The Urban Land Institute and LaSalle Investment Management have developed a framework to help real estate investors evaluate the costs of action versus inaction in response to the climate crisis.
The aim of the tool is to make climate risk disclosure data more readily accessible and help investors and other practitioners future proof their investments by opting for the course of action that will provide the most long-term resilience.
It does so by breaking advice down into three steps for decision making that take into account individual asset risks, local market risks, and ongoing risk mitigation efforts.
These three steps are to evaluate the level of exposure to physical climate risk and financial implications; identify hazard mitigation strategies and estimate associated costs; and determine risk-adjusted return and whether or not that return meets firm objectives.
The Physical climate risks and underwriting practices in assets and portfolios report is the second in a series by ULI and LaSalle. It builds on the findings of the first report, which outlined how to source and interpret reliable climate risk data.
Lindsay Brugger, head of urban resilience at ULI, said: “Physical climate risk data collection and disclosure is the first step the real estate industry can take to further invest in and build resilient infrastructure.
“Data drives action and doing nothing incurs deeper costs — from higher insurance premiums to asset repair or replacement. Focusing on the underwriting process, the framework offers investment managers a methodology for developing risk-adjusted returns so deals can be adapted in alignment with a firm’s fund or portfolio objectives.”
Julie Manning, global head of climate and carbon strategy at LaSalle Investment Management, said: “This report helps provide guidance that investment managers can follow to factor the climate risk data they have available to them and improve outcomes at the asset and portfolio level.”
Simon Chinn, ULI Europe vice president for research and advisory services, added: “In Europe, there is certainly increasing recognition of both physical and especially transitional risks that climate change poses to the built environment.
“However, as this report suggests, concerns regarding physical risk arising from weather and climate related extremes may be perceived as a lower priority in Europe, compared to the US and Asia, which have to date experienced a greater frequency and intensity of hazard events, particularly hurricanes and wildfires.”
Yet, he noted that perceptions of physical risks in Europe are beginning to shift.
Chinn said: “The latest data from the European Environment Agency revealed that 2021 and 2022 combined yielded €111.7bn of damage across the EU, a 40-year high.
“Proactive, data-driven strategies to take action and mitigate risk in future will be essential, and this new framework provides an invaluable roadmap to navigate this complex area.”
Photo © Porapak Apichodilok/Pexels
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