As published in PropertyEU ESG Watch Magazine September 2023

The last couple of months have shown us that extreme weather is an issue that is going to have a devastating impact on our livelihoods, lives and real estate.

For those of us whose job it is to protect the fabric and value of the properties we own and occupy, the biggest challenge we face is understanding the physical risks to buildings and knowing how to mitigate them. The industry is facing a ticking time bomb to make our buildings more resilient to climate risks, and I’m not sure enough people really understand how to go about tackling resilience.

Not discounting the fact that our news is filled with images of wildfires from extreme heat and flooding from extreme rainfall, there are a number of highly respected data sources that can be referred to that help build a picture of what future risks will be. What the data doesn’t do though is actually give guidance on what needs to be done on a building-by-building basis to adjust them to make them more resilient.

Climate Vulnerability Risk Assessments (CVRA) are increasingly becoming an essential part of building ownership, whether to satisfy regulatory requirements, or those of investors, lenders, or insurers. What investors are discovering though is that having a CVRA carried out and knowing what to do with the findings doesn’t go hand in hand.

Climate related financial disclosure regulation in the UK and the EU Taxonomy Alignment policy in Europe both aim to leverage financial and business markets to support economic growth, whilst at the same time managing the risks stemming from environmental issues. There is an emphasis on asset managers to assess and disclose how they consider environmental risks.

A CVRA is an effective way for a company to highlight the proactive approach it has taken in identifying and managing climate-related risks, however the report on its own doesn’t ensure the protection of assets or support business continuity.

For those investing in European real estate, compliance with the EU Taxonomy Alignment brings with it the benefit of unlocking potential sustainable finance, such as green bonds and loans, that could prove valuable when looking to make improvements to as- sets as part of plans to build resilience.

The real value of a CVRA though is not in what is says, but what is done with it. Too often it is seen as a tick box exercise undertaken to please investors or other stakeholders. There is no ‘one size fits all’ solution to environmental resilience. Every building in every location will face different risks and needs a bespoke strategy for mitigating those risks.

Our team was recently appointed by a client to make sense of a report it had previously commissioned that was designed to provide data on the climate risks faced on one of its assets in the UK. The report had projected changes and risks over the next two decades, along with hypothesising for 30 and 40 years too.

The report included an incredible amount of data, taken from a variety of sources, and drilled down to a very local level. What it didn’t do though was provide any analysis or recommendations.

Along with analysing the existing data-led report, we undertook a detailed building survey so that we could understand the intricacies of the asset itself. Our team was then able to assess the risk and vulnerability in four key environmental risk areas: temperature, wind, water and solid mass.

The risks in each of these aspects were then measured on a sensitivity scale from very low to very high. For each risk, a detailed explanation was provided, along with measures that we recommend the client implements. In the final part of the report, we provided the client with a comprehensive year-by-year ‘mitigation and adaptation plan’ that sets out exactly which measures should be undertaken when and, just as importantly, what the likely cost of implementation will be.

This gave the client a clear plan to follow and the ability to budget the plan into its investment forecasting. In this instance the recommendations were broken down to schedule for 2023, 2024, 2025 and 2026, as well as a more general 2023-2027 category.

With many funds taking a long-term view to asset management and holding portfolios for up to 30 years, they can almost be certain that each asset is going to face changing climate risks of some kind, be that fluctuating extreme temperatures, overworked flood defence systems in their locality or an increased prevalence of high winds.

The advantage that the long-term view has, though, is that the cost of interventions can be carefully managed and spread over the lifetime of that ownership in order to maximise asset values. It also opens up the potential for external investment into measures that minimise risk, such as improved flood de- fences, as well as the opportunity for new innovation and technology that may reduce the need for more complex and costly solutions.

Mitigation and resilience do not just concern existing building stock. It can be just as important when assessing the viability of new assets. It would be easy to discount a site because of the risks highlighted by the data, but with the right attention to details in the planning and design stages, lower cost, challenging sites can be unlocked for the right usage.

While housing isn’t a suitable asset type for potential future flood plains, some may, for example, be fit for logistics, especially if competition for more desirable land is fierce in nearby densely populated areas. To mitigate risks and ensure the site remains resilient to future climate changes, the design of the site would not just need to factor in raised buildings, but also draining that will keep access roads safe and usable so that future flooding will not lead to business interruption.

Whether it is conducting climate risk assessments on existing assets or potential acquisitions, companies that gain insight into the likelihood of future climate hazards and their potential impacts also need to arm themselves with the knowledge that enables them to implement the measures that enhance the resilience of buildings and protect investments from climate-related risks.

We have seen the devastation caused this summer and while hindsight is a fine thing, there is a clear reality that this is a problem that is not going away. In fact, it is likely to only get worse. Much of the talk surrounding the built environment and climate change is focussed on how to improve buildings to reduce the impact they have on the climate. Just as important for asset values though, is focussing on the impact that the climate is having on our buildings.