How to assess the risk of climate change for real estate investment


Several analytical tools and data sources have emerged as the need to factor climate-related hazards into real estate asset management has increased due diligence. But it's a new task for investors to sort through the complexities and differences among these options.

Climate-risk data

Low inter-provider reliability 

Different sources emphasize distinct physical climate concerns and utilize varying weather model projections. While there was more agreement between service providers regarding some high-risk regions, significant disparities occurred when looking at regionally diverse portfolios. Climate change may affect a property portfolio, thorough research is essential to determine how this can occur.

Not many models contain transition risk.

Due to the complexity of predicting future climate policy responses. However, while estimating the long-term energy costs of properties and the expenditures required to decarbonize them, investors should consider transition risks like the possible introduction of carbon pricing.

Some climate-resilience measures might not be addressed

Most climate provider evaluations don't automatically factor in precise efforts taken at the property and community levels to lessen exposure to climate change, like floodgates and fire-resistant planting. Therefore, the predicted climatic vulnerabilities may be too high.

Indirect risk is overlooked.

Many data providers account for the direct effects of global warming on individual properties, ignoring the indirect implications on supply chains and local economies.

Guidelines for Assessing Climate-Related Risk Data

Given these obstacles, real estate investors should consider the following:

First, your investment horizon needs to be made clear.

Variations in projected greenhouse gas (GHG) emissions and their associated base years are frequently factored into climate models (e.g., 2030, 2050, or 2090). As a result, some real estate investors may benefit by looking at the market over the long run. However, investors should be aware that the predictive power of models declines with increasing time horizons.

Find the most pressing risks.

Different forms of climate dangers are taken into account by data suppliers. For example, investors with a lot of money riding on coastal real estate may want to learn about cyclones and rising ocean levels. Those who have investments inland may be curious about the effects of heat waves and freezing temperatures. Also think about the interconnectedness of potential dangers.

Keep in mind that there isn't a universally accepted definition of risk.

For example, when it comes to heat stress, some data sources may reveal the total yearly temperature rise that is predicted. In contrast, others may reveal the days per year the property would be subjected to excessive heat. Therefore, investors must analyze findings and select service providers based on the parameters most important to their portfolios.

Transition issues should not be overlooked.

Real estate investors have traditionally been concerned about physical climate risks like extreme weather events. However, as the global financial system moves toward decarbonization, low-carbon and emission regulations can potentially affect NOI and EVs.

Investors in real estate now have access to a more robust and widely-available risk management resource: climate models. As a result, real estate investors can gain a complete picture of their portfolio's vulnerability to escalating physical and transitional climate hazards by familiarizing themselves with the spectrum of options available to them.