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2019 GRESB Real Estate Results | Rotterdam


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October 3, 2019

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2019 GRESB Real Estate Results | Rotterdam

  1. 1. Investors GRESB Assessment Managers I N V E S T O R P E R S P E C T I V E E S G A N A L Y T I C S E S G A N A L Y T I C S E S G P E R F O R M A N C E D A T A GRESB – Real Asset Sustainability Data and Benchmarking Investor-led and mission-driven
  2. 2. Benchmark size & Assets Location
  3. 3. GRESB Overall Score Development
  4. 4. Regional Scores
  5. 5. Country scores - Europe
  6. 6. EUROPE ENERGY consumed -0.50% WATER consumed 2.89% GHG emitted -3.71% WASTE diverted 81% GLOBAL Energy Intensities & Environmental Impact
  7. 7. Country-level intensities - NL
  8. 8. Key Figures Participants Total property value (USD tn) Properties covered Institutional investors Institutional capital (USD tn) Industry associations 20 10 20 19 3 +100 +100,00018,000 0.9 4.1 1,005198 220.7 Partners1 +50 +403
  9. 9. Scores distribution AVERAGE GRESB SCORE 40% 30% 20% 10%
  10. 10. Sustainability / ESG is a journey
  11. 11. 10 years of impact LIKE-FOR-LIKE REDUCTIONS EQUIVALENT
  12. 12. GRESB Universe (Like-for-like) GRESB Universe (Targets) UN SDG (Target 7.3) Sustainable Development Goals (SDGs)
  13. 13. - Strategy & Leadership - Policies - Reporting - Risk Management - Stakeholder Engagement - Risks & Opportunities - Monitoring - Performance Indicators - Energy - GHG emissions - Water - Waste Industry consolidation - Targets - Building Certifications - Tenants - Community Engagement
  14. 14. Assessment structure
  15. 15. Asset level disclosure +100,000 +66,000 +25,000 # assets All assets Assets • Reported at asset-level Assets • Reported at asset-level • With full data coverage • Excluding outliers
  16. 16. Carbon Risk Real Estate Monitor Property Investing in the Age of Climate Risk CRREM “CRREM is a framework for science based decarbonization pathways and a toolkit to identify stranded assets and promote sustainable investments in the real estate industry.” CRREM EU funded H2020 research project: February 2018 – January 2021
  17. 17. NL – Decarbonization pathways (1.5°C)
  18. 18. Sustainable Real Assets
  19. 19. IIGCC INVESTOR EXPECTATIONS FOR LISTED REAL ESTATE COMPANIES For Professional Clients MiFID Directive 2014/65/EU Annex II) only. No distribution to private/retail investors.. Murray Birt DWS Senior ESG Strategist and IIGCC Property Working Group Co-Chair GRESB Rotterdam – 3 October 2019
  20. 20. RESPONSIBLE INVESTMENT RESEARCH OVERVIEW “Highly Commended” Sustainable Finance Report #2, June 2017 Source: DWS 2016-2019; Savvy Investor June 2017; Investment Week 2018 For illustrative purposes only. Savvy Investor is the world’s leadingresource hub for institutional investors. They curate the best pensions and investment white papers from around the world. The Savvy Investor Awards are judged on the basis of the qualityand readability of the paper and its appeal to their institutionalinvestor audience. No fee was paid to be considered for the award. Investment Week Awards are designed to highlightinvestment research services that demonstrate knowledge, innovation, engagement, clarity and transparency. No fee was paid to be considered for the award. The task of the ESG thematic research team is to support clients and investment teams to understand and consider major sustainability risks and opportunities in their everyday business DWS finalist for Best ESG Research Team DWS finalist for Best ESG Fund ManagementGroup, Best ESG Research Team & Best Thought Leadership Paper (physical risk) For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited. / 2
  21. 21. INSTITUTIONAL INVESTORS GROUP ON CLIMATE CHANGE 3 Source: IIGCC September 2019  IIGCC is an investor-led network of 172 asset owners and mangers. From 11 European countries, together we represent over €24 Trillion in assets.  Ten investors sit on IIGCC’s Board which sets IIGCC’s strategic direction. Many active members lead or participate in our programmes.  The Board has set a simple vision for IIGCC to work toward: Investors taking action for a prosperous, low carbon future.  IIGCC’s mission is to mobilise capital for the low carbon future by amplifying the investor voice and collaborating with business, policy makers and fellow investors.  IIGCC does this by providing investors with the collaborative platform to encourage public policies, investment practices and corporate behaviour that address long-term risks and opportunities associated with climate change. For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  22. 22. IIGCC PROGRAMMES – WHAT WE DO 4 Source: IIGCC September 2019 Policy Corporate Investor Practices Property Activities: • Best practices: Workshops, roundtables and guidance development on the resilience of different sectors to the transition to a low carbon economy. • Engagement: Collaborative engagement with more than 40 companies across Europe. Investors with over €8Tn participate in this group. IIGCC is also coordinating the global Climate Action 100+ initiative. • Resolutions: Coordinating shareholder resolution activity in Europe and helping investors understand which US resolutions to support (Aiming4A has been incorporated into the group). Activities: • Governance: working with boards, trustees and senior management to understand and manage climate- related risks and opportunities. • Strategy: Developing strategic tools and metrics to enable owners and managers to address climate risk and opportunity in their portfolios • Disclosure: Providing guidance to investors on implementation of the TCFD recommendations Activities: • Best practices: