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EVORA Insights New York Roundtable

In September, together with Tishman Speyer, we co-hosted a Roundtable lunch and discussion at the Rainbow Room in the Rockefeller Center. The food and the view were fantastic! It was an invite-only affair for eight real estate investors and investment managers. The topic of conversation was climate risk and how it can effectively be integrated into investment decision making; looking at the differences between the European and the American markets.

“Looking at Europe is like a glimpse of the future – what is happening there now will come to the USA in 5 years or less.”

For any US investment manager raising capital from Europe, they are being faced with ESG questions from investors and sustainable finance regulators. There is an expectation in the US that ESG is here to stay. The US market is having to learn fast, but there is a big gap between the leaders and the laggards. Some ESG themes are seeing greater adoption than others, like Net Zero Carbon and transition risk. This is flowing down from corporate and fund strategies into individual asset plans. It has placed an unprecedented demand on the relevant technical expertise. Diversity, Equity & Inclusion (DEI) has been a priority for the US for a long time and has required a more sophisticated and integrated response than it in Europe.

“We’d never not do a deal because of climate risk.”

There is still a gap between acting on ESG and an acceptance that it will materially affect transactions. However, there is anecdotal evidence that US deals have been stopped and prices have been chipped as a result of European investor concerns about climate risks. One European Core+ fund factored in the transition capex over 20 years and used that to reduce the price paid. Another pulled out of deal during the final stages of DD because the power grid feeding the property was not decarbonising at a fast enough rate.

No-one is monitoring this impact on the real estate market in a systematic way so there is a lot of speculation about which local markets will be affected. Some high risk markets, like flood-prone Miami, do not seem to be seeing demand or prices decline, although there is some evidence that transactions are taking longer. In other US seafront locations, there are other indicators that a future price correction or increased illiquidity might occur, such as increased mortgage and loan default rates.

“Two hold periods: nine years is today.”

Investment managers are thinking ahead in terms of what a Core fund might be looking for when acquiring an asset from a Added Value fund: Will they tolerate increasing climate risk, such as high operational energy costs and carbon emissions due to poor building fabric and inefficient equipment? If more climate change has occurred, will flood, fires and storms become more frequent or more extreme?

That perspective of two hold periods and different attitudes to risk can bring future climate risk considerations back to the present day. Getting the right information from risk models has proved difficult, with multiple vendors providing different answers for the same assets and locations.

“If you’re serious about ESG, it shouldn’t be in an appendix in the IC memo, it should be upfront.”

ESG and climate risk is being integrated into DD and into IC memos. This is occurring in different ways, both quantitative and qualitative. With some firms factoring climate risk into financial models by adjusting the cap rate, as a proxy for increased risk, or adjusting the cash flow to factor in increased transition costs. There is no standard approach, making it difficult to price climate risk into real estate transactions. However, if exit prices are getting chipped then more leverage is required on the buy-side if the required risk-adjusted returns are to be achieved.

Not all of the guests saw climate change as a risk, they also saw accretive opportunities for some assets. If you know what needs to be achieved, then risk-adjusting your under-writing can be more impactful. Instead of a divestment strategy.

“We’re not worried about how much insurance will cost, but whether there will be insurance.”

One developer-operator was concerned about the direction that the insurance industry is taking. In some locations, policies are not being written, even when the location has a high economic resilience and the wealth to adapt to some change. The problem was seen as the insurance sector being backwards looking using historic models. Others felt that these policies couldn’t be packaged for re-insurance. There was a desire for more nuance, particularly for unique assets like data centers.

“The question of whether there should be a carbon price has been overtaken by energy prices.”

Opinions were split on the value of having a carbon price, which could be introduced through fines, like in NY Local Law 97 or through carbon taxes like the new one in Demark. An internal carbon price could also be adopted. There was a view that the Ukraine war, and historic underinvestment in energy security through renewable energy and energy efficiency, has precipitated a very high energy prices which is already driving different decisions without needing a carbon price. Making it easier to justify investment in assets to decarbonise portfolios. Some owners have wanted to help tenants who are struggling to pay by aggregating their demand and using collectively buying power, but the aggregation has proved too hard.

“An empty building is an unsustainable building, so who’s measuring whether climate risk is making a building empty?”

Looking back to the UK, properties are laying empty as businesses have to close down because they can’t afford their energy bill. It is going to cost the UK government about £170bn this year to help those who can’t pay. This is a transition risk because it has been partly caused by conditions created historic underinvested in building energy efficiency and renewables, with the invasion of Ukraine tipping the balance. For real estate investors, these voids compounds the challenge of re-upping leases following the pandemic and sustained hybrid working.

In the US, better data does exist on energy consumption, in some locations where there are legal requirements to disclose annually through Energy Star. This makes it possible to benchmark properties and understand relatively efficiencies. It can show which ones are more exposed, requiring greater capex, and whether it could effect rental income and yield.

If you would like to find out more about EVORA Insights, please contact us today.

A brief history of materiality and ESG at the SEC

It is interesting reading the comments [1] to the proposed ruling by the US Securities and Exchange Commission (SEC) on The Enhancement and Standardization of Climate-Related Disclosures for Investors [2]. Points raised are diverse, but broadly fall within one of two camps; those vehemently opposed to the ruling, and those in support (often calling for more ambitious requirements over and above the proposal from the SEC). This binary grouping is neither surprising nor unexpected for the SEC, given the organization’s four-decade history of contests concerning environmental proposals. [3]

And now in 2022, the SEC is proposing extensive new disclosure requirements for publicly listed firms starting in the fiscal year 2023 (for filing in 2024) for the largest filers – those with a public float greater than $700m – with phased introduction for firms with smaller public floats.  The first compliance date will impact around 2,000 businesses and eventually impact approximately 7,000 in total. The requirements require registrants to include certain climate-related information in registration statements and periodic reports, such as on Form 10-K, including:

  • Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook
  • Climate-related risks and relevant risk management processes
  • Greenhouse gas (“GHG”) emissions
  • Climate-related financial statement metrics
  • Climate-related targets and goals, and transition plan, if any.

The disclosure requirements are centered around the recommendations from the Taskforce on Climate Related Disclosures (TCFD). The SEC joins eight jurisdictions that have TCFD-aligned official reporting requirements, (Brazil, European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom). Additionally, the International Financial Reporting Standards (IFRS) Foundation announced a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.

What is TCFD?

As a high-level summary, the TCFD recommendations provide a framework for businesses to identify, evaluate, manage and monitor climate related risks and opportunities. They are centered around four themes, with a total of 11 recommended disclosures.

  • Governance – what role do people play in managing and overseeing climate related issues?
  • Strategy – how will organizations change to manage future climate-risk?
  • Risk Management – what processes are in place to identify, manage and assess risk?
  • Metrics and Targets – how do you measure progress against climate-related goals?

Globally, there are over 3,400 TCFD supporters, although not all of these have disclosed in full yet. The TCFD 2021 Status Report [4] provides a breakdown of public reporting against each of the recommended disclosures; the Materials and Buildings sector captures commercial real estate, although the 404 firms reporting will not be exclusive to the buildings sector. 

The results suggest that:

  • Most firms are disclosing qualitative risks and opportunities – per Recommendation: Strategy a)
  • Materials and Buildings have highest level of Metrics and Targets disclosure
  • Scenario analysis is disclosed by only a small percentage of firms  – per Recommendation Strategy c)
  • Governance, including Board and Management oversight of climate risks and opportunities, is the next least well disclosed theme after scenario analysis – per Recommendation: Governance a) and b)

On the latter point, gaining Board buy-in and a commitment to climate-related topics is essential for strategies and risk management processes to be truly integrated. Without this, firms will be disclosing under the TCFD framework for compliance reasons only – a missed opportunity.

Disclosure rates against the 11 recommendations differ by region, with Europe leading over the period from 2018 to 2020.  Double digit increases over two years were seen across all regions, with the exception of North America, which also has the fewest percentage of firms disclosing against the 11 recommendations. The takeaway from these numbers is that the SEC is leap-frogging the comfort zone for many North American firms.

