Skin in the Game: Climate Risk and Real Asset Values

In a rapidly changing world, it has become paramount to consider climate risks when assessing real asset values. Extreme weather events, sea-level rise, and shifting climate patterns could significantly impact the long-term sustainability and profitability of real assets such as property, infrastructure, and natural resources.

Adding to the complexity of evaluating climate risks, it is critical to note that these risks are profoundly localized, thus redefining the old real estate adage, "location, location, location," in the context of portfolio management. For instance, coastal properties may face increased flood risks due to rising sea levels, while assets in wildfire-prone regions may be subject to higher insurance costs. Similarly, infrastructures in regions susceptible to extreme heat or cold may incur increased maintenance or energy costs. Hence, accurate geographical data and sophisticated climate modeling are essential tools for investors to comprehensively understand the climate-related vulnerabilities of their portfolios. This allows them to strategically reallocate resources, hedge risks, or even spearhead initiatives for climate resilience, thereby fortifying their portfolios against future climate impacts.