In order to accelerate the financing of the ecological and energy transition, article 173 of the law relating to the Energy Transition for Green Growth (TECV) of 17 August 2015 imposes for the first time in France ESG and Climate reporting obligations for institutional investors. Where are we in taking climate risk into account in the investment policy of French institutions? What direct or indirect impact for property managers?  

Climate risk definition 

Climate risk concerns the financial risk related to the increased vulnerability of economic agents due to their exposure to climate impacts.

In many economic sectors (agriculture, agri-food, energy, textiles, tourism, leisure, construction, etc.), climate risk is much greater than traditional market risk because it is much more unpredictable and therefore highly volatile. 

Following the global greenhouse gas emission scenarios established by the Intergovernmental Panel on Climate Change (IPCC), ADEME identifies 11 main climate hazards that could affect territories and their buildings by 2030-2050. These range from extreme phenomena (drought, floods, forest fires, etc.) to more or less long-term changes (rise in temperature, rise in sea level, etc.). In a context where studies warn us of the urgent need to act, the dynamics established by the Climate Plan of July 2017, following COP21 in Paris, have enabled a collective awareness of the transition to a low-carbon economy.  

Towards sustainable finance that integrates climate risks

Since the publication in August 2015 of the decree implementing article 173 of the French law about energy transition, institutional investors and portfolio management companies are subject to an obligation of transparency at their subscribers on the methods of taking into account environmental, social and governance (ESG) criteria, and climate risk management in their investment policy. As reporting on climate issues is a regulatory obligation reserved for major investors (with a balance sheet of over 500 million euros), only about sixty French financial institutions were concerned in 2016. The overall assessment of the monitoring of the ESG reporting commitments of the 840 institutions concerned is mixed: a small proportion of stakeholders have complied and the quality of the reports produced varies. Among the most advanced in terms of ESG-climate reporting, insurers (AXA, CNP Assurances) and financial institutions (Caisse des Dépots Group) seem to stand out by being signatories to the Principles for Responsible Investment (PRI) and personal commitments relating to the climate (Axa Group Carbon Footprint 2015 Disclosure, Caisse des Dépots Group Climate Commitment). 

At the same time, real estate players of property types or real estate management companies, not directly concerned by Article 173-VI, also find themselves forced, by entrainement effect, to communicate on their ESG-climate practices and impacts. Among them, Altarea Cogedim is particularly committed since it provides a roadmap for reducing carbon emissions in addition to an internal carbon price, as well as an analysis of its exposure to risks related to climate change. The Gecina, Icade and Nexity land companies also meet the objectives of article 173 by identifying and assessing the risks related to climate change. 

The real estate sector had already initiated its “green transition” ten years ago in terms of reflection and awareness and action, notably with the launch of the Sustainable Building Plan launched in January 2009. Integrating the issues of sobriety and energy efficiency, low-carbon construction, the real estate market is at the heart of a dynamic asset valuation, by integrating more and more ESG monitoring and environmental certification procedures. As part of the new 2018 edition of the Sustainability Certification Barometer™, Green Soluce is addressing the subject of green value by proposing a new approach, including climate risk as a market valuation factor for real estate.

Weather derivatives to cover the risks of real estate players

As presented previously, a climate risk is the possibility for the building, its systems, or its users to be negatively affected by a climate hazard. In order to best assess the climate risk existing for a building, three components must be taken into account: 

  • The probability of occurrence of the climate risk; 
  • The severity of the climatic risk, reflecting its consequences on the building if the climatic hazard were to occur; 
  • Its overall acceptable or unacceptable impact, based on the previous two factors.

Since the value of a building can be largely influenced by the valuation actions implemented, environmental certifications, which have become standards on the current real estate market, are levers for action with a direct impact on the performance of real estate assets.

Thus, BREEAM® certification integrates in design and operation phases an evaluation and monitoring of the impacts caused by climate hazards on buildings in the short and long term. A detailed methodology by ADEME enables climate risks to be mapped and an operational action plan to be proposed that is consistent with the risks identified on the territory. The LEED® and HQE Bâtiment Durable™ certifications are also very sensitive to climate risks in the territories, notably by proposing a rainwater management plan and actions against the risk of flooding.

A world pioneer in ESG-climate reporting, France is committed to promoting the ecological and energy transition, imposing information obligations on its institutional investors. The process is well underway; however, challenges remain: increasing the response rate of the players concerned and working on harmonising the methodologies and trajectories adopted by investors.