Development of strategies for implementing green property investment practices and engaging with real estate companies. • Building policy: Engagement with policy makers on building- related energy and climate policy. • Collaboration: Close working with global and European actors in the property space Activities: • Global policy: Official observer of the UNFCCC; regular dialogue at G7 and G20 level; Chair of The Investor Agenda policy stream • Regional policy: Detailed EU policy positions developed on key issues from carbon pricing to renewables and energy efficiency policy and a sustainable financial system. Communicated via strategic policy- maker engagement plans. • National policy: When requested, deep dive into domestic policy • Supporting corporate engagement: policy expertise is channelled to support investor engagements with companies. For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  23. 23. EU ENERGY EFFICIENCY FINANCIAL INSTITUTIONS GROUP (EEFIG) / 5 Source: DWS Jan 2018; PRI, 2014; IIGCC March 2016; EU Commission Feb 2015 and Nov 2016 “Act as an action-oriented platform, to collect, develop, implement and disseminate innovative ideas to accelerate finance for energy efficiency in Europe, with a particular focus on the buildings sector” Timeline of investors contributing to EU energy efficiency policies 2013: DWS and IIGCC Foundingmembers of EEFIG: EU Commission & UNEP FI “Efficiency First can and should be a guiding principle for the Energy Union” -- Maroš Šefčovič, European Commission Vice President for Energy Union Feb 2015, commends EEFIG report Nov 2016: EU Commission proposes “Clean Energy for All Europeans Package” March 2016: DWS Contributionto investor group IIGCC policy proposals to EU Increase in investment? (not yet) EU agrees revision of EU Energy Efficiency Directive & EU Energy Performance in Buildings Directive (May and June 2018) EU member state implementation – improved policies for energy efficiency investment? EU Commission financially supports European Mortgage Federation initiative for energy efficient mortgages EU Commission financially supports initiatives such as DEEP, Investor Confidence Project, EuroPACE etc For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  24. 24. MEASURING AND FINANCIALLY VALUING THE TRUE BENEFITS OF ENERGY EFFICIENCY ― Investment in energy efficiency measures has not grown sufficiently due to a lack of revenue and reliance on cost savings ― Traditional ‘deemed’ monthly energy efficiency savings are not sufficiently robust to match energy market challenges of growing distributed generation. Some recommended energy efficiency measures can even make grid challenges worse ― The time and location of energy use and energy savings matters! ― A new partnership/initiative is needed between governments smart grid/meter organisations, the energy industry and energy users, for adopt digital, smart measurement of EE and actual GHG reduction ― California is leading the way in adopting open source standards for measuring energy efficiency and energy utilities writing ener gyefficiency procurementcont ractsthat are only paid on success ― This represents new project revenue which can be used in financing structures Stronger policies and practices needed California electricity CO2 intensity (Tons/MWh) 2019-2030* Source: Picture for illustrative purposes only. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. * Brook, M. (2018). Building Decarbonization: 2018 Update Integrated Energy Policy Report . Presentation. What is the ‘1 kg’ standard for energy efficiency? For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited. / 6
  25. 25. MEASURE IMPACT DWS’S ESG REAL ESTATE STRATEGY Summary of the implementation process  Tracking data for all assets across seven funds submitted to GRESB, plus others  ESG Acquisition Checklist completed during all asset purchases  Energy audits conducted upon acquisition and every four years thereafter  Sustainability Action Plans created for all assets where an audit has been conducted  Active Energy Management using Monitoring & Targeting Software  Implementation of Capex opportunities identified by audits that achieve strong returns  Include green lease clauses in all new leases  Set 20% US energy reduction target (5m ft2) in 2010, met 3 years early (2016)  First energy reduction target begun in the UK in 2017  Additional targets in all other regions in Europe to be established during 2019  Global target planned from 2020 onwards  Participation of seven funds in the GRESB Real Estate Survey  Analysis of performance on the asset and portfolio level GATHER DATA PRIORITIZE AND IMPLEMENT SET REDUCTION TARGETS Source: DWS Feb 2019. No assurance can be given that investment objectives will be achieved. / 7 For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  26. 26. INVESTOR EXPECTATIONS: / 8 Source: 256 investors with USD30trn AuM are participating in Climate Action 100+, a five-year investor initiative led by investors to engage the world’s largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen climate- related financial disclosures. Investor groups have published several sector guides and members have used them to engage carbon intensive companies. The Investor Expectations series of guides are developed through IIGCC in partnership with AIGCC, IGCC and Ceres, and input from a global network of investors and advisors Due to the importance of energy efficiency in buildings, IIGCC has developed a similar investor guide for publicly listed real estate companies and private real estate managers Guides for investors & companies For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  27. 