Climate Change Multi-Billion Dollar Disasters and its Real Estate Risk Assessment
During the 1980-2020 period climate-related events of over 285 disasters totaled $1.875 trillion. More recently such disasters as the devastating LA wildfires destroying over 15,000 structures and hurricane Helene, the seventh most costly and deadliest hurricane on record cost over $78.7 billion. In 2024 the US experienced twenty-seven weather and climate disasters ranking 2nd and totaling $182.7 billion. NOHA ranked 2024 as the warmest and dryest year on record. The question is how the banking, capital markets, and insurance providers address the risk assessment and modeling of climate change occurrences and their related costs. As a result, insurance rates have doubled over the last 10 years and their respective portfolio costs and magnitude continue to rise resulting in numerous insurance providers pulling out of certain risk-prone markets. Moreover, climate change risk assessments will impact banking and company’s financial performance and the need to address how climate risk impacts their financial statements and capital reserve requirements. Add to this compliance with global ESG disclosure rules which now fall within the regulatory bucket as GBIBS and in many cases has been sidestepped.
In classifying Climate change there are two primary categories – physical risk including hurricanes, floods, wildfires, and chronic risk including floods, heat risk and water stress – rising sea level risks, and drought. Each category lends itself to different markets and risk analytics. Sea level rising risk along the 100,000 miles of US shoreline is one example and more impactful to NYC and Hawaii. Florida, Carolinas, and Louisiana face the greatest risk to hurricanes, wildfires, and floods, followed by California, Washington, and Utah to wildfires.
Real estate most vulnerable to climate change and their related costs and damages is the residential housing market. As a result, their risk assessment requires more insight and the availability of affordable insurance coverage or transition to state backed income market at higher costs. The impact of coverage and costs will have a direct correlation to affordability, the availability of insurance coverage, and the lender’s willingness to provide conventional financing at reasonable terms. Add to this the transition away from fossil fuel use and mandated ESG guidelines will add another element of risk and cost assessment along with the availability or dismantling of FEMA flood insurance.
Going forward sustainability and emerging technological solutions and reporting will need to be incorporated into climate risk assessment. Data Collection and reporting will need to differentiate what is material and important along with investment management tools to accomplish technical solutions and sustainability processes and strategies.
