Assessing climate risk quantification tools - Mere fullfillment of duty or actually benefical?

Hannah Salzberger, Ben Höhn and Sven Bienert

ERES from European Real Estate Society (ERES)

Abstract: The real estate sector is confronted by escalating physical climate risks due to more frequent and severe extreme weather events from ongoing climate change. These risks impact habitability, energy consumption, and maintenance costs, with regulatory pressures threatening asset valuation.Real estate assets that do not address climate risks and fail to adapt to the changing market demands towards sustainable and resilient properties may experience reduced attractiveness and competitiveness.While climates risks have evolved into a pivotal consideration in transaction due diligence and regulatory compliance, the existing tools for risk quantification frequently encounter criticism for their perceived lack of transparency and comparability, stemming from divergent results.In response to the challenges regarding quantifying physical climate risk this research evaluates current methods of quantifying physical climate risks in real estate, considering criteria such as database quality, quantification methodology, transparency, actuality, scope, and geographical suitability.The study employs a two-step approach, initially gathering qualitative data through extensive literature reviews and interviews with tool providers.In the subsequent phase, a quantitative analysis is undertaken using identified tools to assess the physical risk within a predetermined fictive pan-European real estate portfolio, containing approximately 360 assets.By synthesizing tool outcomes with qualitative insights, the research delves into hazards' predictability, country-specific differences, and evaluations of tool classes.Leveraging Ordinary Least Squares (OLS) regressions, the study further endeavors to categorize hazard contributions to predicted total asset loss, providing nuanced and comprehensive insights crucial for risk assessment in real estate decision-making.Overall, the study aims to make several contributions to the field, including an overview of available tools used by market participants, criteria for assessing climate risk tools (with a focus on the real estate industry), and identification of the strengths and weaknesses of different approaches. It is also determined whether an 'all-in-one' tool is efficient enough or whether a more reliable but time-consuming result is achieved by using specialized tools. Finally, it also provides guidance for financial decision-making.

Keywords: Fictive Pan-European-Portfolio; Fiduciary Duty; Physical Climate Risk; Quantification Tools (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2024-01-01
New Economics Papers: this item is included in nep-env
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