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Climate risk is financial risk in real estate
Investors can use disclosure data, rules to maximize impact, avoid stranding assets
The Asset 20 Sep 2023

More accurate risk information can help real estate investors avoid investing in “stranded assets”,  whose value will depreciate due to damage from adverse weather events or an inability to comply with new climate regulations, according to a recent report.

Conversely, such information can help investors direct their capital towards more sustainable and resilient investment funds with assets that are sufficiently hedged against climate risk, finds the Change is Coming: Climate-Risk Disclosures and Their Implications for Property report, published by the Urban Land Institute (ULI), a non-profit education and research institute, and Heitman, a global real estate investment management firm. The report draws on interviews with a range of real estate investors, asset managers and analysts.

The report highlights how investors can leverage the data resulting from government regulations that require real estate companies to disclose climate-related risks related to their properties and overall business models. And it provides insights into how investors can use these climate disclosures to optimize their portfolios and best position themselves in the market.

In detailing the potential for climate disclosure data to benefit investors, the report offers several key observations, including:

  • Regulatory oversight – Until recently, real estate companies only disclosed climate risk voluntarily. In some cases, outside analysts offered their assessment of a business’ climate risk, despite having limited knowledge of its true risk profile. Mandatory reporting will provide investors with far more transparent, verifiable and standardized data across the entire real estate sector.
  • Enhancing comparability – Standardized data disclosure will allow investors to compare risk data more easily from different companies in order to optimize their investment decisions, rather than having to rely on the inconsistent reporting mechanisms that have long been the norm.
  • Maximizing impact – Required disclosure means that companies will have to detail how they can mitigate the physical risks facing vulnerable properties and the business risks associated with transitioning to a low-carbon economy, such as carbon taxes and rising insurance costs.

Consequently, investors will have the opportunity, the report argues, to allocate their capital towards businesses with the best strategies for helping the real estate industry address climate change.

The report also details specific measures investment managers can take to make their portfolios attractive to potential investors. Key strategies include:

  • closely tracking asset-level carbon emissions
  • providing a comprehensive review of a fund’s aggregate climate risk
  • staying proactively informed about changes to the regulatory landscape.

“Governments and investors alike recognize that climate risk is financial risk,” says Lindsay Brugger, ULI’s head of urban resilience. “New regulations are proliferating across the globe and offer new data sets for enhanced investment decision-making. Investment managers will need to stay ahead of these rules for success in a rapidly evolving global market.”

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