27. INVESTOR EXPECTATIONS FOR LISTED REAL ESTATE SECTOR / 9 Source: IIGCC forthcoming October 2019 New Investor Expectations report planned for publication in mid/late October 2019. It seeks to establish key questions for allow for constructive engagement, in order for investors to fully understand how companies in this sector are governing and managing the risks and opportunities associated with a well below 2°C trajectory Lead authors include: Murray Birt (DWS), Felipe Gordillo (BNP Paribas Asset Management), Emanuele Fanelli (Aegon Asset Management), Derk Welling (APG Asset Management) and Ed Gabbitas (Evora Global), with input from Rachel Ward (IIGCC). Contents The property sector – a brief overview Climate change pathways in the property sector Property sector policy landscape Climate and ESG disclosure in the listed property sector Challenges and opportunities for the property sector Investor expectations For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  28. 28. INVESTOR EXPECTATIONS AND QUESTIONS FOR COMPANIES / 10 Source: IIGCC forthcoming October 2019 1. Governance: Expectation: Establish a strong and complete governance framework and process to support board’s oversight and accountability of climate change strategy. The board should be in position to ensure that climate related risks (physical and transition) impacting property assets and portfolios are properly managed and that the strategy, and to monitor the implementation of effective planning so the company is transitioning to a low carbon economy 2. Strategy and scenario planning Expectation: Take action to reduce greenhouse gas emissions and make business operations consistent with the Paris agreement targets. Companies are expected to implement their strategic decisions based on scientific climate scenarios. After each expectation, the publication will set out a series of questions for board members and sustainability professionals For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  29. 29. INVESTOR EXPECTATIONS AND QUESTIONS FOR COMPANIES / 11 3. Risk management: Expectation: Integrate climate related risks (including physical, regulatory/technology and changes in market preferences/behaviour) as part of the overall risk management function aiming to monitor and control how these risks affect the company operations and the value of its property portfolios. 4. Metrics and targets Expectation: Develop a framework to track and reduce the most material emissions (scope 1, 2, 3) Determine and disclose the property portfolio’s opportunities and risks from stronger building energy efficiency policies, technology changes and shifts in tenant preferences for green buildings (climate transition risks). Start to assess, develop, manage and disclose physical climate risk metrics and targets, drawing upon recent guidance that suggests using Value at Risk from future extreme weather events* For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited. Source: IIGCC forthcoming October 2019 • Advancing TCFD Guidance on Physical Climate Risks and Opportunities
  30. 30. INVESTOR EXPECTATIONS AND QUESTIONS FOR COMPANIES 12 Source: IIGCC forthcoming October 2019 * IIGCC March 2016. “Transforming the sustainability of Europe’s building stock” 5. Transparency and disclosure Expectation: Build a disclosure framework following the recommendations from the Task Force on Climate – related Financial Disclosures (TCFD), so the company explains how climate risks and opportunities influence their business, strategy, financial planning and performance. 6. Public policy Expectation: The company’s public policy and lobbying positions and that of their trade associations should be aligned with the company’s own commitments and implementation of the Paris agreement goals and should have some alignment with IIGCC’s views* on policies to support energy efficiency. For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  31. 31. PARIS ALIGNED INVESTMENT INITIATIVE / 13 Source: IIGCC September 2019 Aim The initiative aims to explore how investors can align their portfolios to the goals of the Paris Agreement across equities, corporate fixed income, sovereign bonds, property and Strategic Asset Allocation DWS and Brunel Pension Partnership will co-chair the property working group Objectives Develop working definition of key concepts, terms and pathways relevant to Paris alignment for asset owners in order to clarify, build understanding and consensus around these concepts. This will consider different dimensions to alignment to Paris including: _ alignment of assets with a decarbonisation pathway that would meet the Paris goals _ increasing investment in assets which represent ‘climate solutions’ needed to meet Paris goals Analyse potential methods that could be used to assess alignment of different asset classes, determine the make-up of an aligned portfolio, and assess approaches for transitioning portfolios, in order to provide menu of practical options for transitioning and assessing alignment to Paris goals. Test the approaches to transition and methodologies for assessing alignment using real world portfolios, to understand: _ financial characteristics, risks, issues, and opportunities associated with transition of portfolios to a below 2 degree pathway, assuming global trajectory (emissions, technology, economic) is BAU _ financial characteristics, risks, issues and opportunities associated with transition of portfolios to a below 2 degree pathway, assuming global trajectory also aligns to 2 degrees _ financial characteristics, risks and issues associated with following a BAU portfolio, assuming global pathway aligns to 2 degrees Asset owner steering committee: AP2, Brunel Pension Partnership, Church of England Pensions Board, LGPS Central, PKA, and TPT Retirement Solutions. For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited.
