Real Estate Climate Risks: How Will Europe be Impacted?

Introduction: Increasingly Severe Impacts

Extreme weather events driven by climate change are having severe impacts that are increasingly being seen across Europe. Between 1980 and 2017, weather and climate-related extremes caused approximately €453 billion of total economic losses. Among those losses, it is estimated that only 35% were insured. Climate change has a substantial impact on real estate markets. It can directly damage individual buildings, decrease their value or even lead to assets being rendered unusable. In Europe, floods from extreme rainfall and sea level rise represent a major threat to real estate markets. As climate change leads to more frequent and severe extreme weather events it is increasingly important for real estate investors to understand the climate risk exposure of key assets and prepare for impacts.

Assessing Exposure to Climate Change in Real Estate

To provide a view on physical climate-related risk for the real estate industry in Europe, Four Twenty Seven used a proprietary model that leverages global climate data to provide asset-level risk assessments to physical climate hazards. We analyzed the exposure of 20,816 retail spaces and 16,188 offices in Four Twenty Seven’s database of one million corporate facilities. The real estate sites are owned by over 900 listed companies, out of the 2,000 companies included in our database. We used our climate risk scoring methodology to assess each facility’s exposure to climate hazards, with a focus on floods, sea level rise and heat stress looking out to mid-century.  Flood risk and sea level rise are assessed with a precision of 90x90m. Heat stress is evaluated at a 25x25km scale.

We found that 19% of retail spaces and 16% of offices are exposed to floods and/or sea level rise, with floods representing the highest risk for both types of asset. Heat stress also presents significant risk to these facilities.

Inland Floods: A Major Threat for a Warming Europe

Floods are one of the most prominent risks for real estate in Europe. In most European cities, climate change is increasing the frequency and the intensity of heavy precipitation events, threatening urban infrastructure and increasing flooding.

Floods can inundate facilities directly, leading to disrupted operations and equipment damage and can also have indirect impacts on operations by damaging regional transportation, power and communication infrastructure. Fluvial and pluvial floods can increase costs associated with maintenance and repair of buildings, lead to higher insurance premiums, and reduce revenue due to business disruptions.

Figure 1. Retail spaces’ exposure to floods. A dot represents a city and its size represents the number of retail spaces in the city. The dot’s color represents the percentage of retail spaces exposed to floods, with red representing the highest percentage. Source: Four Twenty Seven

Floods also have wider impacts on real estate markets. For example, studies looking at the residential market in Germany and Finland show that properties in flood-prone areas are sold at lower prices compared to properties without flood risk.

Retail spaces in the United Kingdom are particularly exposed to flood risks, based on our analysis (Fig. 1). Climate change is likely to contribute to more events like the winter storms of 2015-2016 which resulted in around £1.6 billion of total economic damages in the United Kingdom. Over 20% of Edinburgh, Glasgow and Sheffield’s retail assets are located in flood-prone areas.

Figure 2. Retail spaces exposed to flooding in the Greater Glasgow area. A dot represents a retail space and the dot’s color represents its flood risk. Source: Four Twenty Seven

The amount of rain during heavy precipitation events in Glasgow (Fig. 2) is projected to double by 2030-2040 compared to 1975-2005. London is also exposed to surface, fluvial and tidal floods. In our analysis, London is the city with the highest number of retail spaces in flood-prone areas (Table 1). Its most exposed sites have a 20% probability of being flooded each year, and a 1% probability that the flood depth will be higher than one meter, based on Four Twenty Seven’s data.

Without adaptation measures at the site-level and the city-level, these assets will likely suffer from increasing property damages and potential business disruptions due to more frequent and severe rainstorms. For example, floods can reduce business at retail sites such as clothing stores when consumers may prefer to stay home or be prohibited from shopping by inundated infrastructure. Likewise, grocery stores and other retail sites may experience supply chain disruptions or damaged goods with impacts on sales and revenues.

England, Scotland, Wales and Northern Ireland all have a Climate Change Adaptation Program. The English program pledges to construct additional hard defenses and to support communities and businesses in increasing their properties’ and investments’ resilience.

Table 1. Cities with the highest percent of retail spaces exposed to floods, out of those cities with over 70 retail spaces. Source: Four Twenty Seven

Sea Level Rise: When Beach Front No Longer Means Value

Several recent studies have found that there is potential for severe sea level rise if certain tipping points are reached. For example, East Antarctica is warming faster than previously expected, with immense implications for global sea levels. According to opinions gathered from experts, there is a possibility of sea levels rising to two meters by 2100 under a 5˚C scenario. Without coastal adaptation investment, it is estimated that annual damages, due to storm surges and king tides, could reach up to almost €1 trillion by the end of the century in Europe.

The real estate industry is at the front line of sea level rise risk. Properties can suffer from severe damages leading to maintenance and repair costs. Even if a facility itself is not permanently inundated, it may be rendered unusable if its closest rail and road infrastructure experience chronic disruptions. Sea level rise can also have far-reaching market impacts such as increasing insurance costs and higher local taxes to fund adaptation efforts. The perception of sea level rise risk can also impact an asset’s value. For example, French coastal properties suffered from substantial damages after coastal flooding caused by storm Xynthia in 2012. At the Ile de Ré, a touristic French island close to La Rochelle, material losses had a longer-term effect on the real estate market. Home prices dropped in the most exposed part of the island. Fields previously sought after by developers became classified as non-constructible areas after the storm.

Figure 3. Corporate offices’ exposure to sea level rise. A dot represents a coastal city and its size represents the number of offices in that city. The dot’s color represents the percentage of offices exposed to sea level rise, with red representing the highest percentage. Source: Four Twenty Seven

Our assessment found that corporate offices are highly exposed to sea level rise in Europe (Fig. 3). Increasing floods and chronic inundation from sea level rise can affect employee commutes, with implications for business continuity at offices. Assets in Ireland, France, Sweden and the United Kingdom have particularly high exposure.

Copenhagen is highly exposed to sea level rise, with 81% of its offices exposed to coastal flooding. In its Climate Adaptation Plan, the city acknowledges that it will be at high risk of flooding in 2040, stating that if no adaptation measures are undertaken, sea level rise will cause “unacceptable” damage. An asset’s risk to sea level rise will be largely driven by regional adaptation efforts to prepare for flooding from higher tides and storm surge.

Copenhagen has defined a long-term adaptation strategy, including the creation of green infrastructure and flexible spaces that can be inundated during high tides, such as sports fields and parks. The city also constructed dikes and quays to protect it from up to 2 meter storm surges. However, the construction of hard protective infrastructure is leading to very high expenditure for local authorities, which can have impacts on local taxes and the strength of other government services. Adaptation policies may also affect building permit requirements and add restrictions to real estate development. Dublin is the city with the highest number of corporate offices from our database exposed to sea level rise (Table 2). This exposure is concentrated in Dublin’s business district (Fig. 4). Floods in the business district can impact the transportation system, electric grid and telecommunications networks, which all impact local businesses.

