Climate change could cost the U.S. federal budget about $2 trillion each year by the end of the century, according to an analysis by the Office of Management and Budget. The U.S. government could spend an additional $25 billion to $128 billion each year in such areas as coastal disaster relief, flood insurance and crop insurance.
Indeed, the financial impacts of climate change have become increasingly difficult to ignore, culminating in the Securities and Exchange Commission’s (SEC) proposed environmental disclosure rule.
The SEC’s proposed regulations include reporting on a company’s greenhouse gas (GHG) emissions, instituting climate mitigation goals and establishing a company policy to respond to climate risks and events when prevention measures fail.
According to the United Nations Environment Program (UNEP) Finance Initiative climate risk is built into the very nature of how the real estate sector operates. Having a complete picture of the climate risk facing the assets a company manages or relies on, is key to protecting the bottom line. Real estate investors evaluating an acquisition, hotel owners with interests across multiple properties, or investors managing a portfolio of commercial fixed assets could benefit from access to climate-related risk insights.
The industry will benefit hugely as more and more real estate companies are making resilience planning core to their business strategy. Pressure from shareholders, boards, and customers for visibility into climate risk exposure and adaptation planning is mounting. They’re increasingly demanding climate action and transparency. Early movers are starting with internal reporting to executives and boards, whilst others are looking to expand their public facing ESG reports.
Commercial real estate (CRE) will be particularly affected by regulations requiring businesses to identify, assess, and manage climate-related risks on their assets. It will be a challenge, especially for businesses lacking the internal expertise and asset-level screening and reporting tools to efficiently meet the SEC’s new requirements.
There are three main steps every CRE company can take to overcome some of the most common adaptation challenges and prepare themselves for newly proposed regulations in the U.S.
1. Increase Climate Risk Literacy
Most companies do not have an in-house climate science team to help them make informed adaptation decisions based on the latest peer-reviewed climate science. Yet, they need this important science link to effectively build climate literacy that can be applied to planning, funding and building critical infrastructure and valuable real estate assets.
Advances in machine learning (ML) technology have created resource-effective ways to bridge this expertise gap. New climate intelligence (CI) solutions can translate complex climate science data into decision-useful insights in minutes. The cloud-based intelligence is continually updated and available on-demand, giving decision-makers an edge in applying the most current climate insights to decisions and plans.
With climate events accelerating and regulations looming, businesses are increasingly turning to CI for detailed insights that forecast the extent of extreme weather impacts, such as heat stress, flooding, drought and wind risk, on specific assets over specific time periods.
Applying their newfound climate literacy, CRE companies are using climate intelligence to first screen assets—individually and across portfolios—and then incorporate the insights into the critical climate impact and assessment reports that underpin their resilience planning and adaptation strategies. Real estate investors are using CI to assess the acquisition risks and potential of new assets and to make decisions about retrofitting, relocating, replacing or divesting current assets.
2. Climate-Proof Real Estate Assets
Real estate asset holders need to adapt and climate-proof their assets. Relocating an asset to an area with lower climate risks does not necessarily solve the risk problem—not to mention the economic void that relocation leaves in the local economy. In fact, real estate assets are generally long-term investments that were never intended to be moved. And even if relocation (or demolition or divestiture) is considered, it cannot happen quickly. Future-proofing real estate assets against climate-related risk is the needed course of action.
Climate intelligence can inform climate-proofing decisions. For example, choosing building materials that are most resilient against high winds or heat, calculating adequate drainage for flood zones, and factoring in structural measuring standards that account for the sea-level rise. Alongside adapting human-made structures, CRE companies should also consider adapting their natural infrastructure whenever possible to save costs and boost climate resilience.
3. Balance Emissions Reduction with Resilience Planning
While many companies rightly focus on achieving net zero, they need to also protect their physical assets from climate risk. Net zero’s attention-grabbing headlines have kept it in the public eye, but the reality is that both measures are critical and should be done in parallel. UN Secretary-General Antonio Guterres makes this point very clearly: “Adaptation and mitigation must be pursued with equal force and urgency.”
Despite considerable posturing and proclamations following last year’s COP26, clarity about governments’ plans to reduce global carbon emissions is lacking. CRE companies, and indeed all businesses, should not let uncertainty about government action hamper their adaptation and resilience planning.
CRE companies can use climate intelligence to simultaneously assess climate risk impact for combined physical risk (i.e. heat stress, flooding, drought, wind risk) across different IPCC-aligned emissions scenarios, spanning time horizons from 1970-2100. In addition to informing adaptation decisions about their own asset portfolios, they can also look industry-wide at how climate stressors will drive broader changes.
These changes might include the inability to insure exposed assets, lack of funding for exposed assets, or higher operational costs due to a need for increased energy, heating or cooling. Climate intelligence platforms make these views available to CRE’s today. Both are vital to ensuring climate and economic resilience.
Using CI, real estate decision-makers can confidently start building climate adaptation and resilience into their property portfolios today to not only alleviate risk but uncover opportunity. This new form of business intelligence—made possible by advances in earth science and ML—is needed more than ever as businesses set their sights on staying one, two and even three steps ahead of government regulation, and the accelerating impacts of climate change on their current and future operations.
