CRE’s ESG Retreat Masks Growing Spending On Climate Risk

Although the days of corporate pushes for environmental, social and corporate governance-based investing have waned, climate risk data is an increasingly hot commodity for commercial real estate. 

Developers and investors alike are building or buying their own predictive, physics‑based models as insurers raise premiums, federal climate data pipelines shrink and extreme weather losses mount. 

“Climate risk is moving from a secondary ESG consideration to a core underwriting input,” said Jeremy Porter, chief economist at First Street, a nonprofit that provides climate risk modeling for assets involving incidents such as floods, heat and severe storms. “Once that shift happens, every investor, lender and insurer needs the analytics, and the market compounds from there.”

The climate risk assessment industry, which includes a few hundred firms, is poised to double to roughly $13B in value by 2030, according to Boston Consulting. 

CRE investment in these products has ramped up, with BlackRock acquiring a climate scenario model from Baringa Partners in 2021 for an undisclosed sum and CBRE and JLL announcing climate science partnerships in the past two years.

MSCI, a leading provider of market data for CRE, just purchased First Street, a deal reportedly worth $120M. MSCI in particular is focused on supply chain intelligence, which carries substantial weight for firms looking at financial exposure and resiliency. 

“The near-term story is the pricing gap,” Porter said. “Markets that look identical on power, connectivity and demand fundamentals diverge sharply once climate is priced in, and most underwriting hasn’t caught up. That gap is both the downside risk and the commercial opportunity, and it’s why this stops being a niche product and becomes core infrastructure for the sector.”

Part of the bet is that the information these firms provide offers better insight and can inform insurance pricing, which can directly impact underwriting, and will become more and more central to how commercial real estate evaluates deals.

“Real estate investors are now mostly including it in their process, which is a big deal,” said Joseph Sumberg, head of real estate at Galvanize. “That never used to be the case. But I think in the last three years, people have come to the realization that the information the industry has been relying upon is inadequate.”

The shifting federal landscape around climate data and disclosure in the United States is also driving investors to seek other forms of information. The Trump administration has acted to restrict or even pause climate science and research coming from the federal government, erasing online data portals and stopping collection of some climate data. 

Efforts to create broad-based climate risk disclosures via a Securities and Exchange Commission reporting rule were reversed, with a public hearing period around the rescission ending Aug. 3. Advocates for the rule argued that it could aid investors with additional property-level information. An effort to enact similar requirements in California is still in the works. 

“We are no longer going to collect climate data, and it’s sort of asinine, because it isn’t as if it stops the harm,” said Danielle Fugere, president and chief counsel of As You Sow, a shareholder advocacy group focused on climate issues. “We just know less about it. And that’s why people are now starting to say, ‘OK, we’ve got to go buy the data.’”

About 55% of companies are severely exposed to physical risk hazards, 89% of assets face multiple overlapping hazards, and business interruption risk is 14 times larger than asset damage risk, MSCI found in a recent report that looked at half a million physical assets owned by 11,000 companies.

“Sure, there is obviously some pushback on sustainability and ESG,” said Steve Bullock, MSCI’s managing director and head of geospatial intelligence. “But the financial implications of these hazards and the cost of the protection gap from an insurance perspective are very large.” 

Galvanize, which closed a $370M fund and owns a growing portfolio of 20 properties comprising 3.2M SF of industrial real estate, has its own in-house data technologists and analysts to evaluate deals. 

During a recent property purchase in an undisclosed location, the Galvanize team realized increased precipitation and flood risk meant a potential property would have significant stormwater issues, since drainage would direct water directly into the building’s mechanical system. But instead of scuppering the deal, Galvanize simply analyzed the cost of lofting the mechanical systems and determined the project still penciled out. 

The real value of this data will be in identifying opportunities instead of simply vulnerabilities to be avoided, Sumberg said. For instance, by analyzing physical climate pressures and determining that one market will see increased insurance costs and population decline, while another market will see the opposite, these models can help inform investment decisions and boost the value of portfolio assets. 

Part of the challenge going forward will be not just getting the right and best data but knowing how to act on it and making “granular” decisions based on the data, Sumberg said. 

“The challenge with the forecasting or risk assessment market is the variability in the data and the analysis,” JLL Vice President and Climate and Decarbonization Practice co-Lead Janika McFeely said. “The biggest challenge we find with clients is interpreting the data into actionable insights and actions. The market is really at the place of trying to figure out how to use the information effectively.”

Contemporary climate modeling is evolving, both due to new technologies and the realization that a once-stable climate is becoming more and more erratic. Traditional modeling and evaluation of risk looked backward, evaluating the historical record to calculate risks and insurance costs.

Increasingly, there are newer models that, often with the aid of artificial intelligence, try to predict what will happen in the future by looking at the changing physics and climate scenarios brought on by global warming.

They may look at things like increased fuel loads, shifting wind patterns, longer periods of drought and even improved firefighting tactics to better pinpoint wildfire risks, or run thousands of future models of hurricanes to map where risk areas for these storms are shifting in coming decades. 

Advocates argue that these newer models offer a more realistic evaluation in an uncertain time. Better satellite data will offer more insight into individual properties and their resilience. Evolving weather models will provide better ways to gauge potential storm damage. 

But, according to Dan Preston, co-founder and CEO of Stand, one of the climate modeling firms that work with real estate, the challenge remains that actuarial science needs a firm track record. 

“You need to convince an insurance company that your model is right,” he said. “The only way to test that model is to wait until events happen, right? It’s really hard to get that proof because you need to wait like five or 10 years to get enough evidence.”