Figure 4. Corporate offices exposed to sea level rise in Dublin. A dot represents an office and the dot’s color represents its sea level rise exposure. Source: Four Twenty Seven

Dublin is aware of its risk and has developed a 2019-2024 adaptation plan that budgets the construction of new flood defenses and includes a flood risk management strategy. Property managers and real estate investors can engage with the surrounding community to support these regional resilience-building efforts that will also mitigate the risk to their own assets.

Table 2. Cities with the highest percent of corporate offices exposed to sea level rise, out of those cities with more than twenty corporate offices. Source: Four Twenty Seven

Heat Stress: Shattered Records Becoming the New Norm

Heat stress is a growing concern for Europe. The region experienced two recording-breaking heat waves within two months during summer 2019,  affecting public health, hindering productivity and contributing to train delays, with implications for economies across the continent. The decade from 2009-2018 was the warmest on record, with temperatures around 1.7°C above the pre-industrial level in Europe.

Figure 5. Retail spaces’ exposure to heat stress. A dot represents a retail space and the dot’s color represents its heat stress risk. Source: Four Twenty Seven

Our analysis shows that offices and commercial spaces throughout Europe will experience heat waves that are 21 days longer on average compared to 1975-2005. Based on Four Twenty Seven’s data, Southern Europe is expected to experience the highest increase in the duration of heat waves, with projections showing an additional month of temperatures above the 90th percentile every year in Madrid (Fig. 5). Heat waves will also bring higher temperatures, with an 8% average increase in maximum temperatures by mid-century, and over 10% in Paris, for example. This will manifest in cities experiencing climates typically associated with locations significantly further south. For example, a recent study noted that “Madrid’s climate in 2050 will resemble Marrakech’s climate today, Stockholm will resemble Budapest, London to Barcelona.”

The urban heat island effect and worsening air quality will exacerbate the impacts of increasing average temperatures in many European cities, with implications for human health and economies. Heat stress can create new cooling needs for buildings and thus increase operations costs at real estate assets. This is particularly true for assets such as data centers and retirement residences, with significant cooling needs. Extreme heat can also affect consumer behavior, reducing the desire to window shop outside, for example, but increasing the visitors to air-conditioned facilities such as shopping malls. In the long run, increasing average temperatures could have indirect effects on real estate markets as consumer preferences shift.

To reduce their vulnerability, many cities are adapting to extreme heat by increasing green spaces and the use of reflective materials to reduce the albedo effect, for example. Property managers can model on-site adaptations after these examples, while also contributing to wider regional efforts that reduce the urban heat island effect to preserve public health and economic activity.

Conclusion: Understanding Risk to Build Resilience

Real estate assets are already experiencing the impact of extreme heat and floods across Europe and the real estate industry will continue to be impacted by climate change in the near-term. There is an urgent need for resilience-building across assets to ensure business continuity and reduce financial losses. Understanding asset risk is an essential first step towards building resilience. Asset owners and managers can leverage asset-level risk exposure data, alongside awareness of regional adaptation efforts, to improve the resilience of their assets and engage communities around shared resilience priorities.

[1] This analysis does not capture coastal flooding for areas further than five kilometers inland from the coast. This limitation may under-represent risk in coastal-adjacent, low-lying areas that extend inland like Amsterdam.

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Four Twenty Seven’s ever-growing database now includes close to one million corporate sites and covers 2000 publicly-traded companies. We offer equity risk scoring and real asset screening services to help investors and corporations leverage this data.

AIA Video: Stripping Down Climate Risk

Why do climate risks matter for real assets and how can we invest in a more resilient future? There is a growing need to ensure that infrastructure assets and real estate are built to withstand the increasingly severe weather events we experience in a changing climate. Four Twenty Seven Strategic Advisor, Josh Sawislak, discusses how different types of uncertainty will influence physical climate impacts and transition risk outcomes, and how asset design can consider these impacts. Innovating in climate resilience is essential to reduce risk management costs, but it also provides economic opportunities around job creation and product development.

Four Twenty Seven offers real asset screenings and data on climate risk in real estate to inform climate risk mitigation and investments in resilience. Read our paper on Climate Risk, Real Estate, and the Bottom Line or our blogs on scenario analysis for physical climate risk to learn more about these topics.

Scenario Analysis for Physical Climate Risk: Equity Markets

In this second installment of our blog series of scenario analysis, we focus on how investors can start exploring impacts on portfolios of listed equities/fixed income with existing climate risk analytics. The series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. The first installment, on foundations, focuses on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.

Scenario Analysis Serves Different Purposes

Scenario analysis serves different purposes for real asset investors and for equity or fixed income investors. When looking at a single real asset, scenario analysis can be used to inform very concrete decisions regarding the asset, working directly with the asset operator: whether and what flood protections to put in place, insurance requirements, anticipated impacts on operational costs from water and energy consumption, etc.

In contrast, for an equity or fixed income portfolio, investors’ influence on the resilience of the underlying asset (e.g. a corporation or a sovereign entity) is much more limited. In a previous publication we discussed the importance of shareholder engagement with corporations as a key channel for investors to help raise awareness of rising risks from climate change, and encourage companies to invest in responsible corporate adaptation measures. Investors, however, would be hard pressed to run scenario analysis on individual portfolio companies themselves, and disclosures from corporations on scenario analysis remain weak and fragmented.

Meanwhile, prudential authorities in Europe have been signalling expectations that insurers and banks perform scenario analysis on their portfolio to examine potential impacts of climate change, to understand how different climate-driven outcomes might prevent the insurers and lenders from meeting their financial obligations. Most recently, in April, the Bank of England Prudential Regulatory Authority (PRA) released a proposed set of specifications for scenario analysis that includes some simplified assumptions on climate impacts on financial portfolios.

In this piece we examine how available climate risk analytics can be leveraged to inform early attempts at developing stress test assumptions and simulate potential outcomes on investment portfolios aligned with the relative exposure of corporations by sectors and by regions.

Climate Risk Analytics for Equities/Fixed Income

We leverage our data on corporate physical risk exposure to determine what assumptions can be made in this type of early stress test. In this piece, we analyze the climate risk scores for 1730 of the largest companies in MSCI All Country World Index (ACWI). This physical risk assessment is based on the exposure of the underlying database of about a million facilities globally.

We score each company on three components of physical climate risk: Operations Risk, Supply Chain Risk and Market Risk.

427 Methodology Chart
Figure 1. 427 indicators for physical climate risk exposure in corporations (equities/fixed income)
  • A company’s Operations Risk is based on its facility-level exposure to hurricanes & typhoons, sea level rise, floods, extreme heat and water stress. The analysis also considers the sensitivity of different types of facilities. For example, manufacturing plants with their high energy demands are more sensitive to extreme heat than offices.
  • Supply Chain Risk is based on the risk in countries that export commodities that the company depends on and a company’s reliance on climate-sensitive resources such as water, land and energy, based on its industry.
  • Market Risk is based on where a company’s sales are generated and how its industry has historically been impacted by weather variability.

