NAREIM DIALOGUES SPRING 2018
3
1
https://www.dni.gov/files/documents/Newsroom/Testimonies/2018-
ATA---Unclassified-SSCI.pdf
2
https://www.vox.com/energy-and-environment/2018/2/15/17016952/
climate-change-security-threat-cia
3
https://www.climate.gov/news-features/blogs/beyond-data/2017-
us-billion-dollar-weather-and-climate-disasters-historic-year
4
https://www.nytimes.com/2017/11/03/climate/climate-change-
impacts.html
5
https://www.natlawreview.com/article/2018-rising-trends-corporate-
climate-disclosures
6
https://www.nytimes.com/2017/12/13/opinion/climate-change-credit.html
Similarly, Defense Secretary James Mattis testified to
Congress on February 6th about the challenges to the
military when evaluating climate change. When asked about
environmental risks and dealing with extreme weather, Mattis
stated that climate change is an integral part of military
planning, reflecting "This is a normal part of what the
military does, and under any strategy, it is part and parcel."
2
Dan Coates or James Mattis may not be the first people that
come to mind when thinking about real estate investing. But
their role in the U.S. government parallels a key aspect of
investment management – that of a fiduciary. Like a fiduciary,
the intelligence community and military are assessing
risks, understanding exposures, modeling scenarios, and
developing contingency plans. Coates and Mattis don't have
the luxury or time to debate the ramifications or causes of
climate change. Politics aside, they are de facto fiduciaries
acting in the public's stead. Like any institution that acts on
behalf of stakeholders, faces on the ground realities, and is
tasked with delivering real world results, they know they will
be held accountable.
And take note of the time horizon of Dan Coates statement
above. He is not forecasting risks 10 years out, or even
5 years. Secretary Coates' assessment anticipates real
world risks this year.
A RECORD YEAR FOR ECONOMIC LOSSES
According to the National Oceanic and Atmospheric
Administration (NOAA), 2017 marked a record year, having
the most climate and weather-related events causing greater
than $1 billion in damages.
3
Hurricanes Harvey and Irma
generated most of the attention, but real economic impacts
and property damages were felt across the United States,
from California and Western wildfires, drought in the upper
mid-west, and large-scale storms, tornados, and hail events.
While we can't draw cause and effect conclusions between
climate change and any single event, the science does
encourage a probabilistic view and signals a rapidly
increasing risk profile. Simply put, we can expect weather-
related events to be more frequent and more intense.
Extending one's outlook past direct property damages to
secondary effects such as regional economic disruption,
social discontent, and loss of productivity
4
– the challenge
for investment managers and fiduciaries becomes daunting.
NEW MARKET SIGNALS, BENCHMARKS,
AND EXPECTATIONS
Stakeholders across the investment landscape have begun
to ask pointed questions about the risks associated with
climate change – and the obligations of fiduciaries to
asses and disclose exposures. In 2015 the United Nations
Principles of Responsible Investing (UN PRI) initiative
released its report Fiduciary Duty in the 21st Century.
The report strongly asserted that fiduciary duty does not
prohibit the consideration of climate risk and other factors
in investment decision making, further stating that "Failing
to consider long-term investment value drivers, which
include environmental, social and governance issues, in
investment practice is a failure of fiduciary duty." In June of
2017, the work of the influential Task Force on Climate-related
Financial Disclosures – chaired by Michael Bloomberg
with support from Mark Carney, Governor of the Bank of
England – was summarized in its final report. Among many
recommendations, the Task Force strongly advocates that
companies and managers actively inform shareholders and
investors with information about the risks, opportunities, and
impacts posed by climate change.
5
In November, Moody's Investors Service announced its
intention to place greater weight on climate risk issues
when evaluating the credit worthiness of state and local
governments.
6
Also in 2017, CDP launched Climetrics, a
ranking methodology for equity investments that "grades"
investment funds on their exposure to climate impacts.
Specific to real estate, GRESB is launching its resilience
module as part of the 2018 survey, and both this new
module and the full survey have multiple questions and
metrics associated with climate risk evaluation,
mitigation, and recovery.
Given these and other initiatives, investment managers can
expect increasing pressure to engage with stakeholders on
climate risk issues, have a meaningful strategy in place, and
be evaluated accordingly.
©iStock.com/petesphotography
