BlackRock Deal Moves Firm Closer to Quantifying the Impact of Climate Change

BlackRock has made a minority investment in machine learning and data science company Clarity AI, creating a strategic partnership that is part of the firm’s effort to help portfolio managers project the impact of climate change on their investments.

BlackRock will integrate Clarity AI’s technology platform with Aladdin, BlackRock’s operating system used by portfolio managers and others internally, as well as by outside clients. Founded in 2017, Clarity AI provides information on the environmental and social impact of about 30,000 companies in almost 200 countries, according to BlackRock’sannouncementof the deal Thursday.

In December, BlackRock unveiled Aladdin Climate, a major update to Aladdin that allows users to assess the impact of climate change on their portfolio just as they have long analyzed more traditional financial factors. Investors using the tool can analyze climate risks and opportunities down to individual securities and measure the impact of potential policy changes, new technologies, increases in average daily temperatures, and other factors, such as energy supplies needed for specific investments.

The challenge in investing sustainably has long been data. While the amount of data and information available on companies’ governance and environmental impact is growing, it’s still inconsistently available and nothing like traditional financial data.

“The credibility of all the strategies rests on high-quality data and then the tools that can make that data useful to investors,” said Mary-Catherine Lader, Head of Aladdin Sustainability at BlackRock, in an interview. “For many investors, ESG data is a different kind of data than they’re accustomed to dealing with. Often it’s more like big data, than traditional financial data. So having technology and tools to allow you to sift through what is useful and what is not, how you fill gaps, and how you apply it to your portfolio is critical.”

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Using machine learning, Clarity AI trains algorithms to fill in the gaps where there isn’t existing data. Now most data in sustainable investing is historical. Part of what Clarity AI does is assess the estimate the forward-looking impact of changes.

Lader said what’s unique about the company is that it’s developed tools so investors can create their own scores and essentially express their proprietary insights on the materiality of sustainability factors.

“Some investors might have different views, or take governance out of the equation, for example. We see unbundling as the next step,” she said.