Scores are normalized, with 0 being the least exposed and 100 being the most exposed. (For more details, please refer to our previous report Physical Climate Risk in Equity Portfolios as well as our Solutions page)

In line with considerations of relevant time horizons and of impacts being locked in over the climatic short term (detailed in Part 1), our standard equity risk score data considers projected climate impacts in the 2030-2040 time period under a single RCP scenario, RCP 8.5 (the worst case scenario, also known as business as usual), but leverages several climate models.

From Climate Hazard Exposure to Financial Impacts

Studies of how physical climate hazards translate into financial impacts at the company level are scarce. While a growing body of research explores the complex relationships between climate hazards and economic impacts, which vary by sector and by region, academic research on the relationship between climate events and corporate/stock performance, at scale, is still limited. Our approach focuses on leveraging what can be estimated in a robust, data-driven way: relative exposure of companies to climate hazards.

Our analysis of global corporations shows the relative exposure of industries to climate related risks across all three dimensions: operations risk, market risk and supply chain risk (Table 1). This table shows the sectors with the highest exposure, including manufacturing, infrastructure (utility, energy, transportation), and industries with high dependency on natural resources (food, apparel).

Table 1. Industries most exposed to physical climate risks . Source: Four Twenty Seven.

Services, not shown in the table, are not only less exposed, they’re also far less sensitive to changes in climatic conditions, with the exception of the financial sector, which holds the risk of all the other sectors in its investment, lending or insurance portfolios. Note that real estate is not included in this analysis, but data on regional exposure in that sector can be found in our white paper on climate risk in real estate.

These differentiated impacts by sectors can lay the foundations for a stress test, as industry risk levels can be used to set initial assumptions on sector-wide impacts. Following the example set out by the Bank of England’s PRA, for example, investors could assume that sectors with high exposure might see a 10% or 20% drop in value, whereas sectors with medium exposure would see half of that impact. These assumptions are not intended to substitute for financial impact modeling, but provide a shortcut to test how a portfolio might perform under climate-driven duress.

Drivers of Exposure to Physical Climate Risk

While some sectors overlap with those examined in scenario analysis exercises for transition risk, such as utilities and energy, other sectors with high exposure are not typically included in scenario analysis, like tech manufacturing or pharmaceuticals. Understanding the nuances of the risk pathways in each sector and their relative exposure to different hazards is critical to refining assumptions and developing models that can quantify value-at-risk by sector with some accuracy.

Manufacturing companies in the tech sector rely on complex value chains that can be interrupted by extreme weather events, particularly in Asia, which is a region highly exposed to typhoons and extreme precipitation. They also often produce expensive and water sensitive products using costly machinery and can incur costs and damages from extreme events on site.  Pharmaceuticals are particularly exposed because of the prevalence of their manufacturing in water-stressed regions (India, California) and regions highly exposed to hurricanes & typhoons. For example, damaged manufacturing sites in Puerto Rico had rippling impacts on pharmaceutical operations globally during Hurricane Maria in 2017. Pharmaceuticals is also one of the groups with the most weight in the MSCI ACWI, making this exposure particularly significant (Fig 2).

Figure 2. The average company risk score by GICS Industry Group, with Operations Risk on the y-axis and Market & Supply Chain Risk on the x-axis. Red represents those industries with the highest exposure, green represents those with the lowest exposure and the size of the bubble signifies an industry’s weight in the MSCI ACWI.  Source: Four Twenty Seven.

In the utility sector, the nature of the exposure is very different from that observed in transition risk analysis: carbon neutral power generation can be as exposed as thermal generation – for example due to water stress or floods for hydro facilities. In addition, utilities rely on expensive equipment, such as cables, poles, fuel storage and pipes that are often exposed to severe weather and sensitive to extreme conditions. Their operations are also resource-intensive, relying heavily on energy and water for cooling. They can experience operations disruptions during peak energy demands or due to equipment damage during storms.

The exposure of the automobiles & components sector has been illustrated by recent flooding in Japan. Automobile companies rely on manufacturing processes and machinery that can be interrupted due to flooding or hurricane damage, but their reliance on employee labor also makes these companies vulnerable to the wider regional impacts of extreme events. For example, during Japan’s extreme flooding in July 2018, Mazda was forced to halt operations at some of its facilities that were not physically damaged themselves, because its employees could not travel safely to work.

Conclusion

Climate change calls for a better understanding of impacts of physical hazards on financial markets, which remains a topic largely unexplored. Yet as regulators push insurers and banks towards the integration of climate scenarios into stress testing, robust, data-driven views on the relative exposure of sectors or regions provide a helpful foundation from which to explore the potential impacts on equity and fixed income portfolios.

Over time, better data will become available as academic and industry providers develop models that capture the nuances of climate impacts on different industries and geographies, but also as companies make a concerted effort to disclose better data on their past and anticipated financial exposure to extreme weather and climate-related events.

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Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.

Scenario Analysis for Physical Climate Risk: Foundations

The TCFD Status Report published early June 2019 reiterates the need for corporations and financial institutions to perform scenario analysis in a context of uncertainty over climate risk. It notes that while about 56% of companies use scenario analysis, only 33% perform scenario analysis for physical risk. Even fewer firms (43% of those using scenario analysis) disclose their assumptions and findings. The report contains useful case studies, but most focus on transition risk.

Yet a growing number of corporations and financial institutions recognize the need to integrate physical risk into scenario analysis and to develop resilience strategies that address imminent challenges from climate impacts. For example, the most recent IPCC report illustrating the impact of 1.5˚C increase in global temperatures on mean temperatures, extreme temperatures, extreme precipitation and sea levels shows that there will be significant implications for economies even with a 1.5˚C increase in global temperatures. This is still a best case scenario compared to impacts of 2˚C or 2.5˚C warming.

Scenario analysis for physical risk is fundamentally different from transition risk in its challenges and assumptions. This blog series provides our current reflections on how corporations and financial institutions can integrate physical climate risk into scenario analysis. This first blog presents the Foundations, focusing on important characteristics of climate science that affect how climate data can be used to inform scenario analysis for economic and financial risk. The next blog focuses on Equity Markets, with concrete examples of how available data can inform financial stakeholders ready to start putting scenario analysis into action. A forthcoming post will discuss scenario analysis at the asset level for real asset investments and corporate facilities.

Part 1: Foundations

The physical impacts of climate change encompass a range of direct and indirect hazards caused or exacerbated by the concentration of greenhouse gases in the atmosphere. Previous publications such as Advancing TFCD Guidance for Physical Risks and Opportunities, for which Four Twenty Seven was a lead author, provide background on these hazards as they pertain to corporate value chains and economic activities. Further information is also available in Cicero’s excellent report, Shades of Climate Risk. Categorizing climate risk for investors.

