Climate Risk and Resilience Assessments
In November 2022, the U.S. government released the latest draft National Climate Assessment declaring that the calamitous effects of climate change are worsening and becoming more widespread and stating that “the things Americans value most are at risk.” That same month at the Conference of the Parties (COP27) in Sharm El-Sheikh, Egypt, world leaders had to reckon with the reality of sluggish progress reducing carbon emissions to avert the worst of the climate crisis.
Clearly, governments, private industry and individuals need to redouble efforts to mitigate climate change, and at the same time we must get serious about adaptation to reduce the catastrophic risks of a worsening climate and sea level rise. The good news is that when we look at buildings and urban infrastructure, there is overlap in adaptation and mitigation strategies. Identifying these measures and implementing the ones that provide the biggest benefit for the least cost for any given asset starts with conducting a climate risk and resilience assessment.
The landscape of climate risk and resilience assessment is evolving rapidly. Launched just five years ago as a voluntary guideline for risk assessment and reporting, the Task Force on Climate-related Financial Disclosures (TCFD) is being adopted by an increasing number of financial regulatory entities as the basis for mandatory disclosure of climate risk to investors.
Starting with New Zealand in 2020, financial systems in at least eight countries now require disclosure of carbon emissions and climate risk, with more expected to follow. One of the latest is the U.S. Securities and Exchange Commission (SEC), which last year released draft rules for mandatory corporate climate risk disclosures. When fully adopted as anticipated for the fiscal year beginning in June 2023, these disclosure reports will become part of an expanded Form 10-K and will include a company’s direct and indirect carbon emissions and an assessment of the risks that climate change poses to the value of assets. The rule will impact real estate investment trusts (REITs) and large companies that depend on commercial real estate assets, with a ripple effect through to many of the businesses in the building industry that support these entities. Various agencies in the federal government are also adopting carbon emission and climate risk-related regulations that will apply directly or indirectly to vendors in the real estate and building industries.
The increased frequency and severity of climate- and weather-related events due to climate change poses physical risks to assets, and hence financial risks to investment in those assets. Investors with a financial stake in real estate, and all of us who depend on buildings and infrastructure in our daily lives, will want to understand these risks and the potential disruptions to our lives and livelihoods. Both regulation and necessity will make climate risk and resilience assessments a standard part of real estate transaction due diligence, and a consideration when designing and renovating buildings.
So, what is a climate risk assessment? They are standardized processes that consider both physical and transitional risks to assets.
- Physical risks are natural hazard or weather-related risks aggravated by climate change, like prolonged drought, severe heat waves, extreme flooding, and high winds. What standard was a given asset built to and how well will it resist hazard events that are more severe than what it has historically experienced?
- Transitional risk refers to the potential impacts due to changes in regulation or the economy in response to climate change that might impose significant capital expenses on a property or reduce its value. For example, new building performance standards like New York City’s Local Law 97 may require significant capital improvements to achieve required carbon emission reductions.
Governments, private industry and individuals need to redouble efforts to mitigate climate change, and at the same time we must get serious about adaptation to reduce the catastrophic risks of a worsening climate and sea level rise.
A climate risk assessment for a real estate asset includes three steps, both for due diligence in asset acquisition and in capital improvement resilience planning for currently owned facilities.
- First, conducting a location specific, qualitative hazard rating of current climate-related risks, and a future climate change impact projection based on modeled greenhouse gas emission scenarios (Representative Concentration Pathways or RCPs).
- Next is the preparation of an asset-specific vulnerability and materiality assessment, including a visual inspection of the subject property and a review of available records to assess how susceptible it is to the primary identified risks, and if the potential impact of any of those risk will be “material” (significant) in terms of cost or disruption if they occur. In other words, if a potential hazard event occurs, what is the likely magnitude of damages, and how costly would the repairs be or how long might the facility be out of use? A similar assessment can be applied to a proposed new development. Given the identified hazard risks, what higher standards of construction are justified to reduce vulnerabilities?
- The third step involves identifying feasible mitigations to address vulnerabilities and reduce or manage the potential impacts of the primary risks, and what is the cost versus benefit of those mitigations. If we think of the mitigation as a form of insurance, how does the cost of the insurance compare to the projected loss from potential risks?
When it comes time to implement resilience measures for buildings, integrated solutions are the key to reducing risks while also achieving a return on investment even if the property is spared the worst of potential hazards. This is where a dual focus on climate risk adaptation and climate change mitigation comes into play. For example, building envelope enhancements can reduce energy use and cut carbon emissions to comply with building performance standards (transitional risk), mitigate physical risks from high winds, heavy rain, and extreme heat, and enhance passive survivability, the ability of the building to remain habitable during a prolonged power outage. This one measure reduces operating costs, helps to mitigate climate change, reduces both physical and transitional risks, ensures the property will retain or gain value over time, and now has a new marketable feature, resilience, that will be valued by tenants.
The practice of climate risk and resilience assessment will soon be a standard part of property acquisitions and development projects. It is an important part of due diligence and planning to protect the value of our investments, improve the resilience of our businesses and communities, and ultimately, protect human lives and the health of the planet.
Alan Scott, FAIA, LEED Fellow, LEED AP BD+C, O+M, WELL AP, CEM, is an architect and consultant with over 35 years of experience in sustainable building design. He is director of sustainability with Intertek Building Science Solutions in Portland, Ore. To learn more, follow Scott on LinkedIn at www.linkedin.com/in/alanscottfaia/.