GHG data and data quality

The proposed SEC ruling requires registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2) to be disclosed in absolute terms (by Scope) and as an intensity metric. Scope 3 emissions – of which there are 15 categories covering indirect upstream (i.e. related to goods or serviced purchased) and downstream (i.e. related to goods or service sold) – are, receiving a lot of attention due to the fact that Scope 3 emissions are out of direct control of landlords and data quality and coverage is often poor. Aside from small reporting companies, Scope 3 needs to be reported from FY 2024 (filing in 2025), if material.

Defining materiality is not an exact science and the lack of guidance from the SEC may result in reporting opt-outs where Boards deem the organization’s emissions to be immaterial to investor decision making. However, the quantity of emissions (tons CO2) is one method of determining materiality; the Science Based Targets Initiative (SBTi) sets a threshold for materiality as 40% of Scope 3 in relation to Scopes 1 and 2. Other factors influencing materiality need to be considered, such as:

  • Risk – considering relevant climate-related legislative and reputational risks
  • Influence – the registrant’s influence over emissions generation and reductions e.g. percentage ownership and / or a board representation within investee companies
  • Financial – emissions associated with a high level of spend or those generating a high level of revenue.

Many of these factors will need to be considered on a case by case basis, particularly legislative risks, which will need to be considered country by country and at the city level in many instances. For large-accelerated and accelerated registrants there are additional requirements, which will have ramifications for the entire real estate industry, for limited assurance (phased introduction from 2024 for filings in 2025) and the more stringent reasonable assurance (phased introduction from 2026 for filings in 2027).  While public REITs [5] are clearly in the SEC’s crosshairs, so too are others in the real estate value chain. For example, lenders (of both debt and equity investments) will need to report their share of Scope 3 financed emissions – most likely following PCAF [6] guidance.  Similarly, corporate tenants will want to understand their upstream GHG impacts where energy is provided as part of a service e.g. where a landlord procures energy in a building and recharges costs to tenants. The proposed rules will surely impact both contractual lending and leasing agreements on data provision and, importantly, the underlying quality of that data.

Transition plans

Scope 3 emissions also need to be disclosed in a filing if a registrant has made a transition plan (decarbonization target) public that includes Scope 3. For real estate, it is common to see leaders in ESG set net zero carbon targets that include Scope 3, but this is often ringfenced as tenant energy use. As the table below indicates, there are other Scope 3 emissions that may be materially relevant beyond tenant energy use, including embodied carbon of new construction and refurbishments. How the industry responds to this requirement will be interesting to watch. REITs that understand their full Scope 3 position will be able to retain existing climate goals. Those who do not will need to get to grips with Scope 3 accounting, or be forced to take down public goals, or walk back their scope accordingly – neither action is likely to be viewed as favorable to investors that see climate risk as an investment risk.  

Source: Adapted from UKGBC: Guide to Scope 3 Reporting in Commercial Real Estate [7]

A transition plan is used to lay out actions and targets that demonstrate an entity’s pathway toward a low-carbon economy, through reducing its absolute and / or intensity-based GHG emissions or concerning exposure. There are many frameworks that set out characteristics of an effective transition plan. This includes broad industry frameworks such as UN Asset Owners Alliance, through to more sector specific guidance used by signatories of the Net Zero Asset Managers Initiative issued by the IIGCC, and more besides. 

Unlike the frameworks named above, the SEC proposed rule does not provide sufficient guidance on the characteristics of an effective transition plan. For example, this may include disclosure of:

  • Base year, target end year and importantly, interim target year(s)
  • Climate scenario considered (e.g. 1.5C, 2C, 3C)
  • Type of target (e.g. absolute or intensity based)
  • Coverage and scope of the target, including narrative on any carve-outs
  • Alignment with recognized and suitable frameworks

Without specific disclosure requirements, there is a risk that transition plans may not be comparable nor decision-useful for investors – a concern raised by many commentators.

Lastly, but certainly not least, a new Article 14 to Regulation S-X would require a registrant to disclose climate-related financial metrics relating to severe weather events and other natural conditions and / or transition activities.

These financial metrics must be presented on an aggregated line-by-line basis for all negative impacts, and separately, all positive impacts where the impact is greater than 1% of the line item. If collecting Scope 3 data appears challenging, collating these financial metrics will present a gargantuan task for many registrants. Once the data is held, registrants will then face the effort of contextualizing the metrics so they don’t unduly scare investors.

