Climate-risk assessment of real estate investments
Climate change impacts regions differently, but the consequences are global. Businesses need to adapt to changing requirements and report on their progress. In real estate, focus areas for sustainability are energy efficiency, curbing climate change, water efficiency, recycling, reducing the amount of waste, as well as providing sustainable, healthy, and safe properties for tenants.
Scope and Aim of the Assessment
Sampo plc’s real estate investment unit is responsible for If, Mandatum, and Sampo plc’s real estate investments. Most of these investments are in Mandatum’s portfolio. In addition to the wholly owned subsidiaries’ real estate investments, Sampo plc’s real estate investment unit is responsible for Mandatum Life Vuokratontit I Ky, SaKa Hallikiinteistöt Ky, and Kaleva Mutual Insurance Company’s real estate investments.
Sampo plc conducted a thorough assessment of the impacts of climate change on Mandatum and SaKa Hallikiinteistöt Ky’s real estate investments together with an external service provider. Climate risk is already incorporated into real estate investment decisions and property management, but there was a need for a more systematic approach to assessing climate change related risks and improve reporting on precautionary measures to stakeholders.
The aim of the assessment was to look at different climate change scenarios and to identify short, medium and long-term impacts on real estate investments. The identified risks and opportunities were mirrored against the real estate investment portfolio and their significance to business was assessed both from the perspective of risk management and the estimated financial impact of the risk.
The assessment was based on the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations and technical supplement “The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities”. The scenarios used were the Intergovernmental Panel on Climate Change’s (IPCC) RCP 2.6 and RCP 8.5 pathways, and the International Energy Agency’s (IEA) WEO, SDS, and CPS scenarios. In addition, the CRREM tool was used.
Physical risks
The main acute physical risks identified were extreme weather events such as floods caused by heavy rain, changing winter temperatures leading to heavy snowfall and icy roads, as well as storm winds and heatwaves. Although extreme weather events are likely to increase, the risk on the real estate investment portfolio is expected to be small. In the long-term, the risks need to be monitored and integrated into property management, for example by paying attention to landscaping and storm water drainage in urban areas and ensuring that building structures are wind resistant. Heatwaves increase the need for cooling, which has an impact on operational costs. Energy efficiency must be considered when selecting cooling equipment and solutions.
Chronic physical risks include rising sea levels, rising average temperatures, changes in rainfall, and severe droughts. Precipitation is expected to increase in all scenarios, which causes concern for soil structure and soil-bearing capacity and increase the risk of humidity exposure to facades. Both precipitation and drought may carry a small to medium risk for properties and can have a financial impact in the form of increased maintenance and repair costs and investments in water saving solutions.
Transition Risks
Transition risks occur in the shift to a greener economy. Changes in the regulatory environment pose a medium to large risk and must be monitored closely. Increasing regulation on e.g. recycling, energy efficiency, low carbon, and reporting will impact real estate investments already in the short term. Measures such as strong energy efficiency management, investments in renewable purchased energy, own renewable energy production, energy efficient equipment, and environmentally friendly materials, as well as increasing the number of charging stations for electric vehicles contribute to managing regulatory risk.
Other major transition risks to consider include changes in tenants’ behavior. Digitalization is likely to increase remote working, which will affect the length of leases and thus rental income. This is also an opportunity to re-think office space; create convertible spaces and digital solutions. People’s attitudes towards consumption and the use of natural resources is also changing, which means additional demands on landlords. Sampo plc’s real estate investment unit measures tenant satisfaction every two years and responds to feedback from tenants. Developing the property in cooperation with tenants and organizing charity events creates a sense of community. Green Leases are used to agree on sustainable practices for the property.
Risk Management
It is important to integrate climate-related risks in risk management processes and especially monitor the changing regulatory landscape. Well-managed business operations and continuous monitoring of the business environment help anticipate and adapt to changes.
- This was the first climate-risk assessment performed on real estate investments managed by Sampo plc. We gained valuable insights and plan to conduct assessments regularly in the future says Kim Westberg, Head of Real Estate Investments.