Investors Weighing Climate Risk As Crisis Deepens

Real estate investors are increasingly measuring climate and extreme weather risks as major weather events become more frequent, according to new research from JLL. And that’s particularly true in the wake of the UN’s Intergovernmental Panel on Climate Change’s recent dire warnings about the nature of the climate crisis.  

Insurance brokerage Aon reports that extreme weather cost economies more than $3 trillion in the decade spanning 2010 and 2020, and in the US, climate events causing more than $1 billion in damage have quadrupled over the last 40 years.

Around 78% of investors surveyed in JLL’s Decarbonizing the Built Environment research identified climate risk as a financial risk, and the firm says real estate investors and developers are increasingly considering climate risk factors when deciding where to buy or build, citing Urban Land Institute data.

“I think we will look back at 2020 as the tipping point, catapulting climate risk into mainstream consciousness, with the persistent rise of extreme weather events like the record-breaking heat waves sweeping across the northwest of the US and Canada or snowstorms in Texas, making it harder to deny,” says Lori Mabardi, ESG research director at JLL. “The desire to understand climate risks and perils and how they can impact a portfolio or asset is rising every day.”

The firm cites modelling services like The Climate Service, which offers peer-reviewed climate model projections, and MSCI’s Real Estate Climate Value-at-Risk, which assesses the nature and magnitude of physical risks across assets, as important tools in an investor’s kit as they evaluate risk.

“Investors are able to see, for example, the potential financial implications of sea-level rise or temperature extremes, among other physical climate risks,” says Annabelle Harris, senior consultant and climate risk technical lead in JLL’s Upstream Sustainability Services team. “Physical climate events are already being experienced and affecting asset values, leading investors to begin to take a more long-term view towards risk. The direct implications on valuations to vulnerable buildings is slowly becoming clearer.”

Increasingly, there’s an onus on institutional investors to care about climate change and not simply pay lip service to ESG initiatives, experts say.

Institutional investors “have a responsibility to ensure that the money is invested in a risk-averse way,” Etienne Cadestin, global CEO of Longevity Partners, tells GlobeSt.com. “That’s why a lot of pension funds when they’re allocating cash will require investment managers to provide the safeguards to make sure the money is invested in a way that’s responsible, resilient, and future proof…There will be a point that not taking into account climate risk could be taken as negligence.”