This blog is excerpted from an article in Cushman & Wakefield’s Global Investment Atlas research report.
Climate change finally made the executive agenda in 2018. As the effects of global climate change have become more apparent, investors must not only consider physical risk but also transitional risk that comes from changes to policy and market expectation.
Forward-looking investors have already integrated climate-related risks into their overall investment approach and objectives. Those wishing to preempt climate risk to their portfolios should consider:
Investors’ reliance on insurance to cover climate-related risk could become more expensive as insurers improve climate risk modeling. Additional action must also be taken to mitigate the transitional risk of loss of liquidity.
As with any capital expenditure, investors will want to know the returns for building improvements linked to increased asset resilience to climate risk. At this stage, there is no clear data linking climate change resilience to insurance premiums. But this is expected to shift, as occupiers will want to occupy buildings that can withstand climate-related risks in order to minimize potential disruption to their businesses. Learn more…
In 2017, ratings agency Moody’s incorporated climate risk of cities into their credit ratings. While no cities have been downgraded yet, those that do not act could find it hard to raise capital, which could impact future investing and overall competitiveness. Investors with assets concentrated in climate-risk prone geographies should work with local governments to ensure these areas remain attractive places for future capital. Learn more…
With the construction and operation of real estate estimated to contribute 40% of total greenhouse gas emissions globally, designing more environmentally friendly buildings and retrofitting existing assets to improve their energy, water and waste systems has long been a push for the industry, with BREEAM and LEED both nearing their third decade. However, data around profitability for green buildings is mixed. Investors should view improvements not just through higher rents, but the potential downside of inaction. Green loans and bonds are attractive financing options. Learn more…
Along with climate change, health and wellbeing initiatives have become a focus as research points to the impact the work environment has on overall employee health and productivity. Improvements to an asset’s sustainability credentials could lead to a better working environment and attract occupiers who view their physical workspace as a key part of their talent acquisition strategy.
The need for sustainable workplaces to help mitigate climate risk and attract tenants creates tension for investors and their goals to minimize running costs and capital expenditures. While there are significant downsides to taking no action—either government regulation or loss of liquidity, or both—balancing competing objectives is a challenge for investors.
David Bitner is Head of Americas Capital Markets Research at Cushman & Wakefield. His research focuses on how macroeconomic trends, real estate fundamentals and dynamics in the broader capital markets interact to shape commercial real estate risks and opportunities for investors.