The Science: Uncertainties and Relevant Time Frames

Rapid developments in atmospheric and climate science over the past 30 years enable us to understand how these physical hazards will evolve over time due to climate change. Sophisticated global climate models project expected changes in key physical phenomena affected by greenhouse gas (GHG) concentration: heat, humidity, precipitation, ocean temperature, ocean acidification, etc. Like any other models, climate models have limitations in their accuracy and ability to correctly simulate complex and interrelated phenomena. However, it is worth noting that since 1973 models have been consistently successful in projecting within the range of warming that we have experienced in the past twenty years. More details on climate data and uncertainties from global climate models can be found in our report, Using Climate Data.

The Bad News: Impacts Are Locked In

Global climate models project different possible outcomes using scenarios called Representative Concentration Pathways (RCPs). RCP scenarios capture differing GHG emissions trajectories based on a representation of plausible global policy outcomes, without specifying the details of the underlying policies that could generate this outcome. These scenarios show that GHG emissions generated over the coming decades will influence the severity of impacts in the long-term, but also that we are already committed to some impacts through 2100 and beyond.

This is particularly noticeable over the “short term.”  When looking at the next 10 to 20 years, projections for temperature and other physical hazards do not present significant differences under different emissions scenarios (Fig 1). This is due to the massive inertia of the Earth’s systems, and the life expectancy of the stock of greenhouse gases already in the atmosphere. To put it simply, significantly reducing GHG emissions is akin to applying the brakes on a rapidly moving truck. It won’t stop instantaneously. Even if we were to stop emitting GHG altogether, climate change would persist. In the words of the Intergovernmental Panel On Climate Change (IPCC), climate change “represents a substantial multi-century commitment created by the past, present, and future emissions of CO2.”

Figure 1. Temperature increases under different GHG emissions scenarios in the near term. Source: IPCC, as published by Climate Lab Book.

This is by no mean an invitation to give up on reducing GHG emissions. Quite the opposite. Emission reductions are critical to curbing long term impacts and avoiding irreversible effects to our environment (Fig. 2). But for organizations looking at climate data and scenario analysis for risk management and strategy, with a focus on the coming decade(s), this is a critical fact to understand.

Figure 12.5 | Time series of global annual mean surface air temperature anomalies (relative to 1986–2005) from CMIP5 concentration-driven experiments. Projections are shown for each RCP for the multi-model mean (solid lines) and the 5 to 95% range (±1.64 standard deviation) across the distribution of individual models (shading). Discontinuities at 2100 are due to different numbers of models performing the extension runs beyond the 21st century and have no physical meaning. Only one ensemble member is used from each model and numbers in the figure indicate the number of different models contributing to the different time periods. No ranges are given for the RCP6.0 projections beyond 2100 as only two models are available.Source IPCC AR5: Collins, M., R. Knutti, J. Arblaster, J.-L. Dufresne, T. Fichefet, P. Friedlingstein, X. Gao, W.J. Gutowski, T. Johns, G. Krinner, M. Shongwe, C. Tebaldi, A.J. Weaver and M. Wehner, 2013: Long-term Climate Change: Projections, Commitments and Irreversibility. In: Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker, T.F., D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 1029–1136, doi:10.1017/CBO9781107415324.024.
Figure 2. Temperature increases under different GHG emissions scenarios through 2300 from IPCC AR 5: Figure 12.5 | Time series of global annual mean surface air temperature anomalies (relative to 1986–2005) from CMIP5 concentration-driven experiments. Projections are shown for each RCP for the multi-model mean (solid lines) and the 5 to 95% range (±1.64 standard deviation) across the distribution of individual models (shading). Discontinuities at 2100 are due to different numbers of models performing the extension runs beyond the 21st century and have no physical meaning. Only one ensemble member is used from each model and numbers in the figure indicate the number of different models contributing to the different time periods. No ranges are given for the RCP6.0 projections beyond 2100 as only two models are available.
Aside from RCP-driven scenarios, there is, of course, a broad range of possible increases in temperature (and other climate hazards) even when looking at the 2030-2040 time frame. These plausible differences are not so much policy-driven as science-driven, demonstrating the different possible responses from the Earth’s systems to the existing stock of GHG.

These differences have significant implications for businesses and investors. For example, a model of sea level rise developed in 2018 incorporates accelerated rates of melting and recent advancements in modelling ice-cliff dynamics to capture extreme risk of coastal flooding. The model shows the Atlantic rising by 1.2m (3.9ft) by 2060 on the Florida coastline, which would equate to widespread flooding of coastal properties with potential domino effects on real estate prices across the state (Fig 3). The ‘intermediate’ scenario, however, most often used for planning, predicts only a 55cm (1.8ft) rise in water levels. While reducing GHG emissions does reduce the risk of more extreme sea level rise millennia into the future, year after year, scientists find that the Antarctic is warming faster than anybody predicted, and there is increasing concern that the process of ice sheet melt may be too far advanced to be stopped.

Figure 3. Building-level perspective of inundation in downtown Miami under 1m (3.3ft). Red buildings are those most likely to be impacted and blue areas are inundated. Source: NOAA Office for Coastal Management.

Thus, performing scenario analysis where the key variable is GHG emission reduction targets may not be an accurate representation of the range of possible outcomes for the near future. Rather, looking at high and low warming projections across a large set of models to understand the range of potential outcomes (independent of the underlying RCP scenario) is a better way to understand potential risk. In other words, physical risks over the next 10-20 years are largely independent from policy decisions and emission pathways, and a rapid, orderly, effective transition to a low-carbon economy could still come with massive physical impacts as these processes are already under way, fueled by the past 150 years of GHG emissions.

The Worse News: Tipping Points

Another challenge is that climate scientists are not currently able to model certain possible impacts from climate change, commonly known as “tipping points.” Tipping points is a catch-all term for a wide range of phenomena that may accelerate feedbacks due to climate change, though the timing or probability of their manifestation is currently not well understood. The phenomena are known as tipping points because past a certain threshold, they may not be reversible, even with a dramatic reduction in GHG emissions. Tipping points of most concern to the scientific community are presented in this report from the Environmental Defense Fund.

Figure 4. Melting permafrost is a powerful feedback loop exacerbating climate change. Source: UNEP, Woods Hole Research Center.

Some tipping points catalyze “feedback loops” which can worsen and dramatically accelerate climate change beyond human control. Such is the case, for example, with melting ice sheets, which would not only lead to catastrophic sea level rise, but would also further heat up the planet as the poles’ albedo (reflectivity) is reduced after the ice disappears. Thawing permafrost could lead to massive amounts of methane, a particularly powerful GHG, to be released from the frozen tundra into the atmosphere (in addition to many direct impacts for local communities, infrastructure  and ecosystems in the region) (Fig. 4).

