How physical climate risk can impact the value of your real estate assets

Understanding physical climate risk is crucial to make the transition towards a sustainable and resilient infrastructure for your assets. We spoke to Phil Fieldhouse, a Senior Sustainability Consultant at EVORA Global, to gain insight into how physical climate risk impacts asset value and what actions real estate players can take to safeguard their investments in the long term. 

Hi Phil, what’s the current state of play for physical climate risk?

Climate change is ramping up in intensity, with devastating impacts becoming more frequent, severe, widespread, and costly. Physical climate risks (severe storms, rising sea levels, extreme heat, and wildfires) and transitional climate risks (evolving regulations, access to resources, credibility, and changes in worldwide markets) combined are threatening to impact the investment-grade of your infrastructure on a global scale.

How does physical climate risk affect real estate?

Physical climate risk refers to the potential damage and disruption to your assets and infrastructure caused by climate change-related events. These heat, water, and wind-related risks are typically classified into two categories: acute (short-term, extreme events like storms or floods) and chronic (long-term, gradual changes like rising sea levels or increasing temperatures).

Real estate assets are particularly vulnerable due to their fixed location, long lifespan, and the potentially expensive or complex measures needed for smart adaptation. These impacts can be operational (affecting property performance) and financial (affecting asset value and market position).

What do our real asset investors say about physical climate risk?

Our latest IRIS reports reveal some noteworthy statistics on the relationship between climate change and real estate investment. In our 2021 IRIS report, we found that a significant majority of investors (60%) considered climate-resilient location as a top priority for safeguarding the value of their assets in the long term.

Moreover, our 2022 IRIS report shows that almost half of the surveyed investors (46%) have already experienced the impact of extreme weather events on their investments. For example, investors have seen physical climate risk impact asset values, through changes in capital value, changes in income projections, and changes in voids and default rates.

Larger investors (>$5bn AUM) are also aware of opportunities in climate resilience, noting the rise in demand for green buildings as an opportunity related to climate resilience. Indeed, green building certifications demonstrate a higher level of consideration for broad sustainability within the design and operation of assets. Given the overlap between sustainability and climate resilience, addressing one can sometimes – but not always – address the other.

A recurring theme revealed in these surveys revolves around the importance of making smart ESG investment decisions today to account for the potential impact of climate change on future real estate asset values tomorrow. Staying informed about physical climate risk is a crucial first step towards protecting your bottom line.

How can real estate investors better understand physical climate risk?

To better understand and manage physical climate risk, start by identifying the exposure of your assets to extreme weather events based on your location and local context. Has your asset experienced an extreme event in the past? If so, this is a good indication that the asset is exposed to future risk.

If not, there are various resources – both free and paid – to identify future risk to hazards such as flooding, or temperature extremes at your location. Examples of such services vary between geographies, but examples of resources include global publications from the IPCC, national/regional projections from organisations such as GERICS, and more targeted tools like the UK Environment Agency’s Long Term Flood Risk Map.

Armed with data, you can start to evaluate the likelihood and severity of climate hazards in the area surrounding your properties – and consider how the local environment might affect your exposure. For example, if regional data indicates a significant increase in precipitation intensity, an asset would be highly exposed to pluvial flood risk. Local factors such as flood management infrastructure, soil type, and site elevation can all interact to change the true exposure of an asset to this risk.

Next, your need to understand the specific characteristics of your buildings. This includes asset type, age, maintenance history, use, and design. By understanding building design and performance, you can introduce actions within an Adaptation Plan to enhance their resilience and manage potential impacts from climate-related events outside your control.

Can we manage physical climate risk and if so, how do we start?

There are many different options available to manage risk and improve resilience to physical risks. The exact solutions available to you will depend on where you are in your investment cycle, the specific exposure risk profile of your portfolio, and the vulnerability characteristics of your assets.

For risk management, familiarity is key. Understanding how climate risk can influence the investment performance of your real assets requires intimate knowledge of assets, investment strategy, decision making, and climate change. While this may feel complex and overwhelming at first, the power unlocked through a deeper understanding and stronger evidence base for decision making enables asset managers to make more informed investment decisions and avoid shocks relating to the financial performance and position of the fund.

Consideration and disclosure of physical climate risk is also becoming a requirement of disclosure frameworks (i.e., TCFD) and legislation. In Europe, the EU Taxonomy sets out criteria for economic activities to be considered sustainable, which includes action on climate adaptation. Aligning physical risk assessments and adaptation plans to the requirements of the EU Taxonomy – or a local equivalent in your jurisdiction – is a good place to start to demonstrate that you’re acting on climate adaptation.

How can EVORA Global help you safeguard your assets from climate change?

EVORA Global is here to help real estate investors navigate physical climate risk. Our innovative Physical Climate Risk (PCR) Assessment Service is designed to help you identify, assess, and manage these risks. We combine location-based global climate modelling with building-specific insights to evaluate the potential impacts on your properties – and identify best-practice adaptation measures.

Our team of expert PCR consultants are also on hand to collaborate with your team to develop tailored physical risk climate adaptation plans. By combining our experience in real asset investments, climate resilience, and building performance, we can help you improve the resilience of your portfolio in response to our changing climate.

Find out more about Physical Climate Risk and download our PCR Assessment Brochure to discover how our dedicated PCR team can help you protect your real assets and investments ahead of your competitors.