If there is one thing we’ve learnt from spending more time inside our homes over the last year, courtesy of these ‘unprecedented circumstances’, it is the importance of spending time outside.
The natural environment is a key part of our built environment. Access to green space has never been so desirable. And in our cities, where space is a premium and populations are growing, there are innovative ways to maximise our access to nature.
Encouraged by sustainable building certifications and a growing trend for biophilic design (the concept of increasing occupant connectivity to the natural environment), many buildings now incorporate additional greenery, with everything from your standard pot plant, to indoor trees and living walls and roofs.
The health and wellbeing benefits of increasing access to nature are well documented.
Improved air quality, increased productivity, and decreased stress are just a few of the most widely accepted. So it’s not surprising that research has also shown that increasing nature increases property values. We all know the rooms with the view attract a premium, and according to a report commissioned by the Natural Resources Defence Council, improved landscaping can add around 22% to the rental rates for retail buildings. And that’s before we account for the climate resilience impacts of incorporating green infrastructure – sustainable urban drainage systems help manage surface water flooding, living roofs can mitigate overheating and trees prevent soil erosion.
But we are realising the importance of nature at a critical time. Biodiversity is decreasing at an alarming rate. Between the combined pressures of climate change and humancentric land use, space for nature is dwindling and with it the enormous diversity of species on our planet. Indeed, scientists estimate that vertebrates have declined by an average of 70% in the last half-century.
Policy changes are moving in on the issue. The new London Plan brings with it the Urban Greening Factor, a measurement that will ensure London gets greener as it grows. On a larger scale, in the UK, the (much delayed and eagerly anticipated) Environment Bill will enshrine Net Biodiversity Gain into law, meaning that all new development must demonstrate an increase in nature compared to what was on site before.
In the investment space, we are seeing major changes too. Earlier this year France introduced a new disclosure regulation, Article 29, requiring French financial institutions to disclose biodiversity as well as climate-related risks. France’s Article 29 is a sign of what is to come in sustainable finance. Also established this year is the Taskforce on Nature-related Financial Disclosure. TNFD is a market-led initiative focused on standardising nature-related financial disclosures and mitigating biodiversity impacts. With TCFD we have seen a shift in climate-related financial disclosures, and TNFD is set to do the same for nature.
All this points to one thing: the next frontier in sustainable finance is nature.
If you would like to find out more, please get in touch with one of our ESG experts by contacting contactus@evoraglobal.com
https://evoraglobal.com/wp-content/uploads/2021/06/ash-from-modern-afflatus-NQ6Lh81BTRs-unsplash.jpg249600Alice Greenhttps://evoraglobal.com/wp-content/uploads/2017/06/EVORA-logo-for-small-applications-WHITE-300x172.pngAlice Green2021-06-08 10:30:152021-06-08 10:31:26Nature: the next challenge for sustainable finance?
Over a year has passed since the pandemic hit the UK and our workplaces changed dramatically. Increased homeworking has led to a heightened consciousness of the social impact that EVORA, as a company, can have on its people.
The past year has given us countless reasons for our health and wellbeing scales to tip off-balance. We have lost the regular exercise during our daily commute, have been torn away from our emotional support circles and are at a greater risk of anxiety, stress and depression than ever before. Before the pandemic, we would typically spend 90% of our time indoors and staggering 9.5 hours a day sat down. You can only imagine how these figures have increased since Lockdown #1. It’s become ever more important to stay on top of our fitness, our diets and our mindfulness during these tough times to ensure our physical health, mental health and emotional wellbeing endures the long journey back to normality.
That’s why EVORA staff chose to tackle the Feeling Fab in February Challenges. Over the course of 28 days, our staff pushed themselves to do heart-pumping exercise, get the nutritional benefit from switching to plant-based diets and practicing mindfulness.
Assigning metrics to social impact
Measuring and monitoring impact is key to implementing meaningful programmes. Demonstrating additionality – that you have meaningfully added to the lives of individuals – is arguably the most important aspect of human-centric sustainability reporting. EVORA have used some of our own activities to model reporting examples below.
Wellbeing Uplift
Through a month of activity (and nothing less than a bit of healthy competition), Feeling Fab in February encouraged our team to take part in a month of fitness, carbon-conscious eating and mindfulness. Together, and in only one month, we managed to achieve:
+148 additional mindfulness or meditation sessions
+88 additional workouts than we would have done
+84 additional days without meat or dairy than usual
‘’Fab February made me reflect on my current habits and encouraged me to make healthy changes to my daily routines!’’
EVORA employee
Our team felt the mental and physical benefits, as well as the benefits to social cohesion at a time when it’s easy to feel disconnected from colleagues. We are now looking for the next challenge to promote healthy habits in our home-working and beyond as we look to return to the ‘new normal’.
Social Value
We are very proud to announce that EVORA has achieved Planet Mark certification for the 7th year running. The Planet Mark is an internationally recognised certification based on sustainability standards and its mission is to help us all contribute to a thriving planet as a collective force. The certification represents an organisation’s commitment to sustainability programmes to actively reduce environmental and social harm.
For the past two years, we have also measured our social value contribution. Social value, by definition, is the net social and environmental benefit generated to society by an organisation, expressed in ‘£’. In 2019, EVORA generated £454,644 in social value. This includes over £400,000 through actions relating to the people in our organisation and supply chain, as well as money and time donated to charitable organisations, and reducing our carbon footprint through commutes.
In 2020, EVORA generated £61,197 in social value. This has been through actions relating to the people in our organisation and supply chain, as well as money and time donated to charitable organisations, and reducing our carbon footprint through commutes.
https://evoraglobal.com/wp-content/uploads/2021/04/victoriano-izquierdo-190758-scaled.jpg10001500EVORAhttps://evoraglobal.com/wp-content/uploads/2017/06/EVORA-logo-for-small-applications-WHITE-300x172.pngEVORA2021-04-22 12:19:222021-05-13 16:00:19Human-Centric Metrics in Sustainability: What can EVORA do for our people and communities?
Community engagement in real estate is where landlords, property/building managers and occupiers seek to better engage with the local municipality, landlords, occupiers and general public. Community engagement can span a variety of topics from investments in public realm improvements to engaging with schools, prioritising local employment and suppliers, recruiting apprentices, charitable donations, and environment, social and governance (ESG) education programmes.
