Seeking to enhance understanding of risks posed by climate change, Royal London Asset Management engaged flood experts, GeoSmart, to review over 200 high-value commercial assets worth more than £7bn
Due to the increasing frequency and intensity of weather events, as well as recommendations of the Association of Real Estate Funds, Royal London Asset Management (RLAM) engaged GeoSmart to identify sites across its £7bn (€8.4bn) portfolio where asset value and liquidity may be affected by flood risk.
Research suggests that flooding can reduce the value of a property by 30% in severe cases, while insurers are taking an increasingly precautionary approach to climate change and advising that cover may not be available in future for some sites. Pair that with complex ESG reporting requirements for compliance, such as IFRS S2, and it’s easy to see the challenges for asset managers.
Given the significant amount of capital at risk, owners of assets require accurate and reliable flood information to facilitate more informed decisions regarding asset risk. Identifying and quantifying risk is key to supporting and future-proofing asset management at property level and risk management at portfolio level, as well as enhancing decision-making, benchmarking, ESG reporting and investor disclosures.
Defining risk: screening and scoring
All RLAM sites were given an overall flood-risk score, with a summary dashboard providing a high-level view of the aggregated portfolio and granular property-level data. This meant assets could be compared against one another, enabling reconciliation of the aggregated data with its constituents.
The approach was underpinned by clear understanding of risk criteria, key assets on each site and relative value between sites. Types and size of assets were wide-ranging including office blocks, retail units, warehouses, distribution centres, industrial units, trading estates, research parks, hotels and healthcare facilities.
Current and future risk
Following digitisation and verification of each site boundary, data obtained using Geosmart’s FloodSmart Analytics tool created a picture of flood risk from river, coastal, surface water and groundwater sources. The complexity of flooding – including different sources, depths, frequencies, spatial extents, flood defences and climate change scenarios – was analysed and expressed in each flood-risk score. The score was calculated under current baseline conditions and in the 2050s and 2080s, including the extreme RCP 8.5 climate-change scenario.
An up-to-date view of risk was provided, including any changes to flood-risk models and improvements to flood defences which may have been made since the original due diligence reports completed at the site acquisition stage. This enabled a consistent ranking of risk to be considered across the portfolio and the component funds to alert asset managers where further investigation was required.
Flood hazard data was converted to finance/cost data using a common benchmark for a standard commercial property, from which detailed outputs and portfolio rankings were undertaken according to a range of criteria including combined flood risk, capital value, total annual average damage or area flooded.
Individual, site-specific flood-risk screening reports were finalised to support detailed assessment and mitigation. From this, maps illustrating the spatial extent and depth of flooding at five-metre resolution were developed.
Indicative costs of flooding were provided to support initial cost benefit analyses for mitigation measures and to assess the value of assets dependent on flood defences and the reliance on future improvements to the defences in relation to climate change.
Findings and mitigation
The review indicated that the portfolio was in the very low risk category. This profile was also quite stable under future climate scenarios, and it was only in the 2080s that there was much upward movement in the categories under the most extreme high-emission scenario (RCP 8.5). The impact is less significant with lower emission scenarios.
Only a small proportion of the assets were associated with mapped historical flood extents, following which further investigation confirmed that often formal flood defences had been put in place by the Environment Agency (EA), mitigating flood risk. Approximately 10% of assets were dependent on formal flood defences being maintained by the EA against future climate change effects such as sea level rise and increased peak river flow.
Pluvial or surface water flooding was the most widespread risk. The majority of flood depths were relatively minor, not capable of exceeding building threshold levels or in areas of the site occupied by non-essential use such as carparking and landscaping. Depending on the age of construction, the site drainage systems were designed to manage the surface water storm events, with some of the newer assets built with sustainable drainage systems and allowance for increases in rainfall intensity and run-off as a result of climate change.
On the basis of the potential financial risk, the proportion of the total average annual damage from potential flooding sources comprised: 39% fluvial, 6% tidal, 17% groundwater and 38% pluvial. Follow-ups were recommended for sites with a basement or buried infrastructure where potential groundwater flood risk exists, and sites where fluvial or tidal flooding could occur.
A small proportion of sites were selected for site visits and further detailed assessment to verify the original risk screening by obtaining more detailed information on the site, individual building layouts, floor levels, business continuity plans and discussion with the facilities manager. The work included a review of previous assessments and climate change allowances, allowing an updated risk score and recommendations for mitigation options.
Building resilience
The review equipped RLAM asset and fund managers with full awareness of flood risk and potential impact, supporting the following:
● Valuation and liquidity protection
● Retained overall fund value through risk management and potential divestment
● Better insurability
● Climate change disclosure obligations
● Enhanced investor and stakeholder confidence
● Enhanced due diligence for acquisitions and developments.
The uncertainty of future flood risk is likely to increase the need for stress testing of investment portfolios to better understand portfolio resilience and make informed decisions to mitigate potential risks. Herein lies an opportunity for asset and fund managers to successfully manage future risks and build resilient portfolios.
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