What is transition risk?
Transition risks encompass those risks that arise as a result of the global governmental and economic shift toward a low-carbon future. These risks can fall into several categories, including policy and regulatory risks, technological risks, market risks, reputational risks and legal risks.
While these risks are interconnected, policy and regulatory risks are often top of mind for investors as they attempt to navigate an increasingly aggressive low-carbon agenda – implemented in a variety of ways – that could have capital and operational consequences to their assets.
Given the differences in the operational performance expectations among many real estate segments, and in combination with their sensitivity to a wide range of regulatory ambition, estimating the overall transition risk associated with a real estate portfolio can be a daunting task.
The GRESB Transition Risk Tool
As commitments around net zero emissions continue to pick up steam in the financial industry, an understanding of "Paris-alignment" and transition risk has never been more important. GRESB is developing a solution to help the real estate industry evaluate portfolios and assets in light of these issues. This includes benchmarking against the science-based CRREM global decarbonization pathways, with GHG metrics and analytics built from the bottom up.
Originally an EU-funded Horizon 2020 project, the Carbon Risk Real Estate Monitor (CRREM) project highlights decarbonization pathways to translate the Paris Climate Agreement goals into regionally and property type–specific trajectories against which real estate assets and portfolios can benchmark themselves.
These pathways – focusing on the trajectories of GHG intensity from 2020 to 2050 – are primarily alignment tools but can be used as proxies for “transition risk.” In this case, the risk is related to assets being stranded because they are not in compliance with local regulations or have entered market obsolescence (assuming the assets are in nations that follow similar trajectories of low-carbon ambition).
- Together with other consortium members, GRESB launched CRREM and remains a project collaborator, most recently working with CRREM and PCAF to provide extended guidance to investors and banks on the proper accounting and target setting of real estate carbon in financial portfolios. Read more on GRESB’s involvement with CRREM.
- As an active member in the development of CRREM, GRESB has designed the Transition Risk Tool to build on CRREM and our 10-year database of performance information on real assets.
If you would like to stay updated on GRESB’s Transition Risk Tool, please register your interest below.Register