One silver lining of the Covid-19 crisis has been the impact on the environment. As the pandemic shuts down factories, cancels flights, reduces road traffic, and forces people to stay home, pollution in major cities has plummeted. Nitrogen dioxide pollution over New York and other major metropolitan areas in the Northeast was 30 percent lower in March compared to the monthly average from 2015-2019, NASA satellites show.
However, this short-term pause is not a long-term solution. Climate change remains a significant challenge for investors in commercial and residential real estate, in obvious and more subtle ways, according to the research report “Expectations & Market Realities in Real Estate in 2020: Forging Ahead,” developed by RERC, a SitusAMC Company; Deloitte; and the NATIONAL ASSOCIATION OF REALTORS®. Here are three ways the real estate industry is responding to climate change.
1. Protecting Investments from Climate-Driven Damage
The most obvious manifestation of climate change is damage or destruction to properties. Hurricanes, for example, are becoming more devastating. The five most costly hurricanes in U.S. history have all occurred since 2005, including three since 2012, resulting in nearly $500 billion in damages as of September 2019.
When Harvey struck the Houston area in 2017, almost three-quarters of damaged properties were outside the Special Flood Hazard Area, leaving thousands of residents and commercial landowners uninsured. Over one-fifth of U.S. assets are at risk to severe damage (Category 3 or higher) from hurricanes, with a capital valuation of $16.6 billion. According to an MSCI report, real estate investors have three choices for dealing with property damage from climate change:
• Avoid high-risk areas.
• Transfer the risk to insurance companies and tenants; in many cases, however, insurance premiums will rise or become unattainable.
• Control the impact of these risks by working with regulators or implementing their own plans.
2. Adapting to Increased Pressure from Stakeholders and Regulators
Company CFOs say they are feeling increasing pressure from stakeholders to act on climate change, according to a survey by Deloitte. Climate change exposes companies to transition risks, including shifts in technologies, markets and regulation that can increase business costs, undermine the viability of existing products or services, or affect asset values.
Many investment firms have set up sustainability groups to investigate the financial risks associated with climate change. For example, in 2017, CalPERS launched a five-year strategic plan to identify and mitigate high-value sustainable investment risks and opportunities that may affect its investment returns. One-fifth of its $394 billion in public market investments are in sectors with high exposure to climate change, including energy, materials and buildings, transportation, and agriculture, food and forestry, The Los Angeles Times reports.
Meanwhile, regulations aimed at reducing carbon emissions, lawsuits against polluters and market trends such as the fast-dropping price of renewables exacerbate financial risk for investors. For example, in September 2019, Gov. Gavin Newsome issued an executive order directing CalPERS and CalSTRS to decrease carbon emissions and increase climate resiliency. CalPERS has pledged to make its portfolio carbon-neutral by 2050.
3. Increasing investments in Sustainability Initiatives
As the perceived threat of climate change has increased, investors have substantially increased their holdings in sustainable or green enterprises. The challenge of climate change gives companies the opportunity to improve efficiency, spur innovation, and improve supply chains by decreasing reliance on price-volatile fossil fuels. Most companies are increasing energy efficiency and using more climate-friendly equipment. They earn benefits from government incentives and reduce costs. Microsoft pledged in January 2020 to be carbon negative in a decade, and to “remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975.” In addition, it plans to launch a $1 billion climate innovation fund.
Companies need to not only measure their exposure to climate-related risks and subsequently manage them, but also incorporate climate change in their strategic plans. Failure to do so can undermine the sustainability of their businesses.