Reonomy & ClimateCheck: How ESG Data is Changing CRE
Cal Inman, Principal at ClimateCheck, and David Vigilante, Senior Product Manager at Reonomy came together to discuss the increasing importance of environmental data to CRE.
During this discussion, they both also provided their industry experience to highlight how ESG data can mitigate risk and identify opportunities in CRE.
To watch the conversation in full, you can tune in here.
Below, we’ll look at the highlights and takeaways from the conversation.
Theme #1: Both High and Low Severity Climate Risk Impact CRE
When considering climate risk, most people think of catastrophic events that cause a total loss of a property, like fire or flood. While high severity risks are important to mitigate, low severity climate risks can also negatively impact assets.
Climate changes, like extreme temperatures and drought, can cause OPEX to creep up through higher utility costs, more strain on HVAC equipment, increasing water costs, and more.
Properties impacted by low severity risks can become more expensive to manage over time and less profitable, both Cal and David noted.
According to Cal, “There are lots of little effects to OPEX, and as people in real estate know, that has a big impact on yield and IRR. As that data is ingested by more and more folks, it’s going to affect disposition value.”
David further explains, “It’s high severity vs. low severity risk. With high severity risk, you’re going to have total loss of the asset. Whereas in a low severity risk, properties could become much more expensive to maintain and operate.”
Theme #2: Increasing Access to Climate Data
With record wildfires in the West, devastating hurricanes in the Southeast, historic flooding in the Northeast, and more, climate change and its effects are top of mind for stakeholders across CRE.
Along with more attention to climate change, there is also increasing access to climate risk data. This results in more real estate investors, like LPs and pension funds, considering climate data when making investments.
As ESG data becomes even easier to access, both Cal and David predict that this data will play a larger role in investment strategy.
Cal notes, “there’s a lot of great data out there that’s starting to become accessible with groups like ours and through data aggregation groups like yours. So, I think the access to this information is changing.”
David agrees that climate data “does really impact everyone. And, I think we’re seeing more and more of that lately with the LPs, the pension funds, the endowments, having more of that kind of criteria.”
Theme #3: Climate Risk Means Both Investment Risk and Opportunity
As the effects of climate change increase, both Cal and David expect that climate risk will become harder to separate from investment risk.
When climate change impacts livability, infrastructure, insurance premiums, and more, asset value is adversely affected. This increases the risk of investing in that property.
However, climate change also presents an opportunity for those who have the right data to understand and mitigate risk. Through taking steps to reduce property risk, like clearing brush around properties with high fire risk, and investing in resources that may become scarce, like water, savvy investors can find opportunity in climate change.
Speaking to the value of ESG data, Cal remarked that “it isn’t just about how do we make things greener or how do we have fewer carbon emissions. Climate data is really about IRR and investment risk. So, climate change is driving a profound reassessment of risks and asset values.”
“On the commercial real estate side, there could be opportunities as the climate is changing. Risk and opportunity go hand in hand together. So, where there’s more risk, there’s going to be more opportunity for those who are able to figure out how to mitigate risk and take advantage of it,” according to David.
Five Key Takeaways
- Environmental data is becoming more accessible to stakeholders throughout CRE. As this data is increasingly available, ESG data is also becoming more influential in real estate investment decision-making. Large investors, like the New York State Pension Fund, are pulling out of environmentally risky investments to focus on more sustainable investments.
- Climate change not only threatens assets with total loss from events like wildfires or massive flooding, but also threatens properties with increasing expenses from rising utility costs, higher insurance premiums, and increased maintenance, all of which can make an asset less profitable.
- Asset values are also impacted by climate change. With negative impacts on livability, infrastructure, demand, and more, climate change can also bring property values down. These climate-related impacts could cause a shift in how assets are valued.
- As climate change impacts become more ubiquitous, climate risk and investment risk are becoming more closely linked. It’s impossible to assess the investment risk for a property without also considering the property’s vulnerability to climate change hazards. Since climate change can reduce returns and increase expenses, investors should consider ESG data during decision-making.
- Climate risk also presents an opportunity for investors who have the right data to identify and mitigate this risk. Both through strengthening protections for at-risk investments and investing in more environmentally sound properties, investors can harness climate change opportunities to strengthen their portfolios.