Managing climate risk - a 21st century approach for commercial real estate investors

Populations around the globe face heightening climate risk. In 2021 alone, the world witnessed severe flooding in Western Europe and China, ice storms in Texas and wildfires in California – all of which exacted enormous economic and human costs.

Re-insurance data highlights the increasing cost of such disasters: Global economic losses from natural and man-made catastrophes totaled USD 202 bn in 2020, up from USD 150 bn in 2019.¹ Figure 1 shows global losses broken down in line with the industry standard categorisation of climate events into primary perils and secondary perils. Primary perils are natural disasters with known severe loss potential for the insurance industry, such as tropical cyclones or earthquakes, whereas secondary perils are smaller to moderate events or the secondary effects of a primary peril. Examples include river flooding, torrential rainfall, drought, wildfire, thunderstorms and tsunamis. Secondary perils are often not modeled and have historically received little monitoring from the insurance industry. Though the annual costs of both types of climate event are increasing, the share represented by secondary perils is growing.

The overwhelming majority of climate scientists and academics agree that global warming is caused by human activity.²

As figure 2 shows, global temperature anomalies have risen considerably over the last 100 years, and there is consensus that this is the main reason for the rise in the frequency and severity of natural disasters. Though governments, not-for-profit organisations and the private sector have joined the fight against climate change, even the most drastic of interventions will require many years to reverse the global warming trend, and the cost of extreme weather is expected to continue climbing into the foreseeable future.

Real estate and the climate challenge Real estate is a major contributor to global 

CO2 emissions. In 2020, the built environment was estimated to be responsible for 75% of annual global greenhouse gas emissions,³ with buildings alone accounting for about half of this amount.⁴ Around 50% of emissions from new buildings are embedded in the construction materials. The other half arises from operation of the building.⁵ This sets the real estate industry before the dual challenge of creating spaces that are more efficient in use while reducing the up-front carbon emissions involved in construction and refurbishment. This should be kept in mind as we concentrate on identifying climate risks for existing assets.