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From Doubts to Property Gains: How U.S. Investors Are Recasting Climate Risks

  • Investors are increasingly prioritising properties with strong climate resilience to mitigate physical climate risks and secure long-term value.

  • Advanced climate data tools are crucial for assessing vulnerabilities and making informed investment decisions.

  • The profitability of climate-resilient properties is on the rise as demand for such assets grows.

The impacts of climate change are no longer distant possibilities, but current realities that are rapidly reshaping industries globally.

However, many economic sectors are still at an early stage of understanding and integrating effectively climate risk management in their business models.

Among these, the property market in the United States is facing profound challenges as investors are getting worried about financial risks associated with climate-related disruptions.

As these risks become more pronounced, U.S. investors are not only adapting but also pioneering strategies to safeguard their portfolios and capitalise on emerging opportunities.

This article highlights four pivotal ways in which U.S. investors are approaching the mounting impacts of climate change on the property market.

More Concerns around Physical Climate Risk and related Losses

Investors are increasingly aware of the direct physical threats that climate change poses to their property assets.

These threats range mainly from more frequent and severe hurricanes, wildfires, and floods to the gradual but relentless rise in sea levels and temperatures. Such events can lead to substantial damage, skyrocketing insurance costs and diminished property values that in turn create significant financial losses.

In response, investors are placing a heightened emphasis on climate resilient properties to withstand environmental changes and minimise potential losses.

The growing concern over physical climate risks is reflected in investor behaviour vis-à-vis financial institutions, with discussions shifting toward the need to effectively integrate climate risks into business mechanisms.

In the case of Wall Street, investors recently vividly called the financial hub to recognise the profound influence of climate-related risks and opportunities on business profitability, while disregarding these factors can undermine both sustainable growth and market stability.

A key factor driving this shift among investors is the escalating severity and frequency of extreme weather events, which are compelling insurers to retreat from disaster-prone regions. This withdrawal is rendering unproductive housing markets and unexpected losses in both current and future investments.

The latest findings from the Federal Reserve’s (Fed) climate scenario analysis highlight the potential for significant, unanticipated financial losses due to impacts on real estate portfolios, under orderly climate scenarios alone.

Given the idiosyncratic nature of extreme weather events, these risks are likely to become even more severe.To address these challenges, financial institutions are increasingly required to select acute physical risk hazards by type and geographical location, using reliable and relevant data.

However, the Fed remains hesitant to develop severe but plausible scenarios for future exercises, and banks are progressing slowly in acquiring data and projecting scenarios, both of which are essential to managing these risks effectively.

This is where advanced tools like Climate X’s Adapt are becoming indispensable.

The Adapt tool enables financial institutions to assess potential vulnerabilities accurately, offering investors immediate access to asset-level climate risk data and return on investment (ROI) forecasts for adaptation strategies.

By providing these insights, utilising Adapt therefore helps investors make well-informed decisions quickly, enhancing asset resilience and securing a competitive edge in the market.

Furthermore, the EDHEC Infrastructure & Private Assets Research Institute (EIPA) recently conducted an extensive survey of 70 investment industry experts – who collectively manage over $2 trillion in assets – on infrastructure asset losses from physical climate risks.

The results highlighted a significant challenge: many respondents admitted they lack effective methods for measuring climate risk. According to the study, investors could lose up to 54% in the value of “unlisted infrastructure portfolio” by 2050, and the potential financial impact due to climate risks could reach up to $600 billion by the same year.

This reinforces investors need comprehensive and reliable data to avoid substantial losses, along with effective methodologies for assessing and managing climate risks, to accurately forecast vulnerabilities and adapt their strategies accordingly.

Increased support for Climate Disclosure

Transparency around climate-related risks has become a critical demand from investors who seek to understand the full spectrum of risks and opportunities in their portfolios.

The push for more robust climate disclosure is gaining momentum, driven by the need for clear, concise and comparable information that can guide investment decisions and enhance corporate accountability.

