Physical Climate Risk Assessment

EVORA

EVORA’s Climate Resilience team has been advising clients on physical, transition and litigation risks associated with climate change – and how these affect the resilience of financial investments. To this end, the EVORA team has been evaluating which specialist data analysis partner to work with. The majority of data services available today are focused on analysing physical risks, like the extreme weather impacts of heat, flooding and storms. Over the last month it seems like a new data service has been launched each week and we’ve spoken to 10 suppliers so far.

The uptake of the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) for managing Climate Risk in financial investments has been rapid, although recent surveys suggest that the real estate sector is lagging behind. For those companies which complete the annual GRESB survey, the introduction of a Climate Resilience module shows the increasing importance of this topic and it will be interesting to see if this become a mandatory inclusion in 2021.

In our recent conversations with real estate investors and investment managers, there are varying degrees of maturity around how to identify and manage climate risk. There is clear investor demand, from Europe, Asia and North America, that these risks should be disclosed and managed, but the investment managers are still defining methodologies and in most cases this is still a top-down approach. It is revealing to see that rating agencies, like Moody’s, MSCI and S&P, have all made investments or acquisitions in data on the physical risks of climate change.

Our approach to assessing the materiality of physical risks is in three broad phases:

A portfolio or fund screening of a range of weather hazards to prioritise a deeper investigation of the high-risk assets, which can now be quickly produced by a data service partner,
An assessment of the impact pathways to create a shared understanding of how the hazard risk could impact the drivers of asset value, and
A detailed investigation and assessment at asset-level of the specific, material hazards which impact value and are prioritised from 1 & 2 above.

Today, there is not an existing data partner which can deliver on all three of these phases end-to-end so we are working with partners who are ready to collaborate with EVORA to deliver the best service. The deeper analysis of understanding the value-at-risk is still emergent and fluid for investors, although there is a better understanding amongst real estate insurers based on damage costs and claims data. Our expectation is that this market for data analysis will develop significantly over the next 18 months.

Our evaluation so far has identified partners with varying levels of market-readiness, which we have grouped into the following:

SaaS-ready – those partners who can provide an online physical risk screening of assets and portfolios today with a standard price,
Specialists – bespoke or tailored analysis with a one-off price, and
Start-ups to watch – those who have interesting new offers, but are still being developed and priced before they move into one of the other two categories

To structure our evaluation of Physical Climate Risk Data Analysis Services we considered the following criteria:

Technical –the use of appropriate science-based methods to assess climate risk and an evidence base relevant to our clients’ assets with transparent sources. Ideally, the data would have some form of 3^rd-party assurance.
Geo-scale and resolution – the geographic scale and data resolution appropriate to the hazard category and the nature of the engagement. Visualization of risk must be clear.
Industry alignment – the partner should be able to demonstrate that their solution is consistent with industry standards, regulations, guidance and frameworks where appropriate – for instance TCFD recommendations and CDSB/GRESB requirements. The assessment must be relevant to the type of real asset, i.e. commercial office, residential, power network, road, etc.
Client relevance – the partner must be able to present their data/software in a way which is commercially relevant to our clients’ business and aids clear communication, ensuring that it aligns with our four engagement models.
Commercial & delivery model – the partner model must fit the way in which EVORA delivers consulting and SIERA services and provide value to our clients.

If you are interested in receiving advisory services from our Climate Resilience team to understand how to manage and disclose climate-related financial risk, we would be happy to share more of our observations.

EVORA can provide these services to get you started on your climate resilience journey: