Discussions of climate risk sometimes become highly technical and abstract. It is easy to lose sight of the fact that climate change is having real impacts on people’s lives. These are matters of life and death. Decisions that are made around managing real assets matter, not just to the bottom line but to the ability of communities to cope with an increasingly unstable climate and a growing number of extreme events.
Traditional approaches to risk management focus on physical risks and the direct financial impact on the asset owner/investor. This narrow framing not only limits the scope of risk assessment, but also misses opportunities to build adaptive capacity, create broader social value, and drive resilient investing.
GRESB Resilience Module and the Concept of Social Risk
When the GRESB Resilience Module was introduced in 2018, it included a focus on risk from what and to whom? The Module was intended to provide a framework to look at the capacity of organizations to manage and adapt to a wide range of hazards and threats, and how the needs of various stakeholders were addressed (shareholders as well as employees, contractors, partners, local communities, etc.). As the Module evolved to align with TCFD [Task Force on Climate-related Financial Disclosures], it was divided between physical , transition and “social” risk This category was a broad combination of risks that are actually caused by humans (anthropogenic hazards), social vulnerability, and social value.
This new structure allowed GRESB to retain an emphasis on the Social dimensions, as part of a broader Environmental, Social, and Governance scope. However, the category was extremely broad and lacked specific metrics to adequately measure performance. Although the majority of Module participants indicated that they were tracking social risk in some fashion, it was difficult to infer what this meant in practice. As a result of the lack of actionable insights that can be extracted from the collected data on social risk, the resilience indicators related to social risk will not be integrated into the GRESB core assessments along with the other transition and physical risk focused indicators. Even so, this does not mean that the issues are immaterial for real asset companies. Social factors are an essential part of risk management and provide an opportunity for companies to differentiate themselves in the resilience space.
Some examples of social risks captured by the 2020 Resilience Module include: crime rate, modern slavery, workplace health and safety, pandemics, physical security, cyber security, terrorism, demographic shifts, and even “social media risk”. The range of such responses highlights the difficulty of providing useful standardized and benchmarked data to asset managers and investors.
Other answers were drawn directly from the language of the TCFD, such as increased stakeholder concern or negative stakeholder feedback, or addressed environmental or governance issues such as air quality or site contamination. This further illuminates the fact that risks relating to social, climate-related, and other ESG-related issues are not mutually exclusive, and can often complement or compound each other.
Whether stemming from or ultimately affecting people, all ESG risks are related to humans in one manner or another, making the delineation of social risk in the context of a resilience assessment a formidable challenge.
Here we will parse out some of the underlying concepts that are embedded in the broader topic of “social risk” and what these dimensions mean for real asset companies.
Capturing social risk and value
Social risk as used in the GRESB Module was a broad category of potential shocks and stressors as they apply to people. Social risk can be conceptualized as the interplay between social vulnerability and social value.
Anthropogenic hazards – Human-caused hazards include terrorism, gun violence, war and industrial accidents and other hazards. These hazards are generated by people but trigger similar emergency responses to natural hazards. This category looks at humans as threats and are often a key focus of security and emergency management. These types of threats are not directly driven by climate change, but the impacts of climate change may exacerbate them through increased poverty, displacement and resource scarcity. Real estate operators should have a clear understanding of their exposure and vulnerability to such challenges.
Social vulnerability – Social vulnerability constitutes the underlying social conditions that make individuals and communities susceptible to external hazards, and how quickly they are likely to recover. People have been found more likely to be vulnerable based on a variety of socio-economic and demographic factors, including income, race/ethnicity, employment, age, and mobility. It can also be based on location, such as the level of environmental pollution where they live, which often correlates with other vulnerability factors (i.e. poor communities are often disproportionately burdened by pollution). Social vulnerability characterizes those populations that are most likely to be disproportionately affected by disasters, and how readily they might be able to recover.
