Do Florida Case Study Data Require More Disclosure or a Change in Asset Management?

Around the world, governments, businesses, private developers and city planners and officials are spearheading a growing movement to make structures in vulnerable communities more resilient through improved preventative action. The increasing intensity and costs of dramatic weather events has brought an even greater urgency to create buildings and communities that are better adapted to a changing climate and better able to bounce back from disturbances and interruptions.

Resilience is more than the ability to physically withstand major natural disasters – it is a crucial factor in how we survive weather extremes, economic disruption and resource depletion. Ultimately, it is about a community’s ability to come together in the aftermath of an extreme event. The ability of a community to bounce back ultimately benefits everyone. Green, sustainable, resilient buildings are one of the best ways companies and communities can future proof, support climate action, improve quality of life and make an immediate impact.

This article identifies green, sustainable, and resilient building attributes, and data showing where accelerating systemic climate risks can change the threshold where more financial disclosure may be required or more aggressive asset management.

GREEN

A ‘green’ building is a building that, in its design, construction or operation, reduces or eliminates negative impacts, and can create positive impacts, on our climate and natural environment. Green buildings preserve precious natural resources and improve our quality of life.  LEED® was one of the first programs that brought together a menu of options that define the level of ‘green’ in a building.  

The characteristics of a green building include things like:

• Energy and water efficiency
• Waste reduction
• Good indoor environmental quality
• Daylighting of spaces
• Non-toxic, ethical materials

Any building can be a green building, whether it’s an office, medical building, home or hotel, as long as it incorporates a minimum number of the defined characteristics.

SUSTAINABLE

Sustainable buildings can be green, but they take many of these principles to the next level.  Sustainability looks more closely at the building’s direct and indirect impacts on the environment, on society, and the economy, which are commonly referred to as the 3 P’s (‘People’, ‘Planet’, ‘Profit’). A sustainable design seeks to balance each of these areas by using an integrated approach to create “win-win-win” design solutions.  The main objectives of sustainable design are to reduce, or completely avoid, depletion of critical resources like energy, water, land, and raw materials; prevent environmental degradation caused by facilities and infrastructure throughout their life cycle; and create built environments that are livable, comfortable, safe, productive, and enhance social equity.  

Sustainability may incorporate a circular economy approach, an alternative to a traditional linear economy (make, use, dispose).  In a circular economy, we keep resources in use for as long as possible, extract the maximum value from them whilst in use, then recover and regenerate products and materials at the end of each service life.  Building reuse – retrofitting existing buildings – is often a sustainable approach.

RESILIENT

Resilience is the ability to recover from adversity, to return to some sense of normalcy after acute shocks or stresses, or to adapt to a changed environment. Buildings that are green and sustainable find the addition of resilience characteristics to be within reach.  With respect to buildings and communities, resilience is also the act of maintaining livable conditions – despite deteriorating or even devastating circumstances – at all levels and scales of development.  Scientific evidence clearly suggests the Earth’s climate will continue to change even under the most aggressive emissions reduction scenarios.  The decisions we make about how to design, build, and operate buildings, communities, and cities have important consequences, determining the severity of climate impacts and affecting potential disclosures.

Resilience covers subjects such as identification of the risks and hazards to building projects and then developing hazard preparedness and hazard adaptation strategies.  It has been recognized that you cannot neglect the benefits of social cohesion or correlative / area-wide risk reduction.  The strength of relationships between neighbors is an indicator of how well communities will adapt in an emergency. This sense of camaraderie, also known as “social cohesion” – when members cooperate to achieve shared well-being – is a disaster preparedness strategy that many cities are incorporating into their planning.  The insurance industry first identified resilience correlative risk as a type of risk beyond the control of any one structure or asset that can stop operations.  

DISCLOSURE 

The Task Force on Climate-related Financial Disclosures (TCFD) has developed a framework for the  communication of climate-related financial risks and opportunities, to be used by companies in providing consistent, comparable, and reliable information to investors, lenders, insurers, and other stakeholders. Noted as a chronic risk by TCFD’s 2019 Status Report is flooding associated with sea level rise.  Five years of peer-reviewed NASA ice-penetrating aerial imagery, published after TCFD’s 2019 Status Report was finalized, shows global sea level rise has greatly accelerated due to “explosive & disturbing” glacial melt as labeled by NASA, that in combination with storm surge, is more appropriately categorized as an acute systemic risk.  NASA stated that no global sea level rise projections incorporated these new data. Given long lead times required for financing, design and construction of protections, this becomes an even higher risk.  

