As the market gets more adept at computing green premiums and brown discounts, attention is turning to how resilience fits into that picture. Climate change adaptation measures are typically viewed as risk management, to avoid costs and safeguard assets, rather than levers for investment returns, but they are inherently linked to building and portfolio value.
“It is clear that managing physical climate risk is now expected of serious, world class real estate investors and managers around the globe,” Darryl Neate, vice president of sustainability with the Real Property Association of Canada (REALPAC), asserted during a recent webinar that tackled the topic. “We need to learn how to navigate the complexity and uncertainty. It it is new and we’re still all working our way through it, but it comes down to decision-making for asset management and development professionals.”
Floods, wildfires and a barrage of extreme weather events resulted in $3.4 billion worth of insurable losses in Canada in 2023, and that tally is generally presumed to triple or quadruple when uninsured losses are added in. This is at the high end of a trend that has seen insured losses average $2.1 billion annually since 2009, even while those years demonstrate a dramatic upward spike from losses in the range of $250 million to $450 million per year during the period from 1983 to 2008.
Webinar presenters applauded evidence of the commercial real estate industry’s progress in reducing greenhouse gas (GHG) emissions, while expressing concern about its general vulnerability to various weather-triggered calamities. Kathryn Bakos, managing director, finance and resilience, at Waterloo University’s Intact Centre on Climate Adaptation, cited the United Nations Environment Programme’s (UNEP) 2023 findings that climate adaptation momentum is slowing globally. Meanwhile, climate volatility is expected to persist even if the global average temperature increase is held within the targeted 1.5 degrees Celsius.
“We can slow down the rate of change, but we cannot reverse it, at least not with the technology that we currently have,” Bakos reiterated. “So much emphasis is being placed on mitigating greenhouse gas emissions, which is incredibly important, but you can reduce greenhouse gas emissions at site level or across supply chains and still be impacted by the physical risks of climate change. We have to be thinking about it from both sides.”
Webinar presenters sketched out some of the available resources, including: risk assessment matrices to broadly identify prevalent climate-related hazards and effective responses; benchmarking to plot, compare and disclose portfolios’ preparedness and vulnerabilities; software to calculate the building-level potential financial impact — known as climate value at risk — of chronic and acute climate-related hazards; and methodologies to help translate all this data into investment metrics.
Last year the Intact Centre released six industry-specific climate risk matrices to guide financial market participants in their decision-making and to encourage asset owners/managers to evaluate their holdings. Commercial real estate was included in that group because it aligns with the Task Force on Climate-related Financial Disclosure’s (TCFD) definition of sectors that are well placed to serve as models for broader industry — i.e. those with operations and assets that can be significantly disrupted or damaged by severe weather events, but also possessing the expertise to understand potential business impacts and available means to mitigate risk.
The climate risk matrix highlights likely physical threats, recommended safeguard measures and key questions for gauging the preparedness of assets in a user-friendly chart form. Drawing parallels with the well-known ASHRAE energy audit process, Mike Williams, vice president, climate and performance engineering, with RWDI Consulting Engineers, characterized the matrix and similar approaches as a Level 1 adaptation exercise to map out physical risks across a portfolio.
“It’s a great activity to undertake,” he said. “There are a lot of different providers out there and the cost has become sufficiently accessible that most folks with a portfolio of commercial real estate can do that.”
From there, Level 2 takes the scrutiny down to individual buildings and their key systems to help decision-makers determine where and how to act. Software and reliable data are instrumental to that process. When armed with both, Williams explained the possibilities for gauging how chronic and acute climate-related conditions and events can affect building systems and the capital needed for their upkeep and replacement.
To demonstrate chronic risks, he used the example of a chiller to explore the impact of an increasingly hot environment. Computer modelling, via RWDI’s ClimateFirst software, shows how today’s expected 25-year life cycle diminishes to 16 years and then 12 years at points along the projected trajectory of a 250 per cent increase in cooling degree days over the next 35 years.
For acute risks, software modelling considers increased frequency of major storms and changing loss probabilities so that, in Williams’ cited example, the average annualized loss for a backup generator increased from $2,800 to $3,500. A comprehensive analysis of chronic and acute risks across all critical systems delivers what he describes as a “climate-adjusted cumulative capital forecast” for the building.
“We can then look at the climate value at risk at any point in time and really begin to think about: what is at risk to this building?” Williams said. “We can think about where we might begin to make increased investments in the building to shore up against these very known physical climate risks.”
Some Canadian entities participating in the GRESB global benchmark for the ESG performance of commercial real estate portfolios appear to be doing that. Breaking down resilience-related findings emerging from the 2023 survey, Erik Landry, GRESB’s director of climate change, noted that a larger percentage of the 80 Canadian participants reported than their portfolios are exposed to “most acute hazards and chronic stressors” compared to entities from other global regions. However, he hypothesized that could be as much due to the quality of insight as the quantity of risk.
“In Canada we’re seeing a lot more comprehensive risk assessment frameworks where we’re actually seeing things like climate value at risk being calculated and used to inform decision-making, whether that’s for maintenance or retrofit decisions or things like that,” he affirmed.
That’s also, of course, how proponents want such frameworks to be used.
“Right now, I think a lot of the industry is at a point of learning climate risk analyses and ingesting whatever data is available just for the sake of it — maybe for regulatory disclosure or saying that they’ve run a climate risk assessment,” Landry mused. “I’d like to see that move away from a checkbox exercise to something more decision-useful.”
The other webinar presenters concurred that capturing a picture of physical climate risk is generally easier than coming up with resources to address it. Williams offered the statistic that about 90 per cent of investment to date has been channelled to mitigation efforts and addressing transitional risk. However, Bakos argued it’s hard to quibble with the formula that shows $1 spent on adaptation saves $3 to $8 over a 10-year period.
“It’s not a return on investment, but it’s money you don’t have to pay out over a longer- term period,” she said. “It’s cost avoidance, and it’s an opportunity cost that’s not being lost. That’s money that’s now available to use for other initiatives.”
