An Impactful Transition Strategy Incorporates the Impact from Physical Risks

Climate risk is the buzzword of 2023 — everyone is building a strategy around it. Here are 3 reasons why your transition risk strategy is incomplete without assessing physical risks and incorporating their impact into the solution.

In conversation, climate risk is often discussed as having two separate and very distinct parts: transition risks and physical risks. Transition risks refer to the impacts that result from a shift to a low-carbon economy, whereas physical risks refer to the impacts from extreme weather and sea-level rise. Both risks need to be assessed, calculated, and mitigated to achieve net zero. However, within the real estate community, transition risk seems to be overly prioritized.

The transition relies on relationship between interconnected systems, all of which will be impacted by physical risks

The transition to a low carbon economy relies on the relationship between complex and interconnected environmental, social, and economic systems. These systems have evolved together over billions of years and have significant interdependencies. Therefore, a shock to any one system from physical climate risks (heat, storm, flood, fire, drought) will send reverberations throughout the entire chain. An impactful transition strategy must assess how these physical risks impact transition risks and develop a solution with both in mind.

Accounting for Interdependencies

The interdependencies between systems can be direct and indirect. For example, rising temperatures directly impact a building’s heating and cooling loads. A good transition strategy will seek to account for these changes in temperature to better forecast total energy demand and peak energy loads, resulting in various degrees of greenhouse gas emissions. In many cases, urban planners and architects are already addressing heat stress by designing cities with large urban parks and buildings with passive cooling and ventilation. However, heat stress will not only impact asset design, but it will also impact market design.

In other words, rising temperatures will also change the way we live, work, and play. For example, during periods of excessive heat will employees be asked to commute into hot, central business districts to work? Or will they be asked to work from their air-conditioned homes to avoid the heat-induced productivity losses? The answer will most likely lie in between these two examples, with traditional central business districts converted into dense, walkable, mixed-use communities with lush vegetation to keep the area cool. In either case, the amount and timing of energy demanded will change with material impacts to any transition strategy.

Physical risks shorten a building’s lifespan, impeding progress towards a low carbon economy

If you own a building in a high climate-risk area, the probability that you will have to rebuild, or repair has quadrupled over the previous decade. Climate change is now associated with 18 extreme weather events per year, 911 deaths per year, and $153 billion in recovery costs.1 As this trend continues, physical risks will not only put thousands of lives in danger, but it will require significant amounts of capital to be invested in carbon-intensive materials, impeding progress towards a low carbon economy.

Rebuilding is carbon and capital intensive

Rebuilding is a resource and energy intensive process. Two of the most common building materials, concrete and steel, involve energy-intensive production processes that release significant amounts of carbon dioxide. More specifically, concrete and steel are responsible for 11% and 10% of global greenhouse gas emissions, respectively.2 By continuing to rebuild in locations that are disaster prone, we are committing millions of dollars towards a cause that undermines decarbonization efforts instead of strengthening it.

In 2007 Carl Elefante enlightened us, with the adage “the greenest building is the one that is already built”. Physical risks threaten this paradigm by preventing buildings from reaching their intended lifespan. Therefore, a pivotal step towards reaching a low-carbon economy will be to expand the life of buildings, so that materials are in use for longer periods of time, alleviating the need to constantly rebuild.

Repairing is carbon and capital intensive

Even if extreme weather doesn’t destroy your building, repairing it is no easy feat. Today, one of the most highly demanded types of repairs is water damage restoration. However, the process to dry out a space is energy intensive, requiring pumps, dehumidifiers, and industrial fans to run over extended periods of time (usually weeks). These machines consume copious amounts of electricity, especially in cases of severe damage. [A common piece of advice to avoid floods, is build outside of floodplains, similarly a good strategy to avoid the climate risk, to build in areas that are not vulnerable to physical risks based on the characteristics of the underlying location.]

Resilient communities drive resilient real estate (not the other way around)

Communities are the beating heart of real estate — they drive demand which determines market fundamentals. If shop owners are unable to open their doors, employees are unable to get to the business center, and carriers cannot access major roads, then it doesn’t matter if your building is net zero and LEED certified because it will also suffer.

Accounting for community resilience Investing in building adaptation and asset hardening is expensive, so most real estate markets will exhibit different levels of climate resilience. Therefore, it’s important to not only understand a building’s level of resilience, but also its surrounding community’s level of resilience. Community resilience indicators include quality of infrastructure, healthcare, and public spending. These are measurable factors that can predict whether a community will be able manage disruptions caused by extreme weather and sea-level rise.

Going forward, physical risks and how we respond to them will play a significant role in the trajectory of carbon emissions. By acting now, to incorporate physical risks into transition strategy, organizations have an opportunity to accelerate progress towards decarbonization, by extending the useful life of buildings, investing in resilient geographies backed by resilient communities, and thereby locking in carbon for a long period of time.

Originally published August 2023