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.
In late July, the United Nations Secretary General Antonio Guterres issued a stern warning that “the era of global boiling has arrived.” The World Meteorological Organization has recently announced that this September, the hottest September on record, would be firmly propelling 2023 to becoming the warmest year on record. In the same month, torrential storms and flash floods were reported in Hong Kong and New York City, two of the densest urban centers on the planet. The record-breaking 600mm rainfall in Hong Kong over a mere 24-hour time window cost an estimated USD 100 million in flood damage alone. Beyond direct damage to buildings and infrastructure, such extreme weather events and the resulting disruptions could lead to increased insurance premiums, maintenance costs, operational costs, and potentially a decrease in property liquidity and value.
The identification and disclosure of climate risk is not something new to participants of the GRESB assessment. Since 2022, GRESB has released two specific products:
- The GRESB Transition Risk Report shows real estate portfolio managers which of their assets are most exposed to climate-related transition risk and identifies how this may affect their portfolio over time, at both a country and global level, leveraging decarbonization pathways from the Carbon Risk Real Estate Monitor (CRREM).
- The GRESB TCFD Alignment Report helps participants tackle reporting challenges related to the Task Force on Climate-related Financial Disclosures (TCFD).
Climate risk assessment and disclosure is fast moving from something that is good to do to something that needs to be done. This is especially true since the inception of the inaugural sustainability standards by the International Sustainability Standards Board (ISSB) in June 2023. This set of standards, the International Financial Reporting Standards (IFRS) S1 & S2, integrate and are consistent with the TCFD’s four reporting pillars. Amidst all these fast regulatory and market whirlwinds, there are encouraging signs that the global built sector is responding fast to address the climate risk topic, as evidenced by the latest “Progress Report on Climate-Related Disclosures 2023 Report.” Out of 1,365 global companies surveyed, the Materials and Buildings Industry (345 companies) disclosed on average 5.8 of the 11 recommended indicators of TCFD disclosure, the second highest following the banking industry.
In addition to TCFD-aligned disclosure and assessments designed to drive transparency for investors, regulators, and the public at large, we would like to propose three activities where further dialogue and broader collaboration is highly encouraged. These activities will help effectively tackle climate risks and galvanize climate actions across the broad built sector.
1. Communicate climate risks effectively for action
The Transition Risk Assessment Guideline recently released by the Urban Land Institute (Europe) provides an excellent starting point to capture financial impacts via the individual asset or portfolio’s discounted cash flow (DCF) to better initiate and guide discussions on how best and how fast to remove or mitigate such risk. See the table below for reference.
| Name of transition risk | DCF primary impacts(s) | DCF secondary impact(s) |
| Cost of decarbonization | Capital expense, operating expense | Rental income, exit value |
| Energy costs | Operating expense | Rental income, exit value |
| Carbon price | Operating expense | Rental income, exit value |
| Depreciation | Operating expense | N/A |
| Rental income change | Rental income | Exit value |
| Tenant voids (as a result of decarbonization activities) | Rental income | Rental income, exit value |
| Embodied carbon | Operating expense | N/A |
| Exit yield | Income | N/A |
Beyond the transition risks tabulated above (which are largely technology- and market-driven), another major category of transition risk posing direct financial impacts for real estate comes from legal and policy considerations. Relevant examples include the Local Law 97 in New York City and the European Union’s Energy Performance of Buildings Directive. Non-compliance or an inability to meet the requisite energy performance standards/ratings could result in fines or even direct impacts to the asset capitalization.
Similarly, the direct effects of acute and chronic physical climate risks on real estate assets could also be incorporated into the asset’s financial positioning accordingly. See the table below for reference.
| Physical risks | Primary financial impacts | Secondary financial impacts |
| Acute: impacts caused by more frequent and more severe weather events such as storms, floods, and fires | Capex for resilience measures (disruptions or idling of an asset) | Increase in operating costs (increase in insurance premiums) |
| Chronic: rising sea levels | Operating expense, e.g., increased maintenance cost due to accelerated asset degradation | Asset impairment due to demand reduction; or lower production for construction activities, leading to lower project profitability |
If enough data is made available, the combined impacts could be encapsulated as a “climate change premium,” location and time-dependent; and be formally adopted as part of an overall portfolio’s investment management.
