BlackRock’s Deal With Baringa Flags The Boom In Climate Change Consulting To Financial Institutions

BlackRock’s Deal With Baringa Flags The Boom In Climate Change Consulting To Financial Institutions

As a management consulting firm with a dual focus on the energy industry and financial services, Baringa Partners is ideally placed to understand finance-related climate risk. Reflecting this expertise, Baringa developed a climate change scenario model for its financial services clients to answer three questions: 1) What is my portfolio’s climate change risk? 2) What is my portfolio’s climate impact? 3) What are my climate-related investment opportunities? Given there are climate risk advisory offerings from other consultants like Bain and EY, what impressed the demanding team at BlackRock sufficiently to make the Baringa climate change scenario model part of its Aladdin Climate platform?

Baringa’s climate change scenario model is built on three components. Firstly, Baringa has drawn on learnings from its consulting work to produce a global energy transition model – with transparent assumptions – which covers energy, power, transport, buildings, chemicals and land use. Secondly, Baringa collaborated with XDI, a specialist provider of climate risk analytics, to create a model covering 70 million geo-located physical assets such as power plants, mines and commercial offices owned by 4 million firms. The analysis of climate change risk to physical assets maps the impact of climate hazards on each asset based on its construction material and design. Finally, the Baringa climate change scenario model quantifies the financial impact of the energy transition analysis and physical climate risk assessment. Users of the model can zoom in from portfolio level impacts down to the firm or asset level.

Legal & General, a financial services firm with £1.3 trillion of assets under management, has built its Destination@Risk framework using the Baringa climate change scenario model. In March 2021, BNP Paribas, one of Europe’s largest banks, also announced that it had committed to use Baringa’s climate change scenario model to embed climate scenario risk analysis in its decision-making. In total, financial services firms with $11 trillion of assets under management use the Baringa climate model. A particularly high level of adoption has been driven in the UK by the 2021 Bank of England biennial exploratory scenario on the financial risks of climate change.

The recent announcement should be seen as BlackRock playing catch up with European financial institutions as well as an indicator of booming demand for climate change consulting. For climate change scenario analysis, banks, asset managers and issuers can also turn to the likes of McKinsey, which acquired Planetrics in March 2021, or to Willis Towers Watson which acquired Acclimatise in November 2020. Success winning climate risk consulting engagements with financial institutions in the current period will be critical to gaining traction with large enterprises seeking advice on energy transition.