Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position. Please refer to official GRESB documents for assessment related guidance.
Real estate owners are feeling pressure from all sides to take climate change, and its inherent risks, more seriously. Regulators are demanding more transparency surrounding climate risk disclosure, with the UK and New Zealand implementing mandatory climate risk reporting to align with TCFD recommendations. Investors are also increasingly incorporating climate risk and resilience into their due diligence and decision-making processes.
The risks facing the commercial real estate industry are imminent—an estimated 35 percent of real assets worldwide are exposed to climate hazards, according to Four Twenty Seven, a leading publisher and provider of market intelligence on the economic risk of climate change. Of these, 17 percent of properties are exposed to inland flood risk, 6 percent are subject to sea level rise and coastal flooding, and 12 percent will be significantly affected by hurricanes or typhoons.
Leading building managers and real estate investors have realized that ESG data may be the single most vital tool to help firms mitigate uncertainty and build resilience to unforeseen crises. And the ability to automate and centralize this data for faster, more accurate decision-making is increasingly becoming a leading indicator of a real estate company’s success.
Investors are leading the charge
In many cases, banks and investment firms are moving faster than legislators to require climate risk and resilience assessments from real estate owners. In a survey of investment professionals published in the The Review of Financial Studies, only 7% of the respondents had “done nothing” to manage climate risks in the last five years. However, more than half of those who incorporate climate risk into their investment plans only started to do so within the past 5 years.
At BNP Paribas Real Estate Investment Management (REIM), climate risk is an ever-present concern. “We have an existing portfolio and we are acquiring and investing in new buildings in the meantime, so we also have to integrate [climate risk] into our due diligence processes,” said Nehla Krir, Head of Sustainability and CSR, in a recent webinar.
“We have to be equipped now to scan our existing portfolio, consider properties’ locations and the risks that threaten those regions, and assess asset-level exposure to extreme heat, flooding, and other risks intensified by climate change,” she added.
That information often influences investment decisions, according to Krir. “We use climate risk data to determine whether we should divest, dispose, refurbish, or adapt potential buildings, and we apply the same principles to investing in new assets,” she says.
It’s easy to see why investors are now concerned about what was traditionally considered a non-financial risk. In addition to the probability of physical damage or deterioration, buildings that are exposed to climate risks may depreciate in value. Not only will the costs to heat, cool, and protect high-risk buildings begin to rise, but older, less energy efficient buildings may not meet local carbon emissions standards—and therefore have the potential to become stranded at some point in the future. Tenant demand and rental revenue will also likely decrease over time as companies with their own utility costs and ESG objectives to consider may seek greener pastures.
Determining what’s material—and deciding what to do about it
Climate risk data can reveal much about an asset’s future. Physical climate risk determines an asset’s level of exposure to events like hurricanes, typhoons, flooding, wildfires, and slow-burning stressors like extreme heat, drought, and rising sea levels. Transition risk is a relatively new category, describing how our transition to a less polluting, more sustainable economy will affect the financial viability of certain assets. In other words, owners have to examine how long it will take older, inefficient buildings to become obsolete.
So how can real estate firms acquire and keep track of all of this data?
“We’re benefiting from great advances in climate modeling over the last decade,” said Sara Anzinger, Measurabl’s Senior Vice President of Capital Markets. “Advances in technology allow us to look at huge data sets that incorporate satellite and topographical maps running multiple climate scenarios over multiple time frames, then downscaling that information so real estate owners can get insights into their asset-level risks.”
“Software to centralize and automate the more cumbersome aspects of data collection will help owners spend their valuable time strategizing ways to optimize energy performance and allocate the capital necessary toward renovations and improvements that really make a difference,” she continued.
In many cases, investors are not only concerned with climate risk—they’re also interested in what companies are doing to mitigate that risk.
“As our clients are putting in place ESG commitments and disclosure requirements, we are seeing a knock-on effect,” says Sarah Pirrie, Director at Nova Ambiente, a European advisory firm to the real estate industry. “We are being asked for broader climate risk screening, resilience opportunities, and we’re implementing these risk management strategies throughout the lifecycle,” she says.
Collecting climate risk data can be overwhelming at first. Pirrie recommended approaching resilience like embarking on a journey. “Focus on key issues that are important to investors— you don’t need to cover everything, but really drill down and understand what it is you need to be paying attention to,” she said. “It’s not as daunting as you think if you have the right partnerships in place.”
Once you have a better understanding of your risks, there are a number of ways to help mitigate them. Simply knowing what percentage of your assets are exposed to these threats can help you diversify your portfolio. You can focus on building or acquiring new properties in lower risk areas, assess the true resale value of owned buildings that are exposed to climate risk, or allocate capital toward projects that will make buildings in high-risk areas more resilient.
For example, developers in areas exposed to severe storm systems can design roof slopes and fortify structures with appropriate materials to withstand high winds or heavy rain or snow. Building facades can be protected from major storms with impact resistance glazing and water intrusion resistance. Properties that are exposed to heightened flood risks can benefit from improved drainage systems, anchored HVAC and generators, and flexible connections with automatic shutoff. Risers can be installed, or expensive servers and other electrical equipment can be moved to higher floors.
Now is the time to take action
Collecting and disclosing climate risk data may seem like just another box to check for real estate owners, but there are a number of benefits to gaining a deeper understanding of the risks your portfolios face.
Pirrie pointed out that addressing climate risk exposure can help you work ahead on meeting compliance requirements to align with emerging frameworks like TCFD and SDFR. There are also cost-saving opportunities: “The implementation of renewable energy sources and projects to increase energy efficiency will ultimately lower operating costs,” she noted. “The implementation of resilience measures can help reduce insurance costs as well.”
Krir recommended a pragmatic approach: “We must spend less time collecting data and more time focusing on managing buildings and integrating capital expenditure plans to adapt our assets for the changing climate,” she said. “I would encourage all owners to focus on getting a better understanding of the portfolios you are managing and adapt your due diligence, management, and disposal processes. It’s also important to engage with stakeholders and ensure that everyone is aligned and committed to managing climate risk.”
No matter how they choose to proceed, Anzinger urged real estate owners to start as soon as possible. “Don’t wait until the data is perfect,” she advised. “All of us are in this grand experiment together—it’s not going to happen in one fell swoop.”
“It’s extraordinary what the real estate sector has done in terms of climate risk in the last few years, and we’ve got a long way to go,” she said. “And there’s no need to go it alone—take advantage of the best practices and technologies that are already available.”