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NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT MANAGERS 4 FIDUCIARY FIRST STEPS… The real estate implications of climate change are multi-faceted and challenge many organizational, cultural, and economic assumptions – specifically raising questions on due diligence and acquisitions, portfolio allocation, market exposures, property operations, and business continuity. Recognizing the accelerating number of climate events, growing investor concern, and the practicalities of their fiduciary duty, many investment managers are beginning to examine their decision making and risk mitigation processes. At Bentall Kennedy, the sustainability team began examining climate issues in 2013, commissioning academic research that laid the groundwork for factoring climate implications into its corporate strategies. Bentall Kennedy went on to establish a list of key hazards related to climate risk aimed at assessing vulnerabilities of its property portfolio. Giselle Gagnon, Senior Vice President at Bentall Kennedy describes the resulting "ForeverReady" framework, centered on the concepts of readiness and adaptation: "In the short term, each property needs to understand and be aware of their unique, locational circumstances and develop appropriate preparedness plans." Looking towards the long-term and adaptation, the team at Bentall Kennedy has generated new discussions on topics ranging from building structural changes to chiller replacements to accommodate different operating conditions 20-30 years from now based on available science. Giselle concedes that a challenge lies in bringing the various stakeholders together for meaningful conversations. As an example: "One of the opportunities is understanding the readiness of cities. How prepared are they today and how will their capabilities relate to our real estate investments in the future? We would like to understand that piece of the puzzle better." A similar initiative has taken root at Principal Real Estate Investors, relates Jennifer McConkey, Senior Director of Operations and Sustainability: "In 2017 we facilitated a strategic planning workshop with our Responsible Property Investing (RPI) team to map out strategies for the next several years. Climate risk issues arose multiple times – particularly concerning due diligence." The Principal RPI team recognized the need to enhance how they evaluate climate risk and resilience factors in the acquisitions process, from the property conditions assessment to the investment committee. Principal began drafting and piloting some new due diligence protocols in late 2017, and Jennifer expects more progress to occur in 2018: "We want to make sure we get this right, develop a process to uncover what is material when it comes to climate risk, and ultimately hold more meaningful discussions with our investors on the implications." National Real Estate Advisors has focused on market and portfolio allocation questions, as described in its June 2017 publication "Climate change and commercial real estate – How resilient is your portfolio?" The paper outlines National's efforts to benchmark its portfolio risk exposure to markets highly susceptible to climate influenced events such as hurricanes, inland flooding, and tornados. Darob Malek-Madani, Head of Research and Analysis at National, summarized the project's origins, stating "It started with some internal discussions about Miami and its changing risk profile. We had a lot of anecdotes, but we wanted to put numbers to it." To do so, the National team developed a risk analysis tool built from NCREIF and CoStar data, created a "model" portfolio to compare market exposures, and assessed if National was over-weighted in some geographies from a climate risk perspective. The results have proven influential, shaping decisions and policies within National Real Estate Advisors. Maryellen Dolan, Director of Portfolio and Asset Management, shared her perspective "The tool is really supportive of the decision-making process, informing our views on markets, new investments, and existing assets." Stakeholders have reacted positively, and early discussions with investors and consultants lead Maryellen to believe engagement on these questions will accelerate, perhaps becoming a point of competitive distinction: "There seems to be more focus on how to separate investment managers from each other, and risk mitigation tools and quantifiable metrics help us in that regard." STRANDED ASSETS, COMPETITIVE REALITIES, AND MUSICAL CHAIRS? Each of these organizations – Bentall Kennedy, Principal Real Estate Investors, National Real Estate Advisors, and many others – has started to internalize climate risk into their thinking and decision-making. Like Director Coates or General Mattis, each approaches the issue from a different perspective, given the unique needs of their stakeholders. Further, the investment community has a growing appetite for dialogue and transparency on climate risks, at a time of significant consolidation in the investment management community. The concept of stranded assets – where an investment becomes obsolete or non-performing due to changing market conditions – increasingly applies to issues of climate risk. But what about the "stranded asset manager"? Will advisors and fiduciaries who are unwilling or unable to guide investors through climate risks find themselves at a competitive disadvantage? Investment performance will ultimately drive that discussion. But the fiduciary reality emerging is that climate risk factors can influence financial results today, within typical real estate hold periods. At some point, the music will stop, and investors will start asking questions. When this occurs, who will be left standing, or stranded without a strategy in place?