Social vulnerability is a concept often used by emergency response organizations to plan for the types of support that might be needed after a disaster. It is also used by local governments to identify communities that have been the subject of chronic underinvestment in order to prioritize investment of public funds. Social vulnerability as a concept can be used by the real asset industry in a variety of ways, such as understanding which stakeholders (including employees, maintenance staff, contractors, supply chains, customers, or neighbors) might be most sensitive to relevant physical hazards and climate impacts in order to plan responses appropriately. It can also be used to help inform ways that companies can intervene at the local level to alleviate underlying stressors.
The COVID-19 pandemic has underscored the importance of social vulnerability. While the pandemic has been challenging for everyone, people who were already facing underlying stressors—the elderly, people with underlying health conditions, low-wage workers, and low-income communities of color—have all been particularly hard hit by both the virus and the economic fallout. Underlying vulnerabilities limit people’s ability to cope and to recover, exacerbating poverty rates, homelessness and social tensions. Real estate and infrastructure assets are both affected by these consequences as well as have a role in supporting vulnerable populations as climate change increases.
Social value – The economic, social, and environmental value that projects bring to local communities is often expressed as social value or co-benefits. Real Assets provide a wide range of social functions and are dependent on surrounding communities in a variety of ways. Understanding the social value and context of specific asset types can enable better decision-making. Real assets can provide social value by providing things that communities need, like affordable housing, transit-oriented development, good jobs, investing in local communities, reducing pollution or other environmental impacts, and developing partnerships with local organizations that can be stabilizing during times of distress. Social co-benefits are increasingly being quantified in economic terms in order to justify investment in social value, which can be attractive to a growing number of investors.
The real asset industry can have a significant role in reducing social vulnerability and delivering social value. For example, investing in creating new or preserving existing affordable housing can help address housing shortages in many communities, thereby reducing social vulnerability and providing social value. However, converting existing affordable housing to luxury housing or other land uses can exacerbate housing shortages and displace entire communities, thereby increasing social vulnerability and increasing social risk. This impact can be particularly pronounced following disasters, when investors purchase distressed properties at discounted rates and redevelop them to serve more affluent communities.
Holistic risk and resilience assessments
While external hazards such as those driving physical or transition risk often receive considerable attention from organizations focused on protecting their assets, social vulnerability and social value are emerging themes that are not yet being widely addressed in the real estate industry. However, they are at the core of resilience and will play a fundamental role in the ability of local assets to perform over time. Investors looking to mitigate risk and support ESG principles should look for organizations that are at least beginning to acknowledge and address these issues.
Ideally, assessments of resilience that include social vulnerability can be used to address underlying stressors and to enable Real Assets to support social value creation. This can be done directly through investment strategies that stabilize and benefit existing communities, by forming local partnerships to help mitigate underlying social or physical stressors, as well as by supporting other ESG strategies. Such efforts can improve the resilience of given locations, leading to reduced risk at the asset level. Tools are emerging to measure social value and to engage in investment that creates value for existing communities without triggering displacement.
Proactive organizations will look at both climate-related and non-climate-related risks across a portfolio and examine which groups of stakeholders are most exposed and vulnerable. These interconnected dimensions should be addressed in a systematic way in order to drive positive feedback loops and co-benefits. While societal challenges are often thought of as the domain of the public sector, investors and operators have a role to play, and a stake in, supporting their communities and stakeholders. As better frameworks for understanding the social dimension of resilience emerge, supported by better measurement, data, and metrics, we strongly hope that GRESB will find new ways of incorporating these dimensions into their core assessments.
Pandemics, geopolitics, technological change, urbanization, climate change, and demographic change all present significant threats, but they also pose opportunities for those with the foresight and agility to invest in resilience. The International Standards Organization defines organizational resilience as “the ability to absorb and adapt in a changing environment.” Building resilience requires understanding and proactively managing risk, while at the same time building adaptive capacity.
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Every day, more companies are seeking to measure and manage their climate risk. Investors are familiar with the key concepts of risk and have tools and approaches to factor the riskiness of investment decisions into their value propositions and deals. However, climate change raises many new dimensions for the industry that need to be understood in context.
