A practical approach to assessing and managing physical climate change risks in global portfolios
Published on 21 May 2019
affects all organizations
Every day it’s impossible to avoid learning about
another catastrophic climate event in mainstream media. Extreme weather can
destroy properties and valuables, threaten lives and cripple businesses. The Financial
Stability Board has deemed climate change a risk to the global financial system
and launched the Task Force on Climate-related Financial Disclosures (TCFD) to
guide companies on how to disclose climate-related risks, opportunities and
The TCFD divides climate change risk into transition
and physical risks. Transition risks concern market and regulatory changes – how
your business is affected by new technologies, regulations and customer demands.
Physical risks include acute risks from extreme weather events and chronic
risks from longer-term shifts in climate patterns, for example higher
from climate change threaten the value of commercial real estate
Physical risks represent a threat to real
estate because buildings must adapt to the changing climate in their region or
risk obsolescence. Despite the threat, few owners understand their exposure to
these risks and what management strategies currently are in place – especially
across global, diverse property portfolios. This is not surprising as there is
little industry guidance so it can be intimidating to take that first step into
a previously unexplored area. That is why we worked with our client, The
Healthcare of Ontario Pension Plan (HOOPP), to develop a pragmatic approach to
assessing risk and resilience.
You start by understanding the portfolio’s
risks and vulnerabilities… here’s how we did it
HOOPP is a real
estate sustainability leader, recognized on three occasions by IPE with its Sustainable
Strategy Award. This climate change risk and resilience assessment was a collaborative initiative between Quinn & Partners and HOOPP,
conducted on HOOPP’s
global $14 bn real estate portfolio.
The team worked with HOOPP’s insurance
provider to acquire data on physical, climate change-related risks. For acute risks
we analysed historical data for overland flooding, storm surge, wildfire and
wind. For chronic risks we examined forward-looking climate projections for
precipitation changes, temperature changes and sea-level rise, and created a forward-looking
climate risk index.
We collected property resilience data using
a survey deployed to nearly 200 properties across the world and developed a
resilience score for each property. The risk and resilience score for each site
was summarized in a matrix providing a portfolio-wide view of the state of
climate change risk and resilience across all of HOOPP’s holdings.
This exercise demystified the risks of
climate change and allows HOOPP to make informed decisions and disclose climate
action to stakeholders – here are a few examples.
regions and properties to target with climate action?
The risk data provides an overview of the
likelihood and severity of threats in regions where HOOPP operates. Given the
portfolio is mostly located in Canada, the primary threat is overland flooding.
However, all properties are expected to experience precipitation changes and
The real estate team can rest easily knowing
that no properties are at immediate risk of becoming a stranded asset, but
actions are needed now to mitigate flood risk. This is also something that is
becoming important for sophisticated tenants. The investment team can work with
asset managers to invest in flood resilience by influencing operational and
capital plans, based on the risk data and preparedness score for each property.
The data can also be used during
acquisitions to evaluate whether buildings at risk of extreme weather are properly
prepared and what upgrades should be budgeted for in underwriting.
how much to invest to minimize losses and insurance costs
There are no guidelines for how much to
invest in resilience, especially when losses from damages and business
interruption are covered by insurance and vary based on the severity of an
event. In the process, our team learned that claims from water damage can range
from a few thousand dollars to over $1,000,000 per event. But insurance is not
a panacea. Flood deductibles are often higher than general deductibles,
increasing the potential losses during a flood event.
As it relates to extreme weather, the costs
of recovery are higher than the costs to prepare (source: U.S. National
Institute of Building Sciences estimates that exceeding the building code to
increase resilience can save $4 per $1 spent). Science also tells us that the
likelihood of a climate event, such as flooding, is increasing for most properties.
Finally, if a property is ever exposed to a flood, the deductible and premium will
likely increase. Hence it becomes clear that the best climate change strategy
is to invest in resilience.
One strategy can be to invest up to the
deductible value. Industry guidance from groups like BOMA and REALPAC recommend
numerous low-cost investments to improve resilience. The property survey reveals
which resilience management practices are in place and which should be
incorporated in budgets and operational standards. Armed with the information
from this assessment, HOOPP can demonstrate to its insurers how it is acting to
reduce risk to negotiate more favourable rates and deductibles.
assessment sets a baseline for measuring improvement and supports disclosure
Our client now has a baseline from which it can track changes in portfolio risk and resilience. HOOPP can also disclose its climate-related risks, strategies, risk management process and metrics/targets in accordance with TCFD recommendations and PRI and GRESB resilience disclosures. It’s also the first step towards more in-depth scenario modeling and value-at-risk analysis at locations with the most at risk.
There will always be uncertainty when
assessing climate risk, but that is no reason to delay. By its very nature
climate change is rife with uncertainty. Changes are coming but it can be
difficult to know the magnitude, timeline and compounding effects. Nevertheless,
climate scientists have agreed on directional changes. Here in Canada for
example, it’s going to get hotter and wetter and that’s going to affect
commercial real estate from coast to coast. We may not know when the next large
rainstorm or heatwave will happen, but we know they will become more frequent and
extreme and what can be done to prepare for them. That is reason enough to act.
& Partners supports leading institutional investors, real estate and
infrastructure companies with ESG integration and GRESB assessment services. In
2018, the value of all Real Estate and Infrastructure Assessments that the team
submitted on behalf of its clients was CAD 210 billion, which is equivalent to
10% of all North American responses. Please reach out to Francisca Quinn,
Managing Partner, Quinn & Partners, at +1 416 300 8068 for more
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