Trends and expectations for sustainable real assets in 2019: Taking Climate Resilience Mainstream

Climate resilience has emerged as a key field of practice; however, a concern is that thinking and knowledge of this topic, and most importantly actions are not progressing quickly or purposefully enough for real estate managers to adequately prepare their assets for the potentially perilous shocks and stresses caused by climate change.

Resilience is becoming a major consideration for businesses, with impacts on insurance, valuation and rents already starting to show in many countries.

The impact of climate change has vast implications across societal, economic and environmental realms. Building managers and owners have unique responsibilities as stewards of essential economic and social assets. The well-being of communities and economies significantly depends on access to reliable working assets. Consequently, we believe that planning for and adapting to climate change is not only prudent but essential.

Below, we identify five key reasons for integrating climate resilience into asset management and investment planning decision-making.

1.Increasing performance reliability

Assets capable of operating during climate crises will exhibit greater long-term return predictability.

2. Sustaining and increasing asset value

Value will be protected for assets that are not significantly affected operationally by climate-related events, or that do not need significant capital expenditure after such events (when other assets may be experiencing downtime). There may also be opportunities for operational cost reductions through efficiency and resiliency gains.

3. Identification of future opportunities

Demand for resilient assets is likely to increase. Investors are exhibiting increasing interest and understanding in climate resilient assets, particularly in sensitive areas. Investors are mindful of the economic consequences of disruptions and emphasising reliability and resilience is central to their requirements.

4. Growing trust

Assets are designed to provide effective services throughout times of peak demand/need. Assets that operate most effectively during times of climate disruption are therefore likely to generate increased trust from tenants and other key stakeholders and thus retain financial, economic and societal value over the long term.

5. Increasing influence

Investors who lead the evaluation and adaptation of assets and demonstrate the thoughtful performance of fiduciary duties are likely to have a more respected voice within policy discussions.

Progress

As mentioned above, resilience has emerged as an important topic.  Whilst there is a long way to go, progress has been made. Some communities and assets around the world are embracing plans to be resilient to what the future will bring — and what the present is already delivering. We identify five key marks of progress in the practice of resilience:

1. The knowledge base on resilience is expanding
2. Tools supporting resilience are increasingly available, yet remain difficult to select and use
3. Science and practice are increasingly working together, but more collaboration is needed
4. Resilience mandates are emerging in some countries and cities
5. Funding from philanthropy and government has been crucial in field growth.

So, what should real estate companies do?

Consistent with our belief that investors need to deal with the risks of climate change as a practical issue now, rather than put it off into the distant future, we encourage a systematic assessment of the vulnerability of assets to climate risk, ideally by utilising an analytical modelling framework. This will enable the identification of risks, assessment of materiality and provide guidance to investing, considering the need for climate resilience in assets, new investment opportunities and the broader business plan.

Given the relatively short timeframes during which an investor might own a particular asset, a common attitude is that climate risk is of low priority for evaluation. However, by evaluating whether assets are vulnerable to business disruption due to the impacts of climate change, investors may be able to implement resilience measures that positively increase an asset’s valuation. Modelling future climate and risk scenarios can assist climate due diligence by enabling consideration of how the asset may fair against risks posed by tomorrow’s climate and not just todays.

We advise a process for evaluating climate risks:

1. At portfolio level to:
   • Identify relevant geographic climate risks
   • Score and map assets in the portfolio based on criticality and vulnerability
   • Prioritize climate risk mitigations in accordance with ratings
2. At asset level to:
   • Evaluate key climate risks and their relative impacts on a physical assets condition, operational capacity, and for regulatory implications (fines, penalties)

This can then support development of a mitigation strategy which develops action plans based on highest value risk mitigation options per vulnerability reductions

Our conclusions

The cost difference between being pro-active now compared to being reactive in the future will be significant. Early actions have the potential to reduce losses in the short term as well as create significant value by enhancing the resilience of assets in the long term. Forward thinking investors alert to the implications of climate change can integrate adaptive strategies. This will avoid being caught off guard by climate shocks and incurring large remedial costs that could severely disrupt investment returns.

The real estate industry will adapt further as the resilience discipline itself evolves. Best practice is not universal across the sector, and the science and our ability to devise innovative solutions is constantly evolving. As we move through 2019, we recommend that all real estate firms consider resilience by asking the following questions; What does resilience mean? What risks are faced and how can they be mitigated? Progress towards development of a Resilience Strategy is a true win/win – good for business and good for the planet.

Written by Joanna Tomlinson, Sustainability Consultant, EVORA