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A fundamental reshaping of finance

BlackRock CEO, Larry Fink, published his annual letter to CEOs this week and the title — which I am reusing here — should give you an indication of the tone. The focus is squarely on climate change. Larry argues that, sooner than perhaps most people think, climate change is going to cause a “significant reallocation of capital.”

Below are a few excerpts from his letter. If you remember the first post that I published this year, you may remember that Larry is not alone in this prediction. Already 2020 is shaping up to be a year where more of us seem to be turning our attention to climate change. I would encourage you to read the full letter over here.

Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?

These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.

Over the 40 years of my career in finance, I have witnessed a number of financial crises and challenges – the inflation spikes of the 1970s and early 1980s, the Asian currency crisis in 1997, the dot-com bubble, and the global financial crisis. Even when these episodes lasted for many years, they were all, in the broad scheme of things, short-term in nature. Climate change is different. Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis. Companies, investors, and governments must prepare for a significant reallocation of capital.

Photo by Chris Barbalis on Unsplash

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