His study was prepared for the Global Real Estate Sustainability Benchmark (GRESB), an international organization that assesses the sustainability performance of real estate and infrastructure portfolios and assets worldwide.
Earlier this year the group released the GRESB Resilience Module, providing a way for investors to evaluate the capacity of organizations to manage emerging social and environmental shocks and stressors.
“For many diverse, well-capitalized companies with mature risk management procedures, the greatest danger to resilience is the ‘we’ve got this under control’ mentality,” Mondshine wrote. “Regardless of size, sector or geography, the most common risk to an organization is a sense of overconfidence in its resiliency.”
He attributed this overconfidence to three common failings in the typical assessment of climatological, hydrological and meteorological threats:
1. Looking only at long-term risk.
Mondshine said one of the most common sources of overconfidence is the tendency of risk assessments to focus on “out years”, like 2050, 2070 or 2100, due to an increased ability to capture those impacts via models. These long horizons may give comfort to companies that believe they can easily “trade around” these risks. However, changes in the probability distribution of impending risks are already occurring, as severe events anticipated to provide substantial and immediate stress are growing and can instantly alter the market value and insurability of assets before risk managers can reorder portfolios.
2. Failure to recognize the importance of outside-the-fence infrastructure.
Even when a facility provides resiliency measures like backup generation or fuel storage, it is still usually dependent on some public infrastructure, such as electric transmission and distribution lines, substations, water distribution lines, roads, bridges, and tunnels. In a severe hazard event, a facility may be functional, but without staff access to the facility—or fuel deliveries—operations are likely to halt.
3. Lack of relevant quality data.
Due to the difficulty of obtaining, understanding and using climate data, organizations often make do with limited data and methodologies, using forecasts from global, national or regional models. A bottom-up approach may be required to consider the facility’s topography, elevations, locations of mechanicals and other critical equipment as well as existing resiliency measures such as backup electric generation and fuel storage.
Leading institutional investors are incorporating environmental, social and governance (ESG) performance of real assets into their investment process. Regulators are mandating ever more ESG disclosures and improvements. And tenants, owners and other stakeholders are demanding more sustainable, greener and healthier buildings and infrastructure.
The GRESB Resilience Module provides a way for companies to evaluate and disclose their capacity to manage emerging social and environmental risk factors. As an ongoing work-in-progress, it also provides a platform for moving beyond typical shortcomings in the assessment of key social and environmental stressors, offering ESG data, scorecards, benchmark reports and portfolio analysis tools.
Investors use the ESG data and GRESB’s analytical tools to improve the sustainability performance of investment portfolios, engage with managers and prepare for increasingly rigorous ESG obligations.
See Mondshine’s full article on the GRESB web page.
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