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Climate Risks and Threats: What Real Estate Needs to Know

As a resident New Yorker, I am still reeling from the deadly flash floods we experienced at the end of August. We saw Hurricane Ida slam into Louisiana and unleash high winds, heavy rain, and mass power outages. And while most of us knew to expect showers, the unexpectedly intense “remnants” of Hurricane Ida took many of us by storm. Pun intended. 

The morning after the onslaught of rain hit New York, the streets were filled with a low murmur of background conversations as people semi-incredulously shared stories about the events that unfolded the night before. “For any climate deniers out there, this should be a wake-up call,” I overheard one neighbor say to another, who had spent the night filling trash cans with water in a desperate attempt to keep his basement apartment from flooding. While my block in Brooklyn was fortunate to face relatively little damage, the surrounding neighborhood and communities fared far worse: forty-three people died in the greater New York area, and the city was forced to welcome FEMA back to town to aid in the recovery from the storms. And as is often the case, low income communities and communities of color were hit the hardest.

Across the United States, we have witnessed and dealt with increasingly severe weather events over the last several years. From the 2020 Texas snowstorms, the ferocious and seemingly constant California wildfires, and the relentless hurricanes battering Florida and the Gulf Coast, “climate change” is starting to feel less like an amorphous future concept and more like our present reality. 

Climate Risks in the United States

So what are the risks, exactly – and where are they located? A recent New York Times article titled “Every Place Has its own Climate Risk” helpfully outlines the specific threats by location in the US. Using data from Four Twenty Seven, a company that assesses climate risk for financial markets, the New York Times tabulated the highest risk for each county and built a comprehensive, interactive map of nationwide climate risks (see a static version of the Times’s map below, and head to the article to view the original). 

What to call climate change where you live. Intensity shows risk level from low (lighter) to very high (darker).
Source: The New York Times

Unfortunately, no region in the United States is risk-free. The East Coast is susceptible to extreme rainfall and hurricanes. The Midwest faces extreme heat and water stress. And the West Coast will have to contend with water stress and wildfires. The East Coast and Alaska are expected to deal with flooding associated with sea level rise, Florida is expected to experience the greatest consequences of sea level rise, and California deals with it all: drought, wildfires and heavy rainfall that feeds vegetation which exacerbates the wildfires. Furthermore, millions of Americans are expected to be at “high” risk of experiencing these events in their lifetimes (see Table 1 below). 

Table 1: Number of Americans that will be Affected by Climate's Biggest Risks

Climate Risk Type Water Stress Hurricanes Extreme Rainfall Heat Stress Sea Level Rise Wildfires
# of People at HIGH Risk 92,000,000 104,000,000 94,000,000 92,000,000 22,000,000 7,000
Locations Varied Across the U.S. East Coast, South East Coast East, Mid-East, West Midwest, Florida, and Texas Coastal Cities California

Source: The New York Times

Real Estate: One of the Most Vulnerable Industries

Industries also face material climate risks. Real estate is among the industries most vulnerable to climate change, as climate risks present very real threats to physical assets. Four Twenty Seven published a report on climate risk in real estate that outlines the primary risk indicators for real estate and the potential business impacts, ranging from increased energy costs due to rising temperatures, severe property damage, permanent loss of property value, and relocation costs (see Table 2 below for the full list). Correlating this list with the list of regional climate threat categories detailed above can serve as a good starting point for charting and understanding the specific climate-related business impacts that assets across your portfolio may face, so you can start building an action plan. 

Table 2: For Twenty Seven's Climate Risk Indicators

Climate Hazard Description Potential Business Impacts
Heat Stress Increase in Temperature - Increased energy costs
- Heightened risk of brownouts/power outages
- Stress on human health/ labor force
Water Stress Change in water supply and demand - Reduced water supply
- Increased water costs
- Social license to operate/reputation
Floods Change in rainfall conditions and size and frequency of possible floods - Property and building damage
- Compromised infrastructure
- Business interruptions
Cyclones, Hurricanes, Typhoons Exposure to past cyclones - Severe property damage
- Permanent loss of property value
- Relocation costs
Sea Level Rise Heightened storm surge, augmented by sea level rise - Nuisance floods
- Property damage
- Permanent loss of property value
- Relocation costs

Source: Four Twenty Seven

The Task Force on Climate Related Disclosure: A Leading ESG Framework to Manage Climate Risk

While there are many climate-related frameworks that exist to help organizations prepare for the impacts of climate change, the Task Force on Climate Related Disclosure (TCFD) focuses on the financial implications around the climate-related aspects of an organization's businesses. TCFD’s widely-adopted framework categorizes climate aspects as both risks and opportunities, and provides associated recommendations for disclosures that companies can adopt and publicly report on.  

TCFD structures its recommendations around four areas that correspond with core elements of business operations: governance, strategy, risk management, and metrics and targets. These overarching areas are supported by a specific set of recommended disclosures, as outlined in Table 3 below: 

Table 3: TCFD Recommendations and Supporting Recommended Disclosures

Governance Strategy Risk Management Metrics & Targets
Recommendations Disclose the organizations governance around climate related risks and opportunities Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material Disclose how the organization identifies, assesses, and manages climate-related risks. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Recommended Disclosures a) Describe the board’s oversight of climate-related risks and opportunities.

b) Describe management’s role in assessing and managing climate-related risks and opportunities.
a) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.

b) Describe the impact of climate related risks and opportunities on the organization’s businesses, strategy, and financial planning.

c) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
a) Describe the organization’s processes for identifying and assessing climate-related risks.

b) Describe the organization’s processes for managing climate-related risks.

c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management.
a) Disclose the metrics used by the organization to assess climate related risks and opportunities in line with its strategy and risk management process.

b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.

c) Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.

Source: Task Force on Climate-Related Financial Disclosures, page 14

Organizations can voluntarily disclose information in accordance with these recommendations, and investors can then use the responses to evaluate their investment risks and opportunities. TCFD recommends that organizations provide climate-related financial disclosures in their mainstream (i.e. public) annual financial filings. Many organizations also choose to disclose TCFD-related information in their annual ESG reports.

Final Thoughts

Climate threats unfortunately aren’t going anywhere – and will likely become increasingly severe and frequent in the years to come. Real estate organizations must therefore take steps to catalogue and understand the specific climate-related risks that exist across their portfolios so they can plan and prepare effectively for what the future holds. Combining this information with the recommendations from the TCFD can serve as an excellent starting point for creating a comprehensive climate action plan for your portfolio that accounts for both mitigation and disclosure.