Climate Risk, Real Estate, and the Bottom Line

OCTOBER 11, 2018 – BOSTON, MA – Four Twenty Seven & GeoPhy Release First Global Dataset on Real Estate Investment Trusts’ Exposure to Climate Change. 

Four Twenty Seven and real estate technology company GeoPhy today announce the release of a data product that provides granular projections of the impacts of climate change on real estate investment trusts (REITs). REITs represent an increasingly important asset class that provides investors with a vehicle for gaining exposure to portfolios of real estate. The data was launched at the Urban Land Institute Fall Event in Boston, MA, accompanied by a white paper that lays out the implications of climate risk for the real estate sector.

Four Twenty Seven applied its scoring model of asset-level climate risk exposure to GeoPhy’s database of listed real estate investment trusts’ (REITs) holdings, to create the first global, scientific assessment of REITs’ exposure to climate risk. The dataset includes detailed, contextualized projections of climate impacts from floods due to extreme precipitation and sea level rise, exposure to hurricane-force winds,  water stress and heat stress for over 73,500 properties owned by 321 listed REITs.

“Real estate is on the frontline of exposure to climate change” said Emilie Mazzacurati, founder and CEO of Four Twenty Seven. “Many valuable locations and markets are often coastal or near bodies of water, and therefore are going to experience increases in flood occurrences due to increases in extreme rainfall and to sea level rise.” she noted. “These risks can now be assessed with great precision — the availability of this data provides investors with an opportunity to perform comprehensive due diligence which reflects all dimensions of emerging risks.” she concluded.

“The market has begun to price in the potential impacts of fat-tail climate events” noted Dr. Nils Kok, Chief Economist of GeoPhy. “Properties exposed to sea level rise in some parts of the United States are selling at a 7% discount to those with less exposure, and the value of commercial real estate is expected to equally reflect these risks. Leveraging forward-looking data on risk exposure can allow REIT investors to anticipate changes in market valuations and react accordingly.”

Read the report: Climate Risk, Real Estate, and the Bottom Line.

Key findings include:

  • 35 percent of REITs properties globally are currently exposed to climate hazards. Of these, 17 percent of properties are exposed to inland flood risk, 6 percent to sea level rise and coastal floods, and 12 percent to hurricanes or typhoons
  • U.S. markets most exposed to sea level rise include New York, San Francisco, Miami, Fort Lauderdale, and Boston. The high-value REITs most exposed to sea level rise in the U.S. are Vornado Realty Trust and Equity Residential.*
  • Globally, REITs concentrated in Hong Kong and Singapore display the highest exposure to rising seas. Sun Hung Kai Properties, worth $56 billion, has over a quarter of its properties exposed to coastal flooding.
  • 37 Japanese REITs have their entire portfolio exposed to the highest risk for typhoon globally, representing $264.5 billion at risk in properties in Tokyo and other Japanese cities.

Read the report Climate Risk, Real Estate, and the Bottom Line.

Download the Press Release.

*Erratum: A previous version of this blog post mentioned in error that CapitaLand is one of the U.S. REITs most exposed to sea level rise. CapitaLand is a Singapore-based REIT with some exposure to sea level rise but it is not among the most exposed.

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Read more about Four Twenty Seven’s REITs data product and our other solutions for investors.

Engaging with Corporates to Build Adaptive Capacity

June 5, 2018 – 427 REPORT. Shareholder engagement is a critical tool to build resilience in investment portfolios. Investors can help raise awareness of rising risks from climate change, and encourage companies to invest in responsible corporate adaptation measures. We identify top targets for shareholder engagement on physical climate risks and provide data-driven strategies for choosing companies and approaching engagement. Our report includes sample questions as an entry point for investors’ conversations about climate risk and resilience with corporations.

Shareholder engagement on climate change has grown tremendously in recent years. Over 270 investors, managing almost $30 trillion collectively, have committed to engage with the largest greenhouse gas emitters through the Climate Action 100+. In addition to their ongoing efforts to engage and encourage companies to reduce emissions, investors are becoming aware of the financial risks from extreme weather and climate change. Climate change increases downside risks: a negative repricing of assets is already being seen where climate impacts are most obvious, such as coastal areas of Miami. As climate change can negatively impact company valuations, investors must strive to bolster governance and adaptive capacity to help companies build resilience.

