Climate Risks, TCFD, and REITs 

March 18, 2022

In his 2021 annual letter to CEOs, BlackRock CEO Larry Fink stated that “no issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.” 

He then proceeded once more to call for the companies the firm invests in to report their climate risks and opportunities using the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Fink had much such a request in the previous year as well.

As climate change accelerates, identifying and taking action on the risk it presents to REIT portfolios has surfaced as a key issue for the real estate industry.

Data and analytics

To tackle this issue, REITs are turning to data and analytics. REITs are seeking out forward-looking physical climate risk data to explore their portfolios’ exposure to climate risks, pinpoint portfolio trends, and inform decisions on new investments.

As REITs are becoming increasingly more climate-conscious, they are also looking to frameworks like the TCFD and the GRESB real estate assessment resiliency module to manage their climate-related risks and opportunities and disclose them in a way that is useful for investors.

The TCFD has broad buy-in from regulators and policymakers, asset owners, investors, and activists, and is widely considered the best way for external stakeholders to learn more about businesses’ readiness for climate change. 

Indeed, the TCFD has quickly become the global best practice for climate-related risk and opportunity disclosures with New Zealand, Switzerland, the UK, and China announcing moves to mandate TCFD-aligned disclosures. Canada and the US are expected to follow suit shortly and REITs have taken notice.

Climate savvy investors

Investors everywhere are becoming increasingly climate savvy and are having conversations with REITs on how they plan to handle potential climate risks and opportunities. 

So what should REITs be doing now? How can they navigate the complex climate landscape and give investors and regulators the information they need?

To go forward with confidence, REITs need to first understand what climate risks are material to them. They need to understand where their climate risk exposures are located and ensure there are clear lines of internal accountability on how climate change is identified, assessed, and managed within the business.

Risks abound

REITs need to build resiliency across their portfolios to climate-related events. It’s not just the physical impacts,  like extreme weather events, that threaten REITs, but the transition risks that climate change poses as well. 

Transition risks are those produced by the shift towards a low-carbon economy. These can range from changes in carbon pricing to new regulations and mandates to changes in market demand and expectations. Certain transition risks could be just as material to a REIT portfolio as physical climate risks. Therefore REITs need to ensure they are properly tracking and managing their transition risks. 

Using the TCFD framework is the best practice for REITs wanting to identify their physical and transition risks. The TCFD recommendations ensure organizations take a comprehensive look at how climate change impacts their businesses— — both the risks and opportunities — and provide guidance on how to disclose them.

If you work at a REIT and are considering using the TCFD, we can help. Manifest Climate is a climate intelligence SaaS platform that combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to deliver best-in-class climate guidance at scale. We have worked with some of North America’s largest firms to help them navigate climate change and produce credible and trustworthy TCFD-aligned reports. Reach out today to find out how we can help you on your climate journey.