BlackRock, the world’s largest asset manager, has unveiled a major update to its proprietary Aladdin operating system that takes climate change into account.
Aladdin, which BlackRock calls its central nervous system, allows investors to see their whole portfolio and understand its risk. A new module, called Aladdin Climate, helps investors measure both the physical risk of climate change and the risks to portfolios as economies shift to a low-carbon model. It is now available to investors outside BlackRock.
Investors using the tool can analyze climate risks and opportunities down to individual securities and measure the impact of potential policy changes, new technologies, and other factors, such as energy supplies for specific investments, according to BlackRock. Aladdin Climate is initially available as a separate module, with additional asset classes being rolled out next year.
Mary-Catherine Lader, head of Aladdin sustainability at BlackRock, demonstrated its new features on a video call with Institutional Investor. In one example, she selected a mortgage-backed security in Aladdin and then opened a tab labeled “climate physical risk.” Then, a map of the U.S. popped up showing the locations of the underlying loans and the level of climate risk in each one relative to a set of peers.
Lader then picked an environmental scenario and a time frame. Behind the scenes, Aladdin connected the risk factors to highly specific locations on the ground, in some cases to plots of land that are 25 by 25 meters. “Then you can see an increase in energy costs or hurricane, wind and flood damage,” she said during the virtual demonstration. “This looks at how your risk is distributed.”
Lader said the firm began building Aladdin Climate in March and started offering the application to BlackRock managers in October. She said the firm ultimately partnered with seven organizations for the data and analytics.
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Aladdin Climate comes at the end of a year that began with CEO Larry Fink writing in his annual letter that, among other things, it wouldn’t be long before investors would start to significantly alter their portfolios in response to climate changes.
Lader pointed out that it can be difficult to know how to do this. “Who out there can help translate climate science and climate models into economic impact, GDP impact, and real estate price impact and translate that into financial impact?” she asked. “And ultimately, if you are a portfolio manager, how do you understand what to do? What is the potential impact in however many years of rising sea levels? Or in the nearer term, what is the impact of policy changes that are trying to mitigate climate change?"
No single firm had everything, and no one translated the financial impact in a credible and transparent way, according to Lader. “In the case of an MBS, the physical effects of climate changes were particularly relevant. No one at that time could determine the impact on default probability."
Part of the reason that BlackRock has been able to develop the climate application is the dramatic increase in the amount of data that has become available in recent years. Still, some assets are easier to analyze than others.
Not surprisingly, Aladdin Climate is not yet available for private equity, venture capital, and other private markets, where insiders generally hold information close to the vest. But the firm is aiming to include these investments at some point in the future, said Lader.