Since the adoption of the Social Value Act in 2012, ‘social value’ has also emerged as a well-used term within the industry. Based on principles that aim to improve health, wellbeing, quality of life and communities [1], social value is the expression of a positive social change in terms of money – pounds and pence. Assessing outcomes through a financial proxy is useful as it further legitimises initiatives in our capitalistic society and provides a relatable and comparable metric for business and policy makers.
So, how does community engagement dovetail with social value? In its simplest form, community engagement is a programme/activity aimed at generating positive social outcomes. Social value is the process for measuring its impact on society, where possible expressed in market prices.
Why bother with any of this?
From a landlord’s perspective, community engagement is a valuable exercise to undertake as it can increase the value of assets and make areas more safe, attractive and vibrant for communities and occupiers, as well as improve the visibility and understanding of ESG issues. This in turn helps to make communities and occupiers healthier, happier and more productive.
It is important to note that not all community engagement activities can be quantified in terms of market prices. For example, the £ payback of building knowledge of sustainability within communities cannot be as easily quantified as creating local jobs, or apprenticeships, or giving charitable donations, which can feed substantial sums of money back into the local economy. Efforts to quantify social value in terms of market prices should focus on those initiatives where it is feasible and where it can be done robustly.
However, community engagement is a small part of the wider social value agenda. An array of other topics should be considered including, but not limited to, energy and water efficiency, tenant engagement, placemaking, accessibility and occupier health and wellbeing. In respect of energy and water efficiency measures for instance, if you are implementing energy performance and water saving initiatives at an asset level you are effectively driving affordability for your tenants.
Social value and community engagement also tie into impact investing, which is “investing with the intention to generate positive, measurable social and environmental impact alongside a financial return” [2]. Where it generates social and environment impact, community engagement can be a key tool in impact investing. Social value can provide a useful means of measuring and evidencing ‘impact’, particularly where it is used to quantify the socioeconomic benefit of your investment activities.
EVORA is supporting our clients to develop and deliver community engagement, social value and impact investing programmes and training workshops both in the UK and Europe. If you are interested in finding out more, please contact our ESG consulting team today at contactus@evoraglobal.com.
[1] Baldwin, C. and King, R. 2018. Social Sustainability, Climate Resilience and Community-Based Urban Development. 1st ed. London: Routledge.
Can Infrastructure Shape a New Sustainable Future and what should investors know?
As global populations increase, the UN estimates that there will be 9.8 billion people on the planet by 2050. Estimates predict that 68% of the global population will be in urban areas by this time. [1] With an increasingly urbanised global population, the number of megacities is also expected to increase rapidly to 43 Megacities by 2030, with more than 10 million inhabitants in each. There is evidently a pressing challenge to ensure that infrastructure embeds sustainability into cities by encouraging low emissions lifestyles and promoting equitable living. With the passing of 2020 under the cloud of the global pandemic of COVID-19, we are moving into a new decade. This decade has been billed as ‘the decade ofaction’ on sustainability. What role should infrastructure play in meeting the challenges of sustainability and climate change whilst rebuilding economies?
Firstly, we need to consider the existing environmental, social and economic impacts from infrastructure to understand how it can be used in building a more sustainable world. Not all infrastructure is equal today or will be in the future in terms of environmental impact and as a force for positive social change. Traditionally, public and private sector investors have viewed infrastructure as a safe, long term and stable investment class, which makes infrastructure investments ideal for pension fund investors and Government bonds. However, the picture is complex and nuanced: there are signs investors are seeking to acquire specific types of infrastructure classes, whilst moving away from others. Furthermore, the COVID-19 pandemic has exposed the vulnerability of some infrastructure assets in a changing world, a prime example being that of transport infrastructure.
In the recent annual investor survey by IPE Real Assets two questions revealed this changing attitude [2], demonstrating that infrastructure remains an attractive investment class overall, but renewable energy and telecommunications/digital infrastructure are providing the most interest from investors compared to other types of investments.
Infrastructure in a changing world
The COVID-19 pandemic has also highlighted the need to re-think what the future of infrastructure might look like, taking into account future patterns of work, recreation, and travel. Whilst it is apparent that people will want to travel again once restrictions have been lifted, the way we travel in the future is still a point of speculation: the mode of transport, frequency of travel and destinations are likely to be reshaped. These factors will profoundly impact future infrastructure considerations determining city growth and regeneration plans.
It is self-evident now that our reliance on telecommunications and digital infrastructure has never been greater, for keeping in contact with friends and family, working from home, and shopping online. In our reshaped world, digital communications will continue to become an even more essential part of keeping global markets open. They also provide an opportunity to do business more efficiently and with a lower carbon impact by avoiding unnecessary global travel. A key challenge for this asset however it to ensure that society as a whole has equal access to the new digital word.
The recent speeches by UK Prime Minister Boris Johnson and US President Joe Biden highlight the pivotal role digital technologies play in re-invigorating society and unlocking regenerative growth from struggling old industrial cities with the new digital technologies of the future.
The most pressing challenge of our time however is the transformation of energy infrastructure: moving from existing fossil fuel intensive sources to low and zero emissions energy. There is no doubt there is a need for continued but more rapid energy transformation both in terms of technology adaption and grid decentralisation. The current challenge for major power generation plants is centred on a delicate balancing act, requiring careful downscaling of existing fossil fuel intensive assets, whilst continuing to manage them well. This will potentially enable some fossil fuel assets to minimise emissions today and potentially be converted to run on lower emissions fuels in the near future, such as switching from natural gas fired power stations to lower emissions gases like hydrogen.
There are also challenges in how the energy sector dovetails with the built environment and real estate sector. For example, enabling the increased use of renewable energy sources, incorporating energy storage into the grid, as well as integrating power management systems to increase energy network resilience. The energy infrastructure system therefore needs to undergo significant change as it plays a key role in supporting the delivery of net zero carbon for real estate.
