There is no longer any dispute that the unfolding climate emergency poses a significant risk to every type of global asset. In the last year alone volatility on physical impacts from climate risk has increased globally, with the Australian government reporting that severe flooding has cost $3.3 billion in damages so far in 2022; while the White House, USA, has estimated that it will cost the federal budget almost $2 trillion annually to combat physical climate risk towards the end of the century. No wonder business leaders and investors are demanding better climate risk analysis.

Within the real estate industry, conducting forward looking portfolio analyses in order to assess potential climate risk for Real Estate Investment Trusts (REITS) has become a top priority. The key areas analyses need to address include:

–  Risk exposure today and how it will change in the future

–  Risk management around key areas of exposure

–  Portfolio trends

–  Screening investments during due diligence processes

The seriousness of the efforts within real estate to manage climate risk is reflected in the fact that the world’s largest REITs represent 8% of supporters adhering to the TCFD (Task Force on Climate-related Financial Disclosures) framework. While some institutions use the GRESB real estate assessment framework to manage their climate-related risks and opportunities, TCFD has broader buy-in from regulators, policymakers, governments, asset owners and investors. It is widely considered the most effective framework to enable stakeholder assessment of businesses’ readiness for climate change and is quickly becoming best practice globally, with countries such as New Zealand, Switzerland, UK and China having announced mandated TCFD reporting, with the US and Canada expected to follow suit.

For REITS to effectively identify, assess and manage climate change without TCFD becoming another tick box exercise, firms first need to conduct best in class physical risk analysis. At Sust Global we provide the tools to enable this – by supplying dependable, satellite validated, climate science data in an easy-to-use platform called Climate Explorer. Built on top of the latest CMIP6 climate models, created by top scientists, climatologists and economists, by simply uploading your geolocation assets into Climate Explorer our clients are able to quickly identify key areas within the portfolio that are at risk to climate hazards, such as wildfire, heatwaves, sea level rise, floods, cyclones and water stress up to 2100, and under different climate scenarios. Due to the change in emission levels, it’s imperative to conduct analyses under different climate scenarios to understand what the hazard impact could look like in a 1.5 degree rise average in temperature, to a 4.5 average degree rise. Our clients are effectively managing their climate risks and operations using insights provided by the Sust platform. 

Our REIT customers are therefore able to use the TCFD framework to conduct best practice reporting, in turn strengthening their awareness, readiness and actions towards climate change within their portfolio or due diligence processes, thus satisfying the needs of investors.

If you’d like to learn more on how Sust Global can best support your climate risk analysis, find more information on our website, or get in touch at info@sustglobal.com.

A leading US bank with large agency and non-agency residential mortgage backed securities (RBMS) portfolios noticed that defaults by mortgagors within RMBS were rising due to their properties being impacted by climate events, such as wildfire, floods and cyclones. More alarming than the absolute level was the trend, which was rising rapidly. The portfolio managers were aware that this was becoming an increasing performance and fiduciary risk.

Their principal challenge was that they had no robust method to identify the probability and severity of these events over the lifetime of the mortgages across the whole of the United States – at a granular property level, and across multiple climate hazards. They also needed a solution that was scalable and dynamic across thousands of underlying properties and their mortgages, which integrated directly with their workflow.

Sust Global’s climate data analytics were able to provide transparency on climate risk across the portfolio, at the RMBS and individual mortgage level, starting with only the RMBS identifiers (such as CUSIP or ISIN). The location and value of each mortgage was extracted from the identifier via a platform integrated with Sust’s API, which returned real-time RMBS climate risk intelligence, enabling portfolio managers to conduct prospective analyses of investment opportunities as well as for portfolio risk assessments. Climate risks were quantified in terms of probability and severity across six climate hazards: wildfire, floods, hurricanes, heatwaves, water stress and sea level rise. 

To ensure that this data could be fully integrated with the existing investment process, these risks were then converted into financial loss projections, using algorithms developed using massive datasets of historic climate events and the resulting financial losses. These algorithms provide annual financial loss projections, hazard by hazard, over the life of each RMBS and the underlying mortgages.

As a result the Head of MBS Portfolios, and the portfolio managers are able to proceed with confidence and clarity in their decision making with respect to increasing climate risks – across both. In doing so they are improving their risk-adjusted returns and fulfilling their fiduciary responsibilities. It also means that they are now fully compliant, if and when climate reporting legislation is introduced by the SEC.