By Will Bugler
The known and growing risks posed by climate change to large-fixed asset investments, has done little to put off some lenders from financing real-estate in some of the world’s most vulnerable areas. Such actions are coming under increasing scrutiny, with many investors and forecasters calling them ‘insane’. In a recent report, the Urban Land Institute and real-estate investment management firm Heitman assess the potential impacts of climate change on real estate assets and give some direction as to what investment managers and institutional investors might do to understand and reduce their climate risk exposure.
The report shows that while although many assets held by real estate investors are in cities vulnerable to the effects of climate change, most still rely on insurance to guide their risk decisions. However, as premiums are based on historical events, they are not a robust guide to climate change risk to investments. The report shows that physical risks from catastrophic events and chronic climate risk from slower changes to weather patterns, pose direct risk to real estate investments.
Derived from a series of interviews with leading institutional investors, investment managers, investment consultants and others, the report also shows that a growing group of investors and investment managers are exploring new approaches to find better tools and common standards to help the industry get better at pricing in climate risk in the future. These include:
- Mapping physical risk for current portfolios and potential acquisitions;
- Incorporating climate risk into due diligence and other investment decision-making processes;
- Incorporating additional physical adaptation and mitigation measures for assets at risk;
- Exploring a variety of strategies to mitigate risk, including portfolio diversification and investing directly in the mitigation measures for specific assets; and
- Engaging with policymakers on city-level resilience strategies, and supporting the investment by cities in mitigating the risk of all assets under their jurisdiction.
Such tools and methods are becoming necessary to reassure institutional investors and other lenders that their investments are secure. The report points to a series of resources, standards and guidelines that form part of a rapidly developing toolkit that can be used to better understand and manage climate risk.
It is becoming increasingly likely that investors will be expected, and indeed required, to ensure appropriate risk management measures are in place to protect investments from climate risk exposure, and to encourage more robust practices in real-estate construction and development.
A copy of the ULI report “Climate risk and real estate investment decision-making” can be found here.