This Four Twenty Seven report, From Risk to Resilience – Engaging with Corporates to Build Adaptive Capacity, explains the value of engagement, for both corporations and investors and describes data and case studies to drive engagement strategies. While news coverage of extreme weather events can clue investors in to which corporations may be experiencing climate-driven financial damage, new data can empower investors to identify systemic climate risk factors and proactively engage companies likely to experience impacts in the future. Reactive engagement strategies based on news stories can also use data to more thoroughly explore corporations highlighted in the news, by examining other hazards that may pose harm to their operations.

The report also identifies the Top 10 companies with the highest exposure to physical climate risk in the Climate Action 100+ and calls for investors to leverage their engagement on emissions to also address urgent issues around climate impacts and building resilience.

Once they identify companies, shareholders can use a variety of questions to gain a deeper understanding of companies’ vulnerability to climate hazards and their governance and planning processes, or adaptive capacity, to build resilience to such impacts. The report provides sample questions for different components of climate risk, including Operations Risk, Market Risk and Supply Chain Risk, as well as Adaptive Capacity.

Key Takeaways

• The impacts of a changing climate pose significant downside risk for companies; a risk bound to increase as the climate continues to degrade.
• At present, investors are likely to become aware of exposure to financial damages from extreme weather events only after they have occurred. Disclosure is limited but gaining traction.
• Corporate engagement is a tool to encourage companies to deploy capital and technical assistance to build resilience in their operations and supply chains.
• Investors can select target companies reactively based on prior incidents or pro-actively identify firms that would benefit from resilience plans.
• Investors should question companies on their exposure to physical climate risks via their operations, supply chain and market, as well as how they are building resilience to these risks through risk management and responsible corporate adaptation strategies.

Download the report.

Download the press release.

Report: Advancing TCFD Guidance on Physical Climate Risks and Opportunities

This seminal report aims to inform and support early adoption efforts of climate risk reporting, based on findings from industry-led working groups  from the financial sector and corporations. The report calls on companies to perform forward-looking risk assessments and disclose material exposure to climate hazards. It also invites firms to investigate benefits from investing in resilience and opportunities to provide new products and services in response to market shifts. 

Download the full report

Access conference materials (slides, summary, op-eds)

TCFD recommendations

The Task Force on Climate-related Financial Disclosures (TCFD) seeks to “develop recommendations for voluntary climate-related financial disclosures that are consistent, comparable, reliable, clear, and efficient, and provide decision-useful information to lenders, insurers and investors.” It has crystallised a growing concern among investors and business leaders about the physical impacts that climate change could have on the economy and on financial markets.

The TCFD’s initial report noted a lack of understanding about the impact of climate change on corporate value chains and infrastructure, the channels through which these impacts are transmitted to financial markets, and a lack of transparency in reporting these risks. The final report recommended that financial disclosures should include metrics on the physical risks and opportunities of climate change but did not provide detailed guidance on appropriate metrics.

Without formal or regulatory guidance on metrics and indicators, firms are uncertain about what to include in their disclosures. Investors are therefore likely to receive a heterogeneous mix of financial reports including diverse indicators, metrics, assumptions and timeframes, which will fail to provide comparable data across a portfolio or provide the necessary transparency.

Advancing TCFD guidance on physical climate risk and opportunities

Recognising the challenges in the path towards standardising disclosure of physical risks and opportunities related to climate change, the European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) launched an initiative, “Advancing TCFD guidance on physical climate risk and opportunities.” The initiative aims to work with innovative thinkers in the financial and corporate sectors to identify the greatest needs for guidance, research and development. It also seeks to lay the foundations for a common conceptual framework and a standard set of metrics for reporting physical climate risks and opportunities.

The preliminary guidance in this report aims to build on the TCFD recommendations and provide common foundations for the disclosure of climate-related physical risks and opportunities. The report also identifies areas 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. The project focused on disclosure metrics that are specific to corporations. Improving the quality of firms’ climate disclosures is not just important for them, but also critical to managing climate risks and opportunities in financial markets.

Project process

This EBRD-GCECA initiative involved three industry working groups of a dozen participants, with a mix of financial institutions (asset owners, asset managers, banks, insurance), corporations, credit rating agencies, and a financial data provider. Each working group met several times over the first half of 2018 to discuss and consider research questions related to the topic on hand. The working groups debated how best to help the market make progress on disclosure.