Final thoughts

Overall, the SEC has moved from zero to one hundred in some incredibly far reaching, and challenging, requirements. The proposed rules lack clarity in a number of areas and will surely be revised before final issue. However, I do expect the rules to be materially similar when the final form is issued, with my prediction being year end.

Once introduced, the challenge for registrants is to view the rules “beyond compliance” and embrace the TCFD framework as a pragmatic methodology for climate change preparedness and resiliency. This mindset is essential if the US (and the world) are to achieve a just and orderly transition to a net zero economy. 


[1] https://www.sec.gov/comments/s7-10-22/s71022.htm

[2] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

[3] The Commission first addressed disclosure of material costs and other effects on business resulting from compliance with environmental law in a 1971 Interpretive Release.

  • The 1971 position took two years to codify and reached the final and current form in 1982, after a decade of evaluation.
  • In 1975, the Commission also concluded that it would require disclosure relating to social and environmental performance “when the information in question is material to inform investment”.
  • In 2010 SEC guidance specifically emphasized that climate change disclosure might, depending on the circumstances, be required in a company’s Description of Business, Risk Factors, Legal Proceedings, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
  • In 2016, the SEC issued a Concept Release regarding the modernization of regulation S-K including on climate change, noting the growing interest in ESG disclosure among investors and also the often inconsistent and incomplete discourse due to the voluntary nature of corporate sustainability reporting.
  • Finally in 2021, input was sought by the SEC on whether current disclosures adequately inform investors. This was made at the same time the federal Financial Stability Oversight Council (FSOC) listed climate change as an emerging threat to the financial stability of the US.

[4] https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf

[5] https://www.reit.com/what-reit#:~:text=REITs%2C%20or%20real%20estate%20investment,number%20of%20benefits%20to%20investors

[6] https://carbonaccountingfinancials.com/

[7] https://www.ukgbc.org/wp-content/uploads/2019/07/Scope-3-guide-for-commercial-real-estate.pdf

Will TCFD prepare organisations for the climate crisis?

Yanna Badet, Meghan Johnson, Phil Fieldhouse, Karolina Krzystek-De Ranter and Lisa Tassis

Climate Change is hard to ignore this summer:  Europe is battling heatwaves and wildfires, over 60% is in drought conditions while other parts of the world are experiencing several  1000-year floods within months. We are in a climate crisis, and we are feeling it. It is affecting all sectors, including real estate investments, as more stringent regulations are being put in place by governments to reduce emission contributions, and shareholders are demanding carbon neutrality and proof of resilient assets. And then there is the actual physical risk to contend with that can affect the value of the real assets. “TCFD” is one of the acronyms you have probably heard in this context.

So what is “TCFD” exactly and can it truly help the real estate sector prepare for the climate crisis?

TCFD is short for the Taskforce for Climate related Financial Disclosures, a group established by the Financial Stability Board in 2016. It developed recommendations for the industry on how to integrate and address climate risks to prevent climate-induced financial disaster. The premise is simple; to encourage the world’s largest companies to disclose information about how their business is affected by–and deals with–climate change. Since its inception, the recommendations have become a guideline for more than 89 countries and nearly all sectors of the economy, with a combined market capitalization of over $25.1 trillion. Governments are increasingly making the framework mandatory, for example as of this summer (July 2022 – just extended until end of August 2022), TCFD aligned disclosure is required by the UK Government for the largest investment companies, with smaller companies following in the coming years. The EU Taxonomy has similar guidelines and the U.S. Securities and Exchange Commission (the SEC) is also aligning its climate risk disclosure rules with it. So from a regulatory standpoint it can make much sense to start thinking about it now. Depending on your perspective, aligning with TCFD has additional benefits:

Primarily, investors will get access to climate-related information that enables them to compare the performance of their investments in relation to climate resilience. In theory, lower climate-related risk means better risk-adjusted investment performance, which simultaneously encourages investment into more resilient assets.

