Climate Risk Assessment for Commercial Properties

Climate change is no longer a distant threat; its impacts are being felt worldwide, with significant implications for the built environment. This report delves into the methodologies and tools used to assess physical climate risks to commercial properties, providing valuable insights for investors, property owners, and other stakeholders.

Understanding Climate Risk

Climate risk encompasses the potential for problems for societies or ecosystems from the impacts of climate change. This includes impacts on lives, livelihoods, health and wellbeing, economic, social and cultural assets and investments, infrastructure, services provision, ecosystems, biodiversity, and species ¹. It can also arise from the measures taken to respond to climate change ². For commercial properties, this translates to potential financial losses and disruptions arising from both acute events (e.g., floods, wildfires) and chronic changes (e.g., rising sea levels, increasing temperatures) ³. These financial consequences can be far-reaching ⁴. Understanding these risks is crucial for making informed decisions about property acquisition, management, and investment.

Types of Climate Risk

Climate risks are broadly categorized into:

• Physical Risks: These arise from the direct impacts of climate change, such as damage to property from extreme weather events or disruptions to operations due to changing climate patterns ⁵. Physical risks can be further classified as:

• Acute Risks: Event-driven risks like floods, wildfires, and storms ⁵. Acute physical risks are often the most visible and impactful in the short term, as they can cause significant damage and disruption ⁶.
• Chronic Risks: Risks from long-term shifts in climate patterns, such as sea-level rise, changing precipitation patterns, and increasing temperatures ⁵. Chronic risks can have gradual but escalating impacts over time, affecting property values, operating costs, and long-term viability ⁴.

• Transition Risks: These stem from the transition to a low-carbon economy, including policy changes, technological advancements, and shifts in market preferences that could impact the value and viability of commercial properties ⁵.

This report focuses on physical climate risks to commercial properties, with an emphasis on acute and chronic risks.

Specific Impacts of Climate Hazards on Commercial Properties

This section examines the specific impacts of various climate hazards on commercial properties, drawing on the research conducted.

Methodologies for Assessing Physical Climate Risks

Assessing physical climate risks involves a systematic evaluation of potential hazards, exposure, and vulnerability. Several methodologies are employed, ranging from qualitative assessments to sophisticated quantitative models.

• Qualitative Assessments: These involve expert judgment and rely on available information about historical climate trends, projected changes, and the specific characteristics of the property and its location. This approach is often used for initial screening or when detailed data is limited.
• Quantitative Modeling: This approach utilizes climate models, hazard maps, and vulnerability assessments to quantify the likelihood and potential impact of different climate hazards. These models can incorporate various factors, including building characteristics, surrounding infrastructure, and socioeconomic conditions.
• Scenario Analysis: This involves evaluating the potential impacts of different climate scenarios, ranging from moderate to extreme, to understand the range of possible outcomes and inform adaptation strategies.

Some key methodologies and frameworks include:

• The Physical Climate Risk Assessment Methodology (PCRAM): Developed by the Institutional Investors Group on Climate Change (IIGCC), PCRAM provides a structured process for evaluating the materiality of physical climate risks to infrastructure assets, including commercial properties ¹¹. It emphasizes asset-specific assessments and the integration of climate resilience into decision-making throughout the asset's lifecycle.
• The Electricity Sector Climate Information (ESCI) framework: This framework, aligned with the ISO 31000 standard for risk management, guides users through a five-step process for assessing climate risks, including understanding the context, identifying and analyzing risks, prioritizing them, and determining mitigation measures ¹².
• The EU Climate Risk Assessment (EUCRA): This framework provides a high-level assessment of current and future climate impacts on the environment, economy, and society in Europe ¹³. It offers a comprehensive approach to understanding climate risks and informing adaptation strategies at a regional level.
• The City of Calgary's Climate Risk Assessment Framework: This framework focuses on enhancing infrastructure planning and design to adapt to future climate conditions ¹⁴. It provides a structured approach to identifying potential climate impacts on infrastructure and recommending measures to manage, adapt, and recover.
• Deloitte's Sustainability, Climate, and Equity (SC&E) Risk Framework: This framework reflects seven main areas where climate risk and regulations impact organizations: governance and policy; risk strategy and appetite; risk assessment, measurement, and analytics; monitoring and reporting; product risk management; risk data and systems; and risk operating model, people, and culture ¹⁵. It offers a comprehensive approach to managing climate-related risks across various aspects of an organization.

These frameworks provide different perspectives and approaches to climate risk assessment, and the choice of framework will depend on the specific needs and context of the assessment.

