Physical risk framework - Understanding the impacts of climate change on real estate lending and investment portfolios

Mark Westcott, John Ward, Swenja Surminski, Paul Sayers, David N. Bresch

The world is currently on track to see substantial climate change throughout the 21st century. As well as bringing higher temperatures, changes in precipitation and a range of other impacts, climate change will also influence the likelihood and intensity of extreme weather events. Collectively, these ‘physical risks’ threaten the interests of investors and lenders, especially those with interests in real estate and infrastructure assets. This report shows how outputs from climate models can be used by investors and lenders in combination with natural catastrophe risk models to assess physical risks of climate change in different scenarios. As an illustration, this methodology got applied to a sample of 12 real estate portfolios – with a total market value in excess of £2 trillion, spread across Europe, North and South America and Asia – and highlights some important preliminary findings, namely that climate change is anticipated to have large impacts on the risk of losses from floods in the UK and tropical cyclones in North America and the Pacific Rim. Investors, lenders, insurers and policymakers will need to consider how these expected increases in risk can be managed in the most cost-effective manner and, especially, the strategy of organisations set up to help address the insurance protection gap.

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