Summary
An asset management firm faced the challenge of assessing and mitigating the long-term Physical risk posed by climate change to their real estate investment portfolio. They use a vendor-based model that provides risk estimates for a set of climate hazards. To ensure that the model is doing its job to adequately prevent investments in risky deals and ensure risk is appropriately mitigated, Evalueserve provided a thorough validation of the model.
The Challenge
The increasing frequency and intensity of climate-related events pose a substantial risk to real estate investments. However, integrating climate risk assessment into investment evaluation processes is complex due to the reliance on non-financial factors and the lack of standardized methodologies. Recognizing the potential impact of climate-related events on investment returns, especially in real estate, the asset manager incorporated ascreening process based on environmental factors into their due diligence using a vendor-based model. The challenge was to ensure robust validation of the model.
Our Solution
Evalueserve provided a full validation of the model encompassing a thorough technical assessment of the methodologies used for measuring risk of each climate hazard. The validation compared the methodologies with existing scientific research, industry standards, and alternative methods. Evalueserve also performed an in-depth review of the processing components of the models and an evaluation of the implementation by replication, sensitivity analysis and stress testing
Business Impact
By integrating the Physical climate risk screening process, the asset management firm proactively addresses a critical and often overlooked risk factor in real estate investments. This approach helps safeguard their investments against potential losses stemming from climate-related events. With Evalueserve’s validation, the firm can be confident that the vendor-based model will accurately help them identify vulnerable properties and make informed decisions on whether to proceed with investments. As a result, they are better positioned to optimize their portfolio's resilience, enhance long-term financial performance, and align with growing ESG-focused investor expectations.
Conclusion
The integration of an ESG-driven climate risk assessment process into real estate investment due diligence demonstrates the asset management firm's commitment to managing long-term Physical climate risk. By validating the vendor-based model with a combination of scientific research, industry standards, and sensitivity analyses, the firm ensures the robustness of their risk assessment approach. As climate change continues to pose increasing risks, this approach sets a precedent for the industry, showcasing the potential to harmonize financial objectives with responsible investing that considers broader environmental impacts.