Tools for Assessing Physical Climate Risks

A variety of tools and software are available to support climate risk assessments for commercial properties. These tools range from open-source platforms to commercial software packages.

Open-Source Tools

• OS-Climate: This platform, hosted by the Linux Foundation, provides open-source data and software for assessing climate risk, including tools for physical risk and resilience, portfolio alignment, and transition analysis ¹⁶. It is designed to support financial institutions in assessing and managing climate risks and making investment decisions aligned with net-zero ambitions.
• CLIMADA and CLIMADA-App: Developed by ETH Zürich, CLIMADA uses probabilistic modeling to explore hazards, exposure, and vulnerability, enabling impact assessments and cost-benefit analyses ¹⁶. CLIMADA is developed in Python and available via GitHub, while the CLIMADA-App provides a user interface for those not skilled in Python.
• Climate Adaptation Knowledge Exchange (CAKE): This platform offers resources, case studies, and tools for assessing climate risk and planning adaptation measures ¹⁶. It helps communities and organizations make informed decisions to reduce climate risks and learn from others' experiences.

Commercial Software

• CoreLogic Climate Risk Analytics: This solution combines risk modeling with property data, replacement costs, and natural hazard insights to assess potential climate impacts on assets ¹⁷. It leverages CoreLogic's extensive property database and proprietary climate models to provide detailed risk assessments for individual properties and portfolios.
• EarthScan: This software, developed by Mitiga Solutions, leverages data modeling, machine learning, and climate science to provide customized climate risk analysis for various hazards, including flooding, drought, and extreme temperatures ¹⁸. It allows users to upload their asset locations and receive on-demand risk analysis.
• ClimateCheck: This platform offers detailed climate risk data and reports for individual properties and portfolios, assessing exposure to various hazards like precipitation, drought, extreme heat, and wildfire ¹⁹. It provides property-specific risk scores and reports to inform real estate decisions.
• EcoAct Climate Risk (ECLR) Platform: This platform assesses the vulnerability of physical sites to 28 climate change hazards, supporting the identification and prioritization of mitigation and adaptation measures ²⁰. It is designed to help organizations understand their physical climate risk exposure and develop resilience strategies.

In addition to these tools, the following resources are available for climate risk assessment:

• Climate Mapping for Resilience and Adaptation (CMRA): This tool provides climate hazard screening, environmental justice mapping, and tribal area mapping, considering hazards like coastal flooding, drought, extreme precipitation, heat, and wildfire ²¹.
• Climate Resilience Evaluation & Assessment Tool (CREAT): This tool offers climate risk assessment capabilities and maps for hazards like extreme precipitation, heat, and sea level rise ²¹.
• ClimRR (Climate Risk and Resilience Portal): This portal provides climate hazard screening for extreme precipitation, heat, strong winds, and wildfire-conducive weather ²¹.
• Federal Flood Standard Support Tool: This tool helps assess coastal and inland flooding risks ²¹.
• FEMA Flood Maps: These maps provide information on inland flooding hazards ²¹.
• Interagency Sea Level Rise Scenario Tool: This tool focuses on assessing sea level rise risks ²¹.
• National Climate Assessment Atlas: This atlas provides information on drought, extreme precipitation, and heat hazards ²¹.
• National Climate Assessment: This assessment provides information on identifying solutions and understanding climate change impacts ²¹.
• National Sea Level Explorer: This tool allows users to explore sea level rise projections ²¹.

Case Studies of Climate Risk Assessments for Commercial Properties

Several case studies demonstrate the application of climate risk assessments in real estate investment decision-making.

• Hotel Chain Risk Assessment: A study assessed the physical climate risk of a major hotel chain's properties in Europe, India, and China ²². By evaluating risk exposure to various hazards, the analysis identified assets at higher risk of storm damage, properties requiring upgrades due to increased flood risk, and locations potentially facing revenue loss from heat waves. This case study highlights the importance of considering a range of climate hazards and their potential impact on different types of commercial properties.
• Principal Real Estate Investors: This firm conducted a pilot climate risk assessment for one of its private equity funds, evaluating assets across different climate-related risks ²³. The assessment provided insights into potential investment risks at the property level and the overall portfolio's exposure. This case study demonstrates how climate risk assessments can be used to inform investment decisions and portfolio management strategies.
• Mercer International: This case study highlights how scenario analysis can be used to explore key climate-related risks and opportunities facing a company and identify strategic interventions for improved resilience ²⁴. It emphasizes the importance of considering a range of possible climate futures and developing adaptation strategies to address potential impacts.

