According to the latest World Economic Forum Global Risks Report, the top three risks over the next decade are: failure to mitigate climate change; failure of climate change adaptation; and natural disasters and extreme weather events. Temperatures are rising, and weather patterns are changing and becoming continuously more unpredictable, which is leading to increasing uncertainty.

Reporting frameworks (notably the Task Force on Climate-related Financial Disclosures recommendations) and regulations have emerged that require asset owners to disclose their climate-related physical and transition risks and opportunities, including considering the potential impact on their business operations and risk management strategies. Such robust processes are not new. When a business considers financial or economic risks, they will use various scenarios to determine the risk level to the business, for example the likelihood and potential impact of an economic downturn or civil unrest. The same must also occur with the strategy and financial planning for physical climate hazards.

But what are climate-related physical risks, and how do we begin to assess their impact on a business or asset? The term physical risk relates to risks arising from climate-related acute hazards, such as flooding and tropical cyclones, as well as chronic hazards like sea level rise, temperature shifts and precipitation patterns. These risks can result in direct impacts, which can cause physical damage to buildings and infrastructure, resulting in changing property values, and indirect impacts, such as reduced real-estate demand in affected markets and increased insurance costs.

A physical risk assessment enables an asset owner to identify the hazards which are likely to affect their assets or operations under different climate futures. These scenarios can lead to a variety of outcomes, which can be used to better inform business decision making. As climate change physical risks will change over time, it’s good practice to complete assessments based on different time horizons – short, medium and long term. This may show that some physical hazards only arise during longer timescales and therefore may not have been considered in risk management decisions.

Physical risk assessments use global, regional and local climate change models to assess hazard exposure. Combining this physical risk exposure information with asset vulnerability data, allows an understanding of the climate change physical risk at an asset and portfolio level. For example, heat stress can be modelled to identify the exposure level to the asset for different time periods and climate scenarios. An asset vulnerability assessment can then be completed using information such as building typology, insulation, air conditioning, ventilation and electrical systems, and type of walls and roof.

Nevertheless, it’s important to recognise that climate risk modelling does not come without its challenges. There are various methods and approaches used, and choosing a data platform can be difficult, especially for non-experts. Other challenges may include interpreting the data and translating the complex outputs and risk scores into information that can be developed into actionable insights.

Only when a combination of location-specific physical hazard identification, exposure and vulnerability, or an overall risk, has been understood, can property owners plan for mitigation and adaptation strategies – improving resilience and reducing physical risk impacts.

Further information

Contact Sophie West or Sarune Ringelyte 

Why real estate must plan for climate-related risk whatever the weather