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.

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

Exit Notice

You are leaving Vert Asset Management’s fund site.

To continue, click the button below.

Exit Notice

You are leaving Vert Asset Management’s fund site.

To continue, click the button below.

Exit Notice

You are leaving Vert Asset Management’s fund site.

To continue to the Vert Education site, click the button below.