  • Working group 1: Metrics for physical climate risk management and disclosure.
  • Working group 2: Metrics for climate resilience opportunities.
  • Working group 3: Climate intelligence for business strategy and financial planning.

The recommendations we developed aim to serve a dual purpose, seeking to improve corporations’ understanding of their own exposure and risk profile as well as opportunities arising from climate change, and provide clear signals for financial institutions to understand risks and opportunities implicit in individual holdings as well as portfolio-wide exposures.

The working groups built on the TCFD guidance, existing reporting frameworks, and an extensive review of literature to develop a set of recommendations on physical risks and opportunities. As a general rule, this report has prioritised recommendations that are consistent with current industry practices and that leverage metrics and frameworks already used for financial disclosures. It also includes a mix of recommendations that focus on providing better information, as well as recommendations that require more sophisticated analysis. In line with the TCFD recommendations, the recommendations of this EBRD-GCECA initiative are geared to facilitating comparability across companies within a sector, industry or portfolio, and to promoting disclosure of reliable and verifiable information.

Recommendations

Disclosing physical climate risks

A corporation’s vulnerability to climate impacts goes well beyond the physical exposure of its facilities. It includes supply chains, distribution networks, customers and markets. Furthermore, a company’s resilience to climate impacts depends on its risk management and business plans, as well as its governance.

Figure ES-1. How climate change affects corporate value chains

The impacts of climate change on corporate value chains depend on where the company operates and what impacts may affect relevant locations, but they also depend on the company’s activities. Corporations whose production processes consume high volumes of water, for example, may be particularly sensitive to changes in drought and the availability of water. Similarly, corporations with high energy consumption or significant use of outdoor labour will experience greater challenges as average temperatures rise, affecting both energy costs and labour productivity.

Recommendation 1: Assess exposure to all first-order climate impacts

Corporations should consider all first-order impacts when undertaking a climate risk assessment – heat stress, extreme rainfall, drought, cyclones, sea-level rise and wildfires – and additional climate hazards relevant to their industries, such as ocean acidification for fisheries. Exposure to climate hazards should be assessed at the local scale, using the most recent climate data and literature.

Recommendation 2: Assess climate risks over the duration of an asset’s lifetime or over the lifetime of a financial instrument

This report recommends that corporations provide more detailed information on the location of their critical operations, suppliers and market, at least at the country-level, as part of segment reporting to enable investors and creditors to conduct analysis on exposure to risk in their portfolio.

Firms should consider climate impacts over the following timeframes,

  1. Assess changes in asset performance over the past 5-10 years (or longer) that are attributable to extreme weather events or to climate variability, in order to detect possible impacts from climate change.
  2. Assess potential impacts over the expected lifetime of the asset and/or over the lifetime of the investment or loan.

Recommendation 5:  Disclose the impacts of weather variability on value chains

Corporations with moderate or high sensitivity to variability in temperature and precipitation should identify and disclose whether and how changes in temperature and precipitation have materially affected their performance.

Recommendation 6:  Perform forward-looking assessment climate-related risks

Corporations should disclose 1) their assessment of the types of climate-related risks to which they may be exposed in the future due to the geographic exposure of their facilities and 2) the estimated financial impacts from the risks they have identified as being material.

Recommendation 7: Describe risk management processes for the physical impacts of climate change

Corporations should describe their processes for identifying, assessing and managing the physical risks of climate change, as noted by the TCFD. For these physical impacts, aspects of particular interest to financial institutions and banks include risk management processes, insurance coverage, planned facility moves or retrofits, corporate adaptation strategy, and engagement with local authorities to build climate resilience locally.

Disclosing physical climate opportunities

The TCFD also encourages corporations to disclose opportunities related to the impacts of a changing climate. This recommendation is critical to ensuring that businesses and financial institutions continue to thrive in a changing environment. It is also vital for promoting the healthy development of resilience products and services that cater to new market needs for resilience.