Society doesn’t yet realize how very soon the massive financial and dislocative impacts of sea level rise flooding will occur. The 2020 City of South Miami Sea Level Rise Flooding Pilot documented that global sea level rise is accelerating 10x faster than previously expected based on new, corroborated NASA data, with significant (material) coastal property devaluation already occurring.  NASA stated that this new data on the acceleration of sea level rise was “explosive and disturbing” and is not incorporated in any global projections of when the 2’-6’ rise will occur.  Asset managers may arguably have a fiduciary duty to disclose this risk regarding the financial value of their tidal coast real estate assets, especially in Florida and more so South Florida.

Chronic “sunny day flooding” at all low-elevation tidal coasts is driving the issue home globally even without the influence of storm surge.  What this means practically for asset managers is that they may need to identify which tidal coastal assets they own or manage are “high risk,” so that they may sell such assets before they become under-performing financially, or worse, stranded as a possible liability.  

South Florida has been identified as a high risk area due to its porous bedrock, which makes traditional permanent engineering solutions cost-ineffective.  Existing large and expensive buildings and infrastructure are very sensitive to sea level rise flooding and even more so in South Florida.  The porous bedrock is affected by sea level rise, both at the tidal surface level and upwelling from below ground, creating an unacceptable level of risk for which no technologically feasible permanent management solutions have been identified for existing structures.  Trillions of dollars of South Florida coastal real estate assets are affected as a result.

Thus, permanent South Florida options include managed retreat, which is very hard politically, or, with increasing prevalence, the abandoning of coastal properties when the costs of maintaining local government services and infrastructure become prohibitive.  Stranded assets are occurring at an increasing rate at all low-elevation coastal tidal locations.  High density South Florida locations are financing expensive temporary solutions like groundwater pumping and elevating roads, and aggressively trying to rebrand their image. The Miami “Forever” bonds that financed these temporary activities for Miami are an example of such efforts. ¹

An April 2020 Miami Herald article shows a 5% devaluation of coastal property, which McKinsey states will be much higher where resilience financing is not initiated.  The article states, ”unlike the closest historical parallel, a recession, property values won’t bounce back.”  

A January 2019 Florida Governor’s Office resilience report (secured through a Miami Herald public records request) promotes local adaptation plans and its chief resilience officer position and acknowledges that the report itself was driven by the State’s need to maintain its S&P credit rating.  It is certainly significant that the state of Florida is concerned that its credit rating is at stake from accelerating sea level rise flooding and more intense tropical storms, suggesting that such material risks ought to be generally published and disclosed.

CONCLUSION

Sustainable buildings are the cornerstone to enhancing community resilience. They are driving resilience-enhancing designs, technologies, materials and methods. Green buildings must incorporate practices such as the use of durable materials, thoughtful site selection, rainwater collection, demand response, grid islanding, maximal energy efficiency, on-site renewable energy generation and more.  Resilient buildings take into account the changing environment and are planned, designed and operated to adapt to and recover from encountered risks.

USGBC and CMP introduced the RELi™ rating system as a complement to the LEED program for structures and communities.  Administered by GBCI, RELi’s comprehensive approach lays the groundwork for resilient, regenerative and healthy outcomes that support quality of life. The rating system includes more than 50 requirements and credits throughout 8 categories, including panoramic design; hazard preparedness;  hazard adaptation; community vitality; productivity, health and diversity; energy, water and food; materials and artifacts; and applied creativity.  In conjunction with TFCD-aligned disclosures, RELi certification will help asset managers understand and mitigate the climate risk challenges posed to their portfolios.

¹https://www.miamiherald.com/news/business/real-estate-news/article242337701.html

This article was written by Katherine Hammack, GBCI and Mike Italiano, Capital Markets Partnership / CMP.