 

Tipping points further reinforce uncertainty about severity and timing of these extreme impacts and the limitations of using RCP scenarios to understand the range of outcomes for physical risk.

Another source of uncertainty for physical climate impacts are knock-on effects, or ‘indirect hazards,’ from the primary expression of global warming (rising temperature and humidity), ranging from biodiversity losses and ecosystem collapses, human health impacts, impacts on crop yields, pests and soil, impacts on human society, increased violence, and rates of war and migration, etc. (Fig 5)

Figure 5. The likely risks to human and natural systems under several global warming scenarios, with dark purple representing high risks of severe impacts with limited reversibility and white indicating no attributable impacts. Source: IPCC, 2018

These indirect or second-order hazards are as relevant as first-order impacts to understand the implications of physical climate change on economic outcomes, but they’re not captured by RCP scenarios and many require stand-alone models that cannot easily be integrated into one clean set of scenarios.

Conclusion

Scenario analysis is often approached from the perspective of transition risk, where policy developments and GHG emission targets are the key drivers of risk pathways over the next 10 to 30 years. Physical risk, however, requires a different approach. Impacts over the coming decades are largely locked-in and are only marginally influenced by GHG emission pathways. In contrast, uncertainty looms large regarding how severe these physical hazards will be, and exploring a range of possible outcomes for physical risk, including looking at tail-risks, provides important insights for risk management and financial analysis.  In summary, the current state of scientific knowledge and the nature of the Earth’s atmospheric systems call for the developments of scenarios that are decoupled from transition/policy scenarios and instead focused on key scientific drivers of uncertainty and risks that may be experienced regardless of policy decisions over the short to medium term (2020-2040).

While efforts to develop easy-to-use tools for physical risk analysis are nascent, organizations can still extract important insights from climate data and leverage estimates of risk exposure across portfolios. Our next blog in this series provides examples of how financial institutions can leverage data on physical risk exposure in equities to inform some early scenario analysis in equity markets.

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Four Twenty Seven’s data products and portfolio analytics support risk reporting and enable investors and businesses to understand their exposure to physical climate risks across asset classes.

Marketplace Tech: Politics Aside, Climate Data is a Growing Business

As climate change impacts worsen, the need for solutions to support adaptation grows. Founder & CEO, Emilie Mazzacurati, joined Molly Wood on Marketplace Tech to discuss climate risk analytics. The conversation covers the importance of understanding climate risk exposure and how companies leverage climate data to prepare for climate hazards. While recent findings on sea level rise and other climate impacts can be daunting, there is hope for adaptation that builds resilience across sectors.

For more on climate risk and resilience in the private sector, explore our climate risk analytics and read our reports on Climate Risk in Real Estate and Engaging with Corporates to Build Adaptive Capacity.

Newsletter: How Can Real Estate Investors Cope with Sea Level Rise?

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we highlight recent research on sea level rise and feature NPR Marketplace's new podcast series on tech and adaptation.

In Focus: Sea Levels May Rise by 2 Meters

Recent Research Emphasizes the Complexity of Sea Level Rise

There is a statistically significant possibility of sea levels rising by 2m (6.5ft), under a 5˚C increase in temperatures, according to a study released on Monday. The researchers surveyed experts to establish a broader picture of potential sea level rise. While this extreme scenario may not be very likely, the rate of ice melt and its contribution to global sea level is a complicated phenomenon, with increased research leading to growing questions on the interacting feedback loops driving these changes. 

In fact, recent satellite data suggests that warming water is causing East Antarctica to melt more quickly than previously thought and a study released last week found that almost a quarter of West Antarctica's ice is thinning -- its largest glaciers are shrinking five times faster than in 1992.

This growing body of sciences unambiguously calls for better integration of climate data into financial decisions and underscores the need to accelerate adaptation efforts.

Sea Level Rise Has Cascading Economic Impacts

Sea level rise has cascading impacts, damaging physical assets but also reaching far beyond to mortgages, insurance prices and real estate markets. Homes exposed to sea level rise declined in value by about $465 million between 2005 and 2016 in Miami-Dade, FL and in Annapolis, MD "sunny day" flooding already reduces visits to the historic downtown district by 1.7%, costing businesses in the area.
The tangible impacts of sea level rise are already being felt and understanding these impacts enables governments, businesses and investors to manage asset-level and regional risk. Read more on real estate impacts in our new blog post and reach out to find out how our on-demand climate screening application supports real asset investors for due diligence and portfolio risk management.  

Risk and Resilience Along California's Coast

The first study to overlay the impacts of sea level rise, storm surge and erosion along California's coast finds this "dynamic" flooding could affect 600,000 people and $150 billion of property, equivalent to over 6% of the the state's GDP by 2100. The new San Francisco Bay Shoreline Adaptation Atlas proposes a science-based framework for identifying adaptation strategies. It focuses on nature-based solutions along the San Francisco Bay and was created by the San Francisco Estuary Institute and SPUR, the San Francisco Bay Area Planning and Urban Research Association.
How We Survive - NPR Podcast
How does technology help us understand climate impacts and how can innovation in tech help drive adaptation? NPR Marketplace Tech's new podcast series, "How We Survive," features speakers leveraging technology for adaptation across sectors. The podcast includes a conversation with NASA's Annmarie Eldering, who shares the agency's new CO2 monitoring system attached to the International Space Station, that's "watching the planet breathe." Jay Koh of private equity firm, the Lightsmith Group, discusses the importance of adaptation finance, and Four Twenty Seven Founder and CEO, Emilie Mazzacurati, highlights the value of integrating climate data into businesses' and investors' strategies.
Upcoming Events on Climate Risk in Asia

Ceres Webinar: Are Asia's Pension Funds Ready for Climate Change?

In this webinar, speakers from the Asian Investor Group on Climate Change (AIGCC), China Water Risk, and Manulife Investment Management will share key findings from their recent report - Are Asia’s Pension Funds ready for Climate Change? Discussions will explore pension fund exposure to water and climate risks in Asia, including the economic impacts and trade flow and supply chain disruptions in the region. Register Here.
May 28, 2019 6pm PST / 9pm EST; May 29, 2019 9am HKT / 11am AEST
 

Institute of International Finance (IIF) Sustainable Finance Workshop

The IIF is hosting a sustainable finance workshop on disclosure, data and scenario analysis. The event will focus on leading practice in climate risk disclosure, including developments in TCFD and the IIF report on leading practices. Speakers include Satoshi Ikeda, Chief Sustainable Finance Officer, Japan FSA and Representative to the Central Banks and Supervisors Network for Greening the Financial System (NGFS); and Keiko Honda, EVP and CEO, Multilateral Investment Guarantee Agency (MIGA), World Bank. To RSVP contact Raymond Aycock (raycock@iif.com or +1 202-857-3652). 
Wed. June 5th from 2:00-5:00pm, Tokyo. 
Upcoming Events

Join the Four Twenty Seven team at these events:

