AEW’s Thierry Laquitaine sets out concrete steps for meaningful climate-change adaptation
Addressing climate risk in real estate investing takes effort. Improving a direct real estate portfolio requires managers to spend time in and around buildings, getting to know every aspect of their construction, environment, and operation. An individual climate-mitigation strategy must be developed for each building, and sufficient capital allocated to carry out and monitor the implementation.
The effort, however, can reap dividends. AEW estimates that every euro spent on climate adaptation today saves four euros in the future. In a January 2024 report, the European Environment Agency stated, ‘Europe is the fastest-warming continent in the world’, and that ‘economic losses from coastal flood alone could exceed €1tn per year’.
AEW first started work on climate risk in 2016 when France’s Article 173 created mandatory carbon reporting for institutional investors. As properties were mapped, it quickly became apparent that simply reporting on carbon impact would not be sufficient – it would not be enough to just report the risks once a year, so there needed to be a concerted effort to reduce them.
Unable to find an appropriate third-party solution at the time, AEW worked with a climate data provider to develop its own process for precisely detailing the risks of each of its assets. The newly formed partnership visited AEW-managed buildings to evaluate construction, uses, and the local environment, and to track the equipment deployed in the maintenance of the building and by tenants.
With this data map, it was possible to forecast the overall vulnerability of a building to different climate hazards and make recommendations to reduce the potential impacts, alongside a budget for improvements. These recommendations form an action plan, the blueprint for which could be rolled out to other real estate assets.
AEW’s pilot study focused on ten of its buildings in different regions of Europe and across different sectors, including residential, logistics, leisure, and offices.
The study sought to quantify the difference in outcome if AEW did nothing and allowed the assets to be impacted by the full force of climate risks, or implemented a comprehensive action plan to mitigate climate effects.
The outcome of the modeling was very clear: it is substantially more economically beneficial to invest now than to wait and do nothing.
Following the pilot which concluded in 2020, AEW proposed to its clients that it should apply the action plan to all its investments. Most clients validated this proposal, and for several years now, climate-risk analysis has been included in the management of assets.
The process today begins at the due diligence stage when AEW looks to acquire a building. If there are material climate risks, sufficient capital expenditure is incorporated into the business plan to adapt the building. Existing assets are also screened to identify buildings most at risk. Typically, a three-to-five-year action plan is adopted to improve a building.
An effective action plan requires all teams to be involved – including the investment, asset management, and technical departments. Substantial training is therefore provided to the firm’s teams across Europe to ensure staff have appropriate knowledge to adequately address climate risks.
Communication about each action plan extends to individual property managers to, for example, establish procedures for warnings in the case of extreme climate events, and discuss operational issues such as the maintenance of air conditioning and other key equipment for tenants.
The growing prevalence of heatwaves globally has brought AEW’s mitigation measures into perspective. Generally, heatwaves have been found to have a minimal impact on logistics assets, whereas the impact on residential buildings, shopping centers, and offices is substantial.
The key challenge with residential property occurs during the night, when cities suffer from the urban heat island effect, where vegetation is replaced by the asphalt and concrete of roads and buildings, which absorb the sun’s heat, causing ambient temperatures to rise. This increases energy costs (particularly for air conditioning) and air pollution levels.
Most at risk are fragile populations such as those occupying senior housing. Heat-related illness and mortality rates rise as buildings absorb heat during the day and keep interiors hot at night. The temperature of buildings in central Paris, for example, is 8°C higher than in surrounding greener suburbs.
AEW runs thermal simulations and vulnerability assessments in residential buildings to define comfort inside during heatwaves. Recommendations can include installing reflective surfaces on the outside of buildings, the fitting of blinds, and the addition of vegetation around buildings to help reduce external temperatures and increase humidity. In a study published in April 2024, I4CE (Institute for Climate Economics) estimated that the cost of adaptation of the national real estate portfolio to a warming of 4°C in France will reach several billion Euros per year.
Other climate-related risks include subsidence, which is linked to clay soils. If clay is subject to frequent drought and flooding, it expands and contracts, leading to damage to the foundations and structures of buildings. Subsidence is one of the main risks to buildings in Europe as much of the soil in France, the UK, and Germany is clay-based. Property damage claims due to drought-related subsidence are estimated to almost triple to €43bn by 2050.
Fluvial or sea submersion flooding risks are also prevalent around Europe, with a growing list of towns and cities where the population will eventually be displaced.
While flooding cannot be prevented on flood-prone land, asset managers can protect the nerve centres of buildings such as heating systems, power-generation equipment, and data storage. Certain rooms can be reinforced, and critical equipment can be repositioned on higher floors, rather than in basements.
An action plan cannot be static. AEW works with third-party data providers to improve its tools in areas such as satellite imaging, and increasingly with public authorities to use the action plans of larger cities to inform our own analysis.
We have also participated in real estate networks focused on climate risk, such as the Sustainable Real Estate Observatory, an initiative of the real estate industry in France, which is currently leading a major climate change project.
Another initiative, led by AEW’s insurance team, aims to forecast what may happen to buildings in the future and the related financial impact on the insurance premiums, to anticipate the risks and appropriately adapt the insurance scheme in advance.
Efforts to combat climate change continually evolve; data, analysis, and tools need to be updated frequently. Scientists are being drawn to this area of expertise, and knowledge of climate change is improving fast. It is crucial to adapt and keep pace with these changes to protect the value of assets under management and to support investors on the complex path of adaptation.
All opinions are those of the author at the time of publication and are subject to change.
For professional investors only. All investing involves risk, including the risk of capital loss.
AEW is an asset-management company dedicated to real estate and private debt and an affiliate of Natixis Investment Managers. Natixis Investment Managers is the holding company of a diverse line-up of specialized investment management and distribution entities worldwide. Services and products managed by Natixis Investment Managers are not available to all investors in all jurisdictions.
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This article originally appeared in ESG in Alternatives 2024 The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin, Natixis, and AEW accept no liability for any decisions taken in relation to the above.