Lack of transparency, regulations call into question real estate climate risk assessments

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Houston’s Bayou River invaded its banks after Tropical Storm Harvey in 2017 (Shutterstock)

As the 26th United Nations Conference of the Parties on Climate Change (COP26) continues this week, real estate leaders are paying more attention than ever to sustainability and climate change. Rising temperatures, rising oceans and increasingly severe weather conditions are putting the built environment at risk.

“This is a multibillion dollar problem to solve,” says Billy Grayson, executive vice president of the ULI Center for Sustainability and Economic Performance. “The better we anticipate this risk, the better we can price and mitigate it.”

The United States experienced a record 22 weather and climate disasters in 2020 that caused more than $ 1 billion in damage. The previous annual record was 16 events each causing $ 1 billion in damage, recorded in 2017 and 2011. These 2020 events, including tropical cyclones, severe storms, droughts and wildfires, caused a record total of $ 95 billion in damages.

The frequency of these 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 of these events is $ 1.9 trillion.

As the frequency of such climate-related events increases, investors are increasingly asking questions about the exposure to climate risk of a property or portfolio. At the same time, industry experts believe some governments will begin to require disclosure of climate risks in the coming years.

Environmental, social and governance (ESG) professionals quickly had to become experts in climate risk assessment, turning to an increasingly wide range of climate risk analysis providers. But when a person or business is trying to select the right partner, comparing apples to apples is almost impossible.

“The science of climate risk is evolving rapidly and a growing number of vendors in the market are using different assumptions and data sources, leading to a wide divergence in results,” says Elena Alschuler, Sustainability Manager for the Americas at LaSalle Investment Management.

LaSalle compared the ratings of several vendors of a group of assets under his management and evaluated the methodologies in depth to understand their strengths and limitations. The company found big differences in analytical approaches to modeling climate change as well as in how physical risk is translated into financial impact. Many investors and property managers face the same issues.

“In the past, when we bought a building, you did a property assessment and you’re good to go. If there is something broken, you make it part of the price. But that’s not climate change, ”says Jonathan Flaherty, Global Head of Building Sustainability and Technological Innovation at Tishman Speyer.

Time horizons are lengthening and variables are expanding more and more. Among the many providers of climate risk assessments, there is no standard benchmark for measuring change.

“There is internal consistency in a supplier’s results,” says Aleksandra Njagulj, Global Head of ESG for Real Estate at DWS. “However, you can’t make a direct comparison between suppliers, even if they use very similar risk terminology. “

The problems

When LaSalle began to compare the offerings of climate risk assessment providers, the team realized that it was difficult to compare the results. Risks for the same assets came back with huge spreads.

“I like to think about the level and the trend. The starting point is just as important as how it will change, ”says Brian Klinksiek, head of research and strategy for Europe at LaSalle. “Forecasting as an exercise is basically something that relies on historical data from the past and uses it to create a vision for the future, but we don’t have a common frame of reference. We have neither the level nor the trend.

Given the large differences, working with risk assessment providers raises even more questions:

  • What data sources do providers use?
  • Do they include national, regional and local mitigation measures?
  • Are the assessments based on a time horizon of one, 10 or 20 years? What benchmark do they use to measure change?
  • What temperature rise scenarios do they use?
  • Where do they get their climate change forecasting data?
  • Is the forecast for a specific asset or just the generic location?

And then the question is, when is the next time the report is done. What could be done to make property more resilient? How does the risk rating translate into financial exposure? Results received from suppliers are not standard.

Understanding all of these variables requires getting under the hood of the service provider’s software, which often can only be done after signing a contract and nondisclosure agreement.

“You need to know who you are 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 analysis is a starting point, not an end. “

And the goal is not that all climate risk forecasts are the same: variance is expected and welcome.

“These differences are telling when forecasters are transparent about how different assumptions and worldviews lead them to different conclusions,” says Klinksiek. “But with climate risk providers, there is less transparency so far, as they often base their projections on different sets of underlying historical data, use different assumptions and define key metrics differently, making difficult and less insightful comparisons. “

When risks are presented to investors, regulators, or their own team, it is also possible that someone is selecting items from the valuations to make a property appear more or less risky than it actually is.

“Because it is so difficult to compare [assessments], extra diligence is needed in order to choose the best approach, ”says Njagulj. “Many factors come into play, and lack of resources and financial constraints can mean that a cheaper or less robust solution is chosen. “

Additionally, currently, if a building is upgraded, most vendors will not update the rating to reflect actions taken to mitigate climate risk. “We need to be able to show our customers that we are actively mitigating risk,” says Njagulj.

The path to follow

Climate risk assessment in itself is not the goal; this is only the first step on the road to climate resilience for investors.

“Everyone should already have climate software in place,” says Sara Neff, sustainability manager at Lendlease 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 to climate resilience would save billions of dollars over the next decade. According to PwC, the latest report from the Intergovernmental Panel on Climate Change (IPCC) made it clear that even in the best-case scenario, global conditions will continue to worsen and climate-related impacts will increasingly lead to climate change. more business and societal disruption. The recently passed $ 1.2 trillion investment in infrastructure and jobs law provides $ 47 billion for “climate resilience.”

“Even if we reach zero net carbon emissions by 2050, the next 100 years will be difficult,” says Grayson. Inaction is not an option, and climate modernization is already working.

“This is not a matter of the future. These climate risks are affecting properties right now, ”explains Daniele Horton, founder and president of Verdani Partners. “It’s important to take steps to mitigate them and make these properties more resilient. “

A few years ago, Verdani Partners performed a climate risk assessment to help a Houston client mitigate potential risks. The owner took action by installing flood valves and pumps. When Hurricane Harvey hit Texas in 2017 causing $ 125 billion in damage, the client’s properties weathered the storm without any major building damage and major flood insurance claims.

Many real estate professionals are asking for standardization of the measurement and reporting of climate risk. There are precedents for inter-model comparisons in other areas of climate science and energy markets, real estate economics, employment trends and other areas.

“We still have to make decisions while encouraging better standardization,” says Alschuler. LaSalle is moving forward while addressing uncertainty, selecting the approaches that she believes present the strongest analysis, while complementing the results with additional analyzes as needed and continuing to monitor options as they arise. and as they evolve.

“In other areas of forecasting, it is easier for users to determine what explains the differences in forecasting and select the approach that works best for them,” says Alschuler.

Most providers of climate risk assessments are good at identifying high risk assets that need more attention. Gaining a thorough understanding of the strengths and limitations of the analysis by going under the hood, so to speak, will make the results more useful.

“We manage physical assets, not just for financial reasons, but because that’s where people will find refuge,” says Njagulj. “The main social problem is the resilience of our built environment. “

ULI and LaSalle will further research the topic of climate change risk assessments for a report to be released in 2022. If you would like to comment, email Billy Grayson at [email protected].

GRACE DOBUSH is a Berlin-based freelance journalist. In addition to writing for Urban land, she contributed to Fortune, Wired, and Quartz, and is the editor of ADP ReThink Quarterly, a global publication on the power of wages.


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