Climate change and the ESG agenda are changing the way we think about places and their relative attractiveness to real estate occupiers and investors.

Gone are the days when property investors could rely on a quick contaminated land survey, a check on the local zoning plan and a comprehensive insurance policy for their acquisition due diligence. In many parts of the world, environmental considerations have abruptly pushed their way to the front of the agenda, in part through tightening regulations, but also via major climate events. Recent incidents in major cities, from tornados in Nashville to subway flooding in New York City and severe inundations across Europe, have highlighted the fact that the risk to real estate is increasing. 

Similarly, social frictions are leading to disruption, with knock-on effects for the economy and, in many cases, real estate. Rioting in 140 US cities following the death of George Floyd in Minneapolis was estimated to have caused in excess of US$1bn in damage, according to the Insurance Information Institute. The Gilets Jaunes protests in Paris in 2018 caused widespread disruption – and led to a significant rise in international visitors cancelling flights to the city. Perceptions of the safety and stability of these cities as business locations are inevitably affected. 

For investors in and occupiers of real estate, all this has implications for business disruption and rising costs, which we will discuss below. Also, new accounting rules which are gradually being adopted around the globe require more and more businesses to evaluate their total exposure to climate change. Once environmental risks hit their actual value, firms will look to reduce exposure – including in real estate occupation or investment. 

Consequently, environmental, social and governance (ESG) issues have become more prominent in business decision-making. The risks and opportunities associated with all three are unevenly distributed across the planet, which is particularly significant for real estate investments that are, inherently, geographically fixed. 

A sector in transition

Investors have long been used to accounting for variations in economies and governance regimes between countries. The focus on climate is more recent and is being looked at across two key dimensions: physical risk and transition risk.