Governments committing to building back better
It is both encouraging and timely that the new US Biden administration and the UK Government have been raising the profile of infrastructure during recent speeches and have committed to “build back better”. They have stated the intention to invest in infrastructure to provide multiple benefits: tackle the climate crisis; redress social inequities highlighted by the pandemic; and use infrastructure investing as part of their ‘levelling up’ agendas.
In addition, Alok Sharma MP, the President of the UN Climate Change Conference of the Parties, which is scheduled for November 2021 in Glasgow, has also referred to the need for infrastructure to be central to building back better. In fact, the theme is becoming so central to the UK Government policy for 2021 and beyond it has established a dedicated Build Back Better Business Council with the inaugural meeting being held on 18th January 2021. [3]
The Prime Minister outlined the need to seize opportunities of Brexit, support job creation, cement the UK’s position as a science superpower, deliver an upgrade to infrastructure and launch a green industrial revolution – ensuring that we build back better, fairer, greener, and faster.
The Chancellor laid out the three key pillars of the government’s plan to drive growth beyond the pandemic: investing in infrastructure, skills and innovation. He set out that improved infrastructure leads to improved productivity, [and] skills are the single best way to drive human productivity and key in addressing regional disparity, and investment in innovation is critical to deliver new growth, ideas and services.
So why is investing in infrastructure the right thing to do at a time when the global economy seems on its knees? The truth is Governments around the world have always favoured investing in infrastructure as a fundamental element of growing an economy. Not only does it demonstrably invest in your own nation and its future generations, but it also stimulates economic inward investment throughout the economy, enabling it to grow or regrow from within. A 2009 report entitled ‘Construction in the UK Economy: The Benefits of Investment’ showed that every £1 spent on UK construction led to GDP growth of £2.84 [4]. The report also showed that, of the money invested in the construction sector, over 70% remained in the local and national economies. This is due to stimulation elsewhere in the construction value chain, benefits of employment opportunities and wider social and economic benefits such as better education services delivering a higher-skilled workforce.
More recently, a 2018 report by CECA entitled ‘The social benefits of infrastructure investment’ [5] illustrated the social value of investing in infrastructure. The report uses case studies to show how infrastructure shapes our everyday lives in many ways we take for granted, ranging from how we work, travel, spend leisure time, respond to climate change and tackle poor quality in urban environments. It also reminds us that past major public health crises have sparked ground-breaking innovation in infrastructure: after four major cholera outbreaks in London between 1832 and 1866, Joseph Bazalgette revolutionised the sewer network for central London which was instrumental in relieving the city from cholera epidemics, while beginning to clean the polluted River Thames. The pandemic crisis of 2020 has the potential to spark similar transformational changes in our infrastructure networks and systems.
The future of infrastructure?
We have sought to highlight some of the key global patterns in infrastructure investing, as well as governmental commitment to ‘building back better’. It is clear that the landscape of infrastructure is continually evolving and can play a central role in economic rebuilding and growth.
Humankind is unquestionably at crossroads in how we shape our society and the future. EVORA firmly believes that through drive, creativity, and passion there is much to be gained from tackling the challenges set out in this article. Whilst some investors may see the challenges discussed in this paper as a significant risk to your investments, we urge you to also consider them as significant opportunities and to do more for your investors and for the next generation by embracing sustainability and ESG and using this to drive forward innovation.
On a final point and note and inspiration, in a recent article published in IPE in January 2021, it is noteworthy that the United Nations Principles for Responsible Investment (UN PRI) and some significant pension fund investors have called for dialogue with the UK Government on practical ways to access the ‘unrealised reservoir of support from the investor community for stronger climate action’ [6] and to help the delver UK’s 10 Point Plan for a Green Revolution [7]. Although the discussions have not been undertaken at this stage, it is evident there is a strong appetite for ESG financing for the benefits of investors and society. What a great way to start a new decade.
If you would like to discuss improving the sustainability of your infrastructure assets or funds, please contact us at infrastructure@evoraglobal.com
https://evoraglobal.com/wp-content/uploads/2021/01/BUILD-BACK-BETTER-1.png5001500EVORAhttps://evoraglobal.com/wp-content/uploads/2017/06/EVORA-logo-for-small-applications-WHITE-300x172.pngEVORA2021-02-04 09:43:382021-02-04 09:43:39Building Back Better the Potential of Infrastructure
Infrastructure is vital for living comfortable, convenient modern lives. Every day, infrastructure systems are working beneath the ground, on the land, and above our heads. Each morning, when you turn on the tap, power up your computer, or step outside to travel to work, you are interacting with infrastructure. Infrastructure has a life of its own and without it our modern lives would be very different.
Infrastructure is a huge area of investment globally which attracts both government and private sector funding. Due to its size and complexity, it often requires a complex mix of investment strategies including debt, equity and bonds. Infrastructure assets, alongside real estate, are categorised as real asset investments and therefore they share similar Environmental, Social and Governance (ESG) risks and opportunities. However, the scale and complexity of infrastructure assets can create some unique challenges.
The United Nations predicts that population growth will continue, reaching 9.7billion people on the planet by 2050. Much of this population growth will be in urban areas, and infrastructure provisions will need to grow alongside the population. As a result of the continued and growing demand for infrastructure provisions, infrastructure assets have significant potential to positively affect the environment and society. These assets will also play a role in creating a successful and resilient response to the challenges of a changing climate, as well as being affected by climate change themselves.
Due to the pivotal role infrastructure assets hold in meeting current and future demand, and their centrality in addressing climate change, they have varied and wide ranging stakeholder interest groups with high levels of expectation when it comes to ESG delivery. For this reason, EVORA are seeing many investors coalesce and gravitate toward the United Nations Sustainable Development Goals (UN SDGs) as a suitable framework that addresses stakeholders concerns and which they know and understand. Increasingly, there is a growing expectation that implementing effective ESG strategies aligned to the UN SDG’S which address the associated risks and opportunities and link actions to outcomes is becoming the minimum requirement.
This year, the Covid-19 pandemic has profoundly impacted the global economy, causing many to take stock, reflect and consider the future of society. We face dual crises: responding to the pandemic and addressing and responding to environmental and social challenges, including climate change. In a post-Covid world, infrastructure can be central to addressing these multiple challenges. This has been solidified by both the UK Government and the new US administration pledging to place investment in infrastructure at the heart of their ‘build back better’ programs.
