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Research, Sustainability

Physical Climate Risks and Underwriting Practices in Assets and Portfolios

April 11, 2024
  • Report Summary: Physical climate risk data can be a powerful tool for managing asset and portfolio risk and returns. Learn what strategies leading firms are using to manage physical climate risks and navigate market challenges. The latest report from the Urban Land Institute and LaSalle Investment Management builds on their previous report, How to Choose, Use, and Better Understand Climate Risk Analytics, to describe how leading firms are leveraging physical climate-risk data in underwriting practices. With insight into asset- and portfolio-level risk becoming increasingly easy to obtain, new challenges lie in effective interpretation and integration of information into investment practices. Relying on research and interviews with industry leaders, this report provides a nuanced exploration of this emergent issue.

    Physical Climate Risks and Underwriting Practices in Assets and Portfolios is structured into three sections, each addressing different aspects of the industry’s response to climate-risk data:

    Section 1. Explore the current state of the industry, finding that:

    • Leading firms actively coach their teams on physical risk.
    • Regulatory trends affect, but do not motivate physical risk assessment.
    • Different geographies approach physical with their own level of urgency.
    • Investment managers tend to focus on fund risk, capital providers on portfolio risk.
    • Tools to understand and price physical risk are still in a nascent stage of development.

    Section 2. Examines the application of climate data in decision making. Key findings include:

    • Aggregate physical risk is a screening tool; individual hazard risk is actionable information.
    • Climate value at risk remains opaque; the utility of the single number offers value but needs increased transparency.
    • Atypical hazard risk (e.g., flood in a desert) merits increased attention.
    • External consultants can frequently fill skill gaps, especially for firms with less in-house expertise.
    • While no predominant timeframe or Representative Concentration Pathway (RCP) emerged as industry standard, the 2030 and 2050 benchmarks were the most commonly referenced time horizon.

    Section 3. Assess the impact of physical climate risk on acquisition, underwriting, and disposition practices; finding that:

    • Leading firms start with a top-down assessment of physical risk.
    • Market concentration of physical risk is analogous to other concentration risks—a nuanced analysis is required.
    • Capital expenditure for resilience projections is a key forecast but rife with uncertainty.
    • Local-market climate mitigation measures are important to understand but difficult to forecast.
    • Exit cap rate discount for estimated physical risk is an increasingly commonly used tool, frequently 25 to 50 basis points.
    • Firms infrequently disclose physical risk but the market needs increased transparency.

    Important Notice and Disclaimer

    This publication does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or any interests in any investment products advised by, or the advisory services of, LaSalle Investment Management (together with its global investment advisory affiliates, “LaSalle”). This publication has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients and under no circumstances is this publication on its own intended to be, or serve as, investment advice. The discussions set forth in this publication are intended for informational purposes only, do not constitute investment advice and are subject to correction, completion and amendment without notice. Further, nothing herein constitutes legal or tax advice. Prior to making any investment, an investor should consult with its own investment, accounting, legal and tax advisers to independently evaluate the risks, consequences and suitability of that investment.

    LaSalle has taken reasonable care to ensure that the information contained in this publication is accurate and has been obtained from reliable sources. Any opinions, forecasts, projections or other statements that are made in this publication are forward-looking statements. Although LaSalle believes that the expectations reflected in such forward-looking statements are reasonable, they do involve a number of assumptions, risks and uncertainties. Accordingly, LaSalle does not make any express or implied representation or warranty, and no responsibility is accepted with respect to the adequacy, accuracy, completeness or reasonableness of the facts, opinions, estimates, forecasts, or other information set out in this publication or any further information, written or oral notice, or other document at any time supplied in connection with this publication. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this publication for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication and nothing contained herein shall be relied upon as a promise or guarantee regarding any future events or performance.

    By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.

    Copyright © LaSalle Investment Management 2024. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.

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