A story about climate change, property value, and long-term planning.

Photo by Alvin Lenin on Unsplash

In this article, I share one story about how climate change can erode asset value, in this case focusing on property markets, via flooding and sea-level rise. I also offer an answer to the questions: 1) Who should care, and why? And 2) What role can long-term planning and scenario modeling play in all this?

I recently moved to a new house in London, and hired a professional transport company to help me move my stuff over. The van driver, originally from Chile, was a very animated character, with the joy and great sense of humor you expect from a South American soul. During the trip, I asked him: “Are you getting more work now, than you did before COVID?”, a bit rhetorical you might think, and his answer surprised me. He said: “Yes. And mostly, we are seeing a tendency from people to move out of basements, lower ground floors, and areas prone to floods. Some parts of London are being affected by heavier than usual rain, and there is a consequence”. When you hear it happening on the streets, from the people doing the work, it is as real as it gets. The conversation then evolved into discussing other cases of cities where there is also an element of obsolete infrastructure and outdated city planning.

So What?

High-risk properties (those exposed to sea-level rise, or flooding) will see their insurance cost go up, and their market value goes down; this can compound gradually into a significant value loss over time, becoming Stranded Assets (due to unanticipated or premature devaluation).

In more extreme cases, risk could be such that properties may no longer be covered for certain events. Examples of such cities are Mumbai (India), Dhaka (Bangladesh), Guangzhou (China), Lagos (Nigeria), Miami (USA), Tokyo (Japan).

Think of a house on the beach, just meters away from the water. Can you now picture it as if it was at the edge of a cliff?

Photo by Serge Kutuzov on Unsplash

Who should care, and why?

As you can rightly imagine, this directly affects homeowners (buyers and sellers), commercial property owners, property developers, and investors. But the impact goes beyond this group, including insurers (policy price vs cost of incidents), banks (to assess mortgage risk and property value), governments (to allocate taxpayers money for mitigation and adaptation actions, and crisis management), infrastructure managers, city planners, energy providers, tourism industry, to name a few.

When asset value is affected, and future cash flows (money coming in and out) are impacted, we could see trillions of US dollars disappearing from balance sheets, with bleeding consequences in the stock market. Whose share price might be affected? You may ask. Think of banks, insurers, property developers, hotels and tourism companies, some property investors. Now think of your own investments, and where your pension is allocated. Feel comfortable with this?

On the flip side, there can be an opportunity in every crisis. The property market will see some areas go up in value. Think of those with no direct exposure to this threat, with access to controllable rivers and lakes, or the ones in higher lands; these can see their valuation positively affected.

Conclusion, and the role of long-term planning and scenario modeling.

We don’t know when it will happen or to what degree, but when it does, it will be obvious. Adaptation actions are the macro trend here (the ones we take to adapt to the circumstances we cannot change). Some examples are building sea walls or coastal barriers, updating cities’ infrastructure, and relocating population to in-land & up-land areas. And now is the time to start factoring this into financial and strategic planning.

Companies should adopt a connected planning approach, to incorporate externalities and tendencies into the long-term planning process, to help articulate the economic impact via scenario modeling (also known as stress-test or what-if analysis). Geospatial technology is just one example that can enrich the physical asset risks analysis.

This way, decision-makers can better evaluate opportunity costs, and understand where money could be better spent. It means that the modern CFO will see their remit of work expand to cover more elements linked to Sustainability, as they continue to operate as a strategic advisor and value custodian.

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Mauro Reymundo Castro

Solving big and complex business problems, while helping to make the world a better place. Lifelong learner and sustainability enthusiast. All views are my own.