As the ongoing Covid-19 crisis demonstrates, the ability to understand risk and its corresponding impacts and mitigation have been underestimated by a number of businesses and governments around the world. The same can be said of how climate risk is conceived across the economic and political sphere. Despite declarations of climate emergencies and aspirations for net-zero, these proclamations ignore the fact that climate change is already taking place, that geographies, businesses, and economies are already experiencing the impact of climate change. And while zero-carbon should always be paramount, so should climate resilience.
Resilience in real estate
Climate resilience is the process by which an organization, community, Government or economy can recover after a significant climate event. In the real estate context, the ability for an asset to come back quickly into use after a climate event, or to adapt so that it can manage extreme events is paramount to its existence. Other factors such as flexible workspaces or the ability to relocate if a building is inoperable also contribute to its resilience. As we face increasingly intense heatwaves, an asset with an outdated high-cost cooling system runs the risk of losing tenants to better-adapted assets with passive systems and adapted built form.
The role of TCFD’s in real estate resilience
In 2017, The Task Force for Climate Related Financial Disclosure (TCFD) published a report that included a set of recommendations for voluntary and consistent climate-related financial risk disclosures in mainstream filings. They outline how organizations should account for and disclose their exposure to climate risk, focusing on transitional (to a net zero economy), physical and legal risks.
Transition risks identify how an organization can be affected by the drive towards net zero and the wider recognition of the risk climate change presents in areas of culture, policy, technology, reputation and markets. While transition risks could be seen as mitigation heavy, they present a foundation from which resilience actions can be built. For example, changing company culture to focus on zero carbon can lead to better market readiness or changing consumer sentiment. The transition risks can be used as both a horizon scan and as a gap analysis. Is the organization ready for changes in policy? What are consumer behaviors around low carbon?
The increasing coverage and publication of evidence linking poor air quality to a range of indicators around health, coupled with increasing viability of electric vehicles have led to consumers quickly moving away from diesel in favor of something that is cleaner. In 2018 diesel sales plummeted by 37% in the UK. In the case of Jaguar, 90% of their vehicles were reliant on a diesel engine. Their failure to account for the market changes in vehicles was cited as one of three main reasons for their record £3.6bn loss that year.¹
Understanding the physical risks, both from one-off and longer-term events is obviously about understanding the environment. But this is where the issue of stranded assets comes into play and speaks about how your business makes decisions around about existing assets and future investment. If a TCFD analysis of your transition risks reveals there are gaps, this can lead to poor decisions that exacerbate the physical risks. Poor governance and a lack of integration of climate change in decision making, financial and non-financial reporting mean decisions made today may lock in a higher carbon route tomorrow.
The other element of analyzing the physical risks within the TCFD categories is that it allows organizations to develop scenarios and measure how those impact on assets, organizational practices and future decisions. What is the impact of an increase of 18 overheating days per year to 51 days per year on asset cooling costs? Will this impact on projected occupancy rates? If occupants demand flexible rents because of increased home working due to regular heatwaves or extreme storms, how does this tally with investor sentiment around expected returns?
Increasingly, developers and investors have to take account of the legal risk. The Heathrow case illustrated how climate change can be used to demonstrate that developments, infrastructure, projects have to take account of the Government’s Net Zero legislation. This means potentially setting aside project time and funds where projects may be challenged for their lack of climate credentials.
But perhaps where the TCFD’s can be most effective (with and additional bonus for your ESG strategy) is under Governance. For too long, climate or ‘the environment’ has been considered the domain of specialists or the ‘committed individual’ and not of the executive team or the board. This is the governance gap that exists at the heart of many businesses – even if they have committed to net zero. In many instances’ poor consideration of long-term climate change is down to poor recording or organization of data – because most organizations do not organize their data to take account of climate events or have genuine indicators. While carbon footprints can tell us what we have done, they can’t tell us what is around the next corner. And if you are looking backward, without access to data that is managed and optimized then your decisions reflect that.
For many, this will be a new way of assessing the impacts of climate change on their portfolios. The GRESB resilience model has integrated the TCFD’s in a way that allows asset owners to take the first steps on integrating climate risk in a meaningful way. This is an increasingly important addition to the way the climate is assessed in ESG strategies beyond the carbon impact of a building or portfolio leading to more resilient, low carbon portfolios and reducing the risk of stranded assets.
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