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One Of The World’s Biggest Investors Is Preparing Its $178B Portfolio For Climate Change

Katrina Storm Surge
Hurricane Katrina Storm Surge, 2005

Dutch investment giant PGGM is undertaking a radical exercise to find out which assets and areas in its portfolio are most exposed to climate change, and using the data to shape future investment decisions, including where it buys new buildings.

PGGM owns stakes in 4,000 assets around the world with a total value of €160B ($178B). Its equity stake in that portfolio is €14B ($15.5B). With the roughly $16B of listed real estate stocks it also owns, it is the world’s 12th-largest owner of real estate, according to IPE Real Assets.

It has teamed up with insurance company Munich Re to undertake a data-driven analysis of every single one of these assets, and find out which are most at risk as a result of the climate emergency. It said it is one of the first large pension funds or sovereign wealth funds to undertake such an analysis.

“We are a long-term investor, and so we can’t just focus on volatile cyclical changes but have to look at long-term trends like technological change, urbanisation, demographics and of course climate change,” PGGM Senior Director and Strategist for Private Real Estate Maarten Jennen told Bisnow. “Acknowledging possible climate change is one thing but doesn’t improve our portfolio. We need to incorporate it into the way we look at our portfolio, and understand exactly the impact for each asset.”

PGGM used data provided by PropTech company GeoPhy, in which it owns a stake, to provide a precise geolocation for each of the assets in its portfolio. It combined this with data from Munich Re about the potential for this exact location to be affected by extreme weather events that could cause damage to property and which will be exacerbated by climate change, like floods, storms and hurricanes, wildfires and tornadoes.

Jennen said PGGM was able to go beyond broad brush analyses on which areas are most at risk, and identify the risk for individual assets.

“It isn’t just about broad brush thinking like Florida, Tokyo or The Netherlands, that is an area with risks, but also understanding that not every asset in these areas has the same type and level of risk,” he said.

In a paper on the analysis, PGGM said Japan is the riskiest location at a country level in its portfolio, but the five cities with the highest concentration of risk are all in the U.S.: Marrero, Louisiana; Savannah, Georgia; Palm Harbour, Florida; Metairie, Louisiana; and Newark, New Jersey. All had a very high risk of storm surge, all except Palm Harbour had a high risk of river flooding and all except Savannah had a high risk of tornadoes.

Miami flood, king tide
A flood in South Beach, Miami

At the individual property level, four out of the top five assets with the highest risk are in Miami, as these properties are particularly exposed to river flood, storm surge, tornado and tropical cyclone risk, PGGM said.

Jennen said the analysis is helping the company identify areas of risk concentration in its portfolio, which can help it defend against the impact of climate change for individual assets, working in tandem with the roughly 60 external companies and joint venture partners that manage its assets. 

“How many assets have we sold so far because of this information, zero,” Jennen said. “But it is something we need to take into account and discuss with our managers. If you have a manager that accounts for 2% of our portfolio but 8% of our risk related to sea level rise for instance, then you need to have a conversation with them about whether we need to sell assets, or take measures to combat the risk. It will have implications for the structure of the portfolio.”

He said the company will incorporate the data into future investment decisions alongside more conventional considerations. 

“It will start to have an impact on where we will be investing, and also it will form part of our investment due diligence, and these metrics will be taken into account,” he said. As well as things like asset quality and where we are in the cycle, it will be one of the types of analytics we use when underwriting deals.”

PGGM has also teamed up with two other giant investors, fellow Dutch pension fund APG and Norwegian sovereign wealth fund Norges Bank Investment Management, to fund an extension to the European Union’s Carbon Risk Real Estate Monitor project. This analyses the carbon footprint of individual real estate sectors and markets, and provides advice on how owners can reduce the carbon output of their portfolios to hit climate targets. The three investors have provided funding to extend the project beyond Europe to Asia Pacific and the Americas.

“We expect governments to step up regulatory efforts in order to get real estate to reduce its carbon footprint, in order to reach Paris Agreement goals," PGGM Senior Director for Private Real Estate Mathieu Elshout said. "[CREEM research] enables us to determine with greater accuracy the pathway that each asset will have to take to meet those goals, and therefore the risk for certain assets.”