Climate Change Adaptation in Real Estate: ESG Resilience Strategies

In recent years, rising global temperatures have reached unprecedented levels, causing more frequent and severe natural disaster shocks to property values and investment performances across different regions.

As such, ESG teams focused on climate change adaptation in real estate are looking to optimise their approach to better understand, capture and adapt to future climate risks, and address potential losses on the portfolios they manage. However, these teams often meet the challenge of establishing actionable strategies to adapt their portfolios.

This article provides insights on how ESG professionals and asset managers can address this issue, moving beyond climate reporting to develop effective climate resilience strategies.

If you lead work in ESG adaptation strategies for real estate, you should understand that climate reporting alone cannot give you the roadmap to adapt your portfolios, as its central objective is to gather and disclose the company's information. Now, what is the next step?

As climate-related risks escalate, prioritising climate resilience planning is a crucial move if you are looking to protect investments and ensure long-term profits.

Furthermore, the US alone has experienced an average of 18 billion-dollar disasters per year in the past five years, and this trend is expected to continue as global temperatures worsen.

Mere reporting will not offer a straight path to resilience.

ESG climate action in real estate now demands more robust, forward-looking strategies.

According to EY, factors such as energy efficiency, operating costs, and marketability can be integrated into property valuation models to reflect the financial benefits of resilient properties accurately.

Such benefits include potential rent increases, lower operation costs, and reduced discount rates, which can be leveraged for more informed investment decisions.

This also implies that actionable adaptation planning is the way to go, as it allows investors to quantify and capture the financial opportunities linked to climate resilience.

This offers a more tangible and actionable approach to building resilience, compared to climate reporting alone.

Learn more about how climate risk affects asset valuation, Climate Value at Risk, as well as investment decisions by downloading our whitepaper below.

As an ESG professional, you should understand the connection between climate adaptation strategy and your ESG goals in the property sector.

Keep in mind that climate adaptation strategies should primarily focus on identifying physical climate risks your assets (in this case, properties) may be exposed to, and enhancing resilience in investment portfolios.

These climate adaptation best practices can serve as a foundational part of your ESG adaptation strategies for real estate, ensuring that portfolios are protected from escalating climate hazards.

A recent study on a diversified equity portfolio revealed that climate risks significantly erode annual returns by up to 40% towards the end of the decade if left unaddressed.

This highlights the urgent need for proactive measures to identify climate risks and protect investment returns.

Some adaptation strategies your real estate ESG team can consider include:

• Flood Resilience

  Implement flood-proofing measures, elevate buildings, and incorporate green infrastructure to reduce flood risk.

• Emergency response plans

  Develop emergency response plans, install storm shutters, and implement backup power systems to minimise disruptions.

• Heat Island mitigation

  Incorporate green roofs, cool pavements, and urban forestry initiatives to reduce urban heat island effects.

• Climate-resilient building design

  Incorporate climate-resilient principles such as passive solar design, natural ventilation, and durable materials into building design and construction.

Financial institutions (FIs) play a crucial role in driving climate adaptation in the property sector.

As a real estate investor or ESG portfolio manager, you should consider the impact of climate-related risks on property valuation, mortgage creditworthiness, and the availability of home insurance premiums.

In past years, in the US, insurance premiums accounted for a relatively small portion of mortgage payments, around 8%.

However, insurance costs have skyrocketed, now consuming about one-fifth of a typical mortgage payment, exceeding inflation rates and even home appreciation values.

For this reason, financial institutions are taking the impacts of climate disasters on real estate seriously and choose to take proactive actions in support of adaptation in the sector.

Three ways financial institutions are driving climate adaptation in the real estate sector:

• Physical climate risk assessment and stress testing

  FIs conduct regular climate risk assessments and stress testing to identify potential climate risks and opportunities for real estate investments.

  They usually focus on risks that impact their residential and commercial real estate portfolios the most.

  For example, the top US banks that participated in the recent Fed's climate scenario exercise focused their physical risk model on assessing the potential impact on their residential and commercial real estate portfolios.

  They proceeded by evaluating credit risk parameters at the loan level.

• Integration of climate considerations into mortgage lending and property valuation

  Although it is still at an early stage of development, FIs have begun to incorporate climate considerations into mortgage lending and property valuation practices.

  Bank of America (BoA) is enhancing its physical risk considerations into its risk identification processes, including in mortgage lending. The Bank expects to continue its efforts beyond 2027.

