Since the start of 2020, the United States has faced a worldwide pandemic, a call for social responsibility not heard since the 1960’s, partisan-political volatility, severe weather events and economic upheaval, with Great Depression-level unemployment. Yet, the overall impact of these varying catastrophes to industries and markets has yet to be seen, with more predicted to come.
On September 9, 2020, the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission, issued a bi-partisan report prepared with input from banks, environmental groups, investors and a major oil company entitled “Managing Climate Risk in the U.S. Financial System.” The report concludes that the consequences of climate change have the ability to create chaos in the financial systems and disrupt the American economy. Moreover, this 196-page U.S. government entity report is the first to make direct correlations between climate change and the future economic consequences, specifically related to real estate.
The first fundamental finding of the report, on which the balance rests, states that “financial markets will only be able to channel resources efficiently to activities that reduce greenhouse gas emissions if an economy-wide price on carbon is in place at a level that reflects the true social cost of those emissions.” This statement naturally has its opponents, who argue that this action will in itself disrupt the financial markets. Notwithstanding the efforts to date of 11 states, it would also require action by Congress where political inertia and partisan politics remain obstacles.
For Further Information: Dilworth has been and continues to be a firm of innovations. Allowing Dilworth to guide you through yet another rough sea, can start by contacting Joe Kessler firstname.lastname@example.org.
About the author: Joseph F. Kessler represents contractors, real estate developers, REITs, middle-market companies, public authorities, family-owned businesses, and non-profit corporations in matters of corporate governance, development, financing, construction, leasing, and sales of commercial real estate. Joe has also represented clients in eminent domain proceedings and real estate tax appeals for commercial property owners primarily in the City of Philadelphia. He has also chaired what is now known as Green Building United, and written several articles on the value of sustainability.
Sources: 1BlackRock Investment Institute (BII)(2019). Getting Physical: Scenario Analysis for Assessing Climate Risks. New York, NY.: BlackRock.
The impact on the real estate market was one of the first factors that the report focused on to demonstrate the impact of climate change on the financial system. The report states that “emerging research” shows that exposure to climate-related risks already impacts commercial real estate values.1 Simply put, a decline or a perceived decline in real estate values, whether in the residential or commercial sector, puts stress on the financial markets resulting in increased default rates. The research and the data begins to make a compelling case. Those lending institutions, investors, operators and portfolio owners who now have begun to shift their impetus to a carbon-zero way of life will be those who are well positioned and whose assets will not decline. These actions do not require an act of Congress, but the act of those forward-thinking business leaders. They will be the ones to initiate change.
Every recent Amazon ad has a purpose. While socially conscious, let’s not forget that Amazon is working on avoiding any future “cascading effect” on its balance sheet or in its investment portfolio. Table 3.1 of the Report identifies the categories of assets exposed and Table 3.3 identifies the regional exposure.
While establishing a market price on carbon was the first recommendation, 52 more recommendations followed. Recommendation 4.7 states:
“Financial supervisors should require bank and nonbank financial firms to address climate-related financial risks through their existing risk management frameworks in a way that is appropriately governed by corporate management. That includes embedding climate risk monitoring and management into the firms’ governance frameworks, including by means of clearly defined oversight responsibilities in the board of directors.”
Recommendation 6.15 clarifies:
Firms and institutions should consider additional climate scenarios, guidelines and assumptions tailored to their specific needs and vulnerabilities, in addition to those provided by policymakers and regulators, to enhance internal risk management and decision-making. This can focus on generating decision-useful information for identifying and managing climate risk given their specific exposures and vulnerabilities.
What does this mean in 2020?
By starting now, the economy will favor businesses that have a strong balance sheet, are built for the future and have the ability to be nimble amidst quickly changing circumstances. If you continue to innovate, evolve, anticipate and plan to set your sails for what this sea of change sends your way, you will not only keep your heads above water, but will ride the wave of innovation.