In late August of 2017, the United States was bracing for another destructive force of nature. Hurricane Harvey made landfall and brought flooding that had never been seen before in Texas, causing catastrophic conditions in Houston and totalling over $125 million in damage – the second most costly natural disaster in United States history behind Hurricane Katrina in 2005. Since the disaster, researchers have been trying to better understand what caused the tremendous damage and how to prevent it in the future. One particular topic gaining greater traction and significance since Hurricane Harvey is the role of resilience and how it can be implemented in a myriad of ways to mitigate the effects of climate-related events.
Resilience has various meanings, depending on the subject matter, but, for the intent of this article, and to align with the GRESB Resilience Module, we define resilience as, “the capacity of companies and funds to survive and thrive in the face of social and environmental shocks and stressors”. In the case of Hurricane Harvey, the ‘shock’ was the hurricane – a shock being a suddenly occurring event that disrupts operations and processes – and the ‘stressor’ was the environmental degradation caused by urban sprawl and spread of impervious surfaces – a stressor being a long-term, underlying vulnerability that intensifies a disrupting event. Companies can plan for shocks by implementing measures that mitigate the impact of an event, such as reinforcing structures above code in areas prone to earthquakes or avoiding acquiring assets in high risk areas. Companies can also work towards reducing many stressors in the long-term, such as reforestation projects in areas susceptible to mudslides. One example of a company working to mitigate a stressor is Tokio Marine & Nichido Fire Insurance Co. (TMNF). Since 1999, TMNF has planted over 8,994 hectacres of mangrove forests in nine countries in Asia-Pacific in an effort to achieve carbon neutral operations. Besides mitigating CO2 emissions, TMNF’s mangrove reforestation project has protected at least half a million people from storms, tidal surges, erosion, saltwater intrusion, and water pollution.
Although resilience should not be confused with sustainability, it is complementary to an overall sustainability strategy. Typically, the purpose of a sustainability strategy is to mitigate the environmental impact of a company’s operations and business practices, preventing environmental degradation and climate change. However, the globe is not currently operating at carbon neutral, so the effects of climate change are inevitable for the foreseeable future. On the other hand, the purpose of a resilience strategy is to mitigate or entirely avoid the effects of climate change, as to allow a company to maintain optimal business operations, to safeguard physical assets and provide safety to building occupants, and to retain and increase the value of their investments.
Even though it may not be explicitly referred to as resilience, resilience strategies are often already integrated into the real estate sector to some degree. A common strategy considers the flood risk of an asset during the due diligence process. Further enhancing this process by assessing additional climate-related risks, such as assets built to current building code to withstand intense hurricanes, is all part of a comprehensive resilience strategy. Another critical part of the real estate sector’s approach to a resilience strategy is understanding the climate-related risks of existing assets and implementing mitigation measures.
The Business Case for Resilience
With climate-related events occurring around the world, it is natural for an investor to consider the climate-related risks associated with an investment, in the same way an investor would look at any risk.
However, understanding the financial impacts of integrating a resilience strategy into an investment strategy to mitigate climate-related risks is still in its infancy. The lack of concrete, readily available information hinders portfolio managers and investors from considering climate-related risks when performing asset/fund valuations. Fortunately, the insurance industry may offer the key to providing the business case for resilience.
ClimateWise, an initiative from the University of Cambridge’s Institute for Sustainability Leadership, is driving resilience and climate-related risks to the forefront of conversations within the insurance industry. The member-based group, with such notable members as Allianz and Prudential, published in 2016 an extensive research study on how investing in resilience could both mitigate risk for insurance companies and asset management firms, such as through implementation measures.
One simple strategy already being implemented is premium discounts for projects that invest in resilience. In 2013, the city of Avalon, NJ invested heavily in resilience measures against floods, becoming a “Class 5” rated community under the National Flood Insurance Program’s Community Rating System. This rating provided the residents with a 25% reduction in flood insurance premium costs, saving over $1 million dollars for the community.
With industry groups like ClimateWise actively working with the insurance industry to acknowledge and respond to the growing challenges of climate-risk protection, it may only be a matter of time before the insurance industry develops a mechanism that encourages the market to integrate resilience into the investment strategy. One such way, as emphasized throughout ClimateWise’s Investing for Resilience report, is by leveraging their data on various asset types and geographies to develop a universal climate resilience rating system similar to the Community Rating System. It could directly affect investments through an insurance premium structure to favor those with established resilience strategies and penalize those without.
Planning for resilience, however, is not only about managing risk and keeping premiums low, but also about creating and maintaining value. One example is the newly constructed residential building at 6 New Street on Boston’s Harbor. The resilience features include elevated grade and systems placed out of the 500-year floodplain, 100 mph wind resistant exterior wall materials, cogeneration of heat and power, limited waterfront entrances to prevent the greatest loss in case of a flood, ground floor space protected by curb wall and planters, and landscape with saltwater-hardy, native vegetation. Project developers reported the following savings on their investment: $9 million+ in avoided flood-related losses, lower flood and wind insurance premiums (upwards of 10 times less than similar buildings with no resilience measures implemented), and $150,000 in annual energy savings. With various resilience features installed, the building rents units at a premium of 2-18% higher per square foot than similar new buildings without resilience features in the area. They also report faster leasing, higher renewal rates, and greater occupancy.
Putting Resilience into Practice
Case studies, such as the ones above, are a great way to better understand how implemented resilience measures can translate into operational savings and added value to an investment. Formally developed and structured programs are also growing in traction, such as the RELi Resilience Standard certification program for buildings and communities and the reporting disclosure framework, the Task Force on Climate-related Financial Disclosures.
A first step for any company that is exploring integrating resilience into its investment strategy is to review risk consideration and management within the investments. Consider exploring further with the following topics and questions:
- What is the corporate policy around sustainability, energy/water efficiency, disaster recovery and, if it exists, resilience strategy?
- Have any assets received sustainability, energy efficiency, and/or resilience standards and certifications?
- Have climate-related risk assessments been performed for all assets within the portfolio or is there an established fund to identify which assets are most vulnerable to shocks and stressors?
- Have any vulnerable assets implemented resilience measures to mitigate impact from the identified potential shocks and stressors?
- Does the due diligence process consider climate-related risks with new acquisitions?
For an extensive list of climate-related risks and resilience strategies see section “2.2 Where resilience can be found” in Investing for Resilience Report.
Resources and Tools
To continue driving the conversaton around resilience in the real estate sector, please see the following links for resources:
