ULI & LaSalle offer new tool to assess physical climate risk

A new tool to help the real estate sector assess physical climate risk and act on disclosure data is provided in a report published by the Urban Land Institute (ULI) and LaSalle Investment Management. The tool is a step-by-step framework to evaluate physical and financial risk and compare the costs and benefits of resilience.

The framework in the report, Physical Climate Risks and Underwriting Practices in Assets and Portfolios, is broken down into three steps for decision making based on individual asset risks, local market risks, and ongoing risk mitigation efforts.

The first step is evaluating the level of exposure to physical climate risk and the financial implications; the second is identifying hazard mitigation strategies and estimate associated costs; and the third is determining risk-adjusted return and whether or not that return meets firm objectives

“Physical climate risk data collection and disclosure is the first step the real estate industry can take to further invest in and build resilient infrastructure,” said ULI head of urban resilience Lindsay Brugger. “Data drives action, and doing nothing incurs deeper costs — from higher insurance premiums to asset repair or replacement. Focusing on the underwriting process, the framework offers investment managers a methodology for developing risk-adjusted returns so deals can be adapted in alignment with a firm’s fund or portfolio objectives.”

The report is the second in a series by ULI and LaSalle. Building on the first report which outlined how to source and interpret reliable climate risk data, the second provides a market overview, adaptable framework, and recommendations based on emerging best practices for incorporating physical climate risk in the underwriting process.

“This report helps provide guidance that investment managers can follow to factor the climate risk data they have available to them and improve outcomes at the asset and portfolio level,” said Julie Manning, global head of climate and carbon, LaSalle IM.

The report suggests that concerns regarding physical risk arising from weather and climate related extremes may be perceived as a lower priority in Europe, compared to the US and Asia, which have to date experienced a greater frequency and intensity of hazard events, particularly hurricanes and wildfires.

“However in Europe, there is certainly increasing recognition of both physical and especially transitional risks that climate change poses to the built environment,” said Simon Chinn, vice president, research and advisory services, ULI Europe. “Perceptions of physical risk on the Continent are beginning to change, particularly as the latest data from the European Environment Agency revealed that 2021 and 2022 combined yielded €111.7 billion of damage across the EU, a 40-year high. Proactive, data-driven strategies to take action and mitigate risk in future will be essential, and this new framework provides an invaluable roadmap to navigate this complex area.”