  • May 23EU / UC Berkeley Law - Climate Risk and Sustainable Finance in the EU and California, Berkeley, CA: Founder & CEO, Emilie Mazzacurati, joins an event featuring Mario Nava from the European Commission DG Finance, Betty Yee, California State Controller, and Dave Jones, Insurance Commissioner Emeritus, to discuss the future of sustainable finance. Emilie will join a panel to discuss trends in TCFD reporting and the way forward for the United States in climate risk disclosures. 
  • May 30 – Workshop on the California Heat Assessment Tool, Sacramento, CA: Director of Analytics, Nik Steinberg, and Editor, Natalie Ambrosio, will lead a workshop on the California Heat Assessment Tool for SafeCAT members. 
  • June 4 - 7 – Innovate4Climate, Singapore: Director of Advisory Services, Yoon Kim, will present on climate risk and resilient infrastructure in this event hosted by Temasek. 
  • June 6 - 8 – AIA Conference on Architecture 2019, Las Vegas, NV: Strategic Advisor, Josh Sawislak, will present on climate risk and real estate.
  • June 10 - 12 – US SIF Annual Conference, Minneapolis, MN: Senior Analyst, Lindsay Ross will attend.
  • June 11 - 12 – RI Europe, London, UK: Hear Emilie Mazzacurati present on scenario analysis for physical climate risk and meet with Director, Europe, Nathalie Borgeaud, at Four Twenty Seven's booth.
  • June 12 - 14 – Emergency Preparedness Training Workshop, Sacramento, CA: Nik Steinberg will present on the California Heat Assessment Tool.
  • June 19  – Columbia University and PRI Private Round Table, New York, NY: Emilie Mazzacurati will discuss scenario analysis for physical climate risk at this workshop.
  • June 19 - 21 – Columbia University - At What Point Managed Retreat? New York, NY: Lindsay Ross will attend.  
  • July 4 – Finance for Adaptation Solutions and Technologies Roundtable, London, UK: Emilie Mazzacurati will present on private sector solutions for climate resilience investments during London Climate Week.
  • July 4 Young Professionals Conference 2019, Lisbon, Portugal: Nathalie Borgeaud will present on climate risk in real estate.
  • July 17 - 19 – Oxford Climate Related Financial Risk Course, Oxford, UK: Nathalie Borgeaud will teach a session on measuring climate risk.
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Four Twenty Seven sends a newsletter focused on bringing climate intelligence into economic and financial decision-making for investors, corporations and governments. Fill in the form below to join our mailing list. As data controller, we collect your email address with your consent in order to send you our newsletter. Four Twenty Seven will never share your mailing information with anyone and you may unsubscribe at any moment. Please read our Terms and Conditions.
 

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Anticipating Sea Level Rise Impacts on Real Estate Investments

What does the future hold?

New research on sea level rise emphasizes the potential for dire changes over the course of the century. Recent satellite data suggests that warming water is causing East Antarctica to melt more quickly than previously thought and a study released in early May found that almost a quarter of West Antarctica’s ice is thinning, with its largest glaciers shrinking five times faster than in 1992. A study based on expert opinion found that there is the possibility of sea levels rising by 2 meters (6.5ft) under an extreme scenario of  5˚C global temperature increase. This would mean an area of land as big as Libya would be lost, and up to 2.5% of the population globally could be displaced.

The cascading direct and indirect impacts of sea level rise affect all facets of the regional economy. Source: Union of Concerned Scientists.

Extreme scenarios of sea level rise will have severe impacts on our cities and economies. Sea level rise is happening today to a lesser extent; however it is already having tangible impacts on real estate values. This means increasing costs for property owners and tenants, but it also has far-reaching market impacts on access to and cost of insurance, fluctuations in market values and potential increase in local taxes to fund adaptation efforts.

Of all U.S. states, Florida is expected to experience the greatest consequences of sea level rise. Between 1960 and 2015, sea levels along the Florida coast rose by 10-15 cm (4-6 in), and the range of projections vary wide looking a few decades out, with projections ranging from  33 to 122cm  (13-48 in) by 2060.

Widespread flooding risk in Florida

65,000 homes in Florida worth $35 billion are expected to be underwater or impacted daily by high tides in 2040. From soaring insurance premiums and increasing risk of disclosure to declining property value and diminishing tax revenue, sea level rise is already challenging property owners, investors and banks. Among other impacts, the value of single-family homes in Miami-Dade County that are exposed to sea level rise declined by about $465 million between 2005 and 2016.

Furthermore, climate change is predicted to increase the number of strong hurricanes in the region. These stronger storms will combine with sea level rise to exacerbate the impacts of extreme floods. Storm surge flooding damages buildings and landscaping,  destroys merchandise,  and can also have wide-reaching economic impacts due to damaged power and transportation infrastructure.

Downtown Jacksonville, FL flooded during Hurricane Irma. Source: iStock.

Last but not least, tidal flooding, also called “nuisance” or “sunny day” flooding increased from 1.3 to 3 days per year in the Southeast from 2000-2015. By the end of the century tidal flooding could happen daily.  Even with no rainfall, these floods have significant impacts – halting traffic, overburdening drainage systems and damaging infrastructure.

Investors and businesses have a responsibility to understand these risks: using best available science to measure exposure to sea level rise and other flood risks, getting informed on adaptation efforts by local governments, and engaging with local industry associations or other groups to promote further investments in resilience.

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Four Twenty Seven works with investors to provide portfolio hotpot screenings and real time due diligence with site-specific data on sea level rise and other climate risks. Contact us for more detailed analysis and site-specific data on sea level rise exposure and detailed analysis of local jurisdictions’ response.

Newsletter: France’s Central Bank Publishes First TCFD Report

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we highlight the French Central Bank's climate risk assessment, discuss climate risk in real estate and share progress updates on the EU action plan. 

In Focus: Banque de France Publishes First Art. 173 Report
Banque de France, France's central bank, released a comprehensive analysis of climate risk in its portfolio on March 12. The assessment aligns with both Article 173 and the Task Force on Climate-related Financial Disclosures' recommendations. It includes an analysis of physical climate risk exposure in Banque de France's equity, debt and sovereign bond portfolios, provided by Four Twenty Seven.

This report is part of a broader effort by a number of central banks to lead by example and demonstrate how financial institutions need to assess their portfolios' exposure to climate risk. Banque de France is a founding member and provides the Secretariat for the central bank and supervisor Network for Greening the Financial System (NGFS), which focuses on strengthening the global response required to meet the goals of the Paris agreement and manage climate-related risks. 
Read the Report
Real Estate Investors Tackle Climate Risk

Climate Risk and Real Estate Investment Decision-Making

This report explores the evolving understanding of climate risk in real estate, sharing current best practices for measuring and managing risk. The Urban Land Institute and Heitman, a real estate investment management firm, surveyed over 25 investors and investment managers globally on their efforts to integrate climate risk into their investment decisions. Their strategies include mapping physical risk for current portfolios, integrating climate risk into due diligence efforts, exploring ways to mitigate risk and engaging with policy makers on resilience-building efforts.

