How to Manage Climate Risk

MANAGE HOW TO CLIMATE RISK A Practical Sustainability Guide

We know that life is what we make it, and as one of the largest real estate companies in the world, we have the opportunity to help make an impact. We believe that living the change we want and need to see in the world is imperative. That’s why we are taking action now to positively impact the planet, by taking practical steps to implement change. To support this change, we have created the How-to Guide Series – providing you, as the investor, owner or occupier, a set of clear, actionable how-to initiatives that you can implement right now to make asset or even organisation more sustainable and better optimised. WE MAKE SUSTAINABILITY PRACTICAL

By living change now , we can ensure tomorrow is better for everyone.

LIFE IS WHAT MAKE IT

LIVING CHANGE NOW

WHAT YOU SHOULD KNOW:

Know why it matters. Climate risk has rapidly emerged as a critical consideration for real estate investors, owners and occupiers. After all, understanding the impact of climate change on a building or workspace can affect your site selection, property valuation, asset management strategy, or exit timing. It can also inform more effective decarbonization initiatives. Know the types of climate risk. How we talk about climate risk is also changing in step with evolving global weather patterns, standards, and regulations. Increasingly, you now need to identify, mitigate, and report on risks in two categories. The first is physical risk , where climate change-induced weather events and patterns become hazardous to your asset or its operation. The second is transition risk , those issues that arise as your business adapts to a lower-carbon future, such as the pace of change and extent of pressure to disclose ESG performance. This includes the transparent and adequate disclosure of these risks - an increasingly regulated task. Know how to manage it. Whether you’re an asset owner, investor, or an occupier, that means taking real-world steps. These include pinpointing climate-related hazards in your physical environment, reporting risks to your stakeholders like any other financial viability metric, and embedding climate risk management into your organizational processes.

THE RISK SPECTRUM

PHYSICAL

The threat to your building from one-off weather events or long-term changes in weather patterns, including:

• Changed operating practices due to extreme heat or cold conditions. • Severe weather restricting building or site access. • Physical damage due to fire or flood.

TRANSITION

Challenges to keeping pace with market and stakeholder expectations for transparent decarbonization:

• Adapting to new policies, regulations, and reporting requirements. • Development of technology and innovation. • Reputational impact from falling short of expectations or obligations.

HOW YOU CAN COMPLY:

Adapt to the fast-changing regulations. Your ability to adequately address climate-related risk relies on adapting to the fast-moving regulatory environment. Many regulators globally are replacing voluntary guidelines with mandatory reporting. This hasn’t always been consistently applied, but that’s changing. New regulatory regimes are coalescing around a single globally recognized standard, and it’s becoming more integrated with how you would report any other financial measure. Know the TCFD & IFRS recommendations. At the center of more unified obligations is the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, which serve as a reference point in most regulatory policies globally. While they are voluntary standards, they are increasingly embedded within regulatory policies and adopted by many companies. As well, they are informing new standards under the International Financial Reporting Standards (IFRS), and the International Sustainability Standards Board (ISSB) established in 2021. The industry goal is to drive greater alignment and consistency, rather than a range of disparate definitions.

While not exhaustive, on the next page we take a look at the different scopes and stages of progress for regulatory developments by region. Regardless of where you are in your regulatory journey, it suggests regulation will only get tighter.

WHERE YOU MUST REPORT: GLOBAL PROGRESS TOWARDS MANDATORY CLIMATE REPORTING* (*Regulatory mandates differ by location and may apply to certain sectors i.e. financial services)

Applies to companies in the US that do business in California.

PASSED LOCAL REGULATORY MANDATES

VOLUNTARY LOCAL MANDATES

NO LOCAL MANDATES, VOLUNTARY GLOBAL STANDARDS MAY APPLY

WHAT YOU CAN DO: THE STEPS TO MANAGE PHYSICAL CLIMATE RISK

The following guide is a companion to help you better identify and mitigate physical climate risks.

