Before due diligence even begins, investors should perform pre-screening assessments that will be used to inform the full assessments necessary during the due diligence phase.

To start, an energy compliance screening will help reveal whether the property is or will be subject to any ordinances, such as Building Performance Standards, energy audits, and tune-up requirements. It would also be useful to assess physical risks at this juncture and identify whether the property is in an area with high or acute risk for climate hazards such as wildfires, hurricanes, or high winds.

Lastly, getting information on specific asset characteristics, including the age of the property, property type, and lease type, will also be important. With all this data collected, investors can then go a step further during due diligence to assess all potential physical and transition risks, as well as identify potential capital improvements the property will need.

Due Diligence Assessments

If the energy compliance screening shows that the properties are subject to ordinances, the next step would be to conduct a penalty assessment, which evaluates the compliance due dates and penalty amounts. Will the property incur a penalty right when the acquisition occurs, or is there more time to comply?

If the compliance date falls within the projected hold period, an acquisition energy and water audit or decarbonization study would be used to understand which capital improvements will be necessary in the immediate or near future. At this time, investors could evaluate whether these capital improvement projects align with their investment thesis, as acquiring assets that need significant capital improvements for core investments may not be financially sensible.

Investors may also want to conduct a solar or renewable energy feasibility study to further help with meeting decarbonization goals, especially in states like Colorado, Hawaii or New York, where there are high energy costs and large incentives for renewable and solar energy.

Evaluating Physical Risks

In addition to transition risks, it is also prudent to assess the physical risks climate hazards may pose on the property. After the initial climate hazard screening, investors need to assess the property for which resilience measures are already in place and which measures will be required to mitigate those risks. For example, if the property is in an area with potential for flooding, does the property use water-resistant materials. If not, this improvement may be necessary to prevent downtime at the property in the case of a climate event.

If the property is in an area with potential climate hazards, a Construction, Occupancy, Protection, Exposure (COPE) Assessment may also be beneficial. COPE Assessments help insurance agencies to quantify and estimate potential loss based on property data. For properties that would otherwise not be insurable or are subject to high insurance premiums, a COPE Assessment could change this if the assessment shows that resilience measures are in place.

ESG Metrics

Finally, for companies with ESG policies, the best time to collect ESG data is during the due diligence period. Obtaining ESG metrics for the property during this period will help identify whether additional improvements will be necessary so that the property aligns with the company’s overall goals. ESG metric data collection could be performed concurrently with a PCA to save the investor time and money.

Putting Plan into Action

As the real estate landscape evolves with increasing climate and regulatory challenges, it is crucial for property owners and investors to adopt a proactive approach. By integrating pre-screening and thorough due diligence processes, they can better navigate and mitigate both physical and transition risks.

This not only ensures compliance with current and future regulations but also enhances the resilience and sustainability of their investments. Engaging with sustainability consultants and leveraging comprehensive assessments will provide the necessary insights to make informed decisions, securing the long-term performance and value of their properties.