Climate Change: Risks to property investors

As we have seen in the last few weeks, the weather patterns are changing and becoming more unpredictable, this is all due to climate change. The World Economic Forum Global Risks Report 2023 has labelled the top three risks over the next decade to be: failure to mitigate climate change; failure of climate change adaption and natural disasters and extreme weather event. But what does this mean for property investors?

The Bank of England has helpfully set out the risks that climate change may pose including physical risks, transitional risk and liability risk. There have been regulations and frameworks requiring public companies using commercial property to disclose their climate-related risks, as set out by the Securities and Exchange Commission, due to the real estate industry contributing around 39% of total global emissions.

The introduction of this regulation is an attempt to account for carbon emissions, monitor and reduce them domestically by 68% in the next 7 years, with an end goal of being emission-free by 2050. This disclosure from companies is part of the attempt to mitigate climate change as the impact of the climate crisis is ongoing on the value of assets and business disruption. 

Although it is only businesses who must report on the climate-related risks, the risks still apply to residential property too. So when purchasing a property, the solicitor acting on your matter will assist you in carrying out the appropriate searches to ensure any future issues are brought to your attention before it is too late and expensive remedial action has to be taken. It is important for investors to also be aware of the financial impacts that are consequential to the climate change risks.

Physical Risks

These are the easiest to understand as they are associated with the impacts from climate change, including storms, floods and other intense temperatures and weather patterns. Not only can all of these result in damage to buildings, but there is also a chance of rising sea levels and chronic heat waves.

To cope with these potential damages, certain measures must be put in place to protect the property, all of which cost money and the risk will contribute to an increase in insurance premiums.

Last year many specialists were even able to predict an increase of subsidence across the UK due to drought following a heatwave which broke records at the Met Office. Groundsure, a conveyancing search provider, confirmed the statistics for subsidence will have an increase of 801% by 2070 if we do not start trying to make a difference now. Commercial properties dealt with the heatwave in a different way, which increased energy consumption through the use of cooling systems and inflating energy costs.                                                          

Transitional Risks

These are the risks that occur in the process of changing to a cleaner economy, where demand will be focused on the most sustainable assets and many buildings becoming stranded or written off due to them failing to meet the government regulations. Groundsure has estimated that the amount of property being written off could amount to £525 billion.   

To avoid later reduction in value, many investors have decided to either sell or change the use of their property.

Transitional risks include policy and legal risks, more so for commercial property whereby there is a failure to mitigate impacts, adapt to climate change or disclose material climate change facts, which could lead to litigation.

There is also a technological risk, whereby improvements to technology to comply with a lower-carbon and energy-efficient system can disrupt older systems and sometimes fail to work efficiently alongside older systems, which results in unsuccessful investments in technology and costs to invest in such technology.

Liability Risks

Finally, we look at the liability risk. This risk has the least research at the moment and is related to who should be responsible for climate change issues. This is linked with the enforcement of businesses disclosing company information and whether investors are then able to claim against that business, meaning accurate reporting and searches are crucial. There is still a lot of research in this area of risk to be carried out.

This is another aspect for investors to measure prior to investment, to prevent their assets from being exposed to such risks.

Final thoughts

Climate change is nothing new to the UK, but the increased amount of extreme weather is producing additional risks and financial implications. We have noticed a decrease in valuation of property in certain areas, for example those nearer the sea or rivers likely to flood. In existing buildings, smart meters for energy use, sustainable retrofitting and protective measures against flooding and storms are being introduced where possible. Whereas new buildings and development sites need to consider the location and whether it is risk-free, the use of greener and more sustainable materials, renewable energy, how the property is to be constructed, the list is endless. 

Property investment solicitors

At Birkett Long, our team of expert commercial property solicitors provide a high quality service in all aspects of property investment transactions. Amy works in Birkett Long’s Commercial Real Estate Team. To contact her or speak to a member of the team call 01206 636640 or email [email protected]