The TCFD defines “climate-related opportunity” as “the potential positive impacts related to climate change on an organisation,” and notes that opportunities “will vary depending on the region, market and industry in which an organisation operates.” This report identifies three broad types of opportunities related to physical climate change impacts:

  1. Opportunities related to managing existing climate-related physical risks
  2. Opportunities to respond to new emerging risks
  3. Opportunities to adapt to market shifts and cater to new market needs

Recommendation 8: Identify opportunities based on managing risks and market shifts

Corporations and financial institutions should strive to identify opportunities in managing existing climate-related risks and responding to emerging risks. Corporations should also assess the potential changes in their value chains, explore potential market shifts as customer needs change and target their products and services to cater to growing demand for adaptation solutions.

Recommendation 9: Assess climate opportunities over timeframes relevant to business planning

Corporations should define the appropriate timescales in which to report opportunities in consultation with their investors. Opportunities in response to managing existing risks that affect recent and current accounts and the next year’s accounts should be reported as part of core financials. Opportunities arising from market shifts are unlikely to be reported quantitatively and are more appropriate for disclosure in general reporting on future business expectations.

Recommendation 10: Disclose business opportunities at the segment level; for critical facilities, disclose resilience benefits at the facility level

Opportunities may be disclosed at different levels to best serve firms and investors. Opportunities due to shifting market demand or new products should be reported at the segment level, in line with risk disclosures. Benefits from managing existing or emerging risks may be disclosed at the segment level (for process or supply-chain improvements, for example). For critical facilities, it may be advantageous for firms to disclose significant resilience upgrades or strategic improvements at the facility level, to showcase good stewardship and provide confidence that critical facilities are protected.

Recommendation 11: Disclose benefits from resilience investments using the same metrics as for risk disclosure

Corporations should acknowledge the importance of accurately accounting for the opportunity effects on their core financials arising from actions to manage current risks and respond to emerging risks. These metrics may include avoided negative impacts on revenues, operating expenses, capital expenses, supply chain costs, value-at-risk, or projected annual average losses.

Recommendation 12: Include business opportunities in qualitative disclosures

The disclosure of opportunities involving market shifts and new products and services can be achieved by qualitative disclosures of the lifecycle of new commercial opportunities. The disclosures may include information on the development stage of endeavours, sector, the size of potential markets, and the length of time until commercial viability.

Scenario analysis for physical climate risks and opportunities

With regard to climate intelligence for business strategy and financial planning, the TCFD recommendations strongly advocate the development and use of scenarios when analysing climate risks and opportunities. In this context, scenario analysis is intended as a tool to address challenges and acquire key information. Scenarios provide a narrative, either qualitative or quantitative, which “describes a path of development leading to a particular outcome.”

Recommendation 13: Consider current and desired GHG concentration pathways and related warming projections as a basis for scenario analysis of physical climate risks and opportunities

Corporations should not be concerned with developing new climate scenarios themselves. Instead, as a basis for their scenario analysis of physical risk, they should consider at least two main types of existing climate scenarios, based on the Intergovernmental Panel on Climate Change (IPCC):

  • Current GHG pathway: National climate policies currently in place around the world are projected to reduce baseline emissions, which would result in warming of about 3.4°C above pre-industrial levels.[i]
  • Desired (‘aspirational’) GHG pathway: These are the scenarios compatible with limiting warming to below 1.5°C by 2100 (with a probability of ≥50 per cent), and to below 2°C in the 21st century (with a probability of about 80 per cent).

Recommendation 14: Integrate scenario analysis of physical climate risks and opportunities into existing planning processes to ensure strategic, flexible and resilient businesses and investments

The main reason to undertake scenario analysis is to obtain a comprehensive assessment from firms of their risks and opportunities. Firms should achieve this by exploring different possibilities of what might happen in the future, despite uncertainty and by integrating climate change considerations into their existing business strategies and financial planning.

Recommendation 15: Avoid standardised scenario analysis in order to have a more comprehensive range of outcomes

Firms should look at more than one scenario and multiple climate models in order to have a more comprehensive range of potential outcomes. Although a degree of comparability is desirable, it is also recommended that corporations develop their own scenarios, which should be highly contextual, and based on the views and values of individual corporations.

Recommendation 16: Consider data from a wide variety of sources and scales when developing scenario analysis of physical climate risks

In order to construct plausible physical climate risk and opportunity scenarios, firms should consider inputs from a wide variety of sources and levels of detail. These include scientific data (not only on climate change), macroeconomic data, socio-economic data, data on political economics and policy, corporate data, ‘vision’ and market analysis data, ‘big data’, and so on.