  32. 32. FURTHER IDEAS FOR THE REAL ESTATE SECTOR: Benchmarking efficiency of commercial building tenants Source: Green Lease Leaders 2019 — Tenants’ energy use (plug load) is significant — Real estate investors are working to support and encourage tenants but more could be done — Is there a gap that needs filling in Europe? — Are there existing European initiatives that could be augmented or expanded? Potential to partner with US ‘Green Lease Leaders’ awards, benchmark building tenants? Filling an action gap? For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited. / 14
  33. 33. FURTHER CHALLENGES AND OPPORTUNITIES / 15 Source: WorldGBC September 2019; ULI/Coalition for Urban Transitions June 2018  WorldGBC concludes ‘upfront carbon’, will be responsible for half of the entire carbon footprint of new construction between now and 2050, threatening our remaining carbon budget.  WorldGBC has issued a bold new vision that:  By 2030, all new buildings, infrastructure and renovations will have at least 40% less embodied carbon with significant upfront carbon reduction, all new buildings are net zero operational carbon  By 2050, new buildings, infrastructure and renovations will have net zero embodied carbon, and all buildings, including existing buildings must be net zero operational carbon.  How can real estate investors support this vision? Embodied carbon For Professional Clients (MiFID II Directive 2014/65/EU Annex II) only. For Institutional investors only. Further distribution of this material is strictly prohibited. Connected, compact cities  ULI/CUT report shows that well-designed, compact cities are better for investors as well as citizens and the environment.  Bouwinvest Real Estate Investors, Capco, CBRE Global Investors, Grosvenor, LaSalle Investment Management, M&G Real Estate, PGGM, Redevco, and Union Investment supported the report  DWS ideas helped inspired creation of report and project  These companies released a statement committing to champion further understanding of the opportunities and benefits of well-managed and well-serviced densification.  How can real estate and infra investors follow up this report? Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.
  34. 34. DISCLAIMERS (1/2) / 16 Issued in the UK by DWS Investments UK Limited. DWS Investments UK Limited is authorised and regulated by the Financial Conduct Authority. Any reference to “DWS”, “Deutsche Asset Management” or “Deutsche AM” shall, unless otherwise required by the context, be understood as a reference to DWS Investments UK Limited including any of its parent companies, any of its or its parents affiliates or subsidiaries and, as the case may be, any investment companies promotedor managedby any of those entities. This document is a “non-retail communication” within the meaningof the FCA's Rules and is directed only at persons satisfying the FCA’s client categorisationcriteria for an eligible counterparty or a professional client. This document is not intended for and should not be relied upon by a retail client. This document is intendedfor discussion purposes only and does not create any legally binding obligationson the part of DWS Group GmbH & Co. KGaA and/or its affiliates(DWS). Without limitation,this document does not constitute an offer, an invitationto offer or a recommendationto enter into any transaction. When making an investment decision, you should rely solely on the final documentationrelating to the transaction and not the summary contained herein. DWS is not acting as your financial adviser or in any other fiduciary capacity in relation to this transaction. The transaction(s) or products(s) mentionedherein may not be appropriatefor all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independentassessment of the appropriatenessof the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. For general informationregarding the nature and risks of the proposed transaction and types of financial instruments please go to should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with DWS, you do so in reliance on your own judgment. Although informationin this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. All opinionsand estimates herein, including forecast returns, reflect our judgment on the date of this document and are subject to change without notice and involve a number of assumptions which may not prove valid. Any opinionsexpressed herein may differ from the opinionsexpressed by Deutsche Bank AG and/or any other of its affiliates(DB). DB may engage in transactions in a manner inconsistent with the views discussed herein. DB trades or may trade as principal in the instruments (or related derivatives), and may have proprietary positions in the instruments (or related derivatives) discussed herein. DB may make a market in the instruments (or related derivatives) discussed herein. DWS SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF. This document has been prepared without consideration of the investment needs, objectives or financial circumstances of any investor. Before making an investment decision, investors need to consider, with or without the assistance of an investment adviser, whether the investments and strategies described or provided by DWS, are appropriate,in light of their particular investment needs, objectives and financial circumstances. Furthermore, this document is for information/discussionpurposes only and does not constitute an offer, recommendationor solicitation to conclude a transaction and should not be treated as giving investment advice. DWS does not give tax or legal advice. Investors should seek advice from their own tax experts and lawyers, in considering investments and strategies suggested by DWS. Investments with DWS are not guaranteed,unless specified. FOR PROFESSIONAL CLIENTS ONLY
