Climate Alpha at PREA 2023

Earlier this month, the Pension Real Estate Association held its 33rd Institutional Investor’s conference, asking Climate Alpha to keynote the conference. Our Chief Scientific & Investment Officer, Michael Ferrari, took the stage to discuss how climate change, among a host of other economic, demographic, and political challenges, has made investing more difficult than ever.

There are a lot of significant climate-related events that are occurring and there's many ways these impacts trickle down and impact investors. However, if we shift the discussion from climate risk to climate opportunity, there are ways to capitalize. Moreover, if we do this early and we do it collectively, there are ways that real estate investors can generate positive portfolio returns.

“Therefore, being mission-driven and being returns-driven, aren’t incompatible but work hand in hand.”

The insurance industry started publishing bar charts during the ‘80s and ‘90s to show the increasing number of billion-dollar disasters. However, what the insurance bar charts didn’t show is that in addition to the increasing number of billion-dollar events, the frequency and the severity of these events also accelerated (shown above). Therefore, it's not just more billion-dollar disasters, it's the compression of the time in between these disasters that real estate investors should take note of because it poses significant risk to a portfolio over an average holding period.

How should real estate investors prepare for these events?

Firstly, investors are still going to use models, but they must understand that climate models, just like any other model, have limitations. These models are useful tools when they’re used as guides or guard rails since they tell you all the things that can possibly happen. So rather than using a climate model to predict exactly what's going to happen, use models to prepare for a range of potential outcomes.

Secondly, there's a strong push towards big data today. However, we're starting to find that instead of focusing on the big data piece, you should focus on the smart data. Not every model or every approach is scalable. Finding the right data for the right use case and understanding where those small seams of data may lie and how they interact with other pieces of data, is what’s important.

Lastly, sustainability doesn't mean anything unless it has both environmental AND financial sustainability. If investors prepare rather than predict, it allows us to do that in a way that truly is sustainable.

The other thing we need to realize is that many regulatory measures are trying to drive investors towards what they should be doing with their portfolios. How should we be disclosing climate-related risks? How should we be thinking about the natural world?

But nature isn't natural anymore. There’s a human fingerprint on every single cycle that drives society. Since humans are actively shaping these cycles, instead of trying to fight it, let’s try to understand how the world is evolving and allow the built environment to evolve along with the natural environment.

Let’s construct the next generation of real estate by identifying the geographies that are poised to benefit from climate volatility and deploy more capital to those areas.

Real estate investors know the trees, which represent the individual areas that they’re managing, but climate analytics can help them begin to understand the forest, representing the surrounding community. In this regard, investors can begin to understand not just climate risk, but how climate interacts with all these other variables that are important to real estate investors. Moreover, this allows investors to understand which trees to plant, which trees to harvest, and which trees to nourish.

For example, Miami is a negative geography, from an environmental standpoint due to its water issue. However, we also know that Miami’s still going to appreciate in the future. Therefore, understanding where inflection points are, again, not with precision, but from a probabilistic perspective, allows us to be more efficient, and more responsible financial managers.

To close out the day, Jeremy Grantham, cofounder and long-term investment strategist at GMO, underscored the significant opportunities related to climate-driven investments during his conversation with David Rubenstein, cofounder and co-chairman of the Carlyle Group. Grantham confidently shared that an investment climate-related opportunity is one of the best investments you can make today.

To learn more on how to leverage climate data, reach out to our team at www.climatealpha.ai