Recommendation 17: Take account of scientific uncertainty inherent in climate data and in scenario analysis of physical risks and opportunities

Corporations and financial institutions are very well accustomed to making decisions within a large spectrum of uncertainty. In the same way, they should consider and manage the uncertainty that surrounds climate data and climate science for scenario analysis. Scientific uncertainty should be taken into account and made explicit when assessing climate-related financial risks and opportunities.

Recommendation 18: Disclose qualitative information that is relevant to the company and its investors

The ultimate objective in disclosing the use of scenarios is to build investor confidence that a company is meaningfully engaged on the topic of climate change, that it is looking at a broad range of outcomes and is responsive and proactive, rather than defensive and reactive. In this context, firms should disclose information on their climate risks and opportunities in the way that is most appropriate to them, as well as to their investors, and to the type of information disclosed or its format (quantitative or qualitative).

Conclusion

Efforts to formalise and standardise the assessment and disclosure of climate-related risks and opportunities are still in their infancy. As science and business continue to progress in their understanding of climate impacts, the recommendations made in this report will evolve over time, informed by emerging practices and the continuous efforts of corporations, financial institutions, credit rating agencies, industry groups, think-tanks, regulators and governments.

Climate disclosures will remain a topic of active research and discussion, and this report aims to support the emergence of market practices that bring transparency to markets and help build resilience in firms and financial institutions.

The Participants in the Initiative

The EBRD hosted the initiative and funded its technical secretariat.  The GCECA provided a secondment to the technical secretariat. The technical secretariat was provided by Four Twenty Seven, the leading provider of intelligence on climate risk to financial markets, and by Acclimatise, an advisory company specialised in adaptation to climate change.

The expert working groups in the initiative included participants from Agence Française de Développement, Allianz, APG Asset Management, AON, the Bank of England, Barclays, Blackrock, Bloomberg, BNP Paribas, Citi, Danone, the Dutch National Bank, DWS Deutsche AM, European Investment Bank, Lightsmith Group, Lloyds, Maersk, Meridiam Infrastructure, Moody’s, S&P Global Ratings, Shell, Siemens, Standard Chartered, USS and Zurich Alternative Asset Management.

Download the full report

Access conference materials (slides, summary, op-eds)

Physical Climate Risk in Equity Portfolios

November 8, 2017 – 427 REPORT.  Four Twenty Seven’s Equity Risk Scores help investors identify climate risk exposure in their portfolios and design new investment strategies.  Our methodology tackles physical risk head on by identifying the locations of corporate production and retail sites around the world and their vulnerability to climate change hazards, such as sea level rise, droughts, floods and tropical storms, which pose an immediate threat to investment portfolios. This jointly published report explains our equity risk scoring methodology, features a relative risk ranking of CAC40 companies and discusses particular vulnerabilities in Asia. 

At COP23 Four Twenty Seven and Deutsche Asset Management jointly released a report featuring a new approach to climate risk management in equity portfolios. Measuring Physical Climate Risk in Equity Portfolios showcases Four Twenty Seven’s Equity Risk Scoring methodology, which identifies hotspots in investment portfolios by assessing the geographic exposure of publicly-traded companies to climate change.

This comprehensive, data-driven scoring effort culminates in a composite physical risk score that allows for comparison and benchmarking of equities and indices.  This integrated measure provides a point of entry to understand and address climate risk, engage with corporations and identify risk mitigation strategies. “This report is a major step forward to addressing a serious and growing risk that investors face. To keep advancing our efforts, we believe the investment industry needs to champion the disclosure of once-in-a-lifetime climate risks by companies so we can assess these risks even more accurately going forward,” said Nicolas Moreau, Head of Deutsche Asset Management.

Key Takeways

  • Four Twenty Seven’s equity scoring methodology includes Operations Risk, Supply Chain Risk and Market Risk, accounting for differential vulnerability to climate hazards between industries, asset types and locations.
  • Four Twenty Seven screens each corporate site for its exposure and sensitivity to a set of climate hazards including extreme precipitation, sea level rise, hurricanes, heat stress, water stress and wildfires.
  • To calculate Supply Chain Risk and  Market Risk, Four Twenty Seven uses companies’ financial data, such as revenues and production.
  • China leads the world in terms of coastal risk, with 145 million people and economic assets located on land threatened by rising seas, and countries throughout Asia are particularly vulnerable to climate risk.
  • The Thailand floods of 2011 led to vast repercussions across industries, including car manufacturers, Thailand’s rice industry and even tourism.