  35. 35. DISCLAIMERS (2/2) / 17 Investments are subject to various risks, including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you may not recover the amount originally invested at any point in time. Furthermore, substantial fluctuations of the value of the investment are possible even over short periods of time. This document contains forward looking statements. Forward looking statements include, but are not limited to assumptions, estimates, projections, opinions, models and hypothetical performance analysis. The forward looking statements expressed constitute the author’s judgment as of the date of this material.Forward looking statements involve significant elementsof subjective judgments and analyses and changes thereto and/or consideration of different or additional factors could have a material impact on the results indicated.Therefore, actual results may vary, perhaps materially, from the results contained herein. No representation or warranty is made by DWS as to the reasonablenessor completeness of such forward looking statements or to any other financial information contained herein. The terms of any investment will be exclusively subject to the detailed provisions, including risk considerations, contained in the offering documents. This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulationin certain countries, including the United States. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, including the United States, where such distribution, publication,availability or use would be contrary to law or regulationor which would subject DWS to any registration or licensing requirementwithin such jurisdiction not currently met within such jurisdiction. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. © DWS Investments UK LimitedSeptember 2019. Disclaimer – EMEA - The following document is intended as marketing communication. Important Information DWS is the brand name under which DWS Group GmbH & Co. KGaA and its subsidiaries operate their business activities. Clients will be provided DWS products or services by one or more legal entities that will be identifiedto clients pursuant to the contracts, agreements,offering materials or other documentationrelevant to such products or services. The informationcontained in this document does not constitute investment advice. All statements of opinion reflect the current assessment of DWS Investments UK Limited and are subject to change without notice. Forecasts are not a reliableindicator of future performance. Forecasts are based on assumptions, estimates, opinionsand hypothetical performance analysis, therefore actual results may vary, perhaps materially, from the results contained here. Past performance, [actual or simulated], is not a reliable indication of future performance. The informationcontained in this document does not constitute a financial analysis but qualifiesas marketing communication. This marketing communicationis neither subject to all legal provisions ensuring the impartialityof financial analysis nor to any prohibition on trading prior to the publication of financial analyses. This document and the informationcontained herein may only be distributed and published in jurisdictionsin which such distributionand publication is permissible in accordance with applicable law in those jurisdictions. Direct or indirect distribution of this document is prohibitedin the USA as well as to or for the account of US persons and persons residing in the USA. DWS Investment InternationalGmbH. As of: September 2019 CRC:070873
  36. 36. Durability Risk Assessing and quantifying the physical impact of long- term climate change for real estate Job Hogewoning
  37. 37. Durability Risk – Physical Impact of Long-Term Climate Change2 Climate change awareness is growing Regulatory push Climate change poses an ever increasing threat to the financial industry. An increase in extreme weather events will physically damage financial assets. New extremes will likely be reached, which have significantly impacted financial assets. Apart from direct financial impact on the long term, a regulatory push and increased public awareness are already seen. Public awarenessFinancial impact At EY, we believe that the key in addressing climate change, is to first understand how climate change works and how it effects us in a bottom up way.
