Given the sustainability-related concerns facing the real estate sector, ESG framework has been given strong weightage to prepare for climate change. However, experts have suggested that for real-estate sector to become future proof and sustain itself in the long run, the ESG framework is not fully complete – The missing piece of the puzzle is ESG+R, wherein "R" refers to “resilience” - While the letter has yet to establish itself as complete as "E", "S", and "G", resilience remains an urgent topic. As far as the current knowledge goes, resilience has been directly co-related with effective management of physical climate risk and transition risk. Around the world, the frequency, intensity and impacts of natural disasters have increased. In such a scenario, the ability of the building stocks and businesses to optimally prepare for such events and quickly return to full operations—is a quality known as resilience.
In the past few years, "R" has gained significant traction amongst all sectors, with real estate standing out as physical assets face some of the most significant risks. The scale of catastrophe the exposure to physical climate risk causes is overwhelming.
According to Swiss Re Group, the total losses from extreme weather events in 2022 accounted for…
…growth in the destruction caused by wind-fires in the western US states to buildings and other structures over the past decade
Between 2017 and 2021, ValuePenguin study revealed that weather-related property damages reached…
From the outlook perspective, this becomes an even bigger concern once we review the facts associated with current building stocks worldwide and their proximity to high-risk areas and the loss to real-estate it could trigger.
90% of world’s biggest firms will have at least One asset Exposed to climate risk by 2050
According to S&P Global, an estimated 60% of S&P 500 index companies' buildings face high risk of climate-related losses
More than half of the US building stock are in places prone to natural disasters
Level of concern with investment impact of climate risk (asset owners):
As a result of this rising awareness and piling up losses, climate risk / carbon is flagged as the biggest issue amongst asset owners over any other environmental, governance or social theme
Source: FTSE Russell (2021)
Concern over investment value at exposure to climate change varies marginally across regions, but globally about 86% of the asset owners are concerned about this issue
The concern reaches over 90% amongst EMEA and APAC centered asset owners
Comparatively, North America owners are least concerned
Lack of an industry-wide consistent approach for risk assessment:
Assessing the value-at-risk (VaR) of the portfolio, , identifying risk reduction measures, undertaking actions deemed cost-effective and communicating such actions to tenants can help building owners and managers serve their communities, while also providing a value to their occupants.
However, asset owners are currently slow to react to this. To price risks accurately, investors and asset managers must understand a company’s exposure to physical climate risks and how a company plans to adapt to, mitigate or manage those risks.
- At present, this is the biggest problem as the industry lacks a standard framework to assess risk exposure – As a result, different approaches and models are used which yield different outcomes with inconsistencies of great magnitude
- In such a scenario, real estate managers, investors, developers, and others need to identify a reliable partner to be able to leverage the data from climate analytics tools to make more informed decisions
- Since the market and competition is still in an emerging phase, it demands robust knowledge to identify an analytics provider that has tangible and proven offering
The good news is there are numerous vendors in the market that are taking experimental steps to address this issue and create a holistic - packaged offering that addresses entire spectrum of risk reporting, exposure and VaR. For instance:
- Measurable, a leading provider of portfolio ESG reporting solutions, recently added Physical Climate Risk Exposure (PCRX) capabilities by partnering with Moody’s analytics
- In Sep 2022, S&P Global, an analytics solutions provider, launched an enhanced Physical Risk Exposure Scores and Financial Impact dataset to support and manage the physical and financial exposure of corporates and portfolios to climate change
How Evalueserve can help:
Evalueserve has strong knowledge and expertise in assessing the physical climate risk and transition risk market and can help with the identification of best-fit climate risk modelling provider in a particular region. This requires in-depth understanding of capabilities that these vendors provide, and we have in-house experts to do this benchmarking for you.
When selecting these tools, some of the core capabilities need assessment including:
- Carbon foot printing capabilities
- Carbon pricing risk
- Carbon tax scenario analysis
- Energy transition modelling
- TCFD-reporting capabilities
Continuous tracking: We can help you with continuous tracking of these weather events and the loss such events could bring to your portfolio.
Customized dashboard: We can also create custom dashboards to provide you with detailed insights / facts on the climate risks facing your portfolio and understand the whole spectrum of risk across regions in a quick and user-friendly view.
