Climate Change Thread

[ReluctantSamurai]

While response to climate change may be spotty and inconsistent at the government level, businesses are taking the issue seriously. Especially the one business impacted the most---insurers. Policy is already being affected, and changes to investment and policies is already happening:

https://www.heitman.com/news/climate-risk-2/

A report by the Urban Land Institute (ULI), a global multidisciplinary real estate organization, and Heitman LLC (Heitman), a global real estate investment management firm, finds that real estate investors have expanded their analysis of climate risk to explore impacts at the market-level. Investors interviewed for the report noted a heightened appreciation for market-level climate risk and expect assessments of that risk to increasingly influence investment decision-making and outcomes.

Climate Risk and Real Estate: Emerging Practices in Market Assessment finds that investors now commonly view local climate risks, such as wildfires, increasingly frequent and intense storms and sea-level rise, as core factors in investment decision-making. Exact weighting of climate risk varies from investor-to-investor; however, climate risk is having greater impact on investment outcomes overall. Certain investors revealed they were starting to pull back from investment in some local property markets due to lack of climate resilience.

Globally, most major economic hubs are in coastal locations, river deltas, or other high-risk areas and these cities house more than half the world’s population. Many cities’ key business districts are in their most at-risk area, their waterfronts. In many cities, high value residential development, representing a key part of the local tax base, is likewise located in waterfront districts.

Some cities threatened by climate change are in the process of moving their populations, most notably Cairo and Jakarta. Climate migration is also an increasingly recognized phenomenon, with prominent examples in the U.S. including migrations after disasters such as Hurricane Katrina, Hurricane Maria and the 2020 wildfires. With climate change risks intensifying, and costs of insuring, protecting, or rebuilding property rising, the trend to pick up and move altogether may become more common, more quickly than anticipated.


Climate change is increasing the frequency and intensity of many different weather events that result in catastrophic losses, including extreme precipitation, drought, floods, tsunamis, wildfires, heat waves, and landslides. Globally, there were 40 disaster events in 2019 that resulted in at least $1 billion in near-term, direct losses each – part of an upward trend of billion-dollar disasters. Worldwide losses from extreme weather events from 2010-2020, some on a smaller scale, totalled over $3 trillion.

From the aforementioned ULI report (the full PDF is available in the above link):

Leading real estate investment managers and institutional investors are increasingly recognizing climate risk as a core real estate issue that is beginning to affect their decisions at the market level as well as at the asset level. The consensus from interviews with leaders in the industry is that market-scale climate risk assessment will play a role in future investment decisions, mirroring the recent advances in assessing physical risk at the asset level. As this market-scale analysis of climate risks and cities’ resilience strategies advances, investors will better asses both the economic impact of climate-related events and the cost and ability of cities to mitigate the impact of climate change through their resilience strategies.

As investors increase understanding and prioritization of market resilience to climate risk, their real estate investment decisions at the market level are likely to become more climate conscious. In the meantime, some investors are starting to make decisions on whether to invest, or continue investing, in markets particularly vulnerable to the impacts of climate change. Examples of pulling back from entire markets completely because of climate risk are limited but do exist. In these cases, investors often see climate risk as a “tiebreaker issue” that makes a difference if other market-level concerns exist.

BlackRock, the world’s largest asset manager, made headlines in January 2020 when Larry Fink, the firm’s CEO, stated in his annual letter on corporate governance that “climate change has become a defining factor in companies’ long-term prospects,” and “we are on the edge of a fundamental reshaping of finance.” The BlackRock announcement signified an increasing industry prioritization of climate change mitigation, or efforts to prevent or reduce greenhouse gas emissions.Leading real estate investors report participating in the Task Force on Climate-Related Financial Disclosures (TCFD) as established by the Financial Stability Board, and using the results to drive climate-risk decision-making. One interviewee representing a real estate investment trust in Southeast Asia noted, “[A]s TCFD methods are fleshed out, property managers will have a better understanding of those key risks.” The interviewee further noted, “We actually ran a TCFD analysis of our portfolio, and . . . this gives us insight into which regions we should be developing in, how we should respond, and what are the issues we need to look at right away.” GRESB, the Global Real Estate Sustainability Benchmark, has also recently integrated a Resilience Module, which scores respondents on their climate risk and resilience strategy.

The last bold text should raise a red flag as it's called "redlining" outside of the insurance world. And not surprisingly:

A 2019 study by Deloitte found that more than half of U.S. state insurance regulators “indicated that climate change was likely to have a high impact or an extremely high impact on coverage availability and underwriting assumptions.”

In response, insurers have sometimes raised prices or refused to issue new policies in high-risk areas, and regulatory entities have imposed restrictions on higher rates. Following the California wildfires in 2018 and 2019, for example, insurers canceled many homeowner policies in high-risk areas. In response, the state imposed a one-year ban on that practice. Real estate investment managers interviewed for this report noted that they are currently seeing increases in property insurance premiums, a trend many attribute to climate change and the increased frequency of storm events. “We are looking at the possible physical damage, but insurance is a key factor for us,” noted a U.S.-based investment manager. “Pretty much all of our insurance is renewed annually at the discretion of the insurers, so that is part and parcel of the risk.”

Most interviewees also expressed overall uncertainty about future insurance prices and the likely market impacts of shifting insurance policy. In an extreme scenario, some investors envisioned a future in which properties could not qualify for insurance at all and therefore became ineligible for loans. In short, a loss of insurance could cause a downward spiral even in the absence of a peak climate event. Even without a worst-case scenario, the annual insurance pricing structure can under predict risk for longer hold periods as well as for infrastructure.

