COMMENT Climate change is no respecter of economic cycles. Shocks such as global pandemics and banking crises come and go, but the climate remains a permanent, long-term risk for investors to manage. Where Covid-19 may leave a lasting impact is in increasing the pressure on the real estate sector to tackle climate change more urgently.
Awareness of the threat climate change poses to our planet has clearly increased. Different businesses across a variety of sectors are already taking steps to keep global warming below 2ºC and accelerate the transition to a clean energy, low carbon economy.
Improving the quality and availability of data will be critical, as ever, and reporting frameworks will play an integral role for investors. While steps are being taken by asset owners to push the market towards net zero carbon adoption through emission reductions, renewable energy and carbon offsets, the 2020 edition of JLL & LaSalle’s Global Transparency Index highlighted that, in fact, no country achieved the highest score for this factor. Market transformation and disclosure have proven to be the main drivers of lowering carbon emissions to date in the real estate industry, including in the UK and across Europe.
Challenges of transition
Environmental change has for many years been one of the key factors around which all our investment strategies are built. More generally across the investment landscape, we have seen that investment professionals’ awareness of the interplay between political, regulatory and climate-related factors and investment performance has increased.
Most analyses break down climate-related risks into two categories. Physical risks could pose financial implications for organisations – for example, through damage caused directly to assets or indirectly via impacts such as supply chain disruption.
Transition risks involve broader societal, economic and political implications, and these will primarily be manifested through the way asset owners and tenants respond to changing regulatory and political landscapes to drive decarbonisation.
Transitioning to a lower carbon-emission economy will likely entail extensive policy, legal, technology and market changes to address requirements related to climate change. Depending on the speed of these changes, transition risks may impose immediate or distant future financial liability and reputational risk to investment managers.
As we begin to analyse climate risk data that has been generated for our portfolios, we expect to learn a lot more about which risks can be eliminated or contained and which cannot. We believe that insurance plays a pivotal role in understanding the financial impact of climate change, which is why we are working in conjunction with Aon to identify a pool of global insurers to begin a climate change information exchange.
This will help us in our decision making around financing and insurance costs for our investment models, at both the portfolio level and the property level. Additionally, it will enable us to enter dialogue with insurance companies to compare views on current and future pricing, availability, and the intersection of real estate, insurance decisions, and climate risk.
Risk management
Beyond the information exchange, LaSalle’s sustainability, risk management and research teams are working together on two parallel initiatives analysing climate-related physical and transition risks. Again with Aon, we are reviewing and vetting the capabilities of several climate change analytics and modelling firms. We also are developing a global carbon strategy and European pathway to achieve net-zero carbon by 2050. These efforts will enhance our understanding of climate-related risk factors with a goal to apply this knowledge to any investment strategy.
With many pressing short-term concerns created by the pandemic, climate-related factors could be relegated temporarily to a secondary role within investment analysis. That would be an expensive mistake. Given the long-term window over which climate-related risks operate, portfolios will eventually need to anticipate rising insurance costs or possibly the loss of any coverage for real estate in the highest risk locations or jurisdictions.
Analysis of climate risk in 2020, followed by careful portfolio
re-positioning, could spare a portfolio manager from much bigger costs in 2025, as the insurance and investment markets begin to price in climate change. This kind of longer-term view will build financial resilience into an investment portfolio as well as begin to make a positive contribution to the pressing societal need to “flatten the curve” of rising temperatures.
Sophie Carruth is head of sustainability at LaSalle Investment Management
