The global economy is currently facing multiple challenges post COVID-19 pandemic including geopolitical conflicts, supply chain disruptions, energy crises, and high inflation.
Climate change exacerbates these challenges, acting as a “threat multiplier” by increasing geopolitical conflicts, crippling infrastructure, extending the range of pathogens, and causing ecological collapse.
Financial institutions are exposed to physical hazards and transition risks from climate change, which have significant credit, market, and operational implications.
Real Estate Sector Overview
The real estate sector is critically impacted by climate change, necessitating an understanding of both physical and transition risks to ensure future resiliency and success. The sector is exposed to various climate-related risks that can affect property values, insurance costs, and operational stability.
Transition Risks
1. Increasing Regulation and Policy Pressure
– Regulatory measures aimed at reducing greenhouse gas emissions and promoting energy efficiency can impose significant costs on real estate owners and developers.
– Examples include stricter building codes, energy performance standards, and carbon pricing mechanisms.
2. Cost of Indirect Emissions
– Indirect emissions from building operations contribute to overall carbon footprints, and costs associated with these emissions can increase due to regulatory changes.
– There is a growing need to invest in energy-efficient technologies and renewable energy sources.
3. Shifting Market Preferences
– Market demand is shifting towards sustainable and energy-efficient buildings.
– Properties that do not meet sustainability criteria may face reduced demand and lower market values.
4. Change in Investor Sentiment
– Investors are increasingly considering environmental, social, and governance (ESG) factors in their investment decisions.
– Properties with poor sustainability profiles may struggle to attract investment.
5. Reputational Risks
– Real estate companies that fail to address climate risks may suffer reputational damage.
– This can lead to loss of business opportunities and increased scrutiny from stakeholders.
6. Transition Risk Guidance
– Financial institutions need to develop strategies to mitigate transition risks by integrating climate considerations into their investment and lending decisions.
Physical Risks
1. Sea Level Rise and Coastal Flooding
– Properties in coastal areas are vulnerable to rising sea levels and increased flooding risks.
– This can lead to property damage, increased insurance costs, and reduced property values.
2. Inland Flooding
– Heavy rainfall and changing weather patterns increase the risk of inland flooding, affecting properties located away from coasts.
3. Extreme Storms and Wind
– Increased frequency and intensity of storms can cause significant damage to buildings and infrastructure.
– This can result in higher maintenance and repair costs.
4. Wildfires
– Regions prone to wildfires face higher risks of property damage and destruction.
– This affects property values and insurance premiums.
5. Subsidence
– Changes in soil moisture levels due to extreme weather can cause subsidence, damaging foundations and structures.
6. Heat and Water Stress
– Rising temperatures and water scarcity can impact building operations, increasing cooling costs and affecting water availability.
7. Physical Risk Guidance
– Financial institutions should assess the physical risks of their real estate portfolios and implement strategies to enhance resilience.
Leave a Reply