• Development of climate-resilient real estate investment products

  FIs are creating investment products that take into account climate-related risks and opportunities.

  These include green bonds, climate-resilient real estate investment trusts (REITs), and climate-themed exchange-traded funds (ETFs).

  For instance, BNP Paribas Real Estate Investment Management's European Impact Property Fund, launched in 2020, has already acquired 10 European assets by 2023.

  The bank is actively implementing a comprehensive investment plan to significantly improve the resilience of those real estate assets.

Many ESG teams are leading climate resilience efforts in the property sector.

Our team at Climate X has recently produced a guide, "Operations Manual: Climate Risk for Real Estate", to help asset managers and real estate professionals understand how climate risk impacts asset valuation, investment decisions, and CVaR.

Our guide also provides a comprehensive overview of identifying, assessing, and managing financial risks associated with climate change.

Similarly, the sustainability team at the Better Building Partnership (BBP), a leading UK property owners group, recommends key steps to help property owners and investors protect their assets, manage climate risk, and maintain long-term value.

These include (1) identifying physical climate impacts, (2) defining Climate Value-at-Risk (CVaR), (3) forging resilience at the asset level, and integrating adaptation into the investment lifecycle.

These initiatives underscore the growing importance of ESG climate action in real estate, as firms move beyond frameworks to implementation.

Other notable examples include:

• GRESB’s 2025 Climate Risk Indicators

  Developed in response to the escalating importance of climate-risk awareness in real estate, with a focus on robust risk management, risk assessment, and ESG standards.

• Ceres' 2024 Climate Governance Guide

  Providing investors and corporate boards with actionable steps to effectively address and oversee climate-related governance issues.

• ULI-LaSalle Climate Decision Making Framework 2024

  Providing a step-by-step guide to assess physical climate risk and financial risk, and examine challenges and benefits for adopting resilience measures.

As an ESG professional in real estate, climate risk assessment and adaptation planning are indispensable to achieving resilience.

Particularly, self-service climate risk tools can play a crucial role in climate adaptation planning by providing real-time climate risk data, analytics, and other key insights.

Self-service tools like Spectra and Adapt empower ESG teams to implement climate adaptation best practices at scale, supporting more innovative ESG adaptation strategies for the real estate sector.

Here are some unique reasons why these may be the best option for your adaptation planning:

• Unprecedented risk analysis

  By leveraging AI and a digital replica of the planet, Climate X can evaluate over 500 trillion data points to forecast physical climate risks for specific properties until 2100.

• Hyper-local risk intelligence

  Spectra can generate precise risk ratings and financial loss projections tailored to individual locations.

• Data-driven adaptation strategies

  With Adapt, you can explore the best-in-class adaptation measures, assess portfolio vulnerabilities, and make informed decisions to address the impacts of climate change.

Complying with ESG regulations and standards alone does not guarantee that you will automatically develop solutions to adapt your real estate portfolios against climate risks.

While rules like the EU's Corporate Sustainability Reporting Directive (CSRD) require companies to disclose climate-related risks and opportunities, among other things, they do not provide tailored solutions to directly address your risk exposure and adaptation needs.

Moving beyond compliance by prioritising actionable solutions can require you to:

• Conduct climate risk assessments

  As stated above, leverage advanced climate risk analytics tools to assess climate-related risks and opportunities for your real estate investment portfolios.

• Implement climate adaptation measures

  Develop and implement climate adaptation plans for existing and future investments targeting flood-proofing measures, climate-resilient design, and green roofs among other aspects.

• Engage with key stakeholders

  Collaborate with industry peers, governments, and climate risk experts like Climate X to seek best practices tailored for your needs, raise awareness, and build support for climate resilience planning.

• Monitor and report progress

  Track and report on climate-related risks and progress towards your climate resilience goals.

ESG teams play an important role in driving climate resilience within the real estate sector. With rising risks, a compliance-only approach is no longer enough.

Real estate firms must now prioritize climate change adaptation strategies to future-proof portfolios.

As a professional, developing effective climate resilience strategies, leveraging technology and data analytics, and collaborating with stakeholders can help you tailor actionable resilience roadmaps to achieve your long-term goals.

As climate risks continue to intensify, you must remain vigilant and proactive in upgrading your methods and knowledge to meet your resilience needs.

Learn more about how to identify, assess and manage the financial risks associated with climate change by downloading our whitepaper below.