A Financial Impact Assessment Of Climate Change

I have a love of numbers and have worked in the finance world my whole career. But I also have a love for geoscience and recently completed my Master of Philosophy (Geoscience). I will be the first to recognise that’s not a common mix of passions, but it does provide a unique insight into one particular issue facing the property industry – the financial impact of climate change.

Since 2015, I’ve participated in working groups across various organisations including the Investor Group on Climate Change and Asian Investor Group on Climate Change. Such groups play an important role representing institutional investors that are interested in mitigating the impact of climate change on the financial value of our investments. Given the current data – that’s no small feat.

In the latest release of the IPCC report, climate science demonstrates that there is a significant risk to the property industry. Australia has experienced land area warming by 1.4°C between 1910 and 2020, which is actually higher than the global average of 1.1°C. This could see our industry face more extreme challenges sooner including increased frequency and intensity of flood damage to property and infrastructure; increased morbidity, mortality, and infrastructure damage during heat waves and constraints on water resources in southern Australia.

Quantifying the specific impact is still a challenge but the risk is clear. It’s worth getting everyone on the same page on this matter. But the urgency with which property industry bodies collaborate and establish a standardised set of assumptions is lacklustre. Will we have a property industry standard on the impact of a 2°C increase world to allow standard financial impact assessments across the key investment localities? Are our valuers applying a consistent climate impact assumptions on our asset valuations? These questions don’t just need to be asked, they need to be answered.

EG is investigating every opportunity to mitigate climate change impact, including those that others overlook. While many in the property industry focus on investing in new sustainable buildings, it’s been estimated that 80% of buildings that will be in use in 2050 have already been built. In light of the IPCC sixth assessment report, we believe it is the existing assets that we need to address first through impact investing strategies such as EG’s High Income Sustainable Office Trust (HISOT).

The industry focus for climate adaptation needs to shift in other areas too. Asset owners and asset managers seem to be most active in the space with broader service providers lagging. But all representatives in the industry also need to be informed on the urgency of the matter. Ultimately, my niche passions may offer a singular perspective on the financial impact of climate change, but that shouldn’t make it a cause with a single champion. The whole property industry has a role to play in asking and answering the questions that lay ahead.