AEW: European investors not yet pricing in climate risks

The research applies new tools to quantify two sources of climate risk for real estate investors: (1) immediate physical disasters and (2) transition risk associated with climate change mitigation. Recent media coverage has focused on the physical risks of disruption, damage and destruction of buildings as a result of storms, river flooding, rising sea levels, heat and droughts. The increased insurance and climate change adaptation costs related to these could result in “stranded” assets, i.e. impossible to rent or sell in the short term. Despite appearing less urgent, the research highlights how the industry could be facing an even bigger issue through the transition risk associated with climate change mitigation as it incorporates market perception, regulatory and technological obsolesce.

The research examines the potential impact of non-compliance with stricter energy use and greenhouse gas (GHG) emission rules. These targets have been set out by the United Nations (UN) and European Union’s Energy Performance of Buildings Directive (EPBD) and their more recent property type and country specific pathways. Despite a possible delay in policy implementation and enforcement on a national level, non-compliance might render many properties across all sectors as “stranded” well before the UN 2100 deadline.

The findings of the research also reveal that there is currently no clear correlation between the risk of climate hazards and the green certification of buildings. The current myriad of building certifications considers many varying factors with little weighting on energy use and/or GHG intensity. The expected shift in regulations toward GHG reductions could lead investors to shift their emphasis from finding green premiums for highly certified buildings towards quantifying climate related risk premiums and required returns for all buildings.

Hans Vrensen, Managing Director, Head of Research & Strategy, explains:

“Recent headlines on storm induced flooding and Australian bush fires have placed increased attention on Environmental, Social and Governance issues from the media, investors, regulators and the public. Our analysis highlights the risk of properties becoming “stranded” by increasing insurance and adaptation costs in the short term. But, non-compliance with future energy targets and GHG intensity pathways might be an even bigger game changer in the longer term, even if we expect delayed application and enforcement of these targets in local markets. Since investors are not currently fully considering these risks in acquisitions, it could have interesting pricing implications in the future. The industry is set to benefit from the next generation of real estate-specific analytical tools to ensure buildings are more accurately priced, compliant with the stricter rules of the future and more resilient to deal with climate change.”

AEW’s research findings conclude tomorrow.

james.wallace@realassetmedia.com