How does climate change affect real estate? Climate change will leave its mark on every property by influencing weather patterns and bringing about physical environmental transformations. The real estate investments you make today may not exist years from now when you expect their value to appreciate.
“The impacts of climate change will vary across locations but will include changes to the frequency and intensity of extreme weather events (rainfall, drought and bushfires), and will result in physical impacts such as sea level rise and coastal erosion,” state Warren-Myers and Hurlimann in a Research Agenda for Real Estate. “This will place a substantial burden on economies, having a detrimental impact on real estate (property) across short and long timeframes.”
So how can real estate leaders identify physical climate risks to their properties before damage occurs? More importantly, considering changing climate conditions, how can you evaluate a property’s investment potential, including its risks?
To make intelligent, financially sound investment decisions, you need to discover the unknowns, beginning with climate due diligence.
Measurabl’s Climate Due Diligence Scan (CDDS) is a cutting-edge product that allows real estate investors to evaluate any property’s physical risk exposure, among other risks, through detailed and accurate data. Simply enter the property’s details like address, type, floor area, and year built, and gain the insights you need to make resilient investments.
This blog article is the second in a series on climate due diligence, informing real estate stakeholders why they should proactively protect their current and future investments from physical climate risks and how CDDS can help them.
Why Investments Need to Weather the Storm
For real estate investments to make it through changing climate environments, measures have to be put in place to protect against vulnerabilities. Doing so ensures the property’s value resilience in the long run.
“Higher temperatures lead to more extreme weather systems and an increase in large-scale incidents, from massive hurricanes to wildfires, from gale-force storms to flooding. Where the real estate market is concerned, these incidents are making it tougher to manage the costs and condition of property on a yearly basis,” states Ari Chazanas, founder and CEO of Lotus West Properties.
How does climate change affect real estate? Climate change poses risks to every aspect of a building’s operations and value; climate-related risks can impact real estate asset valuation through physical and transition risks.
Physical risks stem from a changing climate and encompass acute events like floods, fires, extreme heat, storms, and chronic conditions such as rising sea levels and changing temperatures. On the other hand, transition risks arise from changes in the economy, regulations, consumer behavior, technology, and human responses to climate change.
Both types of risks collectively impact buildings in numerous ways, directly and indirectly affecting real estate asset valuation. For example, physical climate risks can result in property damage, business disruption, increased insurance costs, supply chain disruptions, and potential loss of asset value. Likewise, transition risks can have financial impacts including fines and penalties, stranded assets, and asset value depreciation.
Climate due diligence plays a crucial role in safeguarding asset value against physical climate risks, among other climate-related threats.
Measurabl’s CDDS was built to help real estate stakeholders assess an asset’s exposure to physical climate hazards; the product ranks physical threats to a building on a scale between one and a hundred, helping identify if the risk to the property is low or high. Knowing possible threats your assets may face makes you better equipped to make sound business decisions.
Invest in the Future with Proactive Due Diligence
To proactively mitigate physical and transition threats against your real estate investments, it’s crucial to prioritize climate due diligence.
“[…] the accelerating physical consequences of a changing climate are becoming more pronounced as communities face storms, floods, fires, extreme heat, and other risks,” according to McKinsey. “[…] The climate transition not only creates new responsibilities for real-estate players to both revalue and future-proof their portfolios but also brings opportunities to create fresh sources of value.”
But what should due diligence entail in the context of physical climate risks? To ensure all aspects of an investment decision are considered thoroughly, real estate leaders should be able to gather essential information and perform the following functions:
- Identify if a property is located in a high-risk geography
- Examine historical weather patterns to project future risk exposure
- Assess property vulnerability based on risk proximity or physical characteristics
- Consider the regulatory, financial, and insurance implications of real estate transactions
- Invest in physical resilience amidst changing climate conditions
Unfortunately, the knowledge to make these business decisions isn’t readily available, especially at scale—until recently.
Measurabl CDDS offers insight into both physical climate risks as well as transition risks. Durch S&P Global Sustainable1‘s top-notch climate risk scoring methodology, CDDS helps you evaluate the property’s vulnerability to seven acute and chronic physical climate risks, from coastal flood, drought, extreme cold, extreme heat, fluvial flood, and tropical cyclone, to water stress and wildfire. The CDDS assessment covers three different climate scenarios and time horizons, providing a comprehensive understanding of the property’s exposure to climate-related risks.
Durch Measurabl’s CDDS, real estate stakeholders can benefit from having in-depth information regarding an asset’s physical climate risk exposure in a variety of ways.
For example, lenders can inquire with borrowers about their actions if their building is located in a high-risk area, seeking insight into how they’re addressing climate risks; this allows lenders to assess the potential financial risk associated with that investment and structure around it. Direct investors can better understand the financial risks their assets face by considering factors such as energy costs compared to their portfolio and climate-related risks like extreme cold or heat.
By evaluating these threats, investors can make informed decisions to diversify their portfolios and mitigate climate-related vulnerabilities. Likewise, lenders can adopt a similar approach to managing climate risks within their loan books.
Assessing physical climate risk is only part of the climate due diligence process; CDDS also helps identify a building’s regulatory risk exposure, energy benchmarks assessment, and more.
This is the second blog in our series about Measurabl’s Climate Due Diligence Scan. For more about CDDS, check out the rest of the series:
• The Power of Climate-Informed Due Diligence in Improving Energy Performance
• Tapping Into Sustainability With Green Building Certifications