  38. 38. Durability Risk – Physical Impact of Long-Term Climate Change3 Already now it is evident from insurers data that the impact of climate change through extreme weather events has tripled over the past three decades. Global insured catastrophe losses (left panel) and number of relevant natural loss events worldwide (right panel) (1985—2018: left panel: left hand scale: USD billions; right hand scale: percentages: right panel: left hand scale: number of events: right hand scale: percentages) 0 100 200 300 400 500 600 700 800 900 85 86 87 88 89 90 91 92 93 94 95 19851987198919911993199519971999200120032005200720092011201320152017 0 20 40 60 80 100 120 140 160 0 10 20 30 40 50 60 70 80 90 100 19851987198919911993199519971999200120032005200720092011201320152017 Global economic losses from extreme weather events have increased Source: Swiss Re Institute, Munich Re NatCatService and ECB calculations. Earthquake/tsunami Weather-related catastrophes Man-made disasters % of weather-related catastrophes losses – 5-years moving average (right-hand scale) Hydrological events Meteorological events Geophysical events % of weather-related events – 5-years moving average (right-hand scale) Climatological events This trend is not likely to slowdown or decrease for the coming decades, but instead will grow. Especially the weather related events are likely to occur more often and more severe.
  39. 39. Durability Risk – Physical Impact of Long-Term Climate Change4 Climate change is the top risk identified by the World Economic Forum 2019 Source: The Global Risk Report 2019 4.0 3.46Average 2.5 3.0 3.5 4.0 4.5 3.41 Average 3.5 3.0 Likelihood Impact Failure of national governance Asset bubbles in a major economy Data fraud or theft Profound social instability Failure of urban planning Failure of regional or global governance Illicit trade Deflation Adverse consequence of technological advancesUnmanageable inflation Energy price shock Failure of critical infrastructure State collapse or crisis Unemployment or underemployment Terrorist attacks Failure of financial mechanism or institution Food crises Fiscal crises Spread of infectious diseases Critical information infrastructure breakdown Weapons of mass destruction Large-scale involuntary migration Man-made environmental disasters Cyber-attacks Natural disasters Interstate conflict Biodiversity loss and ecosystem collapse Water crises Extreme weather events Failure of climate-change mitigation and adaptation Extreme weather events Failure of climate-change mitigation and adaptation Water crises Natural disasters Cyber-attacks Man-made environmental disasters Large-scale involuntary migration Interstate conflict Biodiversity loss and ecosystem collapse At the World Economic Form 2019 the Top 10 risks that were identified, both in likelihood as in impact. With five entries, the Top 10 for the coming 10 years was dominated by climate change related risk.
  40. 40. Durability Risk – Physical Impact of Long-Term Climate Change5 Climate Change is finding its way into the regulatory framework for banks and insurers EU NFDR - Table 4 – Disclosure on Principal Risks and their Management Type 2 Describe the linkages between major climate-related risks and financial KPIs Disclose any significant assumptions that have been used to assess climate-related risks. When relevant, disclose how scenarios and/or internal carbon pricing are used for risk management actions such as mitigation, transfer or adaptation. Identify the locations that are critical to value chains, including operations, suppliers and markets. Disclose financial impacts of extreme weather events, including possible indicators on days of business interruptions and associated costs, cost of repairs, fixed-asset impairment, value chain disruptions and lost revenues. Describe how the company's performance is affected by weather variability, in particular for companies sensitive to variability in temperature and precipitation. Regulators have also identified climate change and the related risks as one of the most important topics going forward for financial companies to make insightful and report on. Upcoming and existing regulation requires financial companies to disclose the financial effects of the physical risk associated with climate change. Including an assessment of the whole value chain. A difficult part is that the regulation ask for reporting, but do not specify how financial impact should be calculated. The following guidelines are currently in place: • EIOPA 2 (Insurers) • TCFD (Voluntary) • EC Guidelines on reporting climate- related information (Banks) • PRA (UK) to include climate stress testing
  41. 41. Durability Risk – Physical Impact of Long-Term Climate Change6 Climate: the nuts and bolts A story of energy and water in the atmosphere Thewatercycle Ocean Lake Infiltration Precipitation Deposition Transportation Sun Condensation Evaporation River Discharge Transpiration Snowmelt Surface flow Percolation Climate change is more than just the warming up of the earth. All climate systems are interconnected and the impact of more energy in this system will also have long lasting effects on precipitation, droughts, wind and general increase of temperature. Extreme weather events are increasingly likely to occur, and with the ongoing industrialisation and increasing population, these will have a greater physical impact.
