Dangers of Misinformation and Climate Data Accuracy for Property Investment

• Trustworthy data is essential, as misinformation around climate risk data can lead to misguided investment decisions and increased financial risks in the property market.
• Non-compliance with climate-financial disclosure rules due to misinformation can result in asset mispricing and legal consequences.
• Political bias around climate risk management can fuel disbelief in science-based evidence, leading to distorted decisions around adaptation strategies.
• Effective climate resilience depends on coordinated efforts among stakeholders.

Climate change poses increasingly urgent threats to the U.S. property market, which is still largely unprepared.

Adding to this concern, misinformation can become a key obstacle in adapting effectively in a long run, if left unaddressed. The challenge is not just about identifying climate risks but also about ensuring that accurate information drives decision-making processes.

Digesting inaccurate or misleading information can distort perceptions of risk, leading to poorly developed investment strategies and misguided policy responses.

Additionally, miscommunication about regulatory changes or adaptation strategies can hinder collaborative efforts and delay necessary actions.

In this context, it is crucial to recognise and address the dangers of misinformation. This article looks at four ways it hinders climate adaptation.

At Climate X, we could never emphasise enough how accurate climate risk assessment is critical for developing robust adaptation strategies, particularly within the property market where assets are directly exposed to unpredictable events and their occurrence and severity.

However, misinformation can create ripple effects throughout the property market.

Flawed climate models and data inaccuracies can result in either underestimations or overestimations of climate risks. In 2021 for example, Morgan Stanley’s analysis of climate-related risks in their real estate portfolio showed varying results from different data providers.

Some properties were identified as high-risk by one provider but not by others, indicating inconsistencies in climate risk data. This variability can lead to misinformed investment decisions, where capital is allocated to properties that may not be resilient to future climate impacts.

The analysis also revealed that 30% of the properties in their portfolio were classified as high-risk by at least one data provider. Reliance on outdated or incorrect data might cause property developers to build in high-risk areas prone to flooding or other climate-related hazards.

This not only exposes property owners to significant financial losses but also raises safety concerns.

The implications extend to the insurance industry as well. Insurers rely on precise risk assessments to set premiums and coverage levels. When data is inaccurate, insurance products may be mispriced—either becoming prohibitively expensive for property owners or failing to provide adequate coverage.

Such misalignments can lead to a rise in claims and potential financial instability for insurers, compounding the overall risk in the property market.

Morgan Stanley’s analysis also shows that data providers are essential to stakeholders’ data needs.

However, the institution states that investors need confidence in climate risk data, but differing methodologies among providers can lead to misinterpretation if not thoroughly understood.

The firm’s findings echo academic concerns; they equally highlight the need for transparent data collaboration with external vendors and improved industry-wide harmonisation.

In that sense, Climate X offers advanced solutions with Spectra and Adapt.

These solutions mitigate issues of poor modelling and data inaccuracies by providing instant access to real-time climate risk data at asset level, customisable risk assessments, and comprehensive adaptation measures based on high-end climate modelling.

As far as trustworthiness is concerned, our workflow solutions promote data transparency with downloadable reports and speed up transaction closures with on-demand adaptation data and return of investment (ROI) calculations.

The standardised approach embedded in this tool can be leveraged on to harmonise methodologies across the industry, ensuring consistent and reliable risk assessments, and in turn helps property developers, investors, and other stakeholders make informed decisions and build asset resilience efficiently.

Transparency in climate-related financial disclosures is vital for informed decision-making by investors, insurers, and other stakeholders.

Misinformation can result in non-compliance with disclosure rules, obscuring the true extent of climate risks and leading to mispriced assets.

With the Securities and Exchange Commission’s (SEC) Climate Disclosure rules in place, if a mandated real estate company fails to disclose crucial information such as flooding and at-risk locations, investors might overvalue the asset, facing significant financial losses when these risks become evident.

Banks might also issue mortgages without fully understanding climate risks, increasing the likelihood of defaults and subsequent financial losses. Non-compliance could also result in penalties and legal actions from regulatory bodies.

This affects the company's financial standing, reputation and trustworthiness in the market, leading to reduced investment and higher costs of capital.

Insurers, banks, and investors play pivotal roles in shaping the property market's resilience to climate risks. Misinformation can, therefore, lead to suboptimal decision-making by these entities.

Insurers might set premiums too low, failing to cover the actual risk, or too high, making insurance unaffordable for property owners.

Insurers are adjusting their models to account for these risks, but without accurate data, these adjustments might be insufficient or overly cautious, affecting insurance affordability and availability.

This is exemplified by the recent premium rises in California, where The California Department of Insurance has authorised a 34% rate increase for Allstate homeowners’ insurance, impacting more than 350,000 policyholders, as part of a trend of significant premium hikes – including a 30% increase sought by State Farm.

Banks may issue mortgages without adequately accounting for climate risks, leading to higher default rates and financial instability. For instance, if a bank underestimates the flood risk in a region, it might approve loans for properties that are later damaged by unforeseen floods, causing borrowers to default on their payments.

This not only jeopardises the bank's financial health but also exacerbates the vulnerability of the housing market to climate change. A 2021 study by the Stockholm School of Economics discovered that banks with substantial mortgage exposure in flood-affected areas experience lower profits and capital ratios afterwards.

However, the study notes that smaller banks with significant vulnerability to flood risk perform negatively by only up to 2.6% per annum – implying that flood hazards are underpriced.

Additionally, this underperformance persists despite accounting for climate-related impacts and investor climate concerns. The latter could misallocate capital if they are unaware of the full extent of climate risks, investing in properties that might lose value due to the increasing frequency of extreme weather events.

Therefore, the lack of accurate, granular data on climate risks can result in systemic mispricing of assets, ultimately destabilising the broader financial system.

Climate risk management can become highly politicised, leading to biased and opaque decision-making processes.

Misinformation exacerbates these issues, as political agendas may overshadow scientific data and expert recommendations. This politicisation can hinder the implementation of effective adaptation measures, leaving communities and properties more vulnerable to climate impacts.

For example, political divisions can result in inconsistent climate policies across states, creating confusion and uncertainty for property lenders, developers and investors.

The SEC climate disclosure rules were challenged recently by 35 Republican lawmakers.

Despite their efforts, Illinois and New York decided to advance state-level mandates, following California's lead on new legislation supporting the introduction of the Scope 3 emissions disclosure requirement—disclosing indirect emissions from activities affecting a company’s value chain.

Overall, if one state enforces rigorous regulations to understand and mitigate climate risks effectively while a neighbouring state does not, the lack of uniformity can undermine the entire resilience effort and lead to disparities in property market stability.

Effective climate resilience requires coordinated efforts among various stakeholders, including government agencies, private sector entities, and community organisations.

Misinformation can erode trust and cooperation among these groups, leading to fragmented and ineffective adaptation strategies.

To safeguard investments and ensure the resilience of the property market, it is imperative for all stakeholders to prioritise accurate information and adopt transparent, science-based adaptation strategies.