Effective communication is pivotal to connecting and driving engagement towards actions. Tackling climate risk effectively requires us to translate them into language that could better guide the discussions and decision-making process in strategic business or financial planning.
2. Contextualize climate scenarios in practical and locally relevant variables
One of the key themes relevant for all industries under the TCFD Status Report is the persistently lowest disclosure rates, across all industries surveyed, on the “resilience of strategies” recommended disclosure.
The COVID-19 pandemic has tested the capacity of companies and society at large to develop and practice organizational resilience – agility, flexibility, adaptability, and self-sufficiency – and the capacity to “survive, adapt, and thrive no matter what kinds of chronic stresses or acute shocks experience.”
The reported gaps on disclosure of how resilient an organization’s climate strategies are against various climate scenarios and trajectories could likely be due to a lack of sector- or industry-specific plug-ins that directly delineate the relationships or dependency of their strategies with the common climate model components such as macroeconomic, energy, emission intensity, and climate variables.
While climate models can be difficult to comprehend, weather-related events are easier to be contextualized. So, a good starting point could be to take stock of the “resilience strategies responses” (e.g. height and number of flood gates) and stress-test them against a range of extreme weather-related events and known hazards. As a guide, IFC’s Building Resilience Index provides a comprehensive list of physical risk mitigation measures applicable to buildings and infrastructure. As weather effects are local, further guidance from local meteorological units or building code reviews could be helpful to better contextualize the macro climate model variables into relevant parameters that asset owners and operations could work with.
3. Understand and seek climate risk management schemes through a system-network lens
Risks do not operate in a vacuum, nor propagate in linear tracks. They are dynamic, interdependent, and networked – a mirror of our world. Climate risks are no exception. While a direct physical risk impact may disrupt a factory’s production schedule, the potential coupling and cascading of events within this asset’s network matters. For example, the 2011 tsunami in Japan, massive floods grounding transportation, and associated supply-chains disruptions in Thailand resulted in estimated an economic loss of over USD 40 billion for the global automotive sector.
While the extent of globalization within the built sector may be less, there are unique challenges where failures of tackling climate risks may trigger cascaded risks such as liability or reputation risks. This is because occupied buildings and infrastructure are the physical backbones with close ties to people’s lives, businesses’ operations, and supply of critical utilities and public-goods services. Thus, enhancing risk-sharing schemes amongst the various parties or risk-transfer mechanisms via insurance are both areas where the broader built sector stakeholders could benefit from more open dialogues and data sharing. It is less costly to mobilize and incentivize the required market capital to flow when there is a time window to have the resilience delivered than to wait until the cost of mobilizing such capital becomes too high or when the risk is deemed too large that even the insurance industry may opt to exit. At that stage, the default option is to “accept” the risk – to either write off the asset, or accept to live with whatever other losses and consequences climate inaction may bring.
To conclude, resilience-based adaptation and decarbonization-based mitigation measures are imperatives for managing climate risks in terms of risk avoidance and mitigation. Risk-sharing and transfer mechanisms exist, but more industry-wide dialogues and collaborations are needed to help encourage, enhance, and evolve new business models and product offerings from the insurance sector or risk underwriting parties. With the accelerated pressures on climate risk disclosures by asset managers or owners, Schneider Electric is committed to supporting the built sector’s accelerated climate actions and working with the broader industry stakeholders to tackle climate risk together – from strategy to action.
This article was written by Bess Ng, Associate Principal, Sustainability Business, APAC, at Schneider Electric.
References
GRESB Transition Risk Report & TCFD Alignment Report (2022)
Financial Stability Board “Progress Report on Climate-Related Disclosures 2023 Report” (October 2023)
Financial Stability Board “2023 TCFD Status Report” (October 2023)
Urban Land Institute, Europe “Transition Risk Assessment Guidelines” (June 2023)
International Finance Corporation (IFC) – Building Resilience Index
World Economic Forum “The Global Risks Report 2023” 18th Edition (January 2023)
Schneider Electric Sustainability Research Institute “How Schneider Electric’s Climate Risks Interact” (July 2023)
Global Adaptation & Resilience Investment Working Group “The State of Climate Adaptation and Resilience Investment” (November 2022)