Read the report and contact us for more information about our products for financial institutions and corporations.

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Four Twenty Seven’s ever-growing database now includes close to one million corporate sites and covers over 1800 publicly-traded companies. We offer subscription products and advisory services to access this unique dataset. Options include data feeds, an interactive analytics platform and company scorecards, as well as custom portfolio analysis and benchmarking.

Assessing Exposure to Climate Risk in U.S. Municipalities

May 22, 2018 – 427 REPORT. Cities and counties are bearing the costs of the sixteen billion-dollar disasters in the United States in 2017, raising concerns over the resilience of municipalities to the impacts of climate change and associated financial shocks. Credit rating agencies are increasingly integrating physical climate risk into their municipal rating criteria; however, they lack concrete metrics that compare and assess which municipalities are exposed to climate impacts. Four Twenty Seven’s new local climate risk scores provide comparable, forward-looking data to fill this gap. This report discusses our approach to measuring exposure to climate hazards and highlights cities and counties most exposed to the impacts of climate change.

Following Hurricane Harvey, Moody’s downgraded Port Arthur from A1 to A2 due to its “weak liquidity position that is exposed to additional financial obligations from the recent hurricane damage, that are above and beyond the city’s regular scope of operations.” (Moody’s). This follows the recent trend of rating agencies increasingly considering climate change and past extreme weather events in their evaluations of U.S. cities. While this consideration is an important step, their evaluations could be better informed by incorporating forward-looking comparable data on the climate risks that impact these municipalities.

Featuring Four Twenty Seven’s new local level exposure scores, our report Assessing Exposure to Climate Change in U.S. Munis, shares key findings from our scoring of all 3,142 U.S. counties and the 761 cities over 50,000 in population. The research results are based on Four Twenty Seven’s market-leading expertise in five major climate categories, including cyclones/hurricanes, sea level rise, extreme rainfall, heat stress, and water stress. “This new dataset provides a comprehensive suite of risk scores to better inform rating and pricing decisions,” says Emilie Mazzacurati, Founder & CEO. “We believe that our analytics will be very helpful for all market participants, including muni bond investors, local governments, and ratings agencies.”

This report highlights specific cities and counties most exposed to each climate hazard and also discusses regional trends and economic sensitivities that may exacerbate a muni’s vulnerability.  “Climate risk is increasingly a part of our credit analysis for municipal issuers across the country,” said Andrew Teras, senior analyst at Breckinridge Capital Advisors. “The climate risk scores developed by Four Twenty Seven provide a comparable way to evaluate climate exposure and will give us another factor for assessing our investment universe.”

Key Findings

  • Sea Level Rise: The mid-Atlantic, particularly New Jersey, Virginia, North Carolina and Florida, has the highest exposure to coastal flooding in the United States, with the Bay Area and Pacific Northwest also highly exposed in several of their coastal cities and counties.
  • Cyclones/Hurricanes: The majority of cyclone risk in the United States is concentrated in the Southeast, given its geographic proximity to the Gulf of Mexico and the tropical Atlantic Ocean. The coastal Mid-Atlantic and Northeast are also exposed to cyclones, but they tend to be less frequent than in the Southeast and somewhat weaker on average after interacting with land or cooler ocean waters.
  • Extreme Rainfall: The Midwest is particularly exposed to heightened flood risk due to changing rainfall patterns. Recent advancements in attribution science show extreme rainfall to be the main driver of recent floods rather than 20th century agricultural practices, as was largely believed to be the case until recently.
  • Heat Stress: The highest heat stress scores tend to be centered in the Southeast and Midwest, concentrated in Missouri and western Illinois and fanning out to the Great Plains, Mississippi River Basin, and Florida.
  • Water Stress: Key watersheds for agricultural production such as the Central Valley aquifer system in California and the Ogallala Aquifer in the Great Plains are highly exposed to water stress. The agriculturally-dominated areas of Bakersfield, Delano, and Visalia, CA along the Central Valley Aquifer are among the ten cities most exposed to water stress. Similarly, municipalities along the Ogallala Aquifer in the Great Plains also rely heavily on agriculture and are among the most exposed to water stress.

