Climate risk: The $35 trillion question

As Donald Trump’s presidency gets underway and Britain begins its painful divorce from the E.U., it would be all too easy for major corporations to focus solely on navigating political volatility. But a 2015 report from the University of Cambridge’s Institute of Sustainability Leadership highlighted a risk that puts even the biggest political developments of our generation in the shade.

In putting a price on how much value global investment portfolios could lose from short-term market shifts in response to climate risks, the institute has come up with a figure so high as to be unreal. It calculated the potential cost as 45% of the value of all global investment portfolios, or $35.4 trillion, equivalent to the entire GDP of the European Union.

Real estate’s role

The International Energy Association projects that almost two- thirds of global emissions reductions must come from buildings

Real estate is responsible for around 40% of all global emissions, which means real estate investment trusts (REITS), fund managers and institutional investors have a commercial imperative to act now. Each takes a long-term view around the assets they buy, manage and invest in.

The huge potential risk noted by Cambridge is all encompassing. It covers the consequences of losing natural resources, hits to food supply chains, and penalties for breaching climate legislation, such as the new Minimum Energy Efficiency Standards (MEES), which stops investors transacting poor-performing buildings.

Above all, though, it covers the most tangible impact of climate risk: extreme weather events and natural disasters and the damage caused to buildings and impact on footfall, which is itself a key driver of income.

The Global Risk Institute estimates half those losses are unhedgeable without co-ordinated, system-wide action on climate change. And with the International Energy Association projecting that almost two- thirds of global emissions reductions must come from buildings, the message is clear: it’s time for real estate to get real about climate change.

Climate change agreements, from Kyoto to Paris to Marrakesh

A comprehensive global deal on climate change has long been the Holy Grail. The Kyoto Protocol in the 1990s was hamstrung by the withdrawal of the United States under the Bush administration. The public failure of the 2009 COP15 climate change conference in Copenhagen was a stall. But 2015’s COP21 conference in Paris finally saw a deal that united governments and business around solid commitments and strategies for limiting global temperature increases to less than 2 degrees.

The election of Donald Trump last November could have been a terminal body blow to the Paris Agreement, in light of his pledge to pull the United States out of the deal and claims that climate change is a hoax. But his election galvanised nations and businesses to take an even firmer stance on their Paris commitments at the COP22 conference in Marrakesh.

Cutting emissions and reducing energy can also generate superb savings and productivity boosts as well

In the words of the U.S. special envoy on climate change Dr. Jonathan Pershing: “Heads of state can and will change, but I am confident we can and we will sustain a durable international effort to counter climate change.” In short, what was achieved in Paris is, at least for now, seen as bigger than any one single nation.

The reason for that is there is no alternative. Unless we limit global temperature growth to less than 2 degrees, we face unimaginable pressure on the world’s food and water supplies and an acute increase in the frequency of extreme weather events. Property owners in areas like Somerset can bear testament to the misery of the latter, having borne the brunt of several severe winter floods in recent years that were formerly once-in-a-generation events.

And while sustainability efforts have for a long time suffered from an air of hair shirts and eating greens as a business approach, many are picking up on a key lesson: cutting emissions and reducing energy use isn’t only the right thing to do for the planet, but can also generate superb savings and productivity boosts as well.

Construction firms talk of how the wellbeing benefits of green buildings for workers have seen a growth in demand from office occupiers for sustainable features, while property managers talk with some wonder at how active management systems and solar panels in cities such as Hull not typically renowned for sunlight have generated tens of thousands of pounds in energy savings.

Small businesses pose the biggest challenge

As our report highlights, many of our most well-known companies are playing their part and taking action. To some degree, it is far easier to do this with the resources many FTSE 100 companies have. The bigger challenge, however, will be driving these kinds of emissions reductions and savings among smaller firms that aren’t necessarily able to install advanced building management systems as quickly.

Whether it occurs through legislation or by greater support from lenders, the contributors to our report have several suggestions for how we can give the needed leg-up to those who own the many older buildings responsible for the bulk of U.K. building emissions.

Plenty will consider these measures too burdensome. But as the Grantham Institute outlines, there is no alternative. The price may be high, but it certainly cannot be higher than the cost of living on an increasingly uninhabitable planet.

After all, to take the words of one of our contributors, it would be wrong and all too easy to view climate change in terms of risk. The goal is shifting our mindset toward opportunity: the opportunity for a cheaper, more efficient low-carbon economy that leads to a higher quality of living for all.

For long-term investors, there can be no greater prize.

About Paul Chetwynd-Talbot

Paul Chetwynd-Talbot is Managing Director of Willis’ Real Estate Practice. He joined Willis in 2000 and has over …
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