Whether government officials acknowledge climate change or not, businesses are, and business decisions going forward are going to influence climate change policy irregardless of governmental decisions. A few examples:

However, a few investors indicated that they are beginning to suspend acquisitions or take steps to reduce their real estate footprint in city markets where they harbor climate-risk concerns. Examples of divesting from entire markets because of climate risk remain limited but do exist. In most cases where an investor divested from an entire market, they harbored general concerns about that market, and climate risks represented one problem too many. Some investors shared examples about markets where their behavior had recently changed because of perceived climate risk, primarily providing commentary on U.S. markets, including the following:

One investment manager described an exit from Houston after Hurricane Harvey (2017), where “the climate risk factor added a material lever to the overall conversation.” The process of exiting took several years, given the need to make improvements to damaged properties. “We had to wait a couple of years . . . to restore the buildings’ reputations,” noted the investment manager. “We have been trying to determine an internal case study of what happened there and what does it mean to have your property impacted by a climate event.”

Another investor described a decision to significantly reduce investment in Boston because of concerns about sea-level rise and the high proportion of the city developed on fill.

One European investment manager noted that market decisions related to city-level physical risk can also happen in cities where climate risk is not commonly perceived as a major issue. The investment manager shared Edinburgh as an example, where a concern about future sea-level rise for a potential acquisition prompted an investigation of the municipality’s infrastructure plans for the surrounding area. “If flood risk comes out as something unfixable, then that will be an exclusion,” said the investment manager.

Some interviewees noted overall speculation about prospects in South Florida, discussing concerns about flood risk while recognizing the resilience work underway at the city and regional levels. “I do think there is an observed discount for properties in South Florida,” noted one U.S.-based investment manager. Another investor described a process by which its fund reduced its exposure to a region after completing a local flood-risk study that shed light on the region’s compounded risk via its geological foundation of porous, erosion-prone limestone. While the firm did not report a formal policy on investment in the region, the flood-risk study led to greater focus on properties with fewer vulnerabilities at the asset level.

In a small number of conversations, some managers noted making market-based decisions on limited or even anecdotal information. “There are so many markets to choose from,” noted one manager, explaining that anecdotal concern was enough for him to avoid markets that could be vulnerable. Decisions like this were informed by a range of types of sources, from popular media articles to think tank studies focused on topics outside of real estate and land use. This approach to investment decision-making could prove detrimental to cities vulnerable to climate impacts and whose extensive resilience policies and infrastructure investments may require greater industry recognition.

Going forward, it seems that development projects are going to come under more scrutiny regarding profit/loss:

Another investor summed up the issue: “To pursue any of these strategies [for climate adaptation] costs money, and that will increase taxes.” These taxes and fees incurred could range from transaction costs to stormwater fees, permitting costs, zoning variance costs, or many other models. Efforts to enhance resilience, such as strengthened building codes and design guidelines, are also likely to present additional costs in the short term, even if they lead to avoided losses over the long term. An interviewee from a ratings agency agreed, noting that “there’s a balance certainly to be struck between the implementation of projects and the cost at which they’re being implemented.”

The areas most under risk are obvious, and that bodes very bad for low value communities particularly minority ones:

Globally, most major economic hubs are in coastal, river delta, or other high-risk areas. These locations present many advantages, relating to connectivity, trade, quality of life and placemaking. These cities house more than half the global population, with
much higher percentages of residents in some regions. About 80 percent of U.S. residents live in cities, for example, and 39 percent of the European Union population lives in metro areas with 1 million or more inhabitants.

Many of the greatest infrastructure needs are in historically marginalized communities, including for low-income residents or people of color. In many South and East Asian countries, for example, infrastructure access closely correlates to income. In the United States, low-income communities are frequently located in flood-vulnerable parts of cities, and about 8 to 9 percent of government-subsidized housing is in flood-prone areas. In the United Kingdom, nongovernmental organization Climate Just notes
that low-income households are less likely to live in flood-resilient homes and have home contents insurance, and are more likely to be displaced by flooding.

In some locations, flood risk and race also correlate; in Chicago, for example, “Thirteen zip codes represent nearly three-fourths of flood damage claims paid between 2007 and 2016. In these areas, 93 percent of residents are people of color.” Previously redlined neighborhoods also face significantly more risk from extreme heat; a 2019 study found consistently higher temperatures in formerly redlined neighborhoods in 94 percent of the cities surveyed. With a frequent lack of parks, tree canopy, and cooling infrastructure, low-income neighborhoods can be as much as 13°F/–10.56°C hotter than affluent areas in the same cities.

And so a Catch 22 situation arises. The cities most at risk for damage from climate related events, are exactly the ones that business investment will be staying away from precisely because of climate-related risk. In conclusion:

As real estate investors have become more sophisticated in tracking and evaluating climate risks, leading firms have already begun to broaden their scope of analysis to the city or marketcontext. This has increased investors’ interest in data about how cities respond to extreme weather events as well as data on the financial implications of long-term city planning decisions and infrastructure investments.

Evaluating climate risk at a market level will require the development of new assessment methodologies. Few metrics are available to quantify market-scale risk and resilience, which can make it difficult for leaders in the field to test and build support for innovative ideas to enhance city resilience.

As investors find solutions and build these types of metrics into their investment decision-making, climate risk will become a more significant factor.

Here in the US (as elsewhere in the world), Dr. No and the rest of the GOP can attempt to block every single piece of the Biden Administration's climate policy, but eventually the old adage of "Money Talks and Bullshit Walks" will prevail, and Congress will be forced into a reality that many in the business world have already accepted.