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Real estate managers using problematic tools for climate-risk assessment – report – Pensions & Investments

Real estate managers are using a grab bag full of conflicting climate models, assumptions, data and software to assess climate risk, according to a soon-to-be released report by the Urban Land Institute and LaSalle Investment Management.

It’s like comparing apples with “something that isn’t a fruit,” Elena Alschuler, LaSalle’s Americas head of sustainability and vice president who co-authored the report, said in an interview.

These findings come at a time when many investors are trying to assess the physical risks to their real estate portfolios of such weather events as floods, wildfires and excessive heat caused by climate change.

These inconsistencies have led climate analytics providers to arrive at different risk scores for the same building, said the report, which is based on interviews with U.S. and global real estate managers conducted in the second quarter of 2022.

The variation between scores range from small to great orders of magnitude, Ms. Alschuler said.

Executives at ULI or LaSalle who conducted the research and wrote the report would see results of one property being assessed as having no risk for damage from flood or hurricane, while another provider would flag the same property as being at very high risk for hurricanes and floods, Ms. Alschuler said.

ULI and LaSalle executives are shining a light on the problem to promote the development of a consistent approach to climate-related analysis. The industry needs a “common language” to assess risk from climate change and the business impact of that climate risk, she said.

Indeed, real estate managers interviewed do not believe that physical risk from climate change is currently priced into commercial real estate values, she said.

“Can we assess climate risk? The answer is sort of,” Billy Grayson, executive vice president for centers and initiatives at ULI, said in a separate interview.

Real estate managers, investors, developers and others in the industry need to be able to leverage the data from climate analytics tools to make more informed decisions, Mr. Grayson said. The climate risk analysis is not as “sophisticated and consistent” as other real estate forecasting yet, he said.

For instance, there is a great deal of variation in how managers arrive at value-at-risk, quantifying possible financial losses from climate change, Lindsay Brugger, vice president of resilience at ULI, said in an interview. The data used to calculate value-at-risk vary from market value to replacement cost and insurance costs, Ms. Brugger said.

“Climate risk providers are not real estate experts. On the flip side, the real estate industry is not expert on climate risk science,” she said.

And there’s not enough transparency among climate risk providers.

“Some providers have very pleasing outputs that are built on methodologies that are not super clear,” said Brian Klinksiek, LaSalle’s head of European research and global portfolio strategies and incoming global head of research and strategy. Mr. Klinsiek will take on his new role at the end of 2022, replacing Jacques Gordon, who is retiring.

“We’re not asking every provider to have the same view,” Mr. Klinksiek said in an interview. The key is that there be clear explanations of methodology and data so that managers and investors can take that into consideration when making their own risk assessments, he said.

The report will be published Thursday.



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