  42. 42. Durability Risk – Physical Impact of Long-Term Climate Change7 The increase in energy creates a shift in probabilities of extreme weather, making extreme the new normal Source: Economics of extreme weather events: Terminology and regional impact models, Weather and Climate Extremes Increase in mean and variance Probabilityofoccurrence Cold Average Hot C Previous climate Less cold weather New Climate More hot weather More record hot weather Climate change is best explained in terms of probability. The probability of a severe tail event occurring will increase as the distribution of events becomes flatter. It also means that what is considered extreme and unlikely now, will become normal and more likely in the future. These increases in probabilities can be calculated. It is the vision of EY that assessing physical risk is an exercise driven bottom-up. It starts with data sufficiently granular on climate. Then, climate scenarios from the KNMI and the IPCC need to be taken into account to assess the range of future probabilities of extreme events.
  43. 43. Durability Risk – Physical Impact of Long-Term Climate Change8 Climate extremes cause major financial damages and are increasing in frequency 0 10 20 30 40 50 60 70 80 90 Jul/80 Jul/83 Jul/86 Jul/89 Jul/92 Jul/95 Jul/98 Jul/01 Jul/04 Jul/07 Jul/10 Jul/13 Jul/16 Rainmm/hour Time Cloudburst & Damage Cloudburst Damage > 8 mln Damage > 25 mln More events and high damages in the past 18 years When the increases in probabilities have been determined, it is key to assess what impact an extreme event will have. A probability in itself will not provide answers on the financial consequences. The best guide for this are past damage events, linked to the specific circumstances of the occurrences. When taking a cloudburst (more than 25mm of rain in an hour) and reported damages by insurance companies, it can be seen that large events occur more frequently nowadays and have a higher impact.
  44. 44. Durability Risk – Physical Impact of Long-Term Climate Change9 Connecting the dots: combine the increase in probability with the damage the events costs 0 0,0002 0,0004 0,0006 0,0008 0,001 0,0012 0 500 1000 1500 2000 2500 3000 ProbabilityDensity 30 day summed Rainfall in mm Rainfall near Schiphol 1906-1925 1926-1945 1946-1965 1966-1985 1986-2005 2006-2019 Damage event C Damage event B Damage event A The final step is then to connect the probabilities with impact. Combining this with geographic data will lead to an assessment of current and future exposure to physical risks due to long term climate change.
  45. 45. Durability Risk – Physical Impact of Long-Term Climate Change10 A way forward: going from insights, to actions, to progress Insights ► Impact on Risk Governence ► Portfolio concentration ► Industry concentration ► Portfolio versus climate triggers Action ► Transparent climate reporting towards stakeholders ► Active modelling of climate triggers ► Integration of climate risk into daily business Progress ► Climate integrated into strategic framework ► Climate integrated into operational framework ► Proactive role for the financial industry The journey starts with insight. Without clear and concise information on how climate change will affect your portfolio it is not possible to make an assessment on how you will be impacted. The next step is the regular reporting and monitoring of physical risk. By embedding it in your processes with the proper modelling tools, it is possible to provide insight for all required stakeholders and the possibility to steer. The final step will be to fully embrace the topic of climate change and include this at the strategic level. True progress is gained by helping your clients with specific products or product features to facilitate a more robust and durable future. Climate Scan Model Framework
  46. 46. Durability Risk – Physical Impact of Long-Term Climate Change11 The impact of climate change is not limited to one department Risk Management Framework Components Overall governance arrangements Risk strategy and appetite Policies and standards Risk identification Risk assessment and measurement Risk monitoring and management Risk reporting and management information Risk data 3 54 6 7 8 2 1 The impact of climate change on credit risk should be incorporated in the overall risk management framework 1. As an identified risk in the overall governance and arrangements of the financial institutions 2. As a potential metrics for the risk appetite framework 3. As a risk identified by the institution 4. As a risk measured and assessed in the Strategic Framework 5. As a risk monitor and manage in the Operational framework 6. As a risk fully part of the Sustainability report 7. With specific data collected 8. As a risk fully integrated in the policies
  47. 47. Durability Risk – Physical Impact of Long-Term Climate Change12 Average damage due to pole rot per house 50k – 100k Climate Scan Example: making complex information easily accessible Source: Klimaateffectatlas, CAS Leeuwarden Amsterdam Rotterdam Den Haag Present 2050
  48. 48. Durability Risk – Physical Impact of Long-Term Climate Change13 Amsterdam highlight: creating a detailed view to generate the right insights Source: Klimaateffectatlas, CAS Present 2050 Average damage due to pole rot per house 50k – 100k Source: Klimaateffectatlas, CAS With our Climate scan service, we will support and help you to identify and quantify the physical climate risk in a selected asset portfolios. The Climate scan combines the most recent technical and regulatory knowledge, visualization and your portfolio information to assess your climate exposure. The Climate Scans are tailormade and personalized, to reflect your wants and needs concerning insights. By providing these insights, you will gain better awareness into the positioning of your company with regard to policies and regulations, technical capacities, and risk appetite. Climate Scan