Secondly, the disclosing companies will be the ones to identify, manage, and monitor the risk of climate change on their business. This provides the strategic oversight required for risks to be managed and helps companies to proactively address the climate-related issues they face.

Thus, the TCFD process can lead to proactive climate risk management, more investment into futureproof, decarbonized and climate resilient assets versus the contrary, and increased capacity within the industry to make more climate-conscious and therefore lower risk investment decisions. All of which is already being demanded by many shareholders and will only continue to pay off, as climate risks increase.

There is of course a balance to be struck for real estate investors and managers: invest the “right” amount so that risks are averted, while keeping investments rewarding.

To respond to and reduce the impacts of climate impacts on the real estate and other sectors, two main things have to be addressed :

  1. Mitigation – by drastically reducing greenhouse gas emissions to avoid further contributing to climate change – and become independent from fossil fuels; and
  2. Adaptation – to increase the resilient capacity of assets to climate impacts. This concerns  both physical, and the less tangible ‘systemic’ (i.e. social or economic), aspects.

One of the challenges is certainly a remaining level of uncertainty when it comes to climate change. At the same time, catastrophic climate impacts are already happening now, even effects that were forecasted to happen in the distant future only a few years ago, are materializing now. Thus the element of time is important to consider. There is none to be wasted. We believe that the more information investors and asset managers have, the better informed these decisions can be made. The TCFD, with its framework to define, capture, and disclose anyclimate-related information that relates to investment risk, financial position & performance, business planning and strategic decision-making, at a minimum provides a good starting point to ensure opportunities and threats are not missed and risk reduction can be acted on. In its latest Guidance update, the TCFD also published Guidance on Metrics, Targets, and Transition Plans to further support financial statement preparers in disclosing decision-useful information and linking those disclosures with estimates of financial impacts. Such information will help users better assess their investment, lending, and underwriting risks – and inform paths and progress toward net zero. This makes TCFD a useful and timely mechanism for companies and organisations to begin to understand and manage these risks, helping them to more prepared for the unfolding and increasingly irreversible climate crisis.

The full 2021 Status Report, updated Annex, and guidance document are available on the TCFD website. TCFD will deliver its next status report to the FSB in September 2022.

It’s getting hot in here! Heat risk to buildings

The recent heatwave in Canada has brought into focus the real and present dangers of extreme weather conditions. Record temperatures in British Columbia, reaching as high as 49.6°C, resulted in hundreds of excess deaths and heat-related hospital visits. As early analysis shows the heatwave would have been ‘virtually impossible’ without human-caused climate change, we know to expect an increase in the frequency of such events, presenting a global challenge for the buildings in which we live and work.

In the UK, the Climate Change Committee (CCC) have recently released their third assessment of the UK’s readiness for the impacts of climate change. The Climate Change Risk Assessment (CCRA3) paints a stark picture of the widening gap between the risks posed by the UK’s changing climate and the government’s policy response. Among the highest priority areas identified by the CCC, they highlight ‘risks to human health, wellbeing and productivity from increased exposure to heat in homes and other buildings’ as requiring urgent action before the next round of national adaptation policies due in two year’s time.

What is the risk?

Average annual temperatures in the UK have already increased by 1.2°C since pre-industrial levels, and are expected to rise further. Summers as hot as 2018 (the joint hottest on record) could occur every other year by 2050, with an increasing likelihood of exceeding 40°C, according to the Met Office’s UK Climate Projections.

Without suitable adaptation measures, cities will become increasingly uncomfortable places to live – the dense concentration of buildings and paved surfaces in urban areas causes an increase in temperature relative to the surrounding countryside, known as the urban heat island effect. This will increase the number of ‘tropical nights’, hot and humid evenings that are a significant contributing factor to heat-related deaths during heatwaves.

More than 2,500 people died during heatwaves in 2020, the most of any year since records began. Continued warming, and current adaptation measures could see this figure triple in coming decades.

In the five years since the previous report (CCRA2), 570,000 homes have been constructed in the UK and under current government targets another 1.5 million will be built by the time CCRA4 is published. If buildings are not designed to cope with the increasing temperatures, there is a real risk that climate vulnerability is ‘locked in’ to our infrastructure.

What are the implications?

