As climate change and lagging infrastructure become mainstays in the U.S. news cycle, investors are struggling to price extreme weather risks. Uncertainty around the frequency, magnitude and mitigation of storms, surges and flooding requires radically different investment analysis. Climate risks must be priced into investment decisions — and with this comes an opportunity for investors to capitalize on resilient infrastructure projects.
Climate risks in real estate aren’t well defined, but advances in, for example, big data enable investors to articulate the value of more resilient projects. Aside from pitching in for the planet, guiding market decisions toward sustainable outcomes will generate payoffs for the real estate industry, especially long-term. While climate-focused investment analysis is relatively new in the U.S., there are effective strategies abroad that can be used here.
Green building demand is up
One internationally ubiquitous trend gaining momentum in the U.S. is the demand for green buildings. Cost effective for owners and occupiers, green buildings refer to the structures and processes that follow environmentally responsible and resource-efficient principles throughout the building’s lifecycle.
Determining what makes a building green is debatable, but RICS led a initiative in Europe to create a finance industry classification system to identify green structures. Creating a common financial language, the taxonomy lists economic activities with performance criteria for six environmental objectives.
Owners can maximize building value through reduced energy costs, an extended asset life and increased rental revenue. Occupiers also see value in energy reduction. For offices, productivity has been noted to increase. Workplace initiatives help attract and retain talent through innovative thinking about environmental impacts. Natural light and better indoor air quality (achieved through biophilia) add to employee well-being. Investors benefit from green buildings as better performing assets with long-term competitive advantage — and U.S. investors are increasingly on board.
A push for faster progress
However, gains are not being made quickly enough to keep pace with the need to mitigate risk. Americans can look to international organizations for examples of how to drive more robust investment in sustainable projects.
The United Nations’ New Urban Agenda is a high-profile example, setting a global standard for sustainable development with three essential components: urban planning and design, urban legislation and regulations, and municipal finance. The last discusses the need for reallocation of the urban value chain to fund sustainability.
The World Economic Forum has been a proponent of asset recycling for cities having difficulty funding infrastructure upgrades that can spur investment. Governments can lease assets to investors and use this new capital to fund sustainable infrastructure. This strategy leverages considerable existing asset resources, which is often a highly valuable but otherwise non-revenue-generating asset.
In China, meanwhile, cooperation and corporate involvement across city borders are key. The Greater Bay Area Plan will turn Hong Kong and 10 neighboring cities into a mutually supporting economic hub through road and rail projects , forming a global center for advanced manufacturing, innovation, financial services, transport and logistics, trade and leisure. The plan integrates businesses into local, regional and international supply chains. It has also enlisted the aid of Chinese tech and retail giant Alibaba, which will develop centralized data analytics to reshape transportation.
This model of partnering with innovative companies could similarly be the key to creating resiliency in the United States.
Not entirely foreign
This big picture thinking is important to creating investor confidence that green development is coordinated and part of a larger societal effort, which will ultimately make investing in it less risky.
Examples at home include New York City’s 50-year OneNYC Strategy, a local initiative that emphasizes an inclusive urban economy that embraces social sustainability as well. The plan aims to make New York the most sustainable city in the world by 2050 and create a value chain that will enable other cities to follow its lead.
U.S. cities and regions can adopt similar global thinking on collaboration to spur a sustainable economy and find innovative ways to encourage private investors to see the immense business value of going green.
Neil Shah
