If an organisation doesn’t have climate change at the top of the agenda at the moment then questions need to be raised. Now I’m sure you can quote some organisations where rightly it shouldn’t be top of the list but the general point is most should. Investors want net-zero commitments AND actions. The regulators are pushing out more regulation and disclosure requirements for companies. Your stakeholders wider than just investors want action, from your customers to your own employees. For real estate it is clear, there is a responsibility to evaluate the portfolio and future proof the portfolio. Let us not forget that real estate is a HUGE contributor to carbon emissions.
There are two ways to think about climate change – there are transition risks and physical risks. We are not just talking about what year the property will flood. This is broader – but also flood risk is a part of the analysis. How real estate adapts and evolves will depend on who the players are and how quickly there will be a valuation risk. It all starts with an analysis of the portfolio looking at value, asset management strategies, investment strategy and ultimately how you can decarbonise the asset. For real estate there are already low hanging fruits for many assets using technology already available – energy efficient lighting (and frankly have the lights turned off when not in use!), low carbon heating and cooling systems and better insulation.
The risks faced need a little more understanding. Physical risks are hazards caused by a changing climate, for example flooding, storms or extreme heat. Transition risk is more linked to the economy changing, consumer behavior and regulation. All these items can add up to create a risk in the valuation. The challenge is to perform an assessment and then look at the actions that can be taken – clearly moving the building isn’t an option but other actions can be taken.
The impact and implications on organisations at a granular level I don’t believe is fully appreciated by all:
- Revenue: Unattractive carbon-intensive assets could lower ability to achieve higher returns. Disruptions to the asset could have far more reaching consequences than ever. For example, if the asset becomes subject to flooding; and
- Cost base: Increased outflows for carbon-intensive assets and potential carbon charges under local legislation. These assets are likely to cost more to maintain.
It is not a simple exercise to decarbonise an asset let alone a whole portfolio of assets. What is the priority and how best to utilise available resources. Data becomes the friend here. An ultimate starting point has to be understanding the starting point – quantify your emissions for each building. Determine the embodied carbon for making future decisions. With this understanding you can then set realistic targets to reduce. An organisation needs the right governance structure around these discussions – try setting policies around the targets (how frequently are they reviewed), what financing is maintained and how do you engage your stakeholders about your actions. Track the action and show the benefits that are unfolding.
There have been announcements made by some organisations following climate stress tests. The numbers weren’t small. The analysis showed one thing for sure – each asset will vary, there is no one size fits all answer. The variance will depend on an assets carbon footprint, who the tenants are and its location. The key is to understand how to respond to the risks. To assess climate change risk will require investment in monitoring of data.
The ultimate goal here is for real estate to have a clear strategy that incorporates climate change risks against each individual property with clear actions to decarbonise the asset and enhance value.
Words of Wilko 