There are growing concerns in the sustainability space over physical asset risk identification and mitigation, and transitional risks – not just due to policy and compliance, but reputational risk by not keeping up with the actions of peers. These concerns coupled with investor pressures (see TCFD), give the topic of climate-related financial risk two legs to stand on.
While the sustainability reporting population tackles water and waste related metrics after they have gotten a good grasp on measuring and reporting their energy and emissions data, a new indicator, financial risks due to climate change, is becoming a sought-after piece of annual disclosures. Tracking risk categories can help inform and keep a company internally aligned with its broader strategy. Investors with a keen eye toward climate risks want to know how sound the investment they are evaluating might be, if the sustainability goals of the company aim to minimize those risks, and governance structures in place to achieve those goals.
Specific to GRESB, the framework asks within its Resilience Module if there are senior employees responsible for resiliency issues and if organizations periodically assess vulnerability to environmental shocks. This is also true in CDP, where it’s asked what risks are considered in an organizations climate-related risk assessments and if climate-related issues are integrated into strategy. Whether it be GRESB or CDP, though catering to different audiences, many of the same questions are asked and align well with the TCFD categories of governance, strategy, risk management, and metrics, and so too should the KPIs real estate companies track. This leaves organizations not just better equipped to answer those questions, but able to answer them well to ensure accurate performance tracking of key targets.
At the base level, tracking risk related to climate change involves traditional measurements like water stress and waste generation, but real estate companies should move toward measuring and setting targets for other climate risks and potential monetary impacts as well as qualitative KPIs. Those qualitative KPIs being the questions GRESB, CDP and other reporting entities have been asking. A few examples of risks and their financial impacts real estate companies should track and have targets set for across their footprint include:
- Flooding/Increased Precipitation
- Sea Level Rise related Flooding
- Duration of Heat Waves
A few examples of quantitative and qualitative targets to keep organizations moving toward better governance, strategy and risk management practices include tracking:
- Number of times high-level employees have engaged in discussion around climate risks
- Amount lost due to climate-related impacts
- Reputational Risk Score – how do goals and processes toward achieving them compare to others in the industry?
- Level at which climate impacts weigh in the organizations planning
Just like organizations now have energy, carbon, water, and waste intensity targets, these climate risk related quantitative and qualitative targets should make their way into quarterly and year end reports and scorecards. As the adage goes, “you can’t manage what you don’t measure”, and if companies are not setting targets toward improving climate risks, they won’t be able to see improvement. Additionally, investors won’t have the confidence to know their investments stand the test of time.
As assets are all physical in the real estate industry, these acute and chronic climate impacts are especially important. However, setting performance targets in these areas and gathering data to track progress towards those targets uncovers more than just insight into the risk associated to a building, or how engaged a company really is with these issues. It can also improve strategic performance when looking at business operations outside of the real estate sector.
Consider a real estate company with a global footprint. After setting climate related performance targets, they realize a cluster of their facilities are in an area with high risk for worsening drought looking 10 years ahead. After seeing this, the organization realizes that those facilities also use an abundance of water. Given the real estate company doesn’t want to disrupt tenants satisfaction, they can make better decisions now to install low-flow water fixtures, incorporate alternate landscaping practices, begin harvesting rainwater and educating those on the area about water reduction efforts. This allows the company to be more agile and resilient in the long run.
Coming out of the 2018 reporting season, and preparing for 2019, companies that set targets focused on improving climate resiliency will be able to respond swiftly when their board and CEO asks what they are doing to protect shareholders investments against climate risks and opportunities. And those ready to answer with a list of climate risks the organization faces and how that data is captured and shared with risk and finance teams will see the benefits of becoming resilient.
This article is written by Donovan Heath, Sustainability Associate Schneider Electric Energy & Sustainability Services.
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