These case studies illustrate the growing importance of integrating climate risk assessments into real estate investment strategies.

Limitations of Current Climate Risk Assessment Methodologies

While climate risk assessment methodologies have advanced significantly, limitations remain:

• Data Gaps and Inconsistencies: Climate data from different providers can vary significantly, making comparisons and projections challenging ²⁵. Data availability and quality can also be a constraint, particularly in developing countries ²⁶. This can lead to challenges in conducting consistent and reliable risk assessments across different regions.
• Model Limitations: Climate models may not accurately represent extreme weather events due to limitations in spatial resolution and the complexity of capturing small-scale processes ²⁷. This can result in underestimations of the frequency and intensity of extreme events, potentially leading to inaccurate risk assessments.
• Uncertainty and Complexity: Climate change is a complex phenomenon with inherent uncertainties, making it challenging to predict precise impacts and long-term consequences. This uncertainty needs to be acknowledged and incorporated into risk assessment methodologies.
• Simplified Assumptions: Some methodologies rely on simplified assumptions and proxy data, potentially leading to underestimations of climate-related losses ²⁸. For example, using a company's headquarters location as a proxy for all its assets can significantly underestimate its true risk exposure ²⁹.
• Transferability of Methodologies: Climate risk assessment methodologies developed in developed countries may not be fully applicable to emerging markets due to differences in data availability, climate vulnerabilities, and socioeconomic contexts ³⁰. This highlights the need for context-specific approaches to risk assessment.

Addressing these limitations requires ongoing research, improved data collection, and the development of more sophisticated models.

Climate Risk Assessments in Real Estate Investment Decision-Making

Climate risk assessments are increasingly influencing real estate investment decisions. Investors are using these assessments to:

• Identify and Quantify Risks: By understanding the potential impacts of climate change on property values, operating costs, and tenant demand, investors can make more informed decisions about property acquisition and disposition ³¹. For example, properties in areas prone to flooding or extreme heat may face higher insurance premiums, reduced rental income, and increased operating costs.
• Inform Risk Mitigation and Adaptation Strategies: Assessments can help identify vulnerable assets and prioritize investments in resilience measures, such as flood protection, energy efficiency upgrades, and water conservation strategies ³². This can help reduce the potential financial impacts of climate change and enhance the long-term value of properties.
• Enhance Portfolio Management: By incorporating climate risk into portfolio analysis, investors can diversify their holdings and optimize their overall risk exposure ³². This may involve investing in properties in less climate-vulnerable areas or diversifying across different property types and regions.
• Meet Regulatory and Disclosure Requirements: Growing regulatory pressure and investor demand for climate-related disclosures are driving the adoption of climate risk assessments ³³. For example, the Task Force on Climate-related Financial Disclosures (TCFD) recommends that companies disclose their climate-related risks and opportunities.
• Identify Investment Opportunities: Climate change can also create new investment opportunities in the real estate sector. This includes investments in green buildings, resilient infrastructure, and technologies that support climate adaptation and mitigation ³¹.
• Consider Climate Gentrification: Climate change can influence property values and potentially exacerbate social inequalities through a phenomenon known as "climate gentrification" ³⁴. This occurs when areas less vulnerable to climate change become more desirable, leading to rising property values and potentially displacing existing residents. Investors need to be aware of this potential impact and consider strategies to promote equitable and sustainable development.

Conclusion

Climate change poses significant physical risks to commercial properties. By understanding these risks and utilizing appropriate methodologies and tools, investors, property owners, and other stakeholders can make informed decisions to mitigate potential losses and enhance the resilience of their assets. This includes:

• Conducting comprehensive climate risk assessments: This involves evaluating potential hazards, exposure, and vulnerability, considering both current and future climate projections.
• Integrating climate risk into investment decision-making: This includes factoring climate risk into property valuations, due diligence processes, and portfolio management strategies.
• Implementing adaptation and resilience measures: This may involve investing in flood protection, energy efficiency upgrades, water conservation strategies, and other measures to reduce vulnerability to climate hazards.
• Staying informed about the latest climate science and best practices: This includes monitoring evolving climate risks, regulatory developments, and technological advancements in climate risk assessment and adaptation.

The urgency of addressing climate risks cannot be overstated. Stakeholders in the commercial real estate sector must take proactive steps to protect their investments, ensure the long-term viability of their properties, and contribute to a more sustainable built environment. This requires collaboration with industry peers, engagement with policymakers, and investment in research and innovation to develop more robust and comprehensive climate risk assessment methodologies and adaptation strategies.

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