Do you know what your company’s climate-related risks are? Your investors want to know
2017 was a record year for natural disasters in the US, and with 11 climate disaster events exceeding $1 billion each so far in 2018, proactive building owners are beginning to think beyond sustainability. Resilience has become the newest buzzword in the green building industry and for good reason. Recent studies, including one conducted by Austin College after Hurricane Irma, show that investments in resilience can reduce losses by over 70%[i].
Beyond the economic incentives of avoided losses, growing interest by investors in climate risk transparency is driving building owners to address climate-related risks to their buildings. Major investors are seeking climate risk disclosure both in financial risk disclosures and through reporting frameworks like Carbon Disclosure Project (CDP) and the Global Real Estate Sustainability Benchmark (GRESB).
A popular standard for the real estate industry, GRESB, has recently incorporated climate-related risks into their reporting framework. In March 2018, GRESB released a new resilience module which is an optional supplement for the GRESB Real Estate and Infrastructure Assessments. GRESB defines resilience as “the capacity of companies and funds to survive and thrive in the face of social and environmental shocks and stressors,” encompassing both short-term shocks and long-term stressors in the physical, economic and social dimensions of resilience[ii]. The Resilience Module focuses on 10 indicators across 4 main categories:
- Leadership and Team
- Resilience Assessment
- Management Goals and Strategies
- Implementation and Improvement
One of the fastest adopted frameworks for addressing climate change in building portfolios is the set of recommendations developed by the G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) are widely regarded as the most robust climate risk disclosure framework, with 390 global investors representing more than $22 trillion USD in assets calling on the G20 to implement the TCFD recommendations[iii]. For companies who report to investors, such as those that report through CDP, understanding the TCFD recommendations is essential. Notably, in their 2018 Engagement Priorities, BlackRock, the world’s largest asset manager, called upon companies to use the TCFD recommendations[iv]. While the importance of building-level resilience may not be immediately clear with the sharpened focus on corporate responsibility and the importance of a ”climate competent board,” understanding asset level risk is an important aspect of assessing a company’s overall risk to climate change.
The TCFD recommendations are structured around four key elements:
- Governance around climate-risks and opportunities
- Strategy including how actual and potential impacts will affect the organization’s strategy
- Risk Management processes for identifying, assessing, and managing climate-related risks
- Metrics and Targets to assess and manage climate-related risks and opportunities[v]
In 2018, CDP updated their Climate Change Questionnaire to align with the TCFD’s recommendations in recognition of the important role that the TCFD plays in helping to integrate climate-related information into financial reporting and increase transparency while providing a roadmap to achieving the Paris Agreement commitments. CDP has also adopted TCFD’s recommendation for organizations to use scenario analysis to better understand how possible future states will affect their business. Climate-related risks are divided into two categories: transitional risks and physical risks. Transitional risks focus on policy, legal, technology, and market changes that will be associated with the transition to a low-carbon economy. Physical risks, on the other hand, consider the direct risk from acute and chronic stressors, including damage to assets or supply chain disruptions[vi]. While CDP focuses on organizational-level disclosure, understanding the risk to buildings is an essential component of evaluating a company’s physical risks.
While GRESB focuses on asset-level risks and CDP on the organization as a whole, the sharpened focus on climate-related risks and resilience within these reporting frameworks highlights the need for companies to better understand the risks to their physical assets. Conducting building-level resilience assessments can help companies take proactive steps to mitigate their risk to climate-related events and support reporting to GRESB and CDP.
[i] Kusisto, L., & Campo-Flores, A. (2017, September 16). Homes Built to Stricter Standards Fared Better in Storm. Retrieved from https://www.wsj.com/articles/one-early-lesson-from-irma-hurricane-building-codes-work-1505559600
[ii] GRESB. (2018, March 15). New! GRESB Resilience Module Tackles Shocks and Stressors. Retrieved from https://gresb.com/new-gresb-resilience-module-tackles-shocks-and-stressors/
[iii] AIGCC, CDP, Ceres, IGCC, IIGCC and PRI, Letter from Global Investors to Governments of the G20 nations (July 3, 2017) Retrieved from https://www.ceres.org/sites/default/files/Global-Investor-Letter-to-G20-Governments.pdf.
[iv] BlackRock, Investment Stewardship Engagement Priorities for 2018 (March 2018) https://www.blackrock.com/corporate/literature/publication/blk-stewardship-2018-priorities-final.pdf.
[v] Task Force on Climate-Related Financial Disclosures, Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) Retrieved from https://www.fsb-tcfd.org/publications/final-recommendations-report.
[vi] CDP, CDP Technical Note on the TCFD. Retrieved from b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/guidance_docs/pdfs/000/001/429/original/CDP-TCFD-technical-note.pdf?1512736184.