As such, U.S. institutional investors – with $2 trillion assets under management – filed briefs to demonstrate massive support for the Securities and Exchange Commission’s (SEC) climate disclosure’s rule, in mid-August this year.

Climate disclosure is more than a compliance exercise; it is a strategic necessity. Investors are increasingly relying on these disclosures to benchmark companies, identify leaders in sustainability, and allocate capital towards businesses that are proactive in managing their environmental impact.

This trend is accelerating as regulatory bodies and industry groups work to standardise reporting frameworks, ensuring that investors have access to the data they need to evaluate climate risks accurately and support sustainable growth.

Looking at the property market, the support for SEC rules means that investors are increasingly supportive of identifying at-risk assets, limiting substantial losses in their real estate investments, and maximising returns.

A Shift toward Green Real Estate Investment

The real estate sector is experiencing a shift towards a more sustainable economy, with investors increasingly prioritising green buildings and sustainable development. This shift is driven by a confluence of factors, including regulatory changes, evolving market expectations, and the economic benefits of energy-efficient, climate-resilient properties.

On the one hand, institutional investors are leading the charge, embedding sustainability into their investment criteria to mitigate risks and enhance long-term value. High interest rates and stringent environmental regulations are prompting a re-evaluation of traditional investment strategies, with a growing preference for assets that align with sustainability goals.

A 2023 CBRE research indicates that non-compliance with these policies in certain cities, such as Boston, Denver, and New York City, could lead to a reduction in net operating income between 5.1% and 5.8%

On the other hand, private real estate investors are also recognising the value of green investments, spurred by the availability of green financing and incentives for sustainable development.

Properties that meet these criteria are becoming more attractive, as this also facilitates funding for resilience against climate risks and a competitive edge in the market. For instance, Calpers, the largest U.S. pension group, has announced earlier this year that it will invest $25 billion in private markets that are green, targeting real estate, infrastructure and private equity.

Furthermore, Peter Cashion, Calpers’ managing director for sustainable investment, supports that “those are the ones [private market assets] that have very evident climate investment opportunities”.

Withdrawal from International Commitment

While many investors are moving towards greater climate resilience and sustainability, there is a growing tension between global climate commitments and domestic investment strategies.

This tension is exemplified by the recent withdrawal of some renowned U.S. asset managers from the Climate Action 100+ initiative, a global effort to engage major greenhouse gas emitters in reducing their environmental impact.

Nonetheless, leavers have assured that they will independently continue to tackle climate issues pertinent to their investments, including those in the property market.

The decision to leave this initiative has sparked debate around the balance between fiduciary duty and long-term sustainability.

Critics such as Sasja Beslik, Chief Investment Strategy Officer at SDG Impact Japan, have questioned whether these asset managers are prioritising short-term profits over the broader goal of combating climate change.

This move could potentially undermine global climate efforts and expose asset managers to reputational risks, highlighting the complex interplay between investor responsibility, legal obligations, and the pursuit of sustainable investment strategies.

Conclusion

As climate change impacts continue to intensify, U.S. investors are increasingly forced to adapt their strategies to mitigate risks and capitalise on new opportunities, particularly in the property market.

The emphasis on resilience is not just a protective measure but also a lucrative strategy.

By investing in climate-resilient properties, investors are not only safeguarding their assets from damage and devaluation but also positioning themselves to benefit from the growing demand for properties that can endure environmental stresses.

This proactive approach – backed by data, innovative tools like Climate X’s Adapt, and a focus on transparency – enables investors to turn potential liabilities into opportunities. As the property market continues to evolve in response to these challenges, those who prioritise climate resilience will likely find themselves at the forefront of a more stable and profitable future.

Next Steps

Banks and real estate firms such as Standard Chartered, CBRE, and Virgin Money leverage our unique climate risk workflow solution, integrating Spectra’s physical risk assessments to identify risks and utilizing Adapt to uncover high-ROI adaptation measures and CapEx opportunities for mitigation planning.

Learn more today to start building resilience in your business.

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