World’s biggest investment fund, with $7 trillion in assets, preps for climate change

“In the near future — and sooner than most anticipate — there will be a significant reallocation of capital.”

Thus writes Larry Fink, the head of New York-based Black Rock — the world’s largest asset manager, with $6.96 trillion in assets under management — in his annual letters to CEOs and shareholders.

Fink says the driver of this imminent, major shift in the markets will be climate change, as every sector of the economy begins to feel the impact of changes in weather and sea level. Even that most basic staple of our financial system — the thirty-year mortgage — will have to adapt to a world in which environmental changes make it impossible to accurately forecast the value of a property over the whole life of the loan.

The insurance market is in a similar bind, and for the same reasons — how do you price flood insurance in a world where a “100-year flood zone” floods twice in a decade?

It’s not just climate change itself that will affect the price of everything from food to land to energy, but also the government responses to climate change. Black Rock anticipates more explicit regulation that both sets limits on emissions and attempts to price carbon in such a way that markets will be forced to shift. So there are second-order regulatory effects that asset managers like Black Rock will have to take into account in their forecasts.

The company puts it this way in its letter:

Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.

In addition to the realities of the market and some amount of client pressure on funds like Black Rock, there also seems to be a realization across the world that you can’t make money in a post-apocalyptic hellscape. More companies in more sectors are trying to be part of the solution because the climate doomsday is just plain bad for business.

Fink puts it this way: “We are facing the ultimate long-term problem. We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider. But there is no denying the direction we are heading.”

How an average investor might adjust

If you want to know all the things that Black Rock is doing to confront this new reality — pressuring portfolio companies to up their sustainability game, divesting from coal, getting its clients ready for regulatory changes, etc. — then check out the letter. These are all things that only a major fund like Black Rock can really do, so there’s not much there that’s actionable for ordinary people.

However, reading between the lines, there are some points worth pondering for the individual investor.

First, it looks like real estate is a trickier bet than maybe it used to be. We’ve all heard the old adages, like “buy land, because God isn’t making any more of it,” or, “when there’s blood on the streets, buy real estate.” My favorite, newish version is the idea that everyone is born short a house, and they have to cover that short at some point, so there is always a structural demand for housing that makes it a great investment.

But Black Rock’s point is that the weather is crazy and getting crazier, which makes it more difficult to pick relatively safe real estate investments. Obviously, coastal property in Florida is out, but what about land in sunny California — home of some of the nation’s craziest real estate prices, but also to an increasingly dire wildfire problem that’s causing massive power outages in addition to direct property damage.

Insurance businesses have also been a really great investment for decades. Much of Warren Buffet’s fortune has been made in insurance (GEICO was an early Buffett standout pick). But the actuarial tables for so many different types of insurable risks are changing, and those changes seem set to accelerate. This may well change the overall risk/reward profile of insurance businesses as an investment class.

You might think one easy answer in an uncertain world would be precious metals. And that could be right. But in times of political and financial instability, gold has been singled out for special tax and regulatory treatment by governments — in the 30’s, FDR banned private ownership of gold by executive order for a time.

Ultimately, I can’t tell you what to invest in, but I can say that I read this Black Rock note as a warning to prepare for turbulence ahead. That means all the standard, boring “sane prepper” stuff we preach on here applies: prioritize getting out of debt and building up a cash cushion that will let you ride out temporary disruptions to your income stream (eg. job loss, illness, relocation).