Helping property players minimise risk

What is the financial impact of climate change on the real estate sector?

The first thing to understand is that real estate is one of the biggest contributors to climate emissions globally. It’s a huge, important component of the challenge that we face, and we are seeing real cases of that challenge across the globe today.

A significant factor our clients face is financial risk. Regardless of our goals, it is important that real estate investments are profitable, but climate change is directly affecting that. One area that’s being affected is insurance premiums, with increased forest fires and flooding, for example, pushing premiums up – over time, that makes a material difference to whether an investment
is good or not.

It is also worth noting that annual repair costs and insurance non-renewals are expected to rise by up to 25%, further introducing more risk to the bottom line.

Access to capital is also becoming an issue, as well as an opportunity. Institutional investors that are allocating their capital have strict criteria that they have to meet as part of their wider corporate strategies. And if assets don’t live up to that strategy, there is a real risk that they could be limited or even cut off.

Real estate is one of the biggest contributors to climate emissions globally. It’s a huge, important component of the challenge we face

The other area being affected is valuations. Think about assets that are suddenly in a new flood zone, or an area where flooding has significantly worsened due to climate change – the value of that asset is going down, presenting a real risk. These are real-life impacts and risks our clients are managing now.

How does the sector understand the risks they are exposed to?

There are multiple different ways to develop understanding of the risks. Typically, we break this down into physical risks and transitionary risks. Physical climate risks include coastal and river floods, heatwaves, wildfires, earthquakes and precipitations. These tend to be easier to assess depending on the location. It’s about having the most up-to-date information, not only from the surrounding area but also about the asset itself – and being able to work with those two pieces together.

Transitionary risks arise from the industry’s shift towards sustainability, regulatory change and how a particular risk is perceived. These are harder to quantify. A lot of it has to do with the speed of change as we transition to a new normal and being agile enough to adapt. How do investors and owners put themselves in the best position for that? Again, it comes down to the same foundational pieces, such as being able to rely on strong data points about your assets and to create a plan and be able to do scenario assessments using that data.

That’s how Deepki can help, especially with clients with numerous assets who are likely to find the risk assessment a lot more challenging to keep track of.

How do real estate players build climate resilience?

Being proactive is really important and gaining comprehensive climate risk assessments to identify vulnerabilities is a great start.

We have a framework we leverage that is based on solid, robust data to support resilience. We’re able to deep-dive into that data to understand it, actively report back and ensure it’s easy to understand. Then we can support our clients to develop and start an effective action plan. We can also help clients understand their risk trajectory using real data that is constantly being updated through automation.

That helps customers to constantly assess and reassess changes over time and have confidence in their position going forward.

Typically, we bring all the information about all of the risks associated with their assets to the forefront. We then bring in a set number of actions that can be used to try to mitigate those risks and we hold firms accountable to make sure the actions happen. Being able to reassess as quickly as possible puts you in the best possible position as things change quickly, and market sentiment is constantly developing.

How do asset owners turn climate models into actionable business decisions?

The models are an opportunity to take early action to mitigate future climate risks. That requires a data-driven approach to ensure efforts are focused on the most effective measures, maximising impact while minimising unnecessary expenditure.

The climate models provide important data on physical risks, such as flooding and heatwaves, and transition risks, which include regulation and examples like carbon tax. These need to be interpreted in the context of financial impact, insurance costs and asset valuation.

Our action plans focus on a range of steps including implementing flood barriers using heat-resistant materials or implementing improved drainage and reducing operational carbon. There’s also simpler upfront work that clients can prioritise such as replacing lighting with LEDs or adding solar panels.

A key challenge is for asset holders to prioritise time and energy on riskier assets. Being intentional about that is crucial. They should understand that they can link some of their insurance premiums, based on underlying data, and work with insurers to give clarity on their mitigation plan. That’s a good opportunity.

There are also a number of organisations that are really starting to be creative about their green loans, and we’re hearing that these partnerships are happening more and more.

It’s also important for funders and recipients to be on the same page – if they have the right plan, then having a holistic conversation is a lot simpler and results in greater collaboration.

What is the role of technology and data in effective climate risk management?

At Deepki, we continue to help our clients use technology to understand their climate risk and manage and adapt in order to reduce exposure and enhance profitability in the long run.

However, this is a challenge because it’s not just a single group of individuals: the real estate sector relies on so many different parties to work together towards the same goal and having a central source of truth is paramount for success. We deal a lot with analytics, performance simulation, tapping into ‘Internet of Things’ devices and data streams. We need to explore those tech sources holistically for the benefit of our clients to help them succeed and comply with regulatory and investor demands.

It is absolutely critical to leverage all the tools and capabilities at our disposal to meet industry targets and create lasting value.

Jeffrey Blaylock, director of client – UK, Deepki