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Adapt and Thrive

Emily Hamilton, Chief Sustainability Officer at Savills Investment Management, outlines a comprehensive approach to integrating climate resilience into the real estate investment lifecycle.

As climate-related risks become more pronounced, integrating climate resilience into real estate investment management is not just a strategic choice but a necessity. The growing frequency and intensity of extreme weather events, coupled with evolving regulatory frameworks, are compelling asset owners and investors to rethink how they approach risk management. From floods and heatwaves to rising sea levels, the threats posed by climate change are reshaping the landscape for real estate investments. Ignoring these risks can lead to significant financial losses, while proactive climate resilience strategies can enhance asset value and ensure long-term sustainability.

The pressure to align investments with regulations such as the EU Taxonomy and Sustainable Finance Disclosure Regulation is also driving investors to adopt a more rigorous approach to climate risk. These frameworks require transparency on environmental impacts, and real estate assets must be scrutinised for their resilience to physical climate risks. This shift is not just regulatory; investors and stakeholders alike increasingly expect real estate portfolios to be future proofed against climate risks.

Failure to do so is already resulting in diminished asset performance and reputational damage, whereas integrating climate resilience can lead to both financial and environmental benefits. Furthermore, integrating climate resilience interventions can also provide biodiversity and social impact co-benefits such as strengthening community resilience and providing vital habitats for birds, insects and animals.

Assessing climate risk in strategy and capital raising

Integrating climate risk into the investment lifecycle begins at the strategic level. When raising capital and developing new investment vehicles, it is essential to assess the exposure of potential assets to physical climate and natural hazard risks. The early inclusion of these considerations ensures that the entire portfolio is structured with long-term resilience in mind.

At this stage, it is important to engage with investors and understand their appetite for climate-resilient investments. Incorporating climate risk screening at the product development stage –particularly in geographies or asset types more exposed to hazards – helps to align investment strategies with both regulatory requirements and market demand. Ensuring compliance with frameworks like the EU Taxonomy at this early stage can set the tone for a portfolio that is resilient from inception.

Embedding climate resilience in asset acquisition

As real estate assets are identified for acquisition, integrating climate resilience becomes a crucial part of the selection process. Assets must be rigorously assessed for vulnerabilities to physical climate risks, such as flood exposure or heat stress. Investment teams need to ensure that each asset undergoes thorough screening, identifying risks that could impact its long-term value and operational viability.

This process requires the use of sophisticated data-driven screening tools and external experts to evaluate the potential impacts of climate risks. However, there are many challenges with these climate risk screening tools as most focus only identifying risk rather than identifying adaptation solutions. Furthermore, different climate risk screening tools can assess the likelihood of a climate risk occurring. It is not unusual to find an asset identified as having a high flood risk by one climate risk screening provider and a low risk by another.

This means that insights from on the ground asset and property management teams are essential. Risks identified at screening must be further investigated rather than taking the screening results at face value. Undertaking further investigations with technical specialists, such as flood risk engineers is one way to improve the reliability of the data.

The role of technical due diligence in underwriting

Climate resilience must also be embedded in the due diligence process during underwriting. Technical due diligence offers an opportunity to analyse the intrinsic qualities of an asset and identify any climate vulnerabilities. As part of a two-stage underwriting process, assets with medium- to high-risk climate exposures should undergo a detailed assessment to determine the potential for mitigation or adaptation.

Deep dive assessments can reveal specific opportunities to make assets more resilient, whether through structural retrofits, energy efficiency improvements, or changes to surrounding infrastructure. By incorporating climate resilience measures at this stage, investment teams ensure that climate risks are not only identified but actively managed and costs are included in the underwriting process.

Adaptation and mitigation during the hold period

Once an asset is acquired, the hold period presents a critical opportunity to implement adaptation and mitigation measures. Asset management teams are responsible for integrating climate resilience into capital expenditure and business plans, ensuring that the asset remains resilient to evolving climate risks throughout its lifecycle. Where possible nature-based solutions should be prioritised to help enhance local biodiversity. Nature based solutions are often more cost effective and can provide co-benefits. For example, reducing flooding through sustainable urban drainage features like swales and rain gardens provides habitats for birds and insects. Using green roofs and tree planting to reduce overheating risk creates carbon sinks as well as providing sustainability features that occupiers may find appealing.

Collaboration with occupiers is essential during this phase. Occupiers’ activities can significantly influence an asset’s climate resilience, making it important to engage with them early and often. Incorporating green lease clauses, for instance, allows property owners to enforce measures such as energy efficiency upgrades and data collection on energy usage. This helps to de-risk an asset and these strategies help to ensure that occupiers are aligned with the asset’s long-term sustainability goals, reducing the risks posed by their operations.

Portfolio management: a holistic approach

At the portfolio level, climate resilience should be monitored on an ongoing basis. Risk scorecards that track physical climate exposures and mitigation efforts provide a structured way to review portfolio performance and identify areas where additional resilience measures may be necessary. Regular updates to governance committees ensure that climate risk remains a priority across the investment management process.

A holistic approach to portfolio management also requires close collaboration between investment teams, ESG experts, and external consultants. Climate resilience is a dynamic challenge. As new data emerges, portfolios must be continually adjusted to address emerging risks and opportunities. By maintaining this constant vigilance, investment managers can build resilient portfolios that withstand climate-related shocks while continuing to deliver strong financial returns.

Collaboration across the supply chain

Achieving climate resilience at the asset level requires close collaboration across the investment supply chain. From developers and contractors to property managers, every stakeholder has a role to play in ensuring that assets are built and managed with climate resilience in mind. Developers, for instance, must adhere to stringent sustainability standards during construction, ensuring that new assets are designed to withstand the physical impacts of current and future climatic change.

Property managers also play a key role, particularly in implementing asset level interventions and monitoring ongoing environmental performance and ensuring compliance with local regulations. Their ability to collect and report environmental data is essential to tracking the success of resilience measures. Engaging with all parts of the supply chain ensures that the entire asset lifecycle is aligned with climate resilience goals, from development through to disposal.

The future of climate-resilient investing

Looking forward, the integration of climate resilience into the investment process will only become more critical. As regulatory demands increase and climate risks intensify, the ability to manage these risks will define the success of real estate investments. Asset owners and investment managers who prioritise climate resilience will be better positioned to navigate the challenges ahead, while those who fail to adapt risk falling behind. Forward-thinking asset owners and investment managers will actively seek to integrate nature-based solutions understanding the multiple co-benefits they can provide which their hard engineering counterparts cannot.

Building climate resilience into the investment lifecycle is not just about managing risks; it is also about seizing opportunities. Resilient assets will increasingly become more immune to brown discounts in the market, as investors seek to allocate capital to assets that are not only profitable but also sustainable in the long term. By embedding climate resilience into every stage of the investment process, from strategy development to portfolio management, investors can create portfolios that are both financially and environmentally robust.

This article was co-authored by Steven Evans, Senior Sustainability Risk Manager at Savills Investment Management.

The post Adapt and Thrive appeared first on ESG Investor.

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