Physical climate risks: prepare and evolve

Climate changes will continue to increase risks in frequency and impact unless the real estate sector do something about it

July 29, 2022Real Estate
We could begin this opinion article by saying the effects of climate change will be irreversible unless we take immediate action. We could scrutinize the statistics and deadlines, or run through possible climate scenarios, but we know all this already.

We hear about these facts time and time again.. Yet, there is a long way to go.

Governments and organizations all around the world have been implementing mid to long-term plans to tackle the climate crisis, and the real estate industry is no stranger to this. One of the Paris Agreement goals, for example, is for competitive zero-carbon solutions in sectors representing over 70% of global emissions, by 2030. And that is a good start.

Regulation, certifications, and other labels are doing their part in guiding the real estate industry, responsible for 37% of the global carbon footprint. But what about the physical risks that once occurred naturally and now are being intensified in impact and frequency by GHG emissions?

In the context of inevitable risk, a crucial mission for Asset Managers is to gather and process their portfolio’s data, and put in place a resilient strategy considering not only risks but also the vulnerabilities it might be exposed to.

Portfolio assessment: emphasis on complete

The physical risks from climate change may be acute, driven by events, or chronic, due to long-term shifts in climate patterns. These events can impact organizations financially by, for example, causing direct damage to assets, or indirect damage to supply chains.

The financial value of a building or any real estate asset may be impacted by water availability, sourcing, quality, food security, acute weather changes affecting land, operations, supply chains, and safety. Some risks, including earthquakes and soil pollution, are not aggravated by climate change, while others, like heatwaves, droughts, and floods are enhanced by it.

Regardless of cause, the impacts of these risks will continue to increase in frequency and impact unless the real estate sector aligns itself with the best practices in sustainability, analyzes its progress, and implements a trajectory based on a series of actions to mitigate risk and minimize damage.

To properly assess the risk associated with your portfolio, one must consider two factors: the evaluation of the geographical exposure, and the vulnerability of the assets.

To give a more tangible example: you may have two buildings in Madrid, one of them specifically vulnerable to heatwaves because 40% of its surface is glass. Both of them have the same geographical location, but one is more vulnerable to a certain physical risk. This also can be influenced by the height and size, construction materials, and so on.

Taking all this into consideration is vital when considering a future investment, or during an asset valuation and financing process. One should always ask: how the vulnerability of an asset might affect its value?

D for Data

Reliable data is the first step toward smart and informed decisions. Data is essential for identifying risks and their analysis can bring useful insights. The completeness and relevance of the data are as important as its analysis. Automated data collection not only simplifies our lives but also makes the assessment more effective.

A thorough geographical exposure and vulnerability assessment is needed to determine the value of an asset, how to improve its ESG performance, and to choose the most important areas from the roadmap.

We’re not talking long term

Ignoring physical climate risk is no longer an option for asset managers and stakeholders alike. An acute awareness of risks and vulnerabilities allows us to see the complete picture, to implement mitigating actions, and design adaptive actions within a solid trajectory to preserve the portfolio value in the long-term plan.

Keep in mind that these challenges, as urgent and stressful as they may seem, create significant opportunities for committed climate resilience organizations. It is time to take a holistic approach to process strategies that improves results and value for investors and for the community.

The first step is to gather and analyze the data to gain powerful insights, followed by the implementation of strategic actions to generate an actual impact. This will allow you to preserve the value of your assets and pinpoint new opportunities arising from the framework and its findings.

The comprehensive risk management information availability to investors and asset managers creates new possibilities for effective resilience planning and implementation. At Deepki, we are keenly invested in making this kind of information available for those who want to create a positive impact.

The combination of the right knowledge and tools will empower the real estate sector to implement adaptive measures to mitigate risks and shield assets, while hopefully resulting in the deceleration of climate aggravated risks themselves. That is our best hope for transforming the environment and working together towards a sustainable future.

Maria Eugenia Ortiz
International Content Manager