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Climate modelling delivers more long-term insight for real estate investors and facility managers

A focus on the impact of the physical and transition factors from climate change as well as assessing the opportunities it provides, is delivering owners and investors with a more holistic view of their climate risk

Aon’s latest Weather Climate & Catastrophe Insight report reflects a climate in transition. In June 2020, the highest temperature ever of 38°C was recorded above the Arctic Circle, while the global temperature was nearly 1°C above the 20th Century average – the second warmest year on record for land and ocean temperatures. And, as the temperatures change, so does the occurrence of climate related disasters like wildfire, drought as well as flooding and wind. At US$268 billion of economic losses, 2020 was the fifth costliest year on record for weather related natural disasters.

For real estate owners, ranging from private individuals, property companies, global investment funds and FTSE 100 businesses, climate change or climate transition has become a major consideration as assets come under threat from more extreme and varying weather events. It’s why a focus on climate analytics is becoming increasingly useful for owners of property assets to help assess the impact of the physical and transition factors from the changing climate, as well as assessing where the opportunities lie.

Hurricanes might shift paths

To date, much of the work carried out to assess risk to buildings from the weather and the climate has been carried out by natural catastrophe models. Put simply, the natural catastrophe models used by insurance and reinsurance companies to assess risk within their portfolio of exposures use past events to develop severity and frequency curves, to estimate what might happen in the next 12 months or so. But with global warming, it’s not as simple as saying weather events like hurricanes will get stronger and more frequent, there may also be a propensity for them to alter path. The warm seas and the trade winds that facilitate hurricanes, for example, might mean there will be more frequent and more powerful hurricanes but the changing meteorology could mean that instead of them going up the eastern seaboard of the US, they go across to Mexico exposing some areas to increased hurricane risk but resulting in reduced exposure to areas traditionally at risk.

This is where a climate model can offer a more holistic view by using science to look at what will happen to weather patterns as a result of global warming. The model we use at Aon is built around the recommendations of the Taskforce on Climate-related Disclosure (TFCD) and maps out physical exposure (for impact factors such as extreme temperature, coastal flooding and wildfire), transition exposure (for impact factors related to a changing legal and regulatory environment, for example, or the development of new technologies), and also looks at what the opportunities are (in areas like resource efficiencies and cost savings, the use of low-emission energy and the chance to develop new products and services).

Triaging a client’s property assets

We run the climate model against a client’s assets – which can be anything from schools, hospitals, railways, offices, to air cargo terminals – and the data is then used to triage which locations/assets are most likely to be affected in a designated time period across the various physical and transition factors. Once the assets/locations of most concern to a client have been identified, specific individual site assessment can be undertaken to see if there are current mitigation factors in play at any given asset/location.

For example, flood water hitting a 40-storey office block and only affecting the basement is unlikely to have the same impact on a business as the same amount of flood water hitting a manufacturing facility that is all on one level. Critically, the modelling also takes into account not just the direct impact on a building but also the surrounding infrastructure supporting the commercial function of the asset/location. You have to consider whether people will be able to get into their office, for example, if the nearby subway is flooded, or the main connecting rail transport is subject to trackside fire disruption.

Making informed decisions

At the same time, an assessment can also be undertaken from a civil/structural engineering perspective to see if resilience or mitigation measures can be put in place to counter the projected physical and transition factors. Whether putting these measures in place is cost effective can be judged against the impact analysis. But, if not cost effective, then an informed decision can made as to when it would be optimal to leave an asset/location and the analytics extended to find a suitable alternative location.

Due diligence on climate factors

For real estate owners, climate modelling can be a crucial factor when it comes to carrying out due diligence on acquisitions or considering disposals. Say an investor is thinking of buying a building and holding it long-term, what are the climate models telling us about that type of asset in that location in 20 or 30 years? The investor might find that if the building is affected by climate transition at this point in the future, then when they come to sell, it’s not worth as much as they hoped it would be when they bought it.

Perhaps the area will be more susceptible to flooding risk which will deter future buyers, or perhaps greater heat might mean a future buyer will be put off by an office block that doesn’t have air conditioning and will need expensive retrofitting to be an attractive prospect? Similarly, if a business has entered a 20-year lease, it will want to know what’s going to happen over the entire period of the lease and not just next year; allowing it to potentially take advantage of any break clauses should the climate impact be sufficiently severe.

Putting a price on transition and physical risk

Of course, any modelling needs assessment and interpretation, and climate modelling is no different. There will be individual risk mitigations in place at the assets being analysed which are not included in the climate modelling and need to be factored in, but this type of analysis can provide holders of real estate assets with a more informed long-term view when it comes to considering climate transition. If you run a catastrophe model against a building it will give you the cost to repair that building from an insurance claim; a climate model however gives you the commercial impact to your asset from climate transition well into the future, empowering decision-making by providing an estimated economic impact on both transition and physical risk, and scoping possible opportunities.