A New Framework for Managing Climate Risk
Real estate practitioners can better manage climate risk in their portfolios by incorporating climate change threats including wildfires, hurricanes and excessive heat into their business models, the Urban Land Institute and LaSalle Investment Management reported.
ULI and LaSalle surveyed real estate managers and climate data providers for their report, How to Choose, Use, and Better Understand Climate-Risk Analytics.
“Over the past few years, climate analytics tools have transformed how investors can assess, price and mitigate climate risk,” said Billy Grayson, Executive Vice President for Centers and Initiatives at ULI. “As with all new tools, it will take some time for real estate developers and investors to identify the best ways to apply these tools to real estate decision-making. Learning from the successes and challenges of early adopters will help the real estate community as a whole, and we hope this report can serve as a roadmap for those looking to better leverage these tools to manage climate risk in their assets and portfolios.”
LaSalle Americas Head of Sustainability Elena Alschuler called dealing with climate risk a collective effort. “We all benefit from consistency and transparency,” she said. “Alignment on key terms and methodologies is critical to the industry’s effort to assess and address climate risk, which should ultimately benefit investors through improved returns.”
How to Choose, Use, and Better Understand Climate-Risk Analytics includes a “climate assessment roadmap” for practitioners seeking to optimize their climate risk mitigation practices. ULI said the roadmap should help the real estate industry:
–Assess variation among climate risk providers in terms of their ability to meet strategic objectives.
–Interpret physical climate risk results including the potential financial impact of a property experiencing climate-related damage.
–Integrate risk-assessment strategy with acquisition, development, financial reporting and asset and portfolio management teams.
The report also provides four key takeaways on the state of climate risk assessment in real estate:
–Current risk metrics are inconsistent. “Often, different climate risk analytics produce widely disparate risk scores for the same property, sometimes by orders of magnitude,” the report said.
–Bridging the science-business gap. The translation of climate science into applied real estate industry practices is still in its early stages and firms are trying different approaches to integrate climate risk across investment, asset management and disposition strategies.
–Rapid acceleration of market value impacts. “While the impact of climate risk on current asset prices is not yet apparent in the market, institutional real estate managers are starting to incorporate it, therefore many believe the impacts will become increasingly visible,” the report said.
–Transparency is crucial. Better understanding and public discourse on physical risk in pricing will push the industry closer to uniform practice and standards.
“We strongly believe that the impacts of climate risk are material to our investment performance, and need to be proactively taken into consideration to ensure our investments are prepared for future risks, legislation and client demand,” said Brian Klinksiek, LaSalle Head of European Research & Global Portfolio Strategies. “While there is still uncertainty in the market around data transparency, which tools to use and what policy impacts might be, one thing remains clear: now is the time to be having these conversations and taking action.”
