This chapter explores how local climate-related risks can become financial risks within the real estate sector and associated markets. These financial risks can directly and indirectly affect all real estate stakeholders including borrowers, lenders, residential and commercial property owners and firms. Five categories of financial risