Climate risk poses a growing threat to property, driving real estate investors and environmental consultants to seek out data that provides insight into potential hazards. ClimateCheck recently hosted a webinar with ERIS, an environmental data company, and AEI consultants, an environmental consulting firm, about the role of climate risk assessment in environmental due diligence.
As climate change escalates, more properties and real estate investments will face heightened vulnerability to extreme weather events and other climate-related dangers. Using both high-level and property-specific climate data will help professionals in the real estate sector understand the risk to specific properties and regions. This data can be used to inform how clients direct resources towards property resilience and shape investment strategies as a whole.
Property and portfolio-level assessments are also crucial from a risk disclosure standpoint, which could become even more necessary as regulations and standards evolve. The webinar touched on forthcoming climate risk assessment guidelines from ASTM, and the planned guidelines’ implication for environmental due diligence. Read on for key insights from the webinar.
Climate hazards and risk data
Climate risk data is a key resource for evaluating the present and future physical climate risks to an individual property and a portfolio. Climate-related hazards can be chronic, such as extreme heat, affecting operating expenses and quality of life. Other climate hazards such as wildfires are more acute, and can cause total loss of property. Both types of hazards can cause damage to a property, whether all at once or over time.
ClimateCheck data covers a range of climate-related events – including drought, fires, heavy precipitation, extreme heat, flooding and high winds – and considers multiple emission scenarios. Our reports evaluate the risk of these events to individual properties or parcels, and also covers population-weighted risk to show how a property fares in comparison to neighboring properties and the region. Local comparisons are important, since properties in the same area bear disproportionate vulnerability to climate impacts.
ClimateCheck reports can also assess the distribution of risk across a portfolio, helping investors identify hot spots. Investors can then prioritize risk mitigation for existing assets and chart possible areas of future investment.
Drivers behind increased engagement with climate risk data
Experts from ERIS, AEI Consultants and ClimateCheck all emphasized the factors that are driving real estate stakeholders to utilize climate risk data and covered how that use has changed over time.
Investors, REITs, lenders, and other real estate stakeholders have increasingly incorporated climate risk data into their overall picture of risk, ClimateCheck founder Cal Inman said during the webinar. In line with increased public attention on climate change and ESG strategies, the real estate industry’s best practices are evolving to include climate risk assessments.
Many real estate stakeholders are watching the SEC’s proposed changes regarding climate risk disclosure, which is contributing to their interest in climate risk data, Inman said. Additionally, increasing costs in the property insurance market are also driving owners to evaluate their assets for climate risk, said Holly Neber, CEO of AEI Consultants.
Stakeholders may also be incentivized by resilience-related funding and access to international capital, Neber said. She cited the insurance company FM Global as an example of a company that is offering financial incentives for implementing property resilience measures.
Development of new ASTM standard and resilience processes
Neber, who is currently chairing the development of the ASTM 62996 “Property Resilience Assessment” guidelines for assessing physical climate risks to commercial properties, outlined the process for assessing property and portfolio resilience. The first step in the process is to screen properties and portfolios for climate-related hazards, using resources such as ClimateCheck’s risk data. This process can guide due diligence for new assets, inform loan origination, and help screen existing assets.
The next step in the process involves zeroing in on the identified climate hazards and the assets deemed higher risk. Stakeholders should review the assets for vulnerabilities, considering not just the physical aspects of the property, such as the building’s construction and the resiliency measures already in place, but how it is being used.
After reviewing the properties for vulnerabilities, assessors can suggest property resiliency measures to prioritize, taking costs into account. Resilience measures preserve the value of an asset and mitigate future damage, but owners have to understand the operations and maintenance of those measures.
Guided by the development of the ASTM standard, real estate professionals and asset owners can use these steps to reduce risk to current assets and prioritize resiliency in their investments moving forward.
Physical climate risk and ongoing due diligence
Incorporating climate hazard assessments into the due diligence process gives clients a fuller understanding of current and future risks to their properties and portfolios. “This is just expanding that lens of what’s important so they can make good decisions,” Neber said.
People are looking to better understand how susceptible their properties are to physical climate hazards and are seeking recommendations for how to protect their portfolios, Inman added. While high-level climate risk data is readily available to the public, professionals with expertise in assessing climate risk can identify specific vulnerabilities and make resiliency recommendations.
Due diligence professionals can incorporate an understanding of physical climate risk into their overall evaluation of environmental risk, and help developers, lenders and owners minimize future risk.
ClimateCheck® was founded in 2019 to empower property buyers, owners, and brokers by exposing and quantifying the risks related to the climate crisis through our proprietary risk assessment and report. The company’s team of experts uses data from government, academic and other public and institutional sources, such as the Intergovernmental Panel on Climate Change (IPCC) to rank drought, heat, fire, flood, and storm risk for individual properties. Clients of ClimateCheck include ERIS, AEI Consultants, Morningstar Inc., Green Street, and Black Knight.