• Conduct regular reviews to keep pace with changing physical and financial risk and changing climate modelling • Timing guided by activity and portfolio changes

• Baseline physical climate risks using data analytics tool • Understand threats, changes, costs and impact on value over time across a range of climate scenarios

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• Model impact of physical risk on assets, liabilities, revenues and expenses • Engage finance team with all involved parties/teams to build collaboration

• Integrate climate risk management into everyday processes • Develop an enterprise approach to accountability

START ASSESSING RISKS STEP 1

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STEP 1 START ASSESSING RISK Assessing risks is easier than you think. Getting the data you need to create a baseline of climate risks is increasingly accessible. Digital analytics tools exist that analyze and visualize robust climate-risk data compiled by leading researchers and experts globally. What to do if you’re acquiring a site: Using one of these digital analytics tools, you can input a street address, and model the physical risk impact of climate change in one dashboard. It means that if you are acquiring a building, you can identify the potential impact of weather events and hazards on multiple timescales, including data on the threat of heat, cold or rain costs to operationalize a change or impact on asset value. What to do if you’re assessing a portfolio: The same applies if you have a single site or a portfolio of a thousand sites, you can input all sites, compare risks, benchmark across locations and identify priority areas of risk.

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Cushman & Wakefield partnered with Jupiter Intelligence to offer an easy to use digital analytics tool. Using our real estate know-how and detailed scientific data, it’s designed for real estate users to quickly assess risks and get answers to following key questions:

WHAT IS MY OVERALL HAZARD SCORE?

HOW IS MY HAZARD RISK GOING TO CHANGE?

Climate Hazard Scores: Change Over Time (2020-2050) by Type

All

61

Wind

Cold

Heat 2020 - 2050 Change

58

All Perils 2020 - 2050 Change

29

Precipitation 2020 - 2050 Change

Precipitation

14

Drought

Fire 2020 - 2050 Change

11

Flood 2020 - 2050 Change

7

Wind 2020 - 2050 Change

-12

Drought 2020 - 2050 Change

Heat

Fire

-18

Hail 2020 - 2050 Change

-26

Cold 2020 - 2050 Change

Hail

Flood

See risks and uncertainty for your building or portfolio level on one or all perils.

Model risks across lease renewal cycles or across your intended hold period.

HOW WILL THIS AFFECT MY BUDGET?

WHAT IS THE NEGATIVE IMPACT ON MY ASSET VALUE?

Best Scenario

Mid Scenario

Worst Scenario

CapEx

OpEx

OpRev

$9,000K

$1,400K

$8,000K

$1,200K

$7,000K

$1,000K

$6,000K

$5,000K

$800K

$4,000K

$600K

$3,000K (Loss in USD)

(Loss in USD) $400K

$2,000K

$200K

$0K $1,000K

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$0K

2020 2030 2040 2050 2075 2020 2030 2040 2050 2075 2020 2030 2040 2050 2075

2075

2075

2075

2025

2035

2025

2035

2025

2035

2055

2055

2055

2085

2085

2085

2095

2095

2095

2065

2065

2065

2045

2045

2045

Understand what costs or CapEx are involved to manage your physical risks.

See how the value of your asset is affected over time.

STEP 2 TRANSLATE CLIMATE RISK INTO FINANCIAL RISK

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STEP 2 TRANSLATE CLIMATE RISK INTO FINANCIAL RISK

By using data-driven tools and dashboards, you are already getting a picture of the relationship between physical climate risk and its financial impact on a building or organization. You may have identified that a site or building is at risk from flooding, fires or extreme cold. That threat may impede your ongoing operations or building access. To ensure that the asset is sustainable and viable, you might have to implement an upgrade you hadn’t initially planned for.

This is where climate risk meets financial risk. As the cost of capital works is added to your budget and models, it can have a bearing on acquisition, valuation, investment and disposal decisions. Below is a simple illustration of the financial surprises that can emerge and how to stay on top of them. By constantly monitoring the physical risk and communicating with the teams responsible for financial risk management, it can reduce the likelihood and response times for unforeseen risks.

