I just saw this post on CBRE’s blog Speaking of Green. It was written by Michael Gottlieb, a managing partner for Advanced Green Solutions. It points out some important issues concerning the risks of climate change for commercial properties. Thanks Michael for letting us post it here.
“It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” – Mark Twain
The average age of a commercial building in the U.S. is 50 years. But the average hold period for a commercial real estate investment ranges from a low of three years for opportunistic investments to a high of 12 years for core properties.
Investor return expectations, loan terms and lease terms all serve to drive the spread between hold periods and the functional life of real estate assets. In today’s turbulent marketplace, investors have a hard enough time projecting performance for the next 12 months – much less the next 600 months – so it comes as no surprise that anticipating the effects of climate change on business scarcely registers as a blip on the radar screen for the average commercial real estate owner. And, speaking from hard-earned experience, changing the dominant investing and operating paradigm of an industry isn’t easy.
In 2010, a Zurich-sponsored survey by Ceres found that most corporate risk managers – 74.3 percent – rank political and regulatory impacts as their top climate change-related concern. The physical risk of climate change was identified as a top-5 concern by just 14.9 percent of the risk managers surveyed. Regulatory liability; fuel/power availability & price; natural disaster; employee recruitment and retention round out the top-5 selections, suggesting that business continuity risks from climate change are rising concerns, but none of those risks ranked higher than 50 percent.
Yet, there is substantial evidence that we already are feeling the physical effects of climate change. NASA’s Goddard Institute for Space Studies in New York, which monitors global surface temperatures, found that nine of the 10 warmest years in the modern meteorological record have occurred since the year 2000. This warming trend continues with the National Oceanic and Atmospheric Administration reporting that the first three months of this year ranked as the warmest such period in the contiguous United States since national records began in 1895.
This trend has not been without financial consequences. There have been 99 weather-related disasters in the U.S. since 1980 with costs exceeding $1 billion. More than half of those disasters have occurred since 2000. It is not surprising that the insurance industry, which holds $23 trillion in global investments, is beginning to take notice. A 2011 Ceres survey found that there is a broad consensus among insurers that climate change will have an effect on extreme weather events.
“Yet despite widespread recognition of the effects climate change will likely have on extreme events, few insurers were able to articulate a coherent plan to manage the risks and opportunities associated with climate change,” the study’s authors said, noting that of 88 insurance companies surveyed, only 11 reported having formal climate change policies in place.
The study also found that the insurance industry is focusing most of its attention on a narrow set of risks, ignoring issues like non-coastal extreme weather and climate liability, which may prove to be significant.
“There’s irony in issuing a warning of unseen risk to an industry literally built on assessing, modeling and mitigating risk. But climate change is a game-changer no less for insurers than it is for farmers, businesses with global supply chains and residents of the lengthy list of affected regions,” the Ceres report stated.
Understanding the scope of the risks posed by climate change can be difficult. In an extreme example, research scientists recently reaffirmed a 1972 study by MIT that found that the world is on track to suffer a “global economic collapse” by 2030 if population and economic growth continues at their current pace without “drastic measures for environmental protection.” The controversial study, “The Limits of Growth,” said an economic collapse is avoidable if new global policies established in conjunction with investment in green technology help to limit the expansion of our ecological footprint.
Despite the risks, changing corporate culture doesn’t come easy. A 2010 analysis by Deloitte, “Shaping a Risk Intelligent Strategy,” found that most corporate leaders put significant effort into identifying threats that could stand in the way of executing their business strategy and developing plans to manage those threats. However, most executives suffer from a blind spot when assessing strategic risks – the failure to consider the possibility that their longer term business strategies are flawed because they are based on assumptions that are no longer valid.
“In a turbulent environment, where circumstances are subject to inevitable but unpredictable, sudden, and violent shifts, it is anything but certain whether what has worked in the past will still work in the future,” the Deloitte study stated. “Any strategy that is founded on what ‘just ain’t so’ is almost sure to fail – no matter how well it is executed – even if it was once the recipe for success. That’s why a full understanding of strategic risk requires systematically and regularly challenging the fundamental assumptions that underlie the strategy. Such understanding is an essential step to creating a robust and agile strategy in the midst of turbulence and uncertainty.”