The report also highlights Four Twenty Seven's asset-level risk screening of Heitman's real estate portfolio and the Four Twenty Seven and GeoPhy analysis of climate risk in REITs. The Washington Post recently cited the report, emphasizing the regional initiatives focused on building resilience to climate impacts and their implications for investors, while a Forbes article, discusses the findings in terms of the economic impacts.

Further Reading

Continued Progress on the EU Action Plan

Respond to the European Commission's Consultation on Disclosure 

The European Commission has released a consultation soliciting expert feedback on their draft supplement integrating climate change into the Non-Financial Reporting Directive (NFRD), based on the Technical Expert Group (TEG) on Sustainable Finance's final recommendations. This is an important step towards increasing the transparency and resilience of the financial system by creating legislation that includes physical climate risk disclosure by companies and investors. The deadline for feedback is March 20

Respond to the TEG Preliminary Green Bond Standard Recommendations

In another of its workstreams the TEG is helping the EC create an EU green bond standard. Earlier this month the TEG released its interim report, explaining the purpose of the proposed green bond standard and its suggested content. The TEG is inviting feedback which will be considered in the development of its final recommendations scheduled to be presented to the EC this June. The deadline for feedback is April 3. 
Four Twenty Seven in the News

Business and the Effects of Global Warming - The Economist

Data limitations, potential first-mover disadvantage, and complicated risk pathways all influence how companies disclose their climate risks and invest in resilience. The Economist covers challenges companies face when addressing climate risk, their wide-ranging reactions and developing solutions, citing Four Twenty Seven.


Facing Up to Climate Change - The Bond Buyer Podcast

Do bond ratings reflect governments’ and businesses’ exposure to physical climate change?  Founder & CEO, Emilie Mazzacurati, joins the Bond Buyer’s Chip Barnett to discuss physical climate risk for investors, businesses and governments. Emilie describes the financial sector’s growing awareness of material climate risk in their bond and equity portfolios and shares efforts being taken to understand and address these risks. 

Climate Change Business Journal Awards

The Climate Change Business Journal (CCBJ) released its 10th annual CCBJ Business Achievement Awards, recognizing outstanding business performance in the climate change industry. CCBJ acknowledged Four Twenty Seven’s release of the first global dataset on climate risk in real estate, developed with GeoPhy, and acknowledged the California Heat Assessment Tool. The tool was collaboratively developed as part of California's Fourth Climate Change Assessment, to help local health practitioners plan for the impacts of changing heat waves on local populations.
Upcoming Events

Join the Four Twenty Seven team at these upcoming events:

  • March 20-22 – Climate Leadership Conference, Baltimore, MD: Director of Advisory Services, Yoon Kim, will speak about the evolving landscape of climate risk disclosure.
  • March 20 – CCBJ 2018 Business Achievement Awards Ceremony, San Diego, CA: Senior Data Analyst, Josh Turner, will join this gathering to receive awards on Four Twenty Seven's behalf. 
  • March 21-22 – San Giorgio Group, Venice, Italy: Founder & CEO, Emilie Mazzacurati, will chair a panel on adaptation and resilience and will speak during a breakfast panel on adaptation finance during this gathering of climate finance experts.
  • March 22 – ICARP Technical Advisory Council Meeting, Sacramento, CA: Yoon Kim will join this quarterly meeting to present on private sector perspectives on assessing physical climate risks. 
  • April 2-3 – Climate City Expo: Business, Asheville, NC: Senior Analyst, Lindsay Ross, will join this gathering focused on innovation in climate resilience.
  • April 10-12 – RI Asia Japan, Tokyo, Japan: Hear Emilie Mazzacurati present on scenario analysis for physical climate risk and meet with Chief Development Officer, Frank Freitas, at Four Twenty Seven's booth.
  • April 8 - 19 – Japan and Australia: Meet with Emilie Mazzacurati and Frank Freitas while they're in Japan and Australia. 
  • April 13-16  – APA National Planning Conference, San Francisco, CA: Yoon Kim, and Director of Analytics, Nik Steinberg, will speak on a panel called, "Beyond Vulnerability: Innovative Adaptation Planning."
  • April 23-25 – National Adaptation Forum, Madison, WI: Yoon Kim will speak about integrating public health into climate adaptation and Editor, Natalie Ambrosio, will present on local adaptive capacity from a private sector perspective.
  • April 29 - May 1  – Ceres Conference 2019, San Francisco, CA: The Four Twenty Seven team will join investors and corporations at this annual gathering.
  • June 11 - 12 – RI Europe, London, UK: Hear Emilie Mazzacurati present on scenario analysis for physical climate risk and meet with Director, Europe, Nathalie Borgeaud, at Four Twenty Seven's booth.
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Four Twenty Seven Wins Climate Change Business Journal Awards

FEBRUARY 19, 2019 – SAN DIEGO, CALIFORNIA – Four Twenty Seven receives Climate Change Business Journal Awards for three climate change risk and resilience projects. 

The Climate Change Business Journal (CCBJ) released its 10th annual CCBJ Business Achievement Awards, recognizing outstanding business performance in the climate change industry. CCBJ assesses markets and business opportunities across the emerging climate change industry and acknowledged Four Twenty Seven’s contributions to this field through our global dataset on climate risk in real estate, the development of the California Heat Assessment Tool and our contribution to the EBRD-GCECA initiative on Advancing TCFD Guidance on Physical Climate Risks and Opportunities.

Four Twenty Seven and GeoPhy earned the Technology Merit: Climate Change Risk Modeling and Assessment award for releasing the first global dataset on climate risk exposure in real estate investment trusts (REITs). REITs represent an increasingly important asset class that provides investors with a vehicle for gaining exposure to real estate portfolios. However, real estate is also increasingly affected by risks from climate change. Four Twenty Seven applied its scoring model of asset-level climate risk exposure to GeoPhy’s database of listed REITs holdings to create the first global, scientific assessment of REITs’ exposure to climate risk.

The California Heat Assessment Tool (CHAT) earned the Project Merit: Climate Change Adaptation and Resilience award for its innovative approach to helping public health officials, health professionals and residents understand what changing heat wave conditions mean for them, through a free online platform. CHAT is part of California’s Fourth Climate Change Assessment, a state-mandated research program to assess climate change impacts in California, and was developed by Four Twenty Seven, Argos Analytics, the Public Health Institute and Habitat 7 with technical support from the California Department of Public Health.

The European Bank for Reconstruction and Development and the Global Centre of Excellence on Climate Adaptation initiative on Advancing the TCFD Recommendations on Physical Climate Risks and Opportunities earned the Advancing Best Practices: Climate Change Adaptation and Resilience award. This project culminated in a conference and report building on Taskforce on Climate-related Financial Disclosure (TCFD) recommendations and providing common foundations for the disclosure of climate-related physical risks and opportunities. It identifies where further research or market action is needed so that detailed, consistent, industry-specific guidelines can be developed on the methodology for quantifying and reporting these risks and opportunities. Four Twenty Seven and Acclimatise provided the technical secretariat that led the working groups and authored the report.

