Why fund managers are missing a trick on climate risk
Climate risk is going to change the value of assets and how easy they are to buy and sell. If you are not thinking about that now, particularly when you are buying or selling properties, you leave yourself at risk of exposure, because nobody knows quite how fast this is going to move. If you are not aware of it, you can’t make informed decisions.
ESG – and climate risk in particular - have been big growth areas. That has been largely driven by the financial regulations coming from Europe.
The Taskforce for Climate related Financial Disclosure, through the Central Bank, has set out a framework for companies to disclose what their climate risks are. That means companies must be forward looking. They can’t just worry about what has happened in the past, they have to think about how the climate is changing, what physical damage might be done by extreme weather events, how regulations might change to reduce emissions and what the costs might place on companies for buildings.
That has led to a real shift in mentality.
Fund managers, heads of real-estate funds, or investment portfolio managers looking at their next acquisitions all want due diligence in place so that they are not acquiring climate change risks. When they buy an asset they are trying to get information about how energy efficient it is today, but also whether there are physical climate risks there in the next period of time.
What that means in terms of geospatial data is models for how the world is going to change.
With geospatial data you can see where there has been recent flood damage, what the scale was, where wildfires are happening in real time. You can start to get a richer picture of how those changes are already starting to happen.
It gives you a platform then to predict what might we expect if the world warms by 2 or 3 degrees. You can start to make informed decisions about property investment. Should you be investing in Miami Beach, where sunny-day flooding is happening on a regular basis? City authorities are putting in water pumps around Miami Beach and are raising street levels to be able to cope with that.
Geospatial data makes those scenarios and their impacts much more visible. Particularly for physical assets like real estate or infrastructure like transport or power.
But I think there’s a gap at the moment. The geospatial world tends to get very excited about maps and dynamic maps, but doesn’t necessarily distil from that the key information points investors need to see. So what is the risk for that particular asset and how might that change over time and what might be the financial implications? I think that step is still required for it to become much more widely used than it is today.
OS data’s future impact
Environmental Impact Assessments today look historically at whether there has been flooding. But what hasn’t been done is using live data in a model for the future. You have to make sure models being used for investment assessments are as up-to-date as the latest data. That is where OS can help. OS can source geospatial data such as what has happened in the heatwave this summer, or how frequently those temperatures are occurring.
What would that mean if you are investing in an office portfolio across Europe, or somewhere more extreme like India? If you are seeing frequent heatwaves, does that building have enough air conditioning to cope with 40 degrees on a consistent basis? Is that office going to be shut down more over the summer months, and therefore of no use for the tenant? Those are the kind of questions I think will be being asked more frequently, particularly when you have that data to say there was much more heat here, or more flooding or fires, instead of just basing it on a 100-year model or similar. That’s where I think OS can play a part.
Climate change today
People are jaded about COP27, because since the big Paris Agreement in 2015, it’s quite clear we’re nowhere near where we should be. The Paris Agreement said we need to keep below 2 degrees of global warming, ideally 1.5 degrees - but we are on course for 2.5. While half a degree doesn’t sound so much, that is significant and some of that is not reversible.
The action we take between now and 2030 is what our kids will experience in 2040 and 2050. That’s going to be more heatwaves, storms, and flooding. We are not changing course fast enough and that makes me anxious, not just for me, but for my kids, and the investments our clients are making because some of them are locked in for the long term, particularly on the infrastructure side. It’s not easy to sell a road or a power station and they are going to still be here, as are 80 per cent of the properties in the world come 2050.
I think there is a growing realisation about sustainability. More and more it’s in the public consciousness. Which is partly down to geospatial data ‘s fascinating role in making those impacts much more visible. Not everyone is looking yet, but if you go onto the NASA FIRMS Fire Map website you can see where there are wildfires around the world. In summer you see red dots everywhere. I’m hoping that will seep into the public imagination to show this is real. It’s not something that is going to happen in 30 years. The action has to be now. It can’t wait.
Company: EVORA Global
Founded: 2011 (UK)
Focus: Real estate, infrastructure, sustainability and finance
Speciality: ESG risk and opportunity for clients across Europe, North America and Asia/Pacific
Record: Grown business from 65 people two years ago to over 200 staff today. Opened New York office in 2022.
Chief Strategy Officer
25 years in the sustainability industry. Founded the Sponge Sustainability Network charity for property and construction professionals (1999-2009).