The global business disruptions of 2020 have made one thing certain: Pandemics and climate change know no borders.
For years, we have enjoyed the benefits of an increasingly interconnected and more global world. But if the COVID-19 pandemic and climate-related weather events have shown us anything in 2020, it’s that our interconnectedness also has some drawbacks. A tsunami in Japan has repercussions for the automotive market in America. A drought in Australia can influence food prices around the world.
Leading building managers and real estate investors have realized that ESG data may be the single most vital tool to help firms mitigate uncertainty and build resilience to unforeseen crises. And the ability to digitize this data for faster, more accurate decision-making is increasingly becoming a leading indicator of a real estate company’s success.
View your asset-level physical climate risk exposure with Measurabl
Climate Risk is Real—Especially for Real Estate
The London School of Economics estimates about $2.5 trillion global financial assets are at peril because of climate change. The Economist posits that figure could be up to as high as $4.2 trillion. Investable real estate is currently worth nearly $50 trillion around the world, and buildings consume about 40% of the world’s energy, contributing up to 30% of the world’s annual greenhouse emissions, according to the United Nations Environment Programme Finance Initiative.
Particularly worrying to the real estate sector is the chance of damage posed to land, buildings, and infrastructure. The physical effects of climate-related factors — heatwaves, drought, wildfires, and hurricanes — are a mounting threat, says accounting firm EY.
But it doesn’t stop there. EY says the indirect effects of these risks include resource shortages and supply chain disruption—similar to what the markets saw during the early days of the COVID-19 pandemic. Real estate owners can also lose money if they can’t get ahead of regulatory responses—carbon pricing, emission caps or subsidy withdrawals—to climate change. And should they ignore climate altogether, they leave themselves open to insurance claims or legal damages.
“The staggering scale of these potential losses has done a lot to raise awareness of climate risks in investment circles,” notes EY.
Most real estate owners understand that they need to react to environmental or weather disruptions, even without putting the “climate change” label on one particular threat or another. Market forces already encourage them to reduce operating expenses by becoming more energy efficient. At the behest of their insurance agents, they modify buildings to mitigate peril from storms and flooding. And to achieve top-of-market rents and lower vacancy rates, they already present renters with a healthier environment.
Related: What Can You Do to Prepare for Physical Climate Risks?
But many companies are still unaware of how their buildings perform from an overall sustainability perspective, which makes it difficult for them to identify potential areas of improvement.
Data Makes a Difference
This is where readily-accessible data on environmental, social, and governance (ESG) factors can help.
“Today, finding ESG data even internally is a highly manual data-collection process [for companies],” Junta Nakai, a business development manager at digital storage firm Databricks, wrote in a recent Business Insider op-ed. He explained that while companies might disclose a range of sustainability-related data — from water consumption and carbon emissions to workforce demographics — each datapoint is usually kept in a separate location and format. Nakai says this limits the usefulness of the data for anything other than creating the occasional report.
By digitizing and centralizing this data, companies can alleviate data access and quality, making it easier to feed into decision-making processes. Digital data becomes the building block that helps real estate owners protect against unforeseen crises.
Related: It’s Time for the Commercial Real Estate Industry to Digitize ESG
Once information is digitized and accessible, Nakai believes, companies can get a real-time view and understanding of their own sustainability performance.
This allows for self-correction and benchmarking, as well as improving compliance with their stated goals. And making sure the data is accessible means owners can disclose their metrics more frequently, which makes it easier to prove compliance with environmental regulations.
“To cement themselves as ESG leaders, companies must first address foundational problems of information quality (is the data accurate?), compliance (will companies adhere?), and verification (is it true?),” Nakai wrote.
Other stakeholders in the real estate ecosystem have upped their use of ESG data, as well. Both institutional and retail investors are increasingly using it as a way to differentiate investments. And the implications of this trend are highly significant for the real estate market.
Read next: What it Takes to Achieve Investment Grade ESG Data