Droughts, floods and fires, oh my! This summer has seen more unprecedented weather events, including a record setting heat wave in the Pacific Northwest (>15○F above previous record), an early and severe start to the wildfire season in the western U.S., and deadly flooding in China and Germany, to name only a few. The recently released UN Intergovernmental Panel on Climate Change (IPCC) report includes dire warnings and confirms that we are already seeing the impact of anthropogenic climate change in the increased intensity and frequency of natural hazard events, including heat waves, wildfires, flooding, extreme wind events, and storm surges. Sea level rise is inevitable and now threatens $136 billion of coastal real estate in the U.S. (311,000 total, including 14,000 commercial properties), potentially rendering them unusable by 2045.
Swiss Re Institute estimates that in 2018 there were $151 billion (USD) in economic losses from natural disasters ($79 billion in insured losses) and 11,000 fatalities, with the upward trend continuing in 2019 and 2020. These reported losses have raised the awareness of regulators, investors and lenders to the risks posed to financial system and has prompted them to look for practical approaches to guide decision-making. Lenders face an increased risk of defaults due to borrowers’ climate-related financial losses. Climate impacts will also cause asset devaluation and reduced yields, impacting investor’s expected returns.
In response, the Task Force on Climate-related Financial Disclosures (TCFD) was launched by the G20’s Financial Stability Board as a voluntary framework for companies to disclose climate risk to investors. In 2020, New Zealand made TCFD disclosures mandatory for organizations in the financial system, and more countries are expected to follow with similar regulations. Securities and Exchange Commission (SEC) Chair, Gary Gensler recently tasked his agency staff with development of a mandatory corporate climate risk disclosures by the end of the year. These disclosure reports may become part of an expanded Form 10-k, including the companies direct and indirect carbon emissions (including suppliers and partners in the value chain). Given the risks that climate change poses to investments and assets, it is only a matter of time before climate risk and resilience assessments become a standard part of real estate transaction due diligence, and a consideration when updating or repositioning assets. What exactly does this mean?
A climate risk assessment typically considers two types of risks, physical and transitional. Physical risk refers to the weather-related risks exacerbated by climate change, including drought, heat waves, flooding, and high winds. How do the risk assumptions underlying the codes and standards in place at the time a property was developed compare to the current understanding of risk posed by the increased intensity and severity of hazard events predicted in climate models or currently being experienced in the region? Transitional risks are the threats posed by shifts in the economy or public policy in response to climate change that could impact property values or operating costs. This could include regulations like energy efficiency and carbon emission reduction mandates that require budgeting for significant capital improvements, as well as potential new development restrictions that limit the use of properties. For example, Oakley, Utah recently imposed a construction moratorium on homes that would connect to the city’s water system due to extreme drought impacts on the municipal water supply, potentially reducing the value of developable land in the city.
A physical risk assessment starts with identifying the prominent threats posed for that specific location. Those could be regional risks like hurricanes, tornados and drought, or localized risks due to the property’s proximity to a floodway, coastline, or wildland urban interface (wildfire risks). In some cases, risks are magnified by a combination of regional and local hazards that must be considered together, for example, proximity to a steep slope in a wooded location susceptible to wildfire, in a region that receives heavy rainfall events. That exact scenario occurred recently in Glenwood Canyon, Colo., when devastating landslides caused by record rainfall occurred in a year following massive wildfires that stripped the hillsides of vegetation. While not climate related, a comprehensive physical risk assessment should also consider natural hazards like earthquakes and tsunamis.
Evaluating transitional risks involves tracking trends in local and national public policy and understanding how anticipated climate change and its impacts on the economy could affect the property values during the expected hold period. It is only a matter of time before some form of carbon tax and/or emission reduction mandate becomes universal, at which time inefficient buildings dependent on carbon-intensive fuel will see increased operating costs or face capital upgrade expenses. Already, existing buildings in New York City are subject to Local Law 97 that imposes carbon emissions reduction targets by 2024, and even stricter requirements by 2030. At the moment, coastal properties are still highly valued, however it might not be long before sea-level rise, increased intensity of storm surges or more frequent and severe coastal flooding could render certain properties undesirable or even uninhabitable. Similarly, local out-migration induced by climate change-related water scarcity, frequent wildfires and associated air quality impacts, or loss of a major local employer due to climate shifts (e.g., winter recreation area, agriculture, etc.) could rapidly reduce property values. Additionally, insurance companies are beginning to refine and restrict coverage for extreme weather events, and in some cases declining to write new policies for properties in high-risk locations, like wildfire prone areas, putting the future insurability of some properties at risk.
Climate change is already impacting us in numerous and profound ways. Fortunately, a comprehensive approach to resilience in buildings can reduce future climate impacts, adapt them to inevitable changes, and mitigate physical risk to building occupants and financial risks for investors and lenders. That approach starts with a climate risk and resilience assessment that will focus the effort on the areas of greatest material concern. Next month we will take a deeper look at what is included in a climate risk assessment and some of the resources available to support their development, and the implementation of mitigations.
Alan Scott, FAIA, LEED Fellow, LEED AP BD+C, O+M, WELL AP, CEM, is an architect with over 30 years of experience in sustainable building design. He is a senior consultant with Intertek Building Science Solutions in Portland, Ore. To learn more, follow Scott on Twitter @alanscott_faia.