Risks from climate change make location essential

When it comes to climate risks and opportunities in real assets, it's location, location, location.

"Location of a building is one of the most critical factors," said Joanna Frank, New York-based founding president and CEO of the Center for Active Design, an organization that promotes healthy design and construction, and operates Fitwel, a certification system originally developed by the U.S. Centers for Disease Control and Prevention and the U.S. General Services Administration.

If people have to drive to get to your property, there's no way to reduce the building's overall impact on energy usage, Ms. Frank said.

If the building is located in a heat island, an area where there is a lot of concentrated heat such as parts of cities that lack trees and green spaces but instead are enveloped in asphalt, it will require increased energy usage to cool the building. This not only increases costs but releases carbon into the atmosphere, she said.

These same factors also impact the health of the people living and working in the building, affecting its desirability as an investment, Ms. Frank said. The location of buildings impact people's health.

"People don't walk unless there are places to go," she said. Properties adjacent to parks and shops encourage people to walk, which impacts not only people's physical but mental health in that it mitigates social isolation, Ms. Frank said.

Also, locations that have ample public transportation reduce single-occupancy car use, which not only is a source of energy consumption, but also driving alone exacerbates stress and feelings of social isolation, Ms. Frank said.

What's more, properties located in heat islands are dangerous for tenants, she said.

"Heat kills more people than any other natural disaster," because people can't tolerate excessive heat, Ms. Frank said. They can't cool down, she said.

A study released in June by the Center for Active Design and real estate manager QuadReal Property Group showed that properties satisfying Fitwel's location requirements garnered higher rent per square foot than those that did not satisfy the requirements. For example, the Bayview at Coal Harbour, apartments located in Vancouver, British Columbia, is within walking distance of the harbor and parks as well as shops and restaurants, which has been driving higher rent, the report said.

Infrastructure projects in areas impacted by climate change cost more to operate and may not be insurable, impacting some investors' ability to leverage the property, said David Scaysbrook, co-founder and managing partner of Quinbrook Infrastructure Partners, who is based in the Isle of Capri, Queensland, Australia.

One of the biggest extreme weather risks for a renewable energy project is flooding and sea level rise, Mr. Scaysbrook said. Quite a few renewable energy projects are located next to oceans and rivers. Quinbrook had one project next to a river that flooded three times and the firm had to raise the equipment so it does not get inundated with floodwater, he said.

And projects are getting flooded more frequently, requiring Quinbrook executives to increase both the likelihood and severity of flooding as part of their analysis, he said.

Another climate risk is extreme heat, which impacts infrastructure projects. Solar energy plants produce less energy and battery storage will fail more frequently in extreme heat, Mr. Scaysbrook said.

This requires managers such as Quinbrook to invest more money than might have been anticipated to upgrade their projects so they can tolerate extreme heat.

Another big issue that managers are just starting to face is insuring projects subject to extreme weather events caused by climate change.

Project owners may argue extreme weather events are not necessarily caused by climate change, but insurance companies assume they are caused by a shifting climate, leading to higher insurance premiums or even refusal to insure properties, Mr. Scaysbrook said.

Insurance is already not available at any cost for certain weather events such as severe flooding, Mr. Scaysbrook said. Quinbrook has one project in Australia that had three major climate events in a short period of time. Right now, there are only two underwriters of this risk globally, he said.

He expects those insurers will also leave the market, making the project uninsurable, Mr. Scaysbrook said. Since Quinbrook does not use leverage, the firm is able to self-insure, he added. But managers that have already leveraged their project will have trouble doing self-insuring, which in turn, will make it difficult to access more debt, Mr. Scaysbrook said.

Even when insurance is available, Mr. Scaysbrook expects that insurance companies will start including extreme weather carve-outs in their contracts.

Some countries and regions are investing in new infrastructure to combat climate change.

On June 30, U.S. Commerce Secretary Gina M. Raimondo announced funding for the $2.96 billion from the infrastructure law earmarked to address climate change, which includes natural infrastructure projects to build coastal resilience, store carbon, remove marine debris and restore habitats.