Weekly Newsletter Feb 22, 202122 Feb 2021
10 Trends for 2021
#8 Risky business
The COVID-19 pandemic may have knocked climate change out of the headlines in 2020, but it has highlighted the need for companies to focus more explicitly on risk management. Don’t forget, the year started with Larry Fink telling Blackrock’s clients that sustainability should be the new standard for investing because: “the investment risks presented by climate change are set to accelerate a significant reallocation of capital.” Understanding and mitigating climate change impacts continues to rise up the corporate agenda, and there are signs of a step change in the private sector’s attitude to carbon reduction. While the short-term focus may be on managing the immediate impacts of the virus, the two issues of health and the environment aren’t mutually exclusive and ’green stimulus' measures are being proposed to promote both economic and environmental repair. The pandemic also serves as a stark reminder that the complex supply chains and business relationships that underpin the global economy are vulnerable to any kind of external shock. Climate risks and carbon reduction can significantly alter the way goods and services are produced and delivered as organizations adjust their procurement strategies and embrace the circular economy. The U.K. Government now requires suppliers to show how they can help “fight climate change and reduce waste”. Similarly, the largest companies with huge buying power will shift the dynamics of the entire value chain. Those with the most extensive supply chains or which are most vulnerable to climate risks – like technology & telecoms, financial services and FMCG companies – are at the forefront of this movement. There are signs of change across sectors everywhere and the potential impact on real estate is immense. Fashion chains H&M, M&S and Inditex are collaborating to engage their supply chains to shift them away from harmful climate practices. Processes for smelting steel and mixing cement are now using recycled content and are powered by renewable energy or recovered heat, as the construction sector puts pressure on suppliers to decarbonize.
More than 1,000 companies have now signed up to the Science Based Target initiative (SBTi) to establish a formal carbon reduction plan. Recent additions include Facebook, Amazon and Ford, joining a list that reads like a Who’s Who of household names. The process requires participants to target their Scope 3 or 'indirect emissions’ where these represent over 40% of the company’s carbon footprint. These include emissions arising from business travel, the activities of their supply chain and embodied carbon in the products and materials used by the organization – including any buildings it occupies in the future. A growing number of companies are aligning with the requirements of the Taskforce on Climate-related Financial Disclosures (TCFD), which will be mandatory for large companies in the UK by 2025. This marks a movement toward appraising climate risks and opportunities, and shines a light on inherent risks in the value chain. Participants from the Dow 30 scored higher than any of the other indices evaluated in a comprehensive study of climate change policies and actions. The number of FTSE 100 companies that have pledged to move to Net Zero Carbon increased by a third in 2020, with more than 80% of the Index now assessing and disclosing their climate risks. The trend toward greater private sector engagement around climate change risks will be a driver of changing behavior. As warned by the former Governor of the Bank of England, “unless we act now, the climate crisis will be tomorrow’s central scenario and, unlike COVID-19, no one will be able to self-isolate from it.”
Climate risks have obvious implications for those invested into, or occupying, real estate. Beyond the need to decarbonize, climate-related events ¬¬¬¬– droughts, storm damage, floods and overheating – are now recognized worldwide as being among the most significant business risks. During 2019, 40 individual weather disasters were recorded that caused damage exceeding $1 billion - each100. The extensive wildfires in the western United States in 2020 have been among the most severe on record. Insurance premiums have soared in areas newly recognized as subject to climate risks, paralleling corporate re-evaluations of business continuity and location strategies. Real estate investors are taking note. The private sector is now aligning behind government efforts to address climate change through a green recovery. Discussion around the implications of Scope 3 emissions and alignment with TCFD may not have the media appeal of a Greta Thunberg youth protest, but money talks. If the money in question is the $7 trillion behind the world’s largest asset manager, it’s probably worth listening.
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