Climate resilience now a critical factor for property investors

The attendance at the EPRA Annual Sustainability Summit in London in December 2019 provides a good indication that the listed real estate industry is taking its role in ESG seriously. The inaugural EPRA Sustainability Summit in 2016 had 31 attendees, while this year, more than 180 delegates attended; a testament to the growing commitment to ESG in the last few years alone.
Yet, what can be said about the speed with which industry, in general, has acted? Swenja Surminski, Head of Adaptation Research at the London School of Economics and keynote speaker at the EPRA Sustainability Summit, argues that all industries have been painstakingly slow in setting out a plan to tackle environmental issues, despite warnings dating back more than 40 years.
Surminski looks at the insurance industry, in which she has worked and has studied for decades, to make this point. The first insurance industry paper pertaining to climate change was published in 1978. This was a good first step and “by 1992,” Surminski says, “climate change was on the agenda for everyone in Europe, not just insurers, from small community groups to large corporates and everyone in between.”
By 2003, the insurer Swiss Re declared itself carbon neutral in a watershed moment that has since seen carbon neutrality declared or planned by governments, businesses, charities and NGOs. This sequence of events suggests strong and steady progress.
Yet, 17 years on from Swiss Re’s achievement:

  • global carbon emissions continue to climb as climate change nears crisis point;

  • diversity and inclusion have only just entered the boardroom lexicon in most Western economies; and

  • electorates the world over continue to appoint officials that pledge increased natural resource production and deny climate change.

“The problem of climate change, social inclusion and the people we elect to govern us,” says Surminski, “is not a business issue or a political issue. It is a human issue. Humans are inherently reactive.”
And statistics from her research support this view. Currently, just 12% of disaster management funds are allocated to risk reduction and prevention activities. The other 88% goes towards funding disaster response, including repair and reconstruction. A behavioural rethink, or a reassessment of the structures that reward current behaviours, may be in order.
It is too early to predict when a ‘crisis point’ may actually come to pass. Still, James Wilkinson, Co-Global CIO of Global Real Asset Securities at BlackRock, sees this behavioural change beginning to take shape. He reminds us that: “This is a period of transition; there has been a huge change in how the world is viewing ESG factors.” And with this, the availability of ESG data has boomed.
Yet data on its own is not the answer. The initiatives it represents are what is important, according to Biljana Perhrsson, CEO of Kungsleden, because “ultimately it is, in reality, not in data-gathering where we can make a positive impact. For now, companies must be judged qualitatively on what they are really doing to protect against climate change.”
For Brian Bickell, CEO of Shaftesbury, this rings true. The business places emphasis on how property companies’ planning and development processes mitigate environmental risk. At Shaftesbury, which owns a very specific type of building in its portfolio, the challenge is different from many competitors. With older buildings, the key is in elongating the lifespan of the building where possible, maximising the use of a structure’s embodied carbon.
Panel discussion on sustainability leadership
“The average age of buildings we look after is about 150 years old,” says Bickell. “In our situation, the most sustainable thing you can do is not pull down a building.”
“Pulling down and rebuilding is often an answer to the problem of trying to add value. But making current buildings environmentally and economically relevant is an underrated, extremely valuable skill,” he says. “The skills we look for in our personnel are those that help us to adapt, not destroy.”
This ethos is mirrored by Louise Ellison, Group Head of Sustainability at Hammerson, who cites a portion of their shopping centre portfolio buildings that were built ten years ago or more as not fit for purpose. “We have to do something with them,” she agrees, “because pulling them down simply makes the problem worse.”
Maximising the lifespan of a structure has become an increasingly important assessment factor for investors, and repurposing buildings is one solution that has proved successful for UK focused portfolios. However, in geographies where the environmental risk to buildings is more disruptive, the nature of construction best-practice is changing to the extreme.
“Environmental disruption is now amongst the greatest risk factors in an investment decision,” according to Felipe Gordillo, Senior ESG Analyst at BNP Paribas Asset Management. For a building, environmental disruption can, at best, lead to underutilization. In the worst cases, it can lead to “obsolescence and destruction of an asset altogether,” he says.
Indeed, the most innovative businesses are increasingly focusing on in-built resilience measures to mitigate overall risk and maximise investment return opportunity. While this makes business sense in order to attract investment, climate change has caused upheaval in the insurance industry, where providers are changing their propositions altogether, and this presents a big problem for property industry leaders.
For example, Alice Legrix de la Salle, Head of Operations at AXA Climate, explains that, in markets such as India, cover for issues such as famine and drought are no longer on offer to farmers. “Famine and drought in parts of the market are now no longer a risk; they are a certainty. It is simply uninsurable,” she says. “As a result, we are shifting the focus from insurance cover to investment in climate change adaptation. Investment is absolutely critical. Investing in infrastructure must help people build something more resilient, rather than to stem the problem.”
Design for adaptation is crucial to respond to chronic and acute climate shocks. “The traditional approach to building design, especially for systems such as HVAC, has always been to look at historical climate data and to design systems accordingly. This is now obsolete; designers and architects must start conceiving a building’s services to respond to future climate scenarios and patterns,” Caroline Field, Associate Director at Arup said.
Another example of ‘design for adaptation’ is coastal buildings that will be required to install utilities, HVAC systems and ducts above the level of potential flooding to prevent disruption of building’s operations during extreme events. The inability to adapt to climate change might put companies in the position to face further financial risks.
“In parts of Florida,” says Gloria Duci, ESG Manager at EPRA, “the big national insurers have rescinded their property insurance offers for assets at risk of the effects of floods and hurricanes. As a result, local insurance from smaller providers is the only available option, and there are questions about the sophistication of cover and availability of finance in these situations.” It is not impossible to imagine Mediterranean areas, like southern Spain and Italy, suffering from chronic heatwaves, or countries such as the UK affected by recurrent flooding, seeing the same fate.
The next decade looks sure to provide property investors and developers the unprecedented challenge of extreme climate risk. The increasing pace of climate change appears an inevitability. As the industry plays catch up with the environment, it must adapt too to the risks presented by the action and reaction of its supporting insurance and engineering industries. Innovative solutions are at hand, but it could be a race against the clock for those at risk to shore up their portfolios and prosper.
Panel discussion on climate resilience in the building sector