Global weather-related disasters cost a record $344 billion in 2017, including $212 billion in uninsured losses. This new high-water mark reflects a combination of social and environmental factors that put more people and property at risk. Property investors are particularly exposed to these issues, as the value of long-term, illiquid assets is intrinsically linked to their location and geographic circumstances.
High-profile shocks have helped raise awareness among investors, and new tools have given companies guidance on how to assess and communicate risks. In 2017, the Financial Stability Board’s Task Force for Climate-related Financial Disclosure (TCFD) provided recommendations for resilience-related reporting, motivating GRESB to add a Resilience Module to its Real Estate Assessment. The module adds eight new resilience-related indicators. In its first year, 121 property companies reported on these indicators, providing a snapshot of management action in North America, Europe, Asia and Australia/New Zealand.
Responses can be summarized across four broad categories: governance, risk management, business strategy and performance metrics. The governance of resilience starts with leadership: 90 percent of module participants have a specific senior employee with responsibility for resilience. These leaders are often charged with conducting or co-ordinating asset- or organizational-level risk assessments. More than 84 percent of entities report periodically evaluating the vulnerability of assets and 85 percent assess overall business operations. More than 80 percent described business objectives and have taken specific actions to mitigate risks and increase resilience.
Responses to individual indicators are important. However, effective management requires co-ordination of these elements simultaneously. Analysis across indicators shows significant differences between respondents. The top quartile of respondents report an average of 81 percent of resilience elements. The bottom quartile report an average of 22 percent of elements with high variance among responses. This suggests that many resilience-related practices are widespread, but there is significant variation across the market, even in this self-selected group of GRESB participants.
Good progress, but more needed
Property companies are beginning to pay attention to resilience. Most respondents have established clear internal leadership; conducted social and environmental risk assessments; begun implementing strategies during development, operations and acquisition; and some are collecting data about shocks, stressors, impacts and near-miss events.
The quality and impact of these actions remain impossible to evaluate. An analyst can see that these management systems and actions exist, but it is not yet possible to evaluate if they work as intended. This situation will change as disclosure about resilience-related management and practice is combined with outcome measures, such as loss rates, asset value and operating income.
These efforts are not surprising given rising interest from institutional investors. Moving forward, market participants can expect even greater focus on resilience from investors, government and tenants. Some companies are already turning this interest into competitive advantage by offering resilience as an amenity at certain properties, such as advertising features like back-up power or flood-resistant designs. Other companies are conducting comprehensive risk assessments and applying this information to inform plans for capital investment and operations.
The results also show that resilience-related practices vary significantly between property companies. This means investors need to ask more questions about how their investments are identifying potential risks and integrating these considerations into business strategies. Over time, the focus of this engagement is likely to shift from qualitative statements toward more objective and quantitative measurements. Over the next several years, this is likely to include greater applications of geospatial risk models and the use of third-party certifications and ratings. The GRESB Resilience Module and core assessments will evolve to drive and support these important steps to protect shareholder value.