Investors everywhere are facing the reality and urgency of climate change. Our experts discuss where they’re seeing the most material effects across public and private markets today—and what they’re anticipating going forward.
Pell George: Climate change will likely play an increasingly prominent role in investment processes for years to come. Maureen, where are you seeing the greatest effects across real estate markets in terms of demand and pricing?
Maureen Joyce: As concerns surrounding COVID and its knock-on effects have started to wane, climate change has definitely returned to the forefront. In our view, the most immediate impact in the real estate market will be on the demand side, as investors start to redline certain areas they believe are more susceptible to climate change. I think we’ll see a greater impact on pricing when investors begin to price in the additional capital costs of renovating buildings to make them more resilient to either physical hazards or costs related to increased regulation. As regulations are enacted, the capital costs of meeting them—or the fines associated with not meeting them—will have to be included in the underwriting and prices of assets. On the flip side, however, I think we’ll start to see premium pricing for the most energy-efficient or water-efficient assets that have been built or renovated to be more resilient to climate change.
Pell George: Building on the regulatory component Maureen mentioned, Ashwinder—are you seeing anything similar with the financial institutions? Are certain assets essentially becoming uninvestible?
Ashwinder Bakhshi: The regulatory component is definitely on the radar, and it has really started with coal—many banks and asset managers no longer want to finance coal mines or thermal-powered power plants. This has forced the market and regulators to focus on the other legacy exposures that sit on bank balance sheets. The ECB conducted stress tests in 2021 that suggested roughly half of European bank balance sheets are exposed to climate related physical or transition risks. The Basel Committee and Financial Stability Board are trying to convince national regulators that climate change is a risk to financial stability. This will encourage banks to improve their physical and transition risk related disclosures and incorporate climate stress testing scenarios into their risk management processes. Ultimately, the banking sector’s ability (or inability) to make these improvements, and to meet both short and long-term goals, will have an impact on their fixed income and equity valuations.