_Environment Risk: Why climate change is a bigger threat than Brexit

The environmental debate

We are all familiar with the political turmoil of Brexit, but the UK’s commitment to zero carbon by 2050 passed through Parliament without even a debate.

There was total consensus amongst MPs that this is an imperative and the right thing to do when most observers would question whether Parliament could agree what day of the week it was.

The environmental debate is no longer about whether climate change is happening, but how we can address the problem and in turn, how it will impact us and the need for adaptation. This means a focus on risk, finance and investment implications of climate change – impacting real returns and costs.

At the Economist Climate Change Risk Conference in London, I bumped into several finance directors which demonstrated how serious this is now being taken - a sea change from even a few years back.

The awareness of climate change is high but there is still plenty to do in risk recognition for occupiers and investors - especially as 100 year events are starting to occur repeatedly.

Finding solutions

The encouraging thing is that as we start to price risk into location and facilities this will drive the market to find solutions which will ultimately mitigate this risk and could make a significant impact on the environmental effect we are having on the planet.

For example as cities become warmer, we will need to develop better insulated and more effectively cooled buildings, and low lying locations will see values drop which will prevent development in these areas.

Environmental, Economic and Political Risk in terms of where a business is operating or funds are investing, is something we have been analysing on behalf of clients for many years. An assessment can be made across the entire portfolio and indeed for some clients across their supply chain.

This enables clients to invest and price with their eyes open and consider mitigation strategies where necessary. For example a risk assessment on California did result in some quite frightening data for a tech client – risks related to earthquakes and wild fires, as well as air quality, drought, coastal flooding and rise in sea levels, spreading disease such as ‘Valley fever’, terrorism, crime and house price inflation.

The economic benefits of being in the biggest tech cluster in the world outweighed these factors, but the client did mitigate much of the risk by opting for an office both in the Valley as well as San Francisco, but also a third one in Austin. 

Risk assessments

Risk profiling of portfolios is something that is increasingly common for clients – at a macro level which markets have the highest risk or at a micro level what are the risks associated with your particular building or site, including access to it.

Goldman Sachs learnt that creating a resilient building in New York was not much benefit during Storm Sandy. The building proved resilient to the storm and was one of the few that had it lights still on in the City, but this was of little value when their employees simply could not get to it.

Risk assessment can make businesses aware of these issues and then start pressurising wider stakeholders to address the risks that maybe outside of their control. 

Earthquakes, fires and natural disasters in different locations have very different risk profiles – clearly a place like California is much better equipped to face such risks than Bangladesh.

Risk assessment can also be applied to building standards in the widest sense – the quality of the standards as well as the proficiency of the authorities enforcing the standards, the risk of bribery and corruption diluting the impact of standards.

These can all be readily assessed at country level for your portfolio and supply chain, before evaluating any particular buildings.

The latter is important because high profile disasters can have significant brand and reputation risk for clients and the expectation now is that companies should have a due diligence process to ensure suppliers are not putting staff at risk or operating in sub-standard buildings.

It makes business and investment sense to mitigate the risk of climate impact and disruption, and as pressure is applied through this process, this should make the world a safer and more environmentally adapted place to work and live.

Get in touch with Neil McLocklin, Head of Strategic Consulting EMEA to find out more about Environmental Risk.