Of the many risks discussed in the report, the CCC singled out the risk of heat in buildings as being particularly notable for the absence of adaptation policy.

There are two years until the next round of national adaptation policies must be submitted; two years that are vital for closing the adaptation deficit. With consultations taking place in England and Wales, it is likely that policy will follow. It is therefore essential that this risk must be considered now, for both standing and development assets.

At EVORA, we can work across the entire life cycle of a project, to help deliver on better building design and operation. As well as helping to reduce the embodied carbon in the materials used in construction, improving resilience to high temperatures can be worked into the building at the design stage to reduce climate vulnerability. This could include measures such as:

  • Passive cooling measures – better shading, more reflective surfaces, and improved ventilation are often the most cost effective ways of reducing the pressures of high heat;
  • Choice of materials – through well informed decisions around the choice of materials, it is possible to create a more comfortable internal environment, whilst also reducing the embodied carbon in construction;
  • Green roofs and rooftop gardens – as well as the obvious boosts to biodiversity, green roofs reduce heat by providing shade, and through the cooling effect of evapotranspiration.

Further to this, through our partnership with Moody’s 427, we are able to incorporate physical climate risks, including those posed by increasing temperatures, into our SIERA platform. This enables our consultants to analyse physical risks on an asset-level basis. This detailed information can then form the basis of best-practice climate resilience measures across a real estate portfolio.

If you would like to know more, speak to our experts today: info@evoraglobal.com

Forward-looking ESG data

To integrate climate risk and sustainability into financial decisions, we need to standardise metrics, improve data quality and ensure that it is forward-looking as well as measuring past performance. For climate risk, this is an essential part of the TCFD Recommendations for integrating climate risk as an investment risk.

Climate risk is divided into three categories:

  1. Transition risk
  2. Physical risk
  3. Litigation risk

They all have forward-looking components. In ESG data terms, we can use historic data and data models to project future implications. We can do this more easily for the E in ESG because we know that we’re operating within planetary boundaries so we know there are limits. The Stockholm Resilience Centre (2015) monitors the nine planetary boundaries shown below.

Whilst this illustration doesn’t show us overshooting the climate change planetary boundary, that is because we haven’t yet. We are on track to do so with our present rate of greenhouse gas (GHG or carbon) emissions. That is why, in 2015, the UN Paris Agreement was signed by 195 states. This Agreement set us on a course to reduce emissions to Net Zero Carbon (NZC) by 2050, which keeps global warming well below 2°C, and ideally 1.5°C, to prevent catastrophic, non-linear climate change.

Over the last two years, many real estate companies and investors have committed to a Net Zero Carbon target and some have a pathway to get there. For most fund managers, they have not yet had time to project out a NZC pathway for their fund and real assets.

A science-based NZC pathway can show a clear route to reducing emissions each year. We need to be over halfway to NZC by 2030. However, local markets will move at different speeds depending on their starting point today; the local regulations; the cost of energy and carbon emissions; and, to some degree, the local awareness of a changed climate and how this forces climate adaptation. Climate adaptation will be required to protect against extreme weather events, which have become fiercer and/or more common over the past decade increasing insurance losses and premia.

These climate risks are the reason why ESG data needs to be forward-looking.

At EVORA Global, we have developed our SIERA software to be forward-looking on climate risk. We have worked on two new modules. The first is focused on NZC and transition risks and this is already available. The second builds on our partnership with Moody’s 427 physical climate risk assessment, which is used by our consultancy team. This will enable users to see both sets of climate risk in one place, associated with each asset and fund.

The screengrab below shows the NZC module, shows a real estate portfolio and the fund’s NZC pathway. This uses asset energy data from the last 9-12 months to calculate carbon emissions for the whole building. Based on asset type and location, it then automatically projects a science-based NZC pathway out to show the required emissions reduction. The tool can then be used to run different scenarios for emissions reduction based on what is know about each asset.

There are other features within the NZC module so do get in touch if you’d like to organise a demo

Physical Climate Risk Assessment

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:

  1. 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,
  2. An assessment of the impact pathways to create a shared understanding of how the hazard risk could impact the drivers of asset value, and
  3. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.