Download the report.

Download the press release.

Lenders’ Guide for Considering Climate Risk in Infrastructure Investments

Climate change poses multifaceted physical risks for infrastructure investors, affecting revenue, maintenance costs, asset value and liability. According to the New Climate Economy report, global demand for new infrastructure investment could be  over US$90 trillion between 2015 and 2017. It is becoming increasingly clear that climate change must be considered in all infrastructure investment and construction.

Four Twenty Seven, in collaboration with our partners Acclimatise and Climate Finance Advisers, published a “Lenders’ Guide for Considering Climate Risk in Infrastructure Investments” to explain the ways in which physical climate risks might affect key financial aspects of prospective infrastructure investments.

Climate Change and Infrastructure

The guide begins with a discussion of climate risk, acknowledging that climate change can also open opportunities such as improving resource efficiency, building resilience and developing new products. It provides a framework for questioning how revenues, costs, and assets can be linked to potential project vulnerability arising from climate hazards.

Revenues: Climate change can cause operational disruptions that lead to a decrease in business activities and thus decreased revenue. For example, higher temperatures alter airplanes’ aerodynamic performance and lead to a need for longer runways. In the face of consistently higher temperatures, airlines may seek airports with longer runways, shifting revenue from those that cannot provide the necessary facilities.

Costs/Expenditures: Extreme weather events can cause service disruptions, but can also damage infrastructure, requiring additional unplanned repair costs. For example, storms often lead to downed power lines which disrupts services but also necessitates that companies spend time and money to return the power lines to operating conditions.

Assets: Physical climate impacts can decrease value of tangible assets by damaging infrastructure and potentially shortening its lifetime. Intangible assets can be negatively impacted by damages to brand image and reputation through repeated service disruptions.

Liabilities: Climate change is likely to pose increasing liability risk as disclosure and preparation requirements become more widespread. As infrastructure is damaged and regulations evolve, companies may face increased insurance premiums and costs associated with retrofitting infrastructure and ensuring compliance.

Capital and Financing: As expenditures increase in the face of extreme weather events, debt is also likely to increase. Likewise, as operations and revenues are impacted and asset values decrease, capital raising may become more difficult.

The guide also draws attention to the potential opportunities emerging from resilience-oriented investments in infrastructure. There are both physical and financial strategies that can be leveraged to manage climate-related risks, such as replacing copper cables with more resilient fiber-optic ones and creating larger debt service and maintenance reserves.

Climate Risks and Opportunities: Sub-Sector Snapshots

The guide includes ten illustrative “snapshots” describing climate change considerations in the example sub-industries of Gas and Oil Transport and Storage; Power Transmission and Distribution; Wind-Based Power Distribution; Telecommunications; Data Centers; Commercial Real Estate; Healthcare; and Sport and Entertainment. Each snapshot includes a description of the sub-sector, an estimation of its global potential market, examples of observed impacts on specific assets, and potential financial impacts from six climate-related hazards: temperature, sea-level rise, precipitation & flood, storms, drought and water stress.

Commercial real-estate, for example, refers to properties used only for business purposes and includes office spaces, restaurants, hotels, stores, gas stations and others. By 2030 this market is expected to exceed US $1 trillion per annum compared to $450 billion per annum in 2012. Climate impacts for this sub-sector include hazard-specific risks and also include the general risk factor of climate-driven migration which drives shifts in supply and demand in the real estate market.

As heat waves increase in frequency, people will likely seek refuge in cool public buildings, leading to increasing property values for those places such as shopping malls that provide air-conditioned spaces for community members. Increasing frequency and intensity of storms may damage commercial infrastructure, leading to recovery costs and increased insurance costs. Real estate managers may have to make additional investments in water treatment facilities to ensure the viability of their assets in regions faced with decreased water availability. An example of the financial impacts of climate change on this sub-sector can be seen in Houston after Hurricane Harvey. After the hurricane hit Texas in August 2017, approximately 27% of Houston commercial real estate was impacted by flooding and these 12,000 properties were worth about US$55 billion.

Download the Lenders’ Guide. 

For more guidance on investing for resilience, read the Planning and Investing for a Resilient California guidance document and the GARI Investor Guide to Physical Climate Risk and Resilience.