Pain Points

The sustainability team had conducted a high-level analysis of climate risks within the firm’s portfolio, pinpointing locations that were vulnerable to storms and sea level rise. It was clear that it was now time to look at a broader range of climate hazards, plus exposure at the individual property level. As such, the team wanted to identify a well-recognized third party that could provide:

• Information on potential physical risks that may materialize in different locations throughout the U.S. over the coming years.
• An understanding of how these climate hazards could impact different property types in different locations.
• An assessment of the financial impact of hazards.
• Scenario analysis to assess different future states to support reporting as per the TCFD.

The sustainability team contacted The Climate Service (“TCS”) to learn more about the firm’s capabilities. TCS was recently acquired by S&P Global and is now part of the company’s Sustainable1 division. Sustainable1 brings together S&P Global’s extensive ESG resources to provide clients with a 360-degree view to help achieve their sustainability goals.

The Solution

TCS described its work with the world’s largest real estate investment managers, which has involved using its proprietary Climanomics® platform to analyze millions of properties and provide a range of nuanced insights. Engagements have outlined the physical risks across clients’ real estate investment portfolios in a way that has supported due diligence, strategic decision-making and a comprehensive understanding of climate-related investment risk. Robust and consistent data models give a holistic picture of physical risks at the asset, company and portfolio -level, along with actionable takeaways.

Clients can use the platform on their own should they choose, inputting four pieces of information on each asset in their portfolio, including: (1) the specific type of asset (e.g., restaurants and warehouses), (2) the location, (3) the value of the property, and (4) ownership structure. The ownership structure can be owners who are investors and may need to repair damages, owners who are also tenants and may need to repair damages and face higher operating costs and non-owner tenants who may face higher operating costs. The Climanomics platform then evaluates the impact of seven major hazards on each asset, including extreme temperatures, drought, coastal flooding, fluvial flooding, water stress, tropical cyclones and wildfires.

This is done in conjunction with a sophisticated analysis of each asset’s unique vulnerabilities to each hazard. For example, geographical coordinates are reviewed, as elevation is one factor that will determine exposure to flooding – in this case, a higher altitude assumes less risk.

To quantify the financial risk, it is important to determine how a hazard will affect an asset in a way that is financially material. For example, how will an increase in temperature impact cooling costs or a flood impact clean-up and repair costs? Of course, this will depend on the type of asset and if it is highly vulnerable or not.

All hazards and assessments of vulnerabilities are considered for each asset to model the average annual loss, which calculates the cost of damage and/or lost revenue as a percentage of the asset’s value. These losses can be incorporated into financial models for owning and operating a property and assessing a climate-adjusted value. The total average annual loss is the sum of the financial impact of all hazards. This can be disaggregated by type of hazard and, within each hazard, by type of expense. The loss data is provided for each decade out to 2100 and four greenhouse gas (GHG) concentration scenarios. Using Climanomics would provide the sustainability team with:

Key Benefits

Members of the sustainability team recognized that climate change is a growing concern that could significantly impact the financial performance of the REIT’s business and, therefore, required deeper investigation. They were impressed with TCS’s bottom-up approach that starts at the asset level and aggregates to the portfolio level for multiple GHG concentration scenarios and time horizons, generating actionable results. A decision was made to subscribe to the offering, and members are now benefitting from having:

• Hands-on access to an easy-to-use platform powered by a transparent methodology and rigorous science.
• The backing of renowned leaders in the climate arena, plus ongoing training and support to use the platform efficiently and stay up to date on enhancements.
• The ability to anticipate the impact of physical risks on assets and assess the possible implications for more vulnerable locations and property types.
• An understanding of physical risks in financial terms to support a climate-adjusted view of investment risk.
• A longer-term view of climate issues to avoid surprises with potential buyers who will likely undertake their own analysis of potential future risks.
• Inputs to inform TCFD-aligned reporting, risk management and resilience.