Climate risk assessments are increasingly becoming an integral aspect of sustainability reporting in real estate. Climate risks can be categorised as physical risks, for instance, the level of exposure to extreme weather events such as hurricanes and flooding, and stress factors, such as changing precipitation pattern or sustained high temperatures. There are also transition risks such as changing climate-related policy and market demands.
In asset management, accurate data is the foundation for effective climate risk management. Previously, investors have taken an organisation level approach to assess climate-related risks in the absence of detailed data at an asset level. Asset specific data better informs key decision making for investors, effectively collating and analysing large sets of climate related property data is a challenge.
Advances in technology and modelling techniques have unveiled asset level climate-related risks, by making it possible to analyse large datasets of location information and specific characteristics of individual assets, such as building structure and fabric, existing local defences, and satellite and topographical maps.
The financial viability of an asset is then evaluated using the output of these assessments with several considerations such as replacement value, building performance data, asset resilience plans and climate scenarios, which can all influence investment decisions. Assessments can also inform understanding of potential costs relating to structural damage. In addition, there may be value at risk as a result of asset stranding, as less energy efficient buildings cost more to heat, cool, and protect, they may not meet local carbon emissions standards and occupiers and investors’ expectations for building’s performance.
The capability to run different climate transition and physical risk scenarios over multiple time frames is being pioneered by the insurance, banking and financial services industries, bringing climate risk assessments to a wider audience at lower cost, helping asset managers make informed judgements on key risks. The difficulties are around standardising methodology, as differences in physical and transition risk scores can exist for the same asset depending on the assumptions, metrics, data and modelling techniques used in these assessments.
Despite this, new sustainability reporting requirements are being introduced for the real estate sector that will help to drive consistency and assess the impacts of climate change. The Task Force on Climate-Related Financial Disclosures (TCFD) encourages companies to disclose how they are mitigating the risks of climate change. Climate risk reporting is becoming mandatory for certain financial market participants and companies under the new reporting rules and green taxonomies in the UK and Europe. GRESB also requires participants to disclose information on their approach to climate risk management, and became part of the scored questions starting from 2023.
Mitigating risks with data
Risks can be mitigated once they are understood. Understanding the level and type of risk enables identification of climate resilience measures to protect the assets (e.g. investing in flood defences or improved ventilation systems). Understanding the proportion and value of assets exposed to climate change threats can also help inform decisions on portfolio diversification. Using climate change information requires engaging all involved stakeholders; providers of climate risk data, communicators, site/ESG managers, and people with knowledge of the community around the asset who will be impacted by climate change.
Underestimation of risk leads to underinvestment in adaptation and mitigation that delays action and increases risks from climate change. It is imperative gain a deeper understanding of the complex dynamics of our planet through the integration of data to safeguard our environment and future generations.
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