As the 26th United Nations Climate Change Conference of the Parties (COP26) continues this week, real estate industry leaders are paying more attention than ever to sustainability and climate change. Rising temperatures, rising oceans, and increasingly severe weather are putting the built environment at risk.
“This is a multitrillion-dollar problem to solve,” says Billy Grayson, executive vice president of the ULI Center for Sustainability and Economic Performance. “The better we get at forecasting this risk, the better we can price it and mitigate it.”
In 2020, the United States experienced a record-breaking 22 weather and climate disasters that caused more than $1 billion in damages. The previous annual record was 16 events, each causing $1 billion in damages, recorded in 2017 and 2011. Those 2020 events, including tropical cyclones, severe storms, drought, and wildfires, caused a record total of $95 billion in damages.
The frequency of such events has accelerated over the past decade. Since 1980, the United States has experienced 285 weather and climate disasters causing damage totaling at least $1 billion, adjusted for inflation. The cumulative cost for these events is $1.9 trillion.
As the frequency of such climate-driven events increases, investors increasingly are asking about the climate risk exposure for a property or portfolio. At the same time, industry experts believe that some governments will start requiring climate risk disclosures within the next few years.
Environmental, social, and governance (ESG) professionals have had to quickly become experts in climate risk assessments, turning to an increasingly wide offering of climate risk analysis providers. But when a person or firm tries to select the right partner, comparing apples to apples is nearly impossible.
“Climate risk science is evolving rapidly, and there are an increasing number of providers in the market using different assumptions and data sources, leading to a wide divergence in results,” says Elena Alschuler, head of sustainability for the Americas at LaSalle Investment Management.
LaSalle compared several providers’ assessments of a group of assets under its management and evaluated the methodologies in depth to understand their strengths and limitations. The firm has found wide variances in the analytical approaches to modeling climate change as well as to how physical risk is translated into financial impact. Many real estate investors and managers are experiencing the same issues.
“In the past when we bought a building, you did a property assessment, and you’re good to go. If there’s something broken, you work it into the price. But that’s not what climate change is,” says Jonathan Flaherty, global head of sustainability and building technology innovation at Tishman Speyer.
Time horizons are getting much longer and variables more wide-reaching. Among the many providers of climate risk assessments, no standard baseline exists for measuring changes.
“There is internal consistency within one provider’s results,” says Aleksandra Njagulj, global head of ESG for real estate at DWS. “However, one can’t make a direct like-for-like comparison between providers, even though they might be using very similar risk terminology.”
The Issues
As LaSalle began comparing offerings from providers of climate risk assessments, the team realized that comparing the results was difficult. Hazards for the same assets were coming back with huge variances.
“I like to think about the level and the trend. The starting point is just as important as how it’s going to change,” says Brian Klinksiek, LaSalle’s head of research and strategy for Europe. “Forecasting as an exercise is fundamentally something based on historical data in the past and using it to create a view of the future, but we don’t have any common frame of reference. We have neither the level nor the trend.”
Given the wide variances, working with providers of risk assessments raises even more questions, such as the following:
- What data sources are the providers using?
- Are they including national, regional, and local measures for mitigation?
- Are the assessments based on a one-, 10-, or 20-year time horizon? What baseline are they using to measure change?
- What temperature-increase scenarios are they using?
- Where are they acquiring their climate-change forecast data?
- Is the forecast for a specific asset, or just for the generic location?
And then the question is what is next once the report is done. What could be done to make the property more resilient? How does the risk rating translate to financial exposure? The results received from providers are not standard.
Understanding all these variables requires getting under the hood of the service provider’s software, which often can only be done after a contract and a nondisclosure agreement are signed.
“You have to know who you’re partnering with, what their models show, and how to use their models for decision-making,” says Laura Craft, head of global ESG strategy at Heitman. “Data analytics are a starting place, not the ending.”
And the goal is not for all the climate risk forecasts to be the same: variance is expected and welcome.
“These differences are insightful when forecasters are transparent about how different assumptions and views of the world lead them to different conclusions,” Klinksiek says. “But with the climate risk providers, there is less transparency so far, as they often base their projections on different underlying historical data series, use different assumptions, and define key metrics differently, which makes comparisons difficult and less insightful.”
When the risks are presented to investors, regulators, or their own team, the possibility also exists of someone cherry-picking items from assessments to make a property appear more or less at risk than it actually is.
“Because it’s so difficult to compare [assessments], extra diligence is needed in order to choose the best approach,” Njagulj says. “Many factors come into play, and lack of resources and financial constraints might mean a cheaper or less robust solution is selected.”
In addition, currently if a building is improved, most providers will not update the rating to reflect the steps taken to mitigate climate risk. “We need to be able to show our clients that we are actively mitigating the risk,” Njagulj says.
The Path Forward
The climate risk assessment itself is not the goal; it is just the first step on the path to climate resilience for investors.
“Everybody should have climate software in place by now,” says Sara Neff, Lendlease’s head of sustainability for the Americas region. “But it has to be backed up by action, and that action should be policy and procedural changes, as well as physical changes.”
Adapting the built environment for climate resilience would save trillions of dollars over the next decade. According to PwC, the latest Intergovernmental Panel on Climate Change (IPCC) report made clear that even in the best-case scenario, global conditions will still worsen and climate-related impacts will increasingly cause business and societal disruption. The recently passed $1.2 trillion Infrastructure Investment and Jobs Act does include $47 billion for “climate resilience.”
“Even if we get to net-zero carbon emissions by 2050, the next 100 years is going to be difficult,” Grayson says. Inaction is not an option, and climate retrofitting is already showing results.
“This isn’t a future thing. These climate risks are affecting properties right now,” says Daniele Horton, founder and president of Verdani Partners. “It’s important to take steps to mitigate them and make those properties more resilient.”
A few years ago, Verdani Partners conducted a climate risk assessment to help a client in Houston mitigate potential risks. The property owner took action, installing flood gates and pumps. When Hurricane Harvey hit Texas in 2017, causing $125 billion in damages, the client’s properties withstood the storm with no major damage to the buildings and no major flood insurance claims.
Many real estate professionals are calling for standardization of how climate risk is measured and reported. Precedent exists for intermodel comparisons in other areas of climate science and in energy markets, real estate economics, employment trends, and other areas.
“We still need to make decisions while also encouraging better standardization,” says Alschuler. LaSalle is moving forward while addressing the uncertainty, selecting the approaches that it believes have the strongest analysis, while supplementing findings with additional analysis as needed and continuing to monitor the options as they evolve.
“In other areas of forecasting, it is easier for users to tell what drives the differences in predictions and select which approach makes the most sense for them,” Alschuler says.
Most providers of climate risk assessments are effective at identifying higher-risk assets that need more consideration. Gaining a deep understanding of the strengths and limitations of the analysis by getting under the hood, so to speak, will make the results more useful.
“We’re managing physical assets, not just for financial reasons but because this is where people will find shelter,” Njagulj says. “The primary social issue is resilience of our built environment.”
—
ULI and LaSalle will be further researching the topic of climate change risk assessments for a report to be released in 2022. If you would like to weigh in, email Billy Grayson at [email protected].
—
GRACE DOBUSH is a freelance journalist based in Berlin. In addition to writing for Urban Land, she has contributed to Fortune, Wired, and Quartz, and is the editor of the ADP ReThink Quarterly, a global publication about the power of the paycheck.
