In the realm of ESG, a fourth concept is emerging as organizations consider the implications of climate change on their businesses. It’s a concept that cuts across organizational units and is usually evaluated along with risk. We’re talking, of course, about resilience.
While the letter “R” has yet to establish itself as fully as “E”, “S,” and “G,” resilience remains an urgent topic within the environmental category. In the past year, it has gained significant traction with organizations across all sectors, though real estate stands out in particular: physical assets face some of the most significant risks when it comes to a changing climate. All of this has contributed to the rise of a new expression: “ESG+R”.
To date, the world has largely focused on climate mitigation rather than climate adaptation or resilience. The majority of efforts revolve around reducing carbon emissions to halt or arrest climate change, rather than preparing for and managing its inevitable effects. But in our post-COVID world, where society has been forced to adapt to the economic and social shocks associated with a global pandemic, “resilience” as a concept is more important than ever before.
In theory, the more you manage your organization’s climate risk, the more “resilient” it becomes. It sounds simple enough. But what does climate risk really mean?
The Task Force on Climate-Related Financial Disclosures (TCFD) is a good place to start. Its industry-leading climate risk disclosure framework defines two types of risks associated with climate change that organizations must manage: physical risks and transition risks.
When it comes to real estate, both physical risks and transition risks can touch almost every aspect of a building’s operations and value. When considered in aggregate, they can help paint the picture of a portfolio’s cumulative climate risk, which is crucial to understand when making long-term strategic and investment decisions.
In commercial real estate, there are three primary scenarios in which it makes sense to evaluate and measure a building’s climate risk:
In general, the best way to manage climate risk is to first evaluate and understand it. While every asset is different, there are some tried-and-true recommended steps you can take to assess risk at both the asset and portfolio levels:
The output from these efforts: critical knowledge to inform your short- and long-term investment decisions. You may decide against acquiring higher-risk assets, and will certainly have a better sense of where you need to invest money to protect overall asset values.
The types of climate risk mitigation activities you engage in may vary significantly depending on the individual asset and portfolio. Here are some best practices to consider at both the asset and portfolio levels as you go through the recommended process outlined above:
The potential cost of not focusing on adaptation and resilience could result in huge financial implications for any company. However, the real estate real industry is expected to be one of the hardest-hit sectors. In one especially jarring study, the International Renewable Energy Agency estimated that $7.5 trillion in real estate assets could be “stranded” and experience major write-downs in value.
With that in mind, perhaps “R” does deserve a special call-out in the world of ESG for real estate. GRESB, the leading ESG framework for real estate, has already given a nod to the increasing importance of resilience by adding an extra module on this topic in its annual benchmark. All told, strong climate resilience strategies will be key to guarding and future-proofing assets, the real estate industry, and the world at large in the years to come.