Integrating climate risk data advised for better investment decisions.

Integrating climate risk data advised for better investment decisions.

Urban Land Institute (ULI) and LaSalle Investment Management (LaSalle) have introduced a new framework designed to assist the real estate industry in utilising climate risk disclosure data effectively, aiming to address the growing challenges of climate risk management in the real estate sector, offering a comprehensive methodology for investment managers.

"The framework offers investment managers a methodology for determining how physical climate risk might affect their returns," Lindsay Brugger, Vice President of Resilience at ULI said. She emphasised that while managing physical climate risk is new for many investors, real estate has always been about managing various risks, and climate is simply another risk to manage.

Julie Manning, Global Head of Climate and Carbon from LaSalle, added that the real estate industry faces an overwhelming choice of climate data service providers. "Our first paper with ULI, released in 2022, helped guide readers in choosing and understanding climate risk analytics," she explains. The most recent paper, released in April, takes the next step by helping investors use the data to make better investment decisions.

Manning identifies two main challenges real estate practitioners face with climate risk data. "Firstly, climate risk data is new to our industry, and like any new concept, it takes time for people to get accustomed to seeing the data, understanding what it's telling you, and what it's not telling you," she said. 

The second challenge is the need for human interpretation of data, which is essential for accurate risk assessment. "Some data providers might indicate a 100% risk of flooding for buildings in Amsterdam, but local teams know that significant flood defence systems mitigate much of that risk," she noted.

Determining whether the cost of improvements is justifiable is another complex decision for investors. "It's as challenging as any other risk-return decision we have to make," Manning said. The goal is to maximise both physical and economic resilience in investments. She underscores the need to balance risk tolerance with capital investment, using occupancy as an example. 

"Imagine you invest heavily to protect a building from flood risk, but the surrounding neighbourhood is flooded and not passable. The impact on tenants, whether they are law firms who can work from home or residents needing access to food and emergency services, is crucial to understand."

Brugger added that risk tolerance is critical, and it's important to consider the cost of doing nothing. "Doing nothing could mean higher insurance premiums, higher repair and replacement costs, or even value impairment," she explained. Resilience strategies can reduce these costs and offer additional benefits, making an asset more attractive year-round, not just during disasters.