• Integrating Climate Risk Factors into Real Estate Investment Strategy
Investors & Developers

Integrating Climate Risk Factors into Real Estate Investment Strategy

Integrating Climate Risk Factors into Real Estate Investment Strategy

Having long languished in the ‘important but not urgent’ quadrant of real estate investors’ to-do lists, 2018 was the year that climate change, and its associated risks, finally made the executive agenda.

A survey of Davos attendees published by the World Economic Forum in January, for example, found that climate-related themes made up three of the top five risks perceived most likely to materialise in 2019, and four of the five thought likely to cause the most damage.

As the incidence of global climate shocks increases, regulation and reporting standards are demanding ever more information from investors on how they are addressing these risks.

Real estate investors must now consider the level to which they are exposed to both ‘physical’ risk as well as ‘transitional’ risk, meaning the risk that comes from changes to policy and market expectation. These risks may have downside implications for companies that have not yet taken appropriate action.

Of course, the line between addressing climate change risk and improving the sustainability metrics of assets can often be blurred, and with the need for all buildings globally to be carbon neutral by 2050 in order for countries to meet their Paris Climate Accord commitments, the two are inexorably linked.

To date, this has been viewed as a challenge with a time horizon substantially longer than investor holding periods. However, the creation of bodies such as the Task Force for Climate Related Disclosures and the rising popularity of GRESB, which in 2018 assessed over 79,000 real estate assets worth over $3trn USD, has reinforced that investors can no longer continue to delay addressing these realities head on. Inaction risks developing competitive disadvantage as reporting standards become either regulatory necessity or market demand driven standard practice.

Furthermore, even if the direct impact of these risks isn’t felt during existing holding periods, avoiding addressing these issues may lead to liquidity concerns in the future when assets are being sold and incoming investors consider climate risk as part of their due diligence process.

Investors wishing to preempt the climate risk to their portfolios should therefore consider:

  • Asset-level resilience to climate change-related threats
  • City-level resilience to these same threats
  • Their asset management strategy

These factors are already being considered and acted upon by some forward-looking investors, and should become a critical part of the investment approach going forward.

The above article is an excerpt from Cushman & Wakefield’s Global Investment Atlas 2019 report. To read the full report on Climate Change, download it here.

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