The effects of climate change are a megatrend on a global scale, influencing the expected risk-return profile of real assets investments and the opportunity set for investors. The increasing frequency and severity of physical climate hazards, as well as nature loss resulting from changing ecosystems requires new ways of thinking about financial risk and return in real assets investments.

As addressing these challenges becomes increasingly important, a growing set of real asset investment opportunities are appearing, designed to mitigate and even begin to reverse climate impacts and nature loss.

Climate and risk-return profile

Climate hazards and nature loss can have direct material impact on real assets investments, and its effects can extend to the broader value chains to impact markets worldwide. In some cases, asset values and income returns from real estate, infrastructure and natural capital investments can fall. In other cases, real asset investment performance will benefit from changing climatic conditions and opportunities to combat nature loss.

Understanding the potential financial risk of climate impacts and nature loss will be critical to individual investment selection, portfolio design and diversification to achieve long-term performance objectives.

Unlike purely financial investments, investing in real assets involves owning and, in some cases, operating a physical asset in a specific location. The investment location determines the asset's climate impacts risk profile. Exposure to hazards such as drought, extreme heat, hurricanes, floods and wildfires as well as economic dependencies on nature and exposure to risks related to nature loss will vary by location.

As financial losses attributed to climate hazards rise (Figure 1), quantitative tools capable of estimating potential ramifications to real asset investments are quickly evolving, enabled by advances in technology and data availability.

The costs of climate hazards are increasing in some areas, however, in low-risk geographies and sectors we expect a rising demand for real assets over time. Climate-resilient asset values may appreciate relative to similar assets in higher-risk geographies for climate impacts because of this. These climate-resilient assets may further benefit from attractive pricing and income returns in the presence of broader climate-induced market volatility.

Quantitative tools are evolving to estimate individual asset- and portfolio-level exposure to physical climate risks and dependencies on nature. Incorporating these metrics into standard financial frameworks will allow real asset investors to design investment portfolios that can optimize climate and nature risk-adjusted returns.

Expanding real asset opportunities to address climate impacts and nature loss

As the expected economic, environmental and social costs of climate change rise, policy together with public and private investment is needed to build in resiliency to climate hazards and halt and reverse nature loss.

Recognizing the urgent societal need to address these challenges, there is an expanding set of solutions-oriented private investment opportunities across real assets.

These opportunities create pathways for investors to contribute to solutions that mitigate and even reverse climate impacts, generating climate and nature benefits as well as a positive financial return. Investments in sustainable land use, nature-based solutions and resilient infrastructure and real estate can address a wide range of climate impacts.

Natural capital

Climate impacts are already being felt in some natural capital investment geographies via changes in crop and timber yields, asset values and market conditions. These changes affect asset management and portfolio positioning to varying degrees depending on location.

In the near-term, climate hazards with the greatest potential impact on the asset class include drought and wildfire in some major investment regions. As climate impacts are expected to intensify over time, a globally diversified natural capital portfolio will be critical to reduce risk and maintain long-term performance.

Climate impacts are also creating opportunities for investors. It is estimated $210 billion of private investment will be needed annually in forestry and agricultural systems to limit climate change to 1.5°C, protect 30% of land and sea by 2030 and reach land degradation neutrality by 2030.¹

Investments in sustainable timberland and farmland that protects, improves and restores nature can generate measurable climate and nature benefits, helping to achieve related targets alongside positive financial returns.

Many of these strategies include management practices for agricultural crops and commercial timber alongside management for carbon, biodiversity or stream and wetland restoration. And in the long-run, this broader ecosystem focused approach to management will result in assets that are more resilient to climate risks like drought and extreme precipitation. There are also opportunities for investments in land-based assets where carbon or ecological restoration credit sales, for example, are the primary drivers of return and asset level management.

Environmental markets are helping make many of these strategies more attractive and scale their positive impact on climate and nature. Environmental markets that put a price on carbon sequestration and storage, or nature protection and restoration, create incentives to change management practices in a way that increases carbon in trees and soil, as well as improves, not diminishes, biodiversity.

To quantify the climate and nature benefits of these changes, there are established crediting standards and mechanisms for monitoring, reporting and independent verification. As environmental markets expand and develop, opportunities to incorporate climate and nature benefits into natural capital investments will continue to grow.

