Turn Climate Risk Into Opportunity with Resilient Geographies
Earlier this month, Climate Alpha’s Founder & CEO Dr. Parag Khanna keynoted Climate Day at CREtech, the Built World’s largest innovation and sustainability conference in New York City. Parag spoke on turning climate risk into opportunity by investing in resilient geographies. Continue reading for a full summary of his presentation.
At Climate Alpha we help investors achieve ESG: Escape Stressed Geography.
Climate data is evolving beyond just scorecards towards meaningful and actionable measurements of financial impact. What they want is to better understand hold/sell periods and disposition timelines -- and understand where to invest next.
Climate risk has a material impact on real estate valuations. This is significant from a historical standpoint because real estate, the world's largest asset class, has mostly moved up and to the right for generations -- and suddenly that’s not happening anymore. We’re seeing some places experience abrupt changes in valuation due to insurance premiums rising after natural disasters, that are causing multiple billions of dollars in damage annually.
Rising disasters remind of our basic human fight-or-flight instinct. When it comes to climate change, it’s neither logical nor rewarding to fight as we can only get so far fighting Mother Nature. What we see is more and more people responding to climate change by relocating.
Especially younger demographics are incorporating climate trends while deciding where to buy homes. Other motivators are smaller family size, high interest rates, less desire to live in a single place, economic insecurity, instability in the labor market, and so forth. There are many socioeconomic factors and hedonic variables at play when it comes to the geographies of where real estate will thrive.
Climate Alpha works to provide a comprehensive view of location analytics and translate it into financial impact so that people can understand holistically which locations will rise and fall in the future based not just on climate risk but also how communities and locations are responding and adapting to risk.
How can one actually quantify resilience? While risk is quantified carefully, resilience can be a more vague term.
People already understand physical climate risk -- heat, hurricane, fire coastal flooding, inland flooding and drought. Resilience looks at energy transition, energy reliability, social robustness, economic momentum, location wellness, and quality of infrastructure. A wide range of sources inform these indicators that can then be scored, indexed, and mapped alongside risk to create an overarching picture -- and calculated to generate price expectations.
Real estate is the most exposed industry to climate change, but every climate risk a location faces can be responded to by commensurate and appropriate measures. If your risk score reflects high heat, you may want to measure the resilience and robustness of the energy grid and consider what investments need to be made to protect it. If your risk reflects high flooding, you may want to focus on draining systems and quality of infrastructure for that location. This goes on and on for every climate risk.
At the same time, we find is that a lot of asset managers suffer from being on the wrong side of the analogy of the forest and the trees. They say that their building or asset is fortified and retrofitted with solar power and top of the line insulation improvements. They believe that those improvements are what’s going to climate-proof their asset in the event of the next storm or natural disaster. We see a lot of that attitude, but it’s not the way economics, market dynamics, investor behavior or location resilience works. In this situation the asset manager knows the tree and is doing everything it can to strengthen that tree, but what really matters is the forest around it. It's the other buildings, the community, the surrounding town and city that matter. You can know everything about the building itself, but to understand how it’ll interact with the future climate impact of its surroundings and the related second order effects bring it all into one picture. Asset managers need to look at the big picture of an asset relative to other locations as it is relevant to the entire market of your business.
As climate change accelerates, we will have to adapt. The logical geographies for investment and habitation are changing and many populations will all have to relocate overtime.
People will eventually move from high risk to low risk areas -- it's already happening. It is important to think ahead and anticipate demand for where businesses should be -- and it doesn’t have to be very far from where they are currently.
Climate Alpha does a lot of work in proximity analysis, finding the most approximate locations to where people are to where they might relocate. It’s an economic and ethical urgency to really consider what are the optimal geographies for businesses and people to be in so that we are not in constant survival mode. Anticipating where people will go is imperative.
There are options for acting with foresight which is what Climate Alpha works to do. We can find climate resilient areas that are affordable and not far from urban centers by running models to identify those locations. It's not just anticipating demand but looking at the trends that are already happening.
We have an opportunity in the next five to ten years to redesign the built world. We probably won’t be building more skyscrapers. What we might be doing instead is looking at the intersection of demographics and climate and find that we have an aging society. By 2030 there will be 90 million people that will be elderly and less mobile. How many of those 90 million live in climate resilient areas that are walkable and have amenities and facilities nearby? The answer basically rounds to zero, and we have to consider that a market failure. This is just one example of a demographic being impacted by a lack of resilient real estate.
There’s an enormous opportunity for investors to make the right decisions and select the right locations. We believe that "if you build it, they will come."
We need to consider what kind of infrastructure we will need for a climate resilient world. We want to provide data not just for climate risk analytics but actionable data that allows people to decide where to move and invest next. We're a migratory species not destined to be stuck in one place. We must focus not just on the downside of risk and mitigation but also the upside, the adaptation, anticipating the future, and seizing opportunities.