Investors are stepping up efforts to understand and better manage the impact of climate change on their physical investments in real assets, including private equity, from farmlands to urban office buildings. It is an increasingly urgent mission as the transition to a net-zero economy ramps up.
"Physical climate-risk scenario analysis is particularly important for real asset investors as portfolios are more likely to be materially affected by increased risk of physical impacts and damage as a result of flooding, coastal inundation, sea level risk and extreme heat," said Shuen Chan, head of ESG for LGIM Real Assets in London. Her firm's analysis of extreme physical climate risk has stepped up in the last 18 months, including more forward-looking scenario analysis of that risk, with the idea "to build more resilient portfolios," she said.
In the U.S., the $267.8 billion New York State Common Retirement Fund, Albany, and Impax Asset Management Group PLC have joined forces to ask S&P 500 companies to identify the location of key facilities and buildings where climate change events could negatively affect operations and in turn, financial results.
"Where a company operates key facilities is a major factor in its exposure to physical risks," said New York State Comptroller Thomas P. DiNapoli, the fund's trustee. "Investors need much more precise physical location data from companies to help make sound long-term financial decisions."
Based on the responses so far, New York State Common and Impax are learning that companies are not seriously considering, let alone planning for, the physical risks of climate change, and investors are dealing with a lot of unpriced value risk, according to a report by Julie Gorte, Impax senior vice president for sustainable investing.
According to an S&P Global Inc. report, an estimated 60% of S&P 500 index companies' physical facilities and buildings face high risk of climate-related losses, representing a total market capitalization of $18 trillion in the U.S. alone.
Along with more dramatic risks to buildings, owners and investors in real assets need to consider the longer-term impact of climate change from greenhouse gas emissions and carbon footprints, sources said. The built environment also contributes more than 40% of global greenhouse gas emissions, according to the World Business Council for Sustainable Development. That ramps up the pressure on private and public decarbonization efforts to achieve global net-zero carbon goals. The International Energy Agency projects that to reach interim goals by 2030, all new buildings would need to be on track to be net-zero carbon ready by 2040, and 50% of existing buildings would need to be retrofitted.