Real estate

Climate impacts on commercial real estate properties span direct and indirect financial risks. Examples of emerging climate-related financial risks are outlined in Figure 3, though the risk profile for individual assets or portfolios vary by location and sector.

As climate impacts become more evident and owners and buyers become more sophisticated in climate risk analysis, we expect resilient properties will attract valuation premiums and at-risk properties will transact at a discount. Beyond short-term financial risks related to climate hazards, full consideration of future risk will be critical to avoid acquiring or holding stranded assets due to a smaller number of buyers and protecting long-term performance.

The landscape scale of climate impacts requires that climate risk analysis extends beyond individual real estate assets and encompasses a broader market view. For example, while a property may have features in place to reduce risks, the surrounding community may not be as resilient to climatic events, experiencing continuity and stability challenges as a consequence. One U.S. study identified lower real estate sales volumes in high-risk areas compared to low-risk areas.²

As regions face increasing climate risks and events, there may be shifts in perception and demand for real estate in local markets. A major research analysis in 2023 for the U.S. revealed that 3.2 million people have already fled neighborhoods due to high flood risk between 2000-2020, and this trend is expected to continue over the next 30 years.³

These migration predictions attempt to capture where populations may shift from unprotected to more resilient real estate markets. Climate-resilient regions and markets create opportunities for investment in accessible, affordable and resilient housing and across sectors for growing populations. Secondary or tertiary markets facing muted climate risks may become the next frontier for real estate investment.

Responsible management and green development strategies can mitigate climate risks and may enhance property values. Protecting or expanding tree cover and vegetation, for example, can significantly reduce heat stress felt by the occupants and work to decrease urban heat extremes, in addition to enhancing measures of well-being.

Risks attached to a rising sea level are also a focus for these strategies. As investment and development strategy adjust for higher sea levels, over time this preserves and protects coastlines, which in turn, can soften the destructive impact of severe storms and storm surge to the built environment.

Infrastructure

The infrastructure investment landscape has shifted considerably in recent years and as climate impacts intensify, identifying and managing both evolving risks and emerging opportunities is critical now more than ever. Increasing frequency and severity of climate hazards has the potential to damage physical infrastructure or impede key functions. This can lead to higher maintenance expenses, insurance premiums and financing costs.

Similar to real estate and natural capital, geographic and market diversification is essential to mitigate localized climate risks and develop portfolio resilience.

Public sector support for building climate-resilient communities, technological advances, increasing corporate commitments and sustainable investment mandates are creating new opportunities for infrastructure investments. Adapting and upgrading existing infrastructure, in some cases in partnership with the public sector on large-scale projects, has potential to improve the resiliency of the infrastructure investment itself and can benefit whole communities. Many transportation and water systems were not built to withstand extreme rainfall or severe storms without suffering major damage, closures or loss of service. Evidence is growing which suggests infrastructure investments, when combined with active asset management, can be designed to withstand extreme climate hazards, which reduces repair and reconstruction costs, improves long-term viability and ultimately benefits communities, particularly at times when emergency services and disaster relief are most needed.

Clean energy projects, such as wind and solar, are vulnerable to climate hazards. Addressing and managing potential risks to these is critical to avoiding related damage to panels and turbines that could affect investment performance. For example, locating renewable wind farms in areas likely to experience extreme wind events risks physical damage, but by selecting the appropriate type of technology, turbines can withstand these extreme conditions. High wind operation control (HWOC) is a critical feature in modern wind turbines that can increase the normal shutdown wind speed of 25m/s to almost 32m/s while reducing power output. Utilizing this technology optimizes turbine performance and safety during high wind conditions, ensuring the turbine continues to operate efficiently while minimizing the risk of damage.

Reacting to climate events creates opportunities across real assets

Addressing the rate and severity of climate events is likely to be an ongoing priority of governments and companies. Advancements in technology are paving the way for new opportunities across real estate, infrastructure and natural capital, from measuring the potential impact of climate events, to improving clean energy equipment and using datapoints to identify optimal asset locations.

As solutions to climate events become more achievable, private investment will play an integral role in reducing and reversing the impacts of climate change. Progress in technology has helped develop environmental markets and responsible investing strategies, highlighting the far-reaching opportunities climate-related solutions will provide investors for the long term, and how positive environmental goals can be reached alongside financial returns.

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