How physical risks impact financial risks:

WEATHER HAZARDS AND PERILS

EXAMPLE FINANCIAL IMPACT

WEATHER HAZARDS AND PERILS

EXAMPLE FINANCIAL IMPACT

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STEP 3 DEVELOP STRATEGIES TO REDUCE EXPOSURE

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STEP 3 DEVELOP STRATEGIES TO REDUCE EXPOSURE

It gives you an edge. If you are actively managing these risks, you may be ahead of your competition. This gives you an edge in attracting tenants to your buildings, by demonstrating your understanding and

There are a range of ways to manage your risk. Systematic and regular reviews of your building or portfolio, ensuring budgeting provisions are current, and assessing risk early for new transactions are just a few. It’s easier than you think. It may sound complex, but it can be as simple as integrating climate-related risk decisions into the activities you already undertake every day. Undertake due diligence and planning when acquiring a new asset. Ensuring these steps are happening regularly and supported by established processes will simplify your risk management approach. It’s not always catastrophic. You will already be screening for other risks, like whether the building is structurally sound. Adding climate risk evaluation during that process will also tell you whether there are related physical and financial risk implications. Remember, climate risks aren’t always catastrophic. Rising heat impact may require an upgrade to HVAC or insulation, but it does not necessarily make an asset obsolete.

management of these issues. It allows you to plan sooner.

Understanding your risks early means you can plan sooner. A site requiring capital improvement over 5-10 years can be built into long-term capital budgets and may not require immediate and unplanned expenses. The key is to start early and manage this issue like any other risk. And there are upside opportunities too. And it’s not just risk avoidance and early planning that have long-term benefits; there are upside opportunities too. Being more disciplined in climate risk management can put you ahead of the competition, giving you an edge in attracting sustainability-conscious tenants.

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Get your organization on board.

Irrespective of data access and maturity, if a risk is identified and acting on it requires multiple stakeholders to be engaged, you need organizational endorsement to motivate everyone to follow through. That chain of accountability should extend across the real estate organization from investment decision-makers to teams responsible for leasing transactions or day-to-day asset management. After all, as stakeholders increasingly expect or demand climate risk reporting and action, an enterprise-wide framework or approach is no longer just ‘nice to have’.

As you translate physical risk to financial risk, much attention is given to the impact on asset valuations. While that can be significant, it’s worth remembering potential changes to operations and maintenance expenses. Once you’ve assessed and analyzed physical climate risks through sustainability teams or consultants, it’s about ensuring those insights aren’t siloed from other parts of your organization. For example, increased precipitation and flooding risk may require relocating your plant and equipment to higher ground. This may prompt you to revisit your asset lifecycle planning and replacement schedule.

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STEP 4 TRACK AND REFRESH

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STEP 4 TRACK AND REFRESH

Refresh or re-evaluate. Once you reach this step, you have the data, a detailed understanding of climate risk, and processes backed by the operational and real estate teams required to take action. From here, the process repeats, but while you don’t always need an end-to-end re-evaluation, some triggers should prompt a refresh. For example, portfolios can change with assets coming in and out, which can shift your risk exposure. If that’s happening more regularly, accounting for new physical and financial risks at a building and portfolio level may be warranted. Another is if you’ve identified a high-risk site that needs more frequent monitoring and intervention. Similarly, a climate event such as flooding may trigger changes in insurance costs even if the flood doesn’t directly impact your location. Establish thresholds and triggers to prompt refreshing your process based on what’s happening across your business. Know that it’s a continuous journey. Put simply, evaluating and managing climate risk is not a process that ends. In fact, the clearer the picture at any given moment, the more effective financial planning, asset resilience and strengthening strategies will be.

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CLIMATE RISK CASE STUDIES:

INTERNATIONAL FINANCIAL INSTITUTION

AUSTRALIAN INSURER

EUROPEAN INVESTOR

Cushman & Wakefield was engaged to help a global finance organization comply with incoming climate-related disclosure obligations. This included understanding the potential physical risks of climate change to their global real estate portfolio.

