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Climate Risk in Real Estate

September 30, 2020

Climate Risk in Real Estate.

“Increasing transparency makes markets more efficient, and economies more stable and resilient.”
– Michael Bloomberg, Chairman of The Task Force on Climate-related Financial Disclosures

Climate risk is on the agenda for all investors, whether they are sustainably minded or not.  The Task Force for Climate Related Financial Disclosures defines climate risk in two realms, physical and transitional.  We encounter greater physical risks as the climate changes.  Transition risk is what companies face as we try to shift to a low carbon economy.

Buildings are, for the most part, immobile. They cannot avoid the physical risks. They must prepare for them. Buildings also have an outsized responsibility with regards to climate change. Buildings use 40% of the world’s energy, and create 33% of the greenhouse gas emissions. As they are a big part of the problem, buildings will need to be a big part of the solution.

Physical Risks

Buildings face a host of challenges due to a changing climate, including:

  • Sea Level Rise – Shorelines will move inland because water expands as temperatures warm.
  • Flooding – Warmer air holds more moisture, leading to increased rainfall and swollen rivers.
  • Heat Stress – More extreme temperature days stress buildings’ energy capacity and the utility grid.
  • Drought – Some areas have less fresh water available than before.
  • Storms – Frequency and intensity of hurricanes increase as temperatures rise.
  • Wildfire – The combination of drought, higher temperatures, and stronger winds can be deadly.

 

Transition Risks

As companies, cities and countries commit to ever more aspirational climate goals and emission reduction targets, real estate owners need to make sure their buildings are ready.  Transition risks for REITs come in the form of both carrot and stick.

  • More and more companies, from tech companies like Microsoft and Google, to energy companies like BP and Total, have committed to net-zero energy targets. In order to reach these goals, they will need to occupy buildings and facilities that help them reduce their energy use and emissions. They’ll look to rent from the REITs that have the most efficient buildings. The more sustainable REITs stand to benefit.
  • More and more cities and countries have set climate alignment goals. To insure they meet them, they are passing legislation like New York City’s Climate Mobilization Act, which requires more than 50,000 buildings reduce their emissions or else face steep fines. In Europe, buildings that aren’t efficient enough cannot be leased. The less sustainable REITs could face increased costs for compliance, and could potentially lose business.

Our Investment Strategy on Climate Risk

Some real estate owners choose to ignore these risks, or underestimate them. Others are fully aware of the risks and are preparing for them. We choose to invest in the latter.  Our thesis is that a portfolio of companies paying attention to these changes will be better prepared for these risks than a portfolio of all or average real estate companies.

Reducing Physical Risk

When we first formed the strategy for the Vert Global Sustainable Real Estate Fund, we knew we wanted to minimize the exposure to physical risks.  And we found several leading climate risk firms that could tell us where those risks were most pressing.  But they couldn’t tell us which companies were facing them.  The data was great for scientists and but not so great for investors.

Vert is proud of our role in the creation of the first climate risk database for Real Estate Investment Trusts. By working with 427, a climate risk consultant (recently purchased by Moody’s) and GeoPhy, a big data real estate researcher, we were able to facilitate the creation of an investor ready database on REIT exposure to the physical risks of climate change. This database now allows us to identify the REITs most exposed to severe risks.

We exclude REITs have that have too much exposure, and those who aren’t preparing their properties in advance.  We include REITs that are divesting from their riskiest assets and investing in resiliency initiatives for the properties they will keep.

Embracing Transition Opportunities

We prefer to invest in the REITs that are committing to a path to net zero carbon.  We believe more tenants in the future will have climate goals. They’ll want to rent the facilities that help them achieve their targets.

We have a specific qualifying methodology for Emissions Excellence. A company can qualify if it has reduced either the energy consumption or the carbon footprint for its property portfolio by an average of 2.6% per year for the past 5 years.  The 2.6% is the International Energy Agency’s scenario that attempts to limit warming to 2 degrees, in alignment with the Paris goals.  In 2020, 44 of the 131 REITs in the Fund qualified on this basis.

Our Engagement Strategy on Climate Risk

Our climate risks is only as good as the data we have access to. We have joined as signatories to the Task Force on Climate Related Financial Disclosures (TCFD) to do our part as asset managers to get companies to disclose more. We do more than sign on. We communicate directly with REITs about the importance of disclosure of comparable, decision-useful information for investors around climate risks.

The Vert 2019 Engagement Campaign reached out to every company in the Fund to encourage them to adopt the recommendations of the TCFD. We asked if they had measured their risks to climate change and if they could begin disclosing them. We had follow-up conversations with dozens of firms to help them organize and structure their disclosure program.

Vert’s current 2020  Engagement Campaign asks REITs about their net-zero energy goals. We are encouraging the firms without publicly stated targets to set them. We ask those with general targets to set them more specifically on a net-zero pathway.  And we are reaching out to firms not in the Fund as well, as we want every real estate owner to know about decarbonization, not just those we invest in.

Explore more insights.

Please refer to the Prospectus for full risk disclosures. All data as of September 30, 2020 and subject to change daily.

The Vert Global Sustainable Real Estate Strategy operated as mutual fund from October 31, 2017 and prior to the fund reorganization on December 4, 2023. The investment objectives have not changed.

Investing involves risk. Principal loss is possible. Investors should be aware of the risks involved with investing in a fund concentrating in REITs and real estate securities, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments. Investments in foreign securities involve political, economic and currency risks, greater volatility and differences in accounting methods. A REIT’s share price may decline because of adverse developments affecting the real estate industry. REITs may be subject to special tax rules and may not qualify for favorable federal tax treatment which could have adverse tax consequences. The Fund’s focus on sustainability may limit the number of investment opportunities available to the fund and at time the fund may under perform funds that are not subject to similar investment considerations. Diversification does not assure a profit or protect against loss in a declining market.

Please refer to the prospectus for important information about the investment company including investment objectives, risks, charges and expenses which must be considered carefully before investing. You may also obtain a hardcopy of the prospectus by calling 1-844-740-VERT. Read it carefully before investing.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance is annualized for periods greater than 1 year. For performance current to the most recent month end please call 1-844-740-VERT. Standardized performance of the Fund is viewable under the Information tab. Click here for standardized performance of the Fund.

Fund holdings and/or sectors are subject to change at any time and are not recommendations to buy or sell any security. Current and future holdings are subject to change. Click here for the Fund’s current top ten holdings.

Basis points are otherwise known as bps or “bips,” are a unit of measure used in finance to describe the percentage change in the value of financial instruments or the rate change in an index.

The Fund is offered only to United States residents, and information on this site is intended only for such persons. Nothing on this web site should be considered a solicitation to buy or an offer to sell shares of the Fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.

ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a Fund’s ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.

Environmental, social, and governance (ESG) criteria refer to activities that contribute to the business that not quantified in typical financial reporting.

The Vert Global Sustainable Real Estate ETF is distributed by Quasar Distributors, LLC.

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