Climate Risk and Real Estate Investment Decision-Making

The Urban Land Institute, a cross-disciplinary real estate and land use network, and Heitman LLC, a global real estate investment firm, released a report on climate risk and response in the real estate sector. The paper explores the evolving understanding of climate risk in real estate and shares current best practices for measuring and managing risk. It highlights Four Twenty Seven’s asset-level risk screening of Heitman’s real estate portfolio and the Four Twenty Seven and GeoPhy analysis of climate risk exposure in REITs. Read the press release from the Urban Land Institute below, originally published on PR Newswire:

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LONDONFeb. 5, 2019 /PRNewswire/ — A new report from the Urban Land Institute (ULI), a global multidisciplinary real estate organization, and Heitman LLC (Heitman), a global real estate investment management firm, points to the pressing need for greater understanding throughout the industry of the investment risks posed by the impacts of climate change. It also highlights proactive measures by Heitman and other leading firms to stay at the forefront of mitigation strategies and accurately price risk into investment decisions.

Climate Risk and Real Estate Investment Decision-Making explores current methods for assessing and mitigating climate risk in real estate, including physical risks such as catastrophes and transitional risks such as regulatory changes, availability of resources and attractiveness of locations. Both types of risks have financial impacts for real estate, including higher operational costs and declining property values. The report, released today at ULI’s Europe Conference in London, is based on insights from more than 25 investors and investment managers in EuropeNorth America, and Asia Pacific, as well as existing research.

“Understanding and mitigating climate risk is a complex and evolving challenge for real estate investors,” said ULI Global Chief Executive Officer W. Edward Walter. “Risks such as sea-level rise and heat stress will increasingly highlight the vulnerability not only of individual assets and locations, but of entire metropolitan areas. This report shows that Heitman and other leading ULI members are prioritizing this issue with provocative approaches to better gauge and develop mitigation strategies. Building for resilience, on a portfolio, property and citywide basis, is paramount to staying competitive. Factoring in climate risk is becoming the new normal for our industry.”

“Opportunities are emerging across the real estate industry for investment managers and investors to better assess climate risk and navigate the potential impacts of climate change on assets and portfolios,” said Maury Tognarelli, Heitman Chief Executive Officer.  “More accurate, forward-looking data on the risks associated with climate change are becoming available, positioning the industry to incorporate climate risks into how investments are underwritten and portfolios constructed. Ultimately, we hope this report will spur discussion among real estate industry participants with the end-goal of improving the investment outcomes for our clients and constituents.”

The real estate industry as a whole has just begun the development of more advanced strategies to recognize, understand and manage risks, and for the most part presently relies on insurance to cover the majority of the shorter term, financial-oriented risks related to climate change, the report states. However, while insurance has remained generally attainable in risk-prone areas, being insured does not protect investors from a reduction in asset liquidity. That, along with the likelihood of future changes in insurance availability and costs, is prompting a growing number of investors and investment managers to explore new ways to build climate risks into their investment processes, including:

  • Mapping physical risk for current portfolios and potential acquisitions;
  • Incorporating climate risk into due diligence and other investment decision-making processes;
  • Incorporating additional physical adaptation and mitigation measures for assets at risk;
  • Exploring a variety of strategies to mitigate risk, including portfolio diversification and investing directly in the mitigation measures for specific assets; and
  • Engaging with policy makers on local resilience strategies.

Whether or not their assets have already been directly affected by the impacts of climate change, “investors see climate considerations as a necessary layer of fiduciary responsibility to their stakeholders, as well as an opportunity to identify markets and assets that will benefit from a changing climate,” notes the report. While early adapters have committed resources to gain knowledge and improve awareness of climate risk, in the coming years, methods are likely to become more sophisticated, it adds.

“The industry needs to be able to better measure the value impact so it can base its future decision-making on a quantitative rather than qualitative understanding of the risks and the potential return on investment from investing in mitigation strategies for their assets.”

While awareness of climate risk is growing, none of the report’s interviewees have yet ruled out attractive investment markets solely because of that risk, the report says. Still, interviewees emphasized the need to invest in a “sensible and smart” way in markets where physical risks from climate change are evident.

Climate Risk shows that leading investment managers and institutional investors are at various points in the undertaking of resilience scans of their portfolios. These scans help to identify vulnerabilities and impacts resulting from sea-level rise, flooding, heavy rainfall, water stress, extreme heat, wildfires and hurricanes. This includes short-term considerations such as business disruption for building tenants as well as higher operating and capital costs caused by increased wear and tear on properties.

The report highlights Heitman’s use of emerging technology that combines next-generation climate maps with real estate data to manage climate risk. Providers of this technology use scientific climate models that project long-term, global climate change impacts and clarify the degree of exposure to both extreme weather events and chronic industry-disrupting fluctuations, such as rising seas. The report also shows how Heitman integrated the analysis into its investment decision-making, noting that the company also considers if and how an asset and the community in which it is located has already begun to mitigate climate risks. “The climate risk assessment contributes to a holistic approach (by Heitman) to constructing global property portfolios,” says the report. “If a portfolio is determined to have a higher-than-targeted exposure, it can be rebalanced over time through limiting new acquisitions or exiting existing assets exposed to a certain risk.”

As a whole, the industry needs to understand the pricing impacts of physical climate risks, and how climate change is likely to have a bigger impact on valuation in the future as asset and market liquidity are affected, the report says. It identifies several steps to raise awareness, such as:

  • Improve analyses of climate risk in annual and quarterly reports. This helps create awareness among investment managers and investors and helps drive change.
  • Use big data to better understand patterns around changes in asset liquidity and value, and weather forecasting.
  • Work with the insurance industry to understand data and gain knowledge on how climate change is affecting premiums and coverage.
  • Engage with city leaders in vulnerable areas to support city-level commitment to and implementation of physical and transitional risk mitigation strategies.

“An eventual downward repricing of higher-risk assets will be the market’s way of redirecting capital to locations and individual assets where it is expected to be better insulated from these particular risks. This process will be painful for investors who are caught off guard, but those who are prepared have the potential to outperform,” the report concludes.

Climate Risk and Real Estate Investment Decision-Making was prepared through a collaborative effort between Heitman; ULI UK, which serves the institute’s members in the UK; and ULI’s Center for Sustainability and Economic Performance. The center provides leadership and support to real estate and land use professionals to invest in energy-efficient, healthy, resilient, and sustainable buildings and communities.

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For more on climate risk in real estate read Four Twenty Seven and GeoPhy’s assessment of asset-level risk exposure in real estate investment trusts (REITs) and find out more about our REITs data product.