— TRANSITION RISK —
What is transition risk?
Transition risks encompass those that arise as a result of the global governmental and economic shift toward a low-carbon future. These risks can fall into several categories including policy and regulatory risks, technological risks, market risks, reputational risks, and legal risks. While these risks are all interconnected, policy and regulatory risks are often top of mind for investors, as they attempt to navigate an increasingly aggressive low-carbon agenda, implemented in a variety of ways, that could have capital and operational consequences to their assets.
Given the differences in the operational performance expectations between many real estate sectors, and in combination with their sensitivity to a wide range of regulatory ambition, estimating the overall transition risk associated with a real estate portfolio, let alone a specific asset, can be a daunting task. GRESB is here to help.
Net Zero Initiatives
Recently, there has been a massive increase in net zero commitments, coming from nations, coalitions of financial institutions, and real estate industry bodies, among others. A few of importance to financial actors in the real estate sector include the IIGCC’s Net Zero Investment Framework, the U.N.-convened Net-Zero Asset Owner Alliance’s Inaugural 2025 Target Setting Protocol, the BBP Climate Commitment and associated Net Zero Carbon Pathway Framework, and the WGBC’s Net Zero Carbon Buildings Commitment.
While commitment is a necessary first step, much focus has now been rightly shifted toward execution, and financial actors and real estate operators alike are in need of credible tools and standards that are able to put their assets and portfolios into the context of these high-level commitments.
As climate-related risks (both transition and physical) become increasingly recognized as material factors for consideration in financial decision making and planning, global standard-setting institutions, financial institutions, and even regulatory authorities are looking to the TCFD as the basis for climate-related reporting. The TCFD recommends the disclosure of scenario analysis exercises to be used in the contextualization of the resilience of an organization’s strategy to climate-related issues.
As the management and disclosure of transition risks become more mainstream, the estimation of such risks at the asset and portfolio level will become a key aspect of risk identification and assessment processes. Such capabilities will serve as the basis for TCFD-aligned disclosures, and other regulatory requirements such as SFDR.
Originally an EU-funded Horizon 2020 project, the Carbon Risk Real Estate Monitor (CRREM) project has derived decarbonization (GHG intensity) pathways (i.e. trajectories from 2020 to 2050) with the purpose of translating the goals of the Paris Agreement (to limit global warming to 2C with ambition to 1.5C by the end of the century) into regionally- and property type-specific trajectories against which real estate assets and portfolios can benchmark themselves. These pathways, while primarily alignment tools, may also be used as proxies for “transition risk” (in this case, the risk of assets being stranded due to regulatory incompliance or market obsolescence) insofar as the covered nations follow similar trajectories of low-carbon ambition.
GRESB has been a consortium member of CRREM since its inception and remains a close collaborator, including the recent collaboration between GRESB, CRREM, and PCAF to provide extended guidance to investors and banks on the proper accounting target setting of real estate carbon in financial portfolios. Read more on GRESB and CRREM here.
Transition Risk Tool
As commitments around Net Zero continue to pick up steam in the financial industry, an understanding of Paris-alignment and transition risk has never been more important. GRESB is working on a solution to help its Members evaluate their portfolios and assets against these issues, including benchmarking against the science-based CRREM global decarbonization pathways, with GHG metrics and analytics built from the bottom-up.