Climate risk and real estate investment decision-making

A report released in 2019 by Urban Land Institute and Heitman details the potential risks and implications of climate change on the real estate sector. Furthermore, the report makes a call to investors and investment managers to come into action and work towards better solutions in the future, for which the report presents a number of thinking paths.

Firstly, the report aims to give property investors a better understanding of climate risk and its real estate investment implications. As such, types of climate risk and their potential impact on real estate are explained.

Secondly, the research addresses the state of current practice for assessing and mitigating climate risk in real estate as well as highlighting best practices across the industry. From the examples it becomes clear that, nowadays, climate risk insurance is used as the main protection for asset value.

Finally, it is acknowledged that climate risk insurance alone is insufficient to mitigate the risk of devaluation in the future. As such, investors and investment managers need to find effective solutions. The report touches upon a number of potential solutions:

• Mapping physical risk for current portfolios and potential acquisitions;
• Incorporating climate risk into due diligence and other investment decision-making processes;
• Incorporating additional physical adaptation and mitigation measures for assets at risk;
• Exploring a variety of strategies to mitigate risk, including portfolio diversification and investing directly in the mitigation measures for specific assets; and,
• Engaging with policymakers on city-level resilience strategies and supporting the investment by cities in mitigating the risk of all assets under their jurisdiction.