Organisation details:
Name: CBRE Investment Management
Signatory type: Investment manager
HQ country: US
AUM: US$146.2 billion
Covered in this case study:
Asset class(es): Real estate
Geography: Global
CBRE Investment Management embraces a proactive approach to managing climate risk, not merely as a matter of compliance, but also as a strategic imperative to create long-term value for our investors. We understand that the health of our planet, society and economy are inextricably linked.
Why we assess physical climate risk in our diversified European core fund
As stewards of capital, we have a fiduciary duty to safeguard the long-term value of our investments and deliver sustainable returns to our clients. By integrating physical and transition climate risk into our investment processes and decision-making frameworks, we fortify our resilience against climate events, systemic shocks, regulatory shifts and market disruptions. We believe that our approach is essential to mitigate risk, create value and help preserve our planet for future generations.
There are two types of physical climate risk: 1) chronic, long-term shifts in climate patterns and 2) acute, more sudden or extreme events. Both chronic and acute risks can impact asset values, hinder business operations, impede asset financing and increase the cost of insurance. By building resilience to physical climate risk hazards such as flooding, extreme wind and heat stress through climate adaptation measures, we can help maintain our assets’ usability and long-term value.
How we assess physical climate risks
Our approach begins with a desk-based screening to identify potential high-risk assets, using a physical risk assessment tool. We then conduct a more thorough analysis on the potential higher-risk assets to better understand asset performance as it relates to physical risk and resiliency. If the asset does not have resiliency measures in place, we typically hire outside experts to help them determine appropriate risk mitigation measures and prepare a mitigation plan, including details of the required operational and capital expenditures.
To aid in the initial evaluation process, when applicable, we previously used Moody’s Climate Solutions’ ‘Climate on Demand’ tool. to evaluate scenarios of climate hazards, such as floods, heat stress, hurricanes and typhoons, water stress including drought, wildfires and sea-level rise, including storm surges. We typically use Representative Concentration Pathways (RCP) 4.5 and 8.5 for moderate and high emissions scenarios respectively. The tool provides a high-level indication of the potential risk exposure for any location globally. If an asset’s location is identified as high or critical risk, further on-site investigations by a consultant may be conducted to assess if mitigation or adaptation measures are already in place or what appropriate measures need to be included in the asset’s business plan to reduce the risk.
At the property level, we may engage with property managers, building engineers and occupiers to monitor and address climate-related factors that may pose risks, such as flooding or heat exposure, or provide opportunities through sharing best practices.
We report about the climate risk of our direct real estate portfolios in our annual climate report. Individual funds and portfolios may report on physical risk in their webcasts or at annual meetings.
How we chose a tool provider
We continually evaluate physical assessment tools and change what we use based on the evolution of the industry and our specific needs.
In collaboration with our parent company CBRE Group, Inc. we conducted an extensive process, beginning in early 2024, to evaluate over a dozen providers of climate risk tools and services. Our review considered issues such as, but not limited to, the breadth of hazards modelled, geographical reach, openness of methodology, usability of the tool and the specific outputs for decision-making.
As a result, we decided to change to Climate X in October 2024, which we believe will provide us with an even greater understanding of our physical climate risk and better help us meet new reporting standards and frameworks. The new tool will:
- provide global coverage, higher resolution and wider coverage of hazards impacting real estate;
- better align with regulation frameworks, particularly in Europe;
- help us understand the financial impact of physical-risk-related expected losses;
- provide a wider scope of scenario modeling to give insights across market expectations and the latest climate science;
- be able to factor in regional/direct asset mitigation measures.
We will also be able to evaluate short-, medium- and long-term risk and take timely and tailored action across our different strategies throughout the investment cycle.
Example: Assessing water, heat and flooding risks in the portfolio
For our European core fund, we conduct an annual high-level physical risk assessment of the portfolio using Climate on Demand. In 2022, the tool identified potential water risk, heat stress and flooding in certain assets in the portfolio. For water risk, smart water meters were installed to determine water usage to better manage consumption and identify water leaks.
Certain logistics assets in Spain were determined to have high vulnerability to heat stress. A consultant we engaged proposed creating more shade through tree canopies as a solution to mitigate the risk exposure and enhance the value of the asset. The costs to implement the recommended solution were included in the business plans for the assets and will be executed based on the proposed timelines.
Since flooding risk was more pervasive among our assets, we hired a consultant to conduct a more thorough analysis. The first step was a high-level screening of the portfolio for potential exposure to flooding. Five assets with potential high exposure to flooding underwent a more detailed assessment using local data sets versus the European data sets used during the initial screening. Local data sets are more granular (e.g., higher resolution) and often more accurate. The local data showed that the flooding risk was low to non-existent for the five assets; therefore, no additional mitigation measures were required, highlighting the value of conducting a more detailed analysis.
