The focus on financial risk is increasing as weather patterns become more intense and unpredictable.

As droughts, floods, wildfires and heatwaves become more frequent and extreme, real estate investors are increasingly taking climate risk into account.

Extreme weather cost economies more than US$3 trillion between 2010 and 2020, according to insurance broker Aon.

In the U.S., climate events that cause at least $1 billion in damage have quadrupled over the past four decades, data from the country’s National Oceanic and Atmospheric Administration shows.

In Asia, as many as 15 million people in seven cities could be affected by rising sea-levels and coastal flooding by 2030, according to Greenpeace East Asia.

As the UN's Intergovernmental Panel on Climate Change’s recent review warns and the consequences of changing weather patterns become clearer, the real estate industry is waking up to what this means for existing and future buildings.

Around 78 percent of investors surveyed in JLL’s Decarbonizing the Built Environment research identified climate risk as a financial risk. Real estate investors and developers are increasingly considering climate risk factors when deciding where to buy or build, according to a 2020 joint study by Heitman and the Urban Land Institute.

“I think we will look back at 2020 as the tipping point, catapulting climate risk into mainstream consciousness, with the persistent rise of extreme weather events like the record-breaking heatwaves sweeping across the northwest of the U.S. and Canada or snowstorms in Texas, making it harder to deny,” says Lori Mabardi, ESG research director at JLL.

“The desire to understand climate risks and perils and how they can impact a portfolio or asset is rising every day.”

Closer modelling

The task of assessing real estate portfolios and modelling future risks is improving as more tools rapidly emerge.

The Climate Service, which works to embed climate risk into decision-making, offers peer-reviewed climate model projections that factor in location, severity and timing of climate-related risks. The service provides financial value-at-risk figures against a host of physical and transition climate risks.

The Real Estate Climate Value-at-Risk (Climate VaR) model from MSCI assesses how the nature and magnitude of physical risks differ across assets and portfolios.

“Investors are able to see, for example, the potential financial implications of sea-level rise or temperature extremes, among other physical climate risks,” says Annabelle Harris, senior consultant and climate risk technical lead in JLL’s Upstream Sustainability Services team. “Physical climate events are already being experienced and affecting asset values, leading investors to begin to take a more long-term view towards risk.

“The direct implications on valuations to vulnerable buildings is slowly becoming clearer.”

While accurately valuing real estate in affected areas is complex, the financial impact of climate change is starting to show. In the U.S., real estate exposed to rising sea-levels sells at a 7 percent discount to similar-but-better-protected properties, according to a 2018 study from Pennsylvania State University and the University of Colorado at Boulder.

And the First Street Foundation’s FloodFactor tool showed in 2018 that homes in eight states along the U.S. eastern seaboard have lost a total of US$14.1 billion in value because of sea-level-rise flooding since 2005.

Being prepared

The response of local and national governments will be a crucial factor in determining the financial impact of climate change.

Damage from flooding, storms and rising temperatures is forecast to cost UK city Glasgow around £400 million (US$553 million) a year and make the Scottish city as warm as London by 2050, according to the coalition Climate Ready Clyde.

Some cities are at higher risk than others, according to JLL’s 2020 Global Sustainability Report, and action is being taken for the long-term. Singapore has committed S$100 billion (US$73 billion dollars) over 100 years to prepare the nation for worst-case flood levels, while the city of Miami has recently appointed its first chief heat officer as the U.S. Army Corps of Engineers proposes a seawall to protect it from storm surges.

Although such moves are good news for investors, they only mark the start of what needs to be done at a city level.

“Investors need to know that the infrastructure surrounding their assets is resilient,” says Jeremy Kelly, director, global research at JLL. “Continued investment by cities is therefore vital to address what has become a costly consequence of global warming. Cities need to show the real estate industry that they are organized and ready for extreme weather events.”

But it’s currently the most climate-progressive investors who are taking extreme weather and climate risk most seriously, Mabardi says.

With the Task Force on Climate-related Financial Disclosures, other regulatory mandates, and momentum building around this critical topic, more and more investors and industry players are likely to swiftly follow suit, she concludes.

JLL is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion, operations in over 80 countries and a global workforce of more than 94,000 as of March 31, 2020. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.