become the most valuable publicly traded corporation in the United States, with a market cap of approximately two trillion dollars. Their achievement is a classic story of American ingenuity, and I am confident our ingenuity will allow us to cope with global climate change.
Resources:
[1] https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
[3] https://yaleclimateconnections.org/2019/04/the-long-history-of-climate-change-security-risks/
[4] https://www.climate.gov/news-features/understanding-climate/climate-change-global-sea-level
[5] https://www1.nyc.gov/site/escr/vision/vision.page
[6] https://www.nobelprize.org/prizes/literature/1949/faulkner/speech/
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Contributing Writer: Subject Matter Expert Charles McCain