So why look at infrastructure now? Firstly, investment in infrastructure development is urgently needed to replace aging and poorly performing assets with assets fit for the 21st century that positively address the climate crisis. Secondly, infrastructure assets are fundamentally about investing in future generations but also, crucially, provide much needed jobs today, thereby providing an excellent way to rebuild and diversify regional and national economies. With these factors in mind, having robust ESG management becomes essential in managing outcomes as well as demonstrating effective use of funding vehicles.
In the recent Aviva Real Assets Study 2020 [1], in which global institutions were asked about their views on ESG post-COVID, the overwhelming response showed ESG as front and centre for investors’ concerns. 81% of respondents stated that ESG objectives and delivering on sustainability is a primary duty of their organisations. Furthermore, 91% of global insurance and pension fund investors are now committed to delivering Net Zero. As a result, infrastructure assets in all its various classes and forms are the foundation for how the Net Zero commitment will be realised. The Aviva survey also indicates that ESG has evolved in its sophistication and needs to be considered as a balanced a score card between the ‘E’ and ‘S’ and not simply about environmental risk management that has been the focus in the past.
So how can the ESG and sustainability agenda be delivered in practice? There are a variety of excellent reporting frameworks, such as GRESB and the UN Principles for Responsible Investment (PRI), for investors to work within which provide globally recognised frameworks which set a baseline for benchmarking performance. Launched in 2016, GRESB Infrastructure continues to grow in popularity, with over 426 assets totalling $579billion assets under management participating in 2020. As the scheme evolves, greater focus is given to performance outcomes rather than just good intentions. Now more than ever, it is imperative for investors to analyse, understand and seek ways to optimise ESG performance in their investments. Reporting is a great place to start.
We have been working with closely with investors over the past decade to deliver best-in-class ESG practices, helping them strive to constantly do better by setting ever more ambitious targets to improve ESG performance. EVORA can help you understand and optimise your infrastructure ESG approach. If you are interested in finding out more, contact the team at infrastructure@evoraglobal.com.
With market uncertainty pervasive and belief in business deteriorating, using the annual sustainability report to restore confidence with all stakeholders is more important than ever.
Your next report will need to provide a clear, trustworthy narrative, detailing specific insights on how the pandemic has impacted on your sustainability strategy, business model, risks and stakeholder commitments.
Sustainability frameworks enable companies to provide reasonably comparable and useful information. However, no such template exists to compare how companies have responded to COVID-19.
EVORA have been making in-roads in accounting for the COVID crisis in our reporting for clients since March, learning more with each report, and share key areas below to consider during your next round of reporting:
1) Controlling the content
COVID-19 has impacted people in many ways. Employees may have experienced challenges adapting to a new way of working; property managers dealing with a whole new set of procedures and protocols to follow; tenants juggling the ‘return to work’ safely and local communities may have experienced unexpected environmental and social impacts.
By including a COVID-19 one-off section in the report; the opportunity may be missed to communicate the impacts of the pandemic in a more nuanced way, tailored to the different stakeholders affected. Instead, it will be more authentic weaved in specific messaging throughout the sustainability reporting, where relevant, through the voice of the affected stakeholder, for example a direct quote from an employee or a tenant.
We also encourage the simplification of the message – avoiding jargon, cliches and overly technical language, and, instead, using straight-forward, clear and concise language.
2) Mapping what is material
Materiality assessments inform meaningful sustainability communications, enabling companies to identify sustainability issues that are important to both their stakeholders and to business success. Used to their full potential they can help shape company strategy, galvanise internal functions and gain senior buy-in, as well as uniting disparate teams and processes.
As society deals with the pandemic, materiality assessments should be reassessed to better integrate sustainability into business strategy and to explore the relationship between a company’s impacts on a sustainability issue and the impact of that issue on the business.
3) Dealing with the data
The shift to homeworking presents a unique challenge. Companies will be demonstrating a reduction in Scope 1 and 2 greenhouse gas emissions in line with the reduction of office building energy consumption.
This presents several possible issues for the reporting company:
Any movement in reported emissions could mask the impacts of any genuine reduction activities
Distortion against targets set
Justification may be required for smaller energy reductions than others in the sector, or anticipated, because they have seen a lesser impact from the pandemic, for instance through keeping offices open, with higher ventilation requirements, rather than closing buildings completely.
Emissions have not been eliminated, rather they have been relocated to employee homes beyond the company’s direct control. Some might argue that the decrease in commuting related emissions makes up for this. In order to provide a credible comparison of year on year performance, quantifiable homeworking emissions should be considered for recognition.
Our initial response is to always explain data with fully contextualised narrative.
4) Shift to online-first
We recommend an online-first approach for corporate sustainability reporting. This enables the audience to more easily search, navigate and locate information. This format can enhance storytelling – enabling more in-depth features and linking direct to other relevant documents.
Stakeholder scrutiny of how organisations are responding to the COVID-19 pandemic is bringing heightened attention to the importance of corporate transparency on sustainability issues. EVORA design reporting strategies for organisations, enabling them to apply frameworks, communicate meaningful sustainability outcomes and impacts to key stakeholders and use reporting as a tool to improve sustainability performance. Get in touch with the EVORA reporting team today.
https://evoraglobal.com/wp-content/uploads/2020/11/max-bender-olXfar5J3WE-unsplash-scaled.jpg10011500Joanna Tomlinsonhttps://evoraglobal.com/wp-content/uploads/2017/06/EVORA-logo-for-small-applications-WHITE-300x172.pngJoanna Tomlinson2020-11-09 13:29:312020-11-09 13:29:32Communicating COVID-19 impacts through Sustainability Reporting
The current World GBC Health & Wellbeing Framework has been in the making for many years now but there is no doubt that living in the midst of a global pandemic has focused our minds on what both places, and better, means for us as a species.
The first essential question is what is ‘place’?
It means so many different things to each of us, both individually, culturally and as a society. In the current situation, it has come to mean both refuge and prison, not least due to the impact of the lack of choices imposed on us and what that does to our mental health.
The definition of office space has been changing rapidly over the last 5 years, driven by new trends in employee engagement, better understanding of the science behind productivity within the workplace, and wider realisation of the impact that unseen threats (long before COVID-19) have on both our short and long term health, happiness and performance.
The recent realisation that most office workers can function well from home is naturally leading to another round of floor tile-gazing as the commercial market asks itself ‘what do people want now?’. Sadly, I suspect the answer is some way off…but it may be a better answer for people.
How did we get here?
I can’t possibly begin to address the myriad responses to that issue, and are surely being written right now, in an attempt to answer this. For me, part of the issue comes in our persistent refusal to consider ourselves a mammalian species, occupying the same spaces as other species on a single planet (not the place here to embark on single planet living and the anthroposcene). Despite all our best efforts, we still have the same respiratory systems, neurological and physicals responses and social needs that our tribal ancestors did. No amount of stone, clothing or behaviour can change the fundamentals of the Homo sapiens as a species, even if our jaw bite has altered slightly over the centuries.
As such, it should come as no surprise to us to discover that what matters to us is the people in those places that we miss most (see the copious employee surveys for evidence) and the sense of belonging to a tribe, be that family, colleagues or a combination. Place, however, is now tinged with a sense of fear, and we must work harder than ever to alleviate that fear and visualise the invisible threats that we are all living with.
What is a ‘better place’?
Philosophically, of course, the first question has to be, “compared to what?” In the resplendent glass houses of the developed cities, where there is an overwhelming choice of types of milk for your coffee in the lobby café, attention has focused on occupier facilities, flexible working space types and more human features within the office environment. However, lest we forget the inequality inherent in air quality issues, the intensity metric of poor air quality versus ‘months of potential life reduced’ is brutal and unforgiving. Focusing on key issue in isolation tend to lead to unintended consequences, which is why we are whole-heartedly supporting the 6 key principles of the new Health& Wellbeing Framework[1], which address both the inter-related factors of healthy places but also the whole building lifecycle.
Since we evolved into our original habitat, complete with sabre tooth tigers and other hungry predators, our natural defences evolved with us; smell, taste, hearing. We did not need to “see” air quality, since we lived mostly outdoors; we did not need to go to the gym, since our food needed to be picked, or chased; we did not need to meet our friends online, since the survival of the tribe depended on our sticking together.
As we stand on the border of a new era of engagement, understanding and opportunity, we do have the chance to reset the parameters of both place and human relationships. A better place, for people, in this context, signifies one which both protects and nurtures, and to do so in the 21st Century requires new eyes and ears in the form of constant monitoring, and new reassurance in the form of visible compliance with new regimes. The good news is that the impact of place on human health is now primary in everyone’s thoughts, and also that the technology is now available to provide the feedback we need from those places. Whether that is our own bedrooms, the road outside or our office, solutions are now at hand that were inconceivable even 10 years ago.
As we reconsider what it will take to get us back to better, this WGBC Framework could not come at a more relevant time. Each crisis brings opportunity.
EVORA’s uniquely broad expertise enables the seamless embedding of health and wellbeing with broader ESG strategy, processes, and reporting commitments for holistic optimisation. Contact our team of 11+ qualified health and wellbeing experts for support.
https://evoraglobal.com/wp-content/uploads/2020/11/daniel-funes-fuentes-TyLw3IQALMs-unsplash-scaled.jpg10001500Philippa Gillhttps://evoraglobal.com/wp-content/uploads/2017/06/EVORA-logo-for-small-applications-WHITE-300x172.pngPhilippa Gill2020-11-04 09:40:072020-11-04 09:40:09What is a better place, for people?
1. Why is climate change such an important investment risk for investors in real estate & infrastructure?
A summary of the factors driving change in the real asset markets.
In early 2020, before the pandemic hit, BlackRock’s Larry Fink called out the fact that “Climate Change is Investment Risk”. Three paragraphs of his annual letter stood out, highlighting the connection between material climate risk, their impact pathways, and the drivers of asset value:
“Will cities be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?
“Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.
“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
On its own, this proclamation from the CEO of the world’s largest asset manager might have created a few ripples in the investment markets, but not create a wholesale market transformation. However, the letter sandwiched an unprecedented period in the history of mankind’s battle with climate change. At the end of 2018, the UN Intergovernmental Panel of Climate Change (IPCC) published a Special Report on the impact of global warming of 1.5°C, which provided a stark warning about the consequences of inaction on climate change. In the period between these two events, several other activities took place which reinforce the market change:
Public opinion about the need to act on climate change shifted significantly in favour of action, in no small part to the meteoric rise in popularity of Greta Thunberg’s ‘Fridays for Future’ school children protests and the disruption caused by other campaign groups, such as Extinction Rebellion (XR) protests, and legal class actions brought forward by student groups around the world.
Climate science and the quality of climate modelling continues to improve, with recent work showing that the likely outcome of global warming will be between an average global warming of 2.6°C and 3.9°C. This is well above the low-risk threshold of 2°C agreed at the 2015 Paris Climate Summit (COP 21) and the preferred target of 1.5°C.
Significant capital reallocation towards delivering ESG objectives happened during 2019 and continued into 2020.
These factors, combined with new and forthcoming government regulations, would suggest that climate change and broader sustainability (or Environmental, Social & Governance) issues are here to stay for investors. Their material impact on financial returns is starting to become better understood as more time and money is invested in improving our knowledge and its application in real asset investment markets. Ignorance of these issues is no longer an excuse.
The way in which climate risks are being understood is in 3 categories:
Physical risk
Transition risk
Litigation, or Liability, risk
For physical risk, the first step is to understand which climate-related hazards present a material risk, both now and over the period of an investment, including the disposal value. For instance, the materiality of a flood hazard could increase over time as climate change creates the conditions for more frequent and/or more severe floods causing damage or disruption to an asset. The impact pathway for that hazard could be that the repair costs and frequency of the floods means that an asset becomes uninsurable. Another impact pathway could be that the flooding makes it impossible to access an asset, which in turn reduces occupancy and the related revenue that generates.
The complex nature of the changes brought about by our warming climate means that the risk hazards and impact pathways could influence the drivers of asset value in multiple ways.