  49. 49. Durability Risk – Physical Impact of Long-Term Climate Change14 Retail exposure: Flood risk as climate change risk driver for collateral valuation ► Both in the Netherlands as in Belgium, maps are created that show regions which are sensitive to flooding ► In the Netherlands 26% of the surface is below see level and 29% is susceptible for river flooding. Note however that significant investments are planned to protect against flooding* ► Rabobank is among the 16 participants that contributed to a pilot project to assess risk and opportunities from the impact of climate change on their loan portfolios (UNEP finance initiative) ► Rabobank performed an assessment of flood risk on their retail real estate loan book. They find a mild impact and rationalize this impact via the protection of the Dutch flood protection network and planned future upgrades ► Some of the challenges: linking external & internal data, frequency of future extreme events crucial drivers but very hard to assess, granularity of available data * Rabobank contributed to “Assessing credit risk and opportunity in a changing climate: Outputs of a working group of 16 banks piloting the TCFD Recommendations (Task Force on Climate-related Financial Disclosure,2018) “ Flood risk will impact collateral valuation Flood maps Rabobank case study* § Flood risk data is available. Linking this data with the bank’s portfolio is an important challenge. Future predictions around changes to the sensitivity of the different regions are subject to considerable uncertainty.
  50. 50. Durability Risk – Physical Impact of Long-Term Climate Change15 Model Framework: using the data and climate scenarios and regulations to understand the future Weather data Data analysis Current situation mapping Client data Damage data Law and regulations Future Hot Spot mapping Climate scenarios Working together with academic parties to understand the impact of climate change on the weather Working together with financial parties to recognize the way climate change will impact financial companies Creating awareness and insight on how climate change will impact your company, and show you a way forward Using the state of the art Climate Scenarios to assess the effect of climate change in the future Monitoring laws and regulations, proactively integrating and anticipating the impact on portfolios Probability Assessment Climate Exposure Future Predictions Damage mechanisms Monitoring Laws
  51. 51. Durability Risk – Physical Impact of Long-Term Climate Change16 Our reporting service will help you to set up a reporting framework to effectively communicate physical climate risk exposure to internal and external stakeholders. The reporting will be highly personalized and can be internally provided in the form of updates with regulations and technical development, or externally for communicating TCFD and EC disclosures. We will help you to write and adjust reports to include climate risk in a relevant and understandable way for different stakeholders. Our model development service helps to you to develop risk models and modelling competencies to have ongoing insight into climate risk exposures. The goal of model development is to actively integrate climate data and scenarios into models such as AIRB or IFRS9 models. We will help you to generate understandable climate risk metrics and enable you to communicate them to both internal and external stakeholders on a regular basis. Our operation models service helps you to integrate climate risk into (existing) acceptance and pricing models, both in quantitative and qualitative way. In a quantitative way, we will help you adjust the models to optimize risk-adjusted earnings and to mitigate the amount of risk exposure taken on in line with risk appetite. In a qualitative matter, we will support you with integrating climate change into the governance framework, completing the total coverage of the operational framework Our strategic support service helps you to consider climate change in your long term strategy development. We will help you adjust your operations to climate change scenarios, and give you the technical insights to improve long-term positioning and new product/service development. We will help you set up KPIs to facilitate strategy execution and monitor performance. Model Framework: How we will support you in this journey Reporting Model Development Operational Support Strategic Support
  52. 52. Durability Risk – Physical Impact of Long-Term Climate Change17 Are you in for the journey? EY is convinced long term climate change is one of the top topics facing the financial sector now. The possible impact is far reaching and will affect this and future generations in an unprecedented manner. New problems require new insights and solutions. EY is highly committed to addressing this risk with our clients and through collaborating with regulators, academics and the financial sector we strive for creating robust solutions. Are you in for the journey with us?
  53. 53. Durability Risk – Physical Impact of Long-Term Climate Change18 Contact Details Wimjan Bos Partner Tel.: 088 407 1719 E-mail: Job Hogewoning Senior Advisor Tel.: 06 – 2908 4062 E-mail: Gerd-Jan van Wiggen Partner Tel.: 06 – 2908 3990 E-mail: Wybren Brouwer Senior Advisor Tel.: 06 – 21252069 E-mail:
  54. 54. About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit © 2019 EYGM Limited. All Rights Reserved. ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. EY | Assurance | Tax | Transactions | Advisory