Navigating climate risk management: Strategies and steps for real estate organizations

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.

By now, the term climate risk has crept into every ESG professional’s vernacular and addressing such risk, both the physical and transition risks, have been brought to the top of the agenda for many ESG-focused firms. Proposed legislation from the US Securities and Exchange Commission (SEC) validates this uptick in climate risk reporting and strategy development. Investors have followed this trend closely with echoing requests for climate risk assessments that evaluate the impact these risks may pose on their investments. For the first time in 2023, GRESB is scoring questions on climate risk as part of its assessment, and while many of the leaders in the ESG consulting space would agree risk reporting is best practice, the reality is that most organizations are not equipped to adequately identify, evaluate, and mitigate climate risks.

Across industries and geographies there is one prominent framework that helps organizations report and standardize disclosures around climate risk management: the Task Force on Climate-related Financial Disclosures (TCFD). Full alignment to the framework is a challenging task, leaving organizations navigating the pressure to develop comprehensive climate risk strategies. At RE Tech Advisors, we approach this as an opportunity to help organizations strategize action plans and initiatives such as net zero goals and decarbonization strategies to address climate risk by reducing carbon emissions and improving efficiency. As a part of Legence, the nation’s first Energy Transition Accelerator™, we have a unique ability to pinpoint processes to help our clients rise as leaders in addressing and reporting on climate risks. In doing so, we are able to take the language of the TCFD framework and provide tangible, actionable steps at both the company and property level.

RE Tech aims to set our clients up for success in climate risk reporting through the following steps:

By understanding a portfolio’s physical risk and risk levels, we help our clients collate their portfolios and properties into Climate Risk Analytics Platforms which will generate risk levels using future climate scenarios. Transition risk, regulatory, technological, and market changes are evaluated. City, state, and country energy and emissions mandates are used to identify risks as well as a client’s ESG goals. We can then help our clients calculate the risk across their portfolio and also help them track progress. At the asset level, those with the highest risk are then evaluated on an annual basis and new potential acquisitions are screened using the same platform and processes in order to continually assess the overall risk profile of a portfolio.

Evaluating risks is important to determine the severity and likelihood of risk affecting certain assets. In order to have a comprehensive understanding of physical risk, we help our clients conduct an analysis on location-based risk using various tools and resources. While many of the tools used are based on location only, RE Tech Advisors has developed an asset-based evaluation to understand existing mitigation strategies already in place to adjust risk. After adjustment we recommend re-evaluating the percent risk at a portfolio level and asset level to compile action items to further mitigate risks. Similarly on the transition risk side, once properties are identified to be at risk, further analysis is done to understand reasoning behind the risk such as inefficient operations, dirty grid, and old equipment/systems. At the same time, opportunities to reduce risk and financial implications are assessed to generate and help prioritize actionable next steps at the asset level as well as evaluating portfolio level strategies and potential results.

As a final step, RE Tech provides insights to assist clients in decision-making for mitigating, transferring, accepting, or controlling risk. At the property level, we assist our clients in evaluating property-specific measures to mitigate climate risk as well as budget for capital and operating expenses associated with managing said risk. Leveraging the Legence team, we are able to support the implementation of energy efficiency and resiliency measures at the property level.

Looking forward, the science behind climate risk predictions and the impact risk has on financial performance continues to evolve. Therefore, the process to identify risks requires continual review and adjustment. To stay ahead of risk and risk reporting, RE Tech continues to monitor physical and transition risk consistently and provides support in identifying, evaluating, and mitigating risks in line with the needs of our client’s company.

This article was written by Katie Fluence, Chang Liu, and Jennifer Kennedy at RE Tech Advisors.