Whilst some of these material risks are apparent today, there are many others which will become much more visible over the coming decade. The trends that we see which could accelerate changes to asset value include: increased environmental & social disruption; increasing government regulation; and the internalisation of these costs to mitigate climate change and to adapt to the consequences. Companies and asset managers need to be prepared to avoid the risk of litigation.
2. What are the expectations for how investors and asset managers will respond to climate risks?
There is increasing certainty about how to be prepared to action.
Climate-related financial risk is a new topic for investors. In 2015, Mark Carney, as the Governor of the Bank of England, gave a speech which warned of the threat of climate change to financial stability. He spoke of the “Tragedy of the Horizon” where inaction on climate change today imposes a cost on future generations that the current generation has no direct incentive to fix. Meaning that the time horizon for decision-making in typical business and investment cycle is not suitable for tackling the catastrophic impacts of climate change.
Earlier in the same year, the G20 asked the international Financial Stability Board (FSB) to report on how climate change risks could be accounted for in the financial sector. Both of these events were precursors to the UN Climate Summit (COP21) in Paris later that year. The international political agreement reached at COP21 was a watershed for international climate policy as governments agreed that a target of limiting global warming to 2°C is a necessity to avoid catastrophic changes and that getting well-below this figure was desirable, so 1.5°C is the stretch target. To achieve this target collectively, we need to stabilise greenhouse gas (GHG) emissions, measured in tonnes of carbon dioxide (CO2) equivalent, by 2050 – also known as getting to Net Zero Carbon or being Carbon Neutral by 2050. Failure to do this will mean that the Earth will continue to warm and the financial losses will be much greater.
This growing recognition that climate change and the related financial risks have to be considered in the financial markets led to the announcement during COP21 to establish a Task Force on Climate-related Financial Disclosures (TCFD) under the auspices of the FSB and chaired by Michael Bloomberg. The TCFD will develop voluntary, consistent climate-related financial risk disclosures for use by companies and asset managers in providing information to investors, lenders, insurers, and other stakeholders. Considering the physical, liability and transition risks associated with climate change.
One year later the TCFD published its Recommendations for consultation, which were finalised by the summer of 2017. Over the last 3 years since the Recommendations were released there has been considerable efforts made by the FSB-TCFD to build support for their adoption by actors in the financial markets. Recognising that preparing an organisation to embed a comprehensive response to climate-related risks could take 3 years.
In parallel to this promotion of TCFD over the last 3 years, GRESB has been piloting a Climate Risk Module as part of their annual disclosure and benchmarking process specifically for real estate and infrastructure. Other international Environmental, Social & Governance (ESG)/Sustainability reporting standards have also promoted more effective consideration of climate risks and preparedness.
Every year the UN published an Emissions Gap Report. In 2019, the report stated that we need to reduce global GHG emissions by 7.6% every year between 2020-2030. If we don’t start that level of reduction now, then by 2025 we will have to reduce emissions by 15.5% every year to hit the target and this will be more costly and still necessary. The later that we leave act to mitigate GHG emissions, the higher the annual cost of mitigation action and the increased likelihood of increase cost of adaptation to a changed climate. Many companies have now adopted science-based targets aligned with the UN to reduce emissions and to get to zero. Governments are following suit.
The Recommendations of the TCFD are not requirements, they provide voluntary guidance intended to help companies acting in the financial markets to better manage and disclose climate-related financial information. There are four key design features of these recommendations:
They can be adopted by all organisations
They are intended to be included in financial filings
They are designed to solicit decision-useful, forward-looking information on financial impacts
They have a strong focus on risks and opportunities related to the transition to a lower-carbon economy
As investors and asset managers consider how climate risks can be considered in their organisations, the TCFD core elements shown below provide a useful structure for getting the organisation ready to disclose the relevant financial information. The TCFD recommendations should be familiar in structure to CFOs and are reinforced by a recent opinion from IASB which recommends that IFRS reporting should include climate risk disclosure. This is almost a precursor to action on individual assets as the structure allows for a strategic approach to be systematically embedded in risk management and then embedded across all levels of the organisation, from corporate through entities / funds, investment, disposal, development and asset management processes.
EY’s ‘Global Climate Risk Disclosure Barometer’, which reviews the disclosure of 500 companies from 18 countries, shows mixed progress in 2019 in the adoption of the TCFD recommendations. Most progress has been made on ‘Metrics & Targets’ and ‘Governance’, whilst the quality of ‘Strategy’ and ‘Risk Management’ are the least developed. Their sector by sector comparison shows that the ‘Real Estate’ and ‘Asset Owners & Asset Managers’ sectors have made the least progress, in terms of coverage and quality. Suggesting that there is significant progress to be made by real estate investors and asset managers to be ready to manage and report on climate-related financial risks.
Whilst the TCFD Recommendations are voluntary, they are a precursor to mandatory disclosure in Europe resulting from the EU ‘Action Plan on Sustainable Finance’. At least for publicly listed companies and funds. Regulations which begin in 2021 will start this process of increasing disclosure.
The EU Taxonomy Regulation has set out a standard set of environmental impact categories, including Climate Mitigation and Climate Adaptation. This Regulation has established the principle of Do No Significant Harm (DNSH) and has set thresholds for what a ‘Significant’ positive impact looks like. It is expected that companies active in the EU will provide disclosure aligned to this taxonomy and it will provide investors with a common lexicon to use in global due diligence and in the scrutiny of fund performance as we experience more capital flowing into ESG funds.
3. How can a company ensure that they are prepared as an organisation to discharge their fiduciary duty?
There are clear steps that can be taken to be prepared to manage climate risks.
EVORA Global advises real estate and infrastructure investors and asset management in Europe and the USA who have global funds, with assets under management in over 30 countries. Our experience with these organisations has shown that there is a broad spectrum of Climate Risk Readiness. From the largest to the smallest they are considering how they respond to climate-related financial risks. They are having to do so now to ensure that they have access to the best capital.
To get ready, an organisation can undertake a Climate Risk Readiness Gap Analysis, which can be displayed on our EVORA Climate Risk Readiness Radar and compared to their peers. This assessment looks at the organisational readiness and is aligned with the TCFD Recommendations and upcoming regulations. It can be supplemented with fund and asset-level scoring of climate risk exposure and management readiness.