Cushman & Wakefield was engaged to help a large insurer evaluate and disclose material risks and hazards across ‘at risk’ properties. The objective was to quantify, mitigate and report on exposure in line with Task Force on Climate-Related Financial Disclosures’ (TCFD) recommendations.

Cushman & Wakefield was engaged to help a pan-European institution align its portfolio with the European Green Deal reporting requirements under the EU taxonomy. This included performing climate risk assessments and identifying climate adaptation measures to boost the organization’s resiliency.

SOLUTIONS

SOLUTIONS

SOLUTIONS

• Completed physical climate risk scenario analysis for 160+ owned and leased sites using the Jupiter platform • Designed user-friendly dashboards to deliver climate risk data for all sites globally

• Produced detailed ratings of short- and long-term risks at each site

• Completed a climate risk assessment using detailed, locally available data

• Identified risks and mitigation measures

• Assessed taxonomy alignment based on climate risk assessments • Developed adaptation solutions recommendations to increase portfolio resilience

• Developed natural hazards screening checklist and bushfire management protocols

• Enabled the evaluation of potential physical risks of climate change during the due diligence process for future real estate transactions RESULTS

RESULTS

RESULTS

• Enabled climate risk reporting capability

• Supported the resilience of physical assets and mitigated climate-related risks

• Supported increased alignment to EU Green Deal legislation

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• Strengthened due diligence process to better identify risks during future site selection

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Find out more about our Sustainability Services

TAKE THE NEXT STEP. While the global movement towards mandatory climate risk reporting means your obligations are increasing, following the policy principles also makes good business sense. If you screen for climate risks at any point in your building’s lifecycle, you can mitigate the physical impact of weather events and patterns. In turn, you can reduce your exposure to unexpected financial downside. On the other hand, sound climate risk management brings opportunities. For example, your buildings can operate more effectively and competitively as you seek to attract and retain tenants or reduce operating costs. Once you understand your climate risks, you might look at things differently. Whether that’s your due diligence process, leasing and renewals strategy, or even how you get all teams up to speed on your chosen risk management path. If you are unsure of when to begin your climate risk journey, there’s no better time than now. With a growing arsenal of digital tools, a structured approach and expert advice from our sustainability team, it’s easier than you think to understand the physical and financial impacts of climate change on your assets.

CONTACT:

JESSICA FRANCISCO Head of Sustainability - Occupier Services, CW Services and Americas jessica.francisco@cushwake.com

RACHEL SCHIFTAN Managing Director Sustainability & ESG, U.S. rachel.schiftan@cushwake.com

GEHAN PALIPANA Head of Sustainability Australia & New Zealand gehan.palipana@cushwake.com

MATTHEW CLIFFORD Head of Sustainability & ESG APAC matthew.clifford@cushwake.com

JAMES WOODHEAD Head of Sustainability & ESG EMEA james.woodhead@cushwake.com

ANOUK DONKERVOORT Climate Risk Lead EMEA anouk.donkervoort@cushwake.com

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We work with some of the largest occupiers and investors globally to action ideas and strategies for a more sustainable world – read more on our climate risk services on the next page or contact our team.

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OUR CLIMATE RISK SERVICES

The Cushman & Wakefield sustainability team are experts at translating climate data into actionable strategies. We can help you understand how climate change might impact your assets/portfolio and also manage and disclose your climate-related risks and opportunities. Our climate risk-related services include: climate risk scenario analysis; climate risk scores and assessments; risk mitigation strategies and plans; TCFD Reporting and EU Taxonomy advisory.

HERE’S HOW WE CAN MAKE IT PRACTICAL FOR YOU:

Our data-driven approach can be set up quickly to pinpoint issues needing deeper attention.

Our people and systems enable regular reviews, so you stay abreast of changes.

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MAKE IT PRACTICAL

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Our consultants co-create implementation plans so you can start rolling out changes today.

We undertake financial risk assessments, like potential capital upgrades or operational changes.

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MANAGE HOW TO

CLIMATE RISK A Practical Sustainability Guide

ABOUT CUSHMAN & WAKEFIELD Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award-winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.

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