Be Prepared: Exploring Future Climate-Related Risk for Residential and Commercial Real Estate Portfolios

Abstract

This article explores how real estate investors and lenders can assess and manage the physical risks of climate change through well-established risk models and climate scenarios. The authors propose a methodology that real estate investors and lenders can use to improve their understanding and management of these risks. The methodology is applied to a sample of 12 real estate portfolios with a total market value in excess of £2 trillion, spread across Europe, North and South America, and Asia, investigating the impacts of climate change on losses from floods and winter storms (UK) as well as tropical cyclones (North America and the Pacific Rim). The estimated changes in risk, especially in the climate scenario most aligned with the current warming trajectory, raises important questions for investors, lenders, insurers, and policymakers as to how these new levels of risk can be managed in the most cost-effective manner.

TOPICS: Real estate, tail risks, ESG investing

Key Findings

• • This article shows how, in practice, insights from climate science and outputs from climate models can be used in combination with system risk models to assess changes in physical risk under different climate futures.

• • The results show that climate change could have large impacts on the losses that investors and lenders face from floods in the UK and tropical cyclones in North America and the Pacific Rim. The estimated changes in risk, especially in the climate scenario most aligned with the current warming trajectory, raise important questions for investors, lenders, insurers, and policymakers.

• • Property-level adaptation measures can materially reduce climate change–induced losses. They are most effective when combined appropriately with other adaptation responses and global efforts to reduce emissions.

• • There is a window of opportunity for investors, lenders, and policymakers, working with insurers, developers, and product providers, to promote property-level adaptation to target those properties that benefit most.