The EVORA Climate Risk Readiness Radar provides an evidence-based scoring mechanism to compare progress. Under each of the five categories – Governance; Strategy; Risk Management; Metrics & Targets; and Disclosure – there are five levels of organisational readiness, and each level has an associated set of actions. For instance, Level 1 Governance required all Board member are trained to understand their fiduciary duty regarding climate risk, including their main materials risks and disclosure responsibilities and requirements. The associated set of actions includes a risk materiality assessment of the organisation’s assets; formal training for the Board; and a declaration by the Board that all of its members have confirmed their understanding.
By understanding this gap analysis of organisational readiness, it is then possible to set out a roadmap for the coming years. This will enable the organisation to communication a clear plan to investors and other stakeholders.
Level 1 Strategy contributes to Level 1 Governance as it requires an assessment of material physical and transition risks through the use of climate scenario analysis. This should be segmented by time horizon, geography and/or sector. As this modelling is a standard requirement for getting to grips with climate risk there are several data analysis software tools now available on the market. 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. Our approach to assessing the materiality of physical risks, and to answer the question “so what?”, 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,
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.
These three phases provide a deeper understanding of risk than a high-level screening can provide. The intention is that this provides a detailed evidence base on which to define a credible, effective and appropriate climate risk strategy and the related processes for risk management. Both of these areas of climate risk management are presently considered weak in most company disclosures.
Today, there is not an existing data partner which can deliver on all three of these phases end-to-end so we collaborate with specialist partners to deliver a comprehensive Climate Risk Materiality Portfolio Assessment service for fund managers. EVORA usually extends this assessment to also cover Transition Risks, in particular forthcoming regulations which could affect value.
These two EVORA Assessments on Readiness and Materiality are essential building blocks in understanding the effort and exposure for an organisation’s preparedness on climate-related financial disclosure. The outputs will provide a clear roadmap for integration over the next few years.
Investor expectations of climate risk have moved on quickly over the last few years. Our expectation is that this acceleration in understanding and scrutiny will continue. Reinforced by new regulations, particularly the regulations flowing from the EU Action Plan on Financing Sustainable Growth and Paris’ climate mitigation goals, ever-improving climate models and continued emissions of greenhouse gases which are not in line with a Net Zero Carbon trajectory. Those investors who are not prepared are much more likely to acquire assets which are at risk, that is not aligned with science-based decarbonisation pathways and/or exposed to a changed climate. The need for organisational preparedness, embedded across all aspects of investment – i.e. asset management; acquisitions; developments; and disposal – is essential portfolio management. Good quality data and information is vital in delivering expected returns in a market which is transitioning to become low-carbon and adapted for a changed climate.
EVORA is engaging with companies and relevant institutions to better prepare the real estate and infrastructure sectors for climate mitigation and adaptation disclosure. The approach outlined in this paper is difficult to fast-track in large organisations to ensure it is properly integrated. One of the biggest challenges which remains is solving the ‘Tragedy of the Horizon’ as this means that the actions required in an investment portfolio cannot always be taken within the investment lifecycle. The TCFD initiative is designed to address this challenge and, to be successful, this requires early and comprehensive adoption by real estate actors. We would recommend to our clients that early action on climate risk reduces the risk of Litigation or Liability Risk, as well as falling disposal values of asset exposed to Transition and Physical Risks. The steps outlined here will guide substantial and measurable progress.
https://evoraglobal.com/wp-content/uploads/2020/09/CRS-Whitepaper-blog-header.png200600Sonny Maserohttps://evoraglobal.com/wp-content/uploads/2017/06/EVORA-logo-for-small-applications-WHITE-300x172.pngSonny Masero2020-09-22 10:52:092020-09-25 14:37:26Climate Risk Readiness White Paper
Embodied Carbon accounts for the total greenhouse gas emissions released to the air as a result of constructing a building
Commitments have been made to achieve Net Zero Carbon by 2050, Embodied Carbon must be considered and reduced to achieve this
Climate change poses a number of financial risks
Embodied Carbon studies can increase climate resilience and therefore reduce risk and increase return
What is Embodied Carbon?
Have you ever walked past a building site and wondered where all the materials have come from? Whether the timber began life as a tree in the UK or abroad? While I was on work experience on one of my Father’s building sites, I found the idea that materials from potentially all around the world have come together to make something new, fascinating. I wondered about the work and energy that went into getting them onto the building site; first the raw materials are extracted, then transported to an industrial site where they are processed into a product, then transported again to the construction site and finally put into place. At each of these stages, energy is consumed and therefore emissions of greenhouse gases are released to the air (measured as emissions of CO2 equivalent, in this article, ‘carbon’). As such, each individual building material has a certain amount of carbon associated with it – the emissions released as a result of that product’s life. These emissions are the embodied carbon of the product, and as a wise person once said, ‘One brick does not a house make’, so the total emissions from all of the products and processes that go into making a building, form the total embodied carbon of that building.
The embodied carbon during construction, along with the operational carbon during the building’s life, such as energy used for HVAC, in addition to the end of life activities such as demolition or deconstruction – depending on where the system boundary is considered – all sum to the total carbon that is released as a result of the building’s life. Accounting for and reducing total carbon emissions has never been more important as the effects of anthropologic climate change continue to devastate parts of the world.
Why is Embodied Carbon becoming more important?
Following the Paris Agreement in 2015, governments around the world agreed that climate change must be limited to ‘well below 2⁰C’, and in our industry a figure of 1.5⁰C has been widely adopted as the target maximum [1]. This can only be achieved by countries and industries achieving a balance between carbon emissions and carbon sinks, resulting in the amount of carbon released to the atmosphere totalling ‘Net Zero’, by 2050 [2]. These commitments are binding, and increasingly severe fines will be issued to those who emit excessive carbon. To be successful, is it vital that governments and companies alike create pathways to Net Zero, to plan the transition to a decarbonised future and ensure that this future aligns with a 1.5⁰C trajectory (see figure 1). It is also important to consider both the total volume of emissions and the rate at which they are released, therefore change must happen in the short term, as sudden reductions in 2040 for example, will not be as successful in limiting the impact of climate change [3].
Figure 1: Global Warming Projections[12]
In commercial real estate, 23 of the leading commercial property owners have committed to becoming Net Zero by just 2030, under the Better Building Partnership Climate Change Commitment [4]. Under this agreement, scope 3, or all other greenhouse gas emissions that occur due to its activities, but which it has no direct ownership or control over, are also included, which covers embodied carbon. With current technology, generating embodied carbon through construction is unavoidable, therefore the only options to balance embodied carbon are to reduce it as much as possible, then offset the rest.
What are some of the risks posed by climate change?
The EU Emissions Trading Scheme operates under a ‘cap and trade’ principle, meaning although offsets can be brought, they will be capped and reduced over time and eventually there is a risk that offsets will no longer be available, or the prices be too high to be economically viable [5]. Similarly, in the voluntary offsetting market, there are a finite number of projects delivering offset ‘credits’, and over time, the low hanging fruit will be depleted so that financing projects becomes ever more expensive. This could lead to the more significant risk of fines being imposed for excessive emissions, along with a carbon tax on the remaining embodied carbon. Furthermore, although industry leaders have placed more responsibility on themselves to improve climate resilience and reduce emissions, there is a transitional risk that regulation will change in the future, leaving some assets stranded. For example, regulation could restrict the use of inefficient technologies or improve carbon accounting and bring more sources of emissions into scope. Should companies refuse to act now and continue with business as usual, they risk being caught out later and be forced to make sudden adjustments to align with new regulations, which could prove extremely costly. Such regulations include the draft new London Plan policy GG6: Increasing efficiency and resilience [6], this policy requires those involved in planning and development to improve energy efficiency and support the move to a low carbon circular economy. As such, planning permission could be refused to developers who do not align to this policy.
The requirements around disclosing climate resilience and environmental performance is becoming more commonplace, the Taskforce for Climate-Related Financial Disclosure (TCFD) is increasing transparency in this area by requesting organisations disclosure their climate-related financial risk publicly [7]. While currently voluntary, emerging Sustainable Financial Disclosure Regulations mean that this is unlikely to stay this way long term. There is therefore a reputational risk that stigmatisation of poor climate resilience could grow, and negative stakeholder feedback could arise. This in turn could prove material should a company lose out on investors because of this, who will be aware of the various financial risks climate change poses and view these as investment risks.
The physical risks of climate change will also be material for any entity with physical assets, which includes real estate, property could be damaged, for example by increased rainfall or flooding, or induce additional operating costs, for example higher temperatures leading to increased use of HVAC equipment, thus requiring additional maintenance. Therefore, it is in the best interest of the industry to limit the physical effects of climate change by sticking to a 1.5⁰C trajectory, where is it widely reported that these risks will be more significant at 2⁰C and above [3].
It must be noted that there is risk in adopting new technology, as it is unknown how that technology will perform in the long term and could have unforeseen consequences, for example new HVAC equipment could cause a building to overheat in certain conditions, potentially contributing to the urban heat island effect. However, new technology and innovations will be required if climate change commitments are to be met, which is why it is important that there is collaboration across the industry to develop and trial new technology and share best practise, which is already evident in companies with robust Net Zero Carbon Pathways, such as Derwent [8]. Considering the challenge of reducing scope 3 emissions, such as during tenant fit out, since developers do not control this activity directly but are still responsible for the carbon, collaboration and stakeholder engagement will be of great importance.
Where does embodied carbon fit into the bigger picture, and how can it increase climate resilience?
Embodied carbon studies can help to increase climate resilience in a number of ways, for example, as such studies become more widespread, increased accountability for developers will help reduce redundant building and encourage developers to think critically about their projects, potentially leading to increased major refurbishment works in preference to new construction. Furthermore, embodied carbon studies can encourage leaner and lighter building, as the simplest way to reduce embodied carbon is to use fewer materials, through identifying and removing redundant building elements. Material hotspots with high carbon intensity can also be identified, and alternatives with lower embodied carbon, such as recycled and reused materials, are promoted which also helps to progress towards a circular economy as highlighted in the European Green Deal [9]. Moreover, by considering embodied carbon during the design phase, strategies can be put in place to reduce it, such as designing for deconstruction, allowing building elements to be disassembled and reused or recycled more easily at the end of life.
Best practice dictates that accounting for embodied carbon emissions falls both with the initial developer and first-time purchaser of buildings [10], because both can have an influence over the design and construction which takes place. Whilst later purchasers of that building will not assume liability for the embodied carbon, it does present an increasing transition risk to developers and purchasers of new buildings, because over time, embodied carbon will contribute an increased proportion of the overall building lifecycle carbon as operational emissions fall. As a financial value is assigned to this risk, the incentive to minimise embodied carbon in future will become ever more critical in investment decision making.
Fortunately, years of varying approaches to measuring and managing embodied carbon have now given way to increased industry consensus, through the publication of key guidance, such as the RICS Whole Life Carbon Assessment for the Built Environment [11]. Several tools now also exist to enable efficient construction of embodied carbon models and identification of best practice enhancements. EVORA utilise One Click LCA for this purpose, saving clients precious time and resource in fast moving design processes.
Embodied Carbon Studies should also be incorporated into a Net Zero Carbon Pathway, as this sends a clear market signal that the financial risks of climate change have been understood and accounted for, which in turn is likely to attract investors, improve stakeholder relations, and could even attract tenants and increase asset value as the market develops over time. However, it is important to plan out a pathway sooner rather than later, reducing the likelihood that a sudden transition is required, which in turn reduces the financial risk of climate change.
https://evoraglobal.com/wp-content/uploads/2020/09/LinkedIn-Posts.png6281200Michael Nortonhttps://evoraglobal.com/wp-content/uploads/2017/06/EVORA-logo-for-small-applications-WHITE-300x172.pngMichael Norton2020-09-18 13:56:272020-09-18 13:56:29Embodied Carbon and its Role in Achieving Net Zero Carbon
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 3rd-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:
Gap Analysis of Risk Readiness
Risk Materiality Portfolio Assessment
Net Zero & Climate Risk Asset Audit
Net Zero & Climate Risk Data Strategy
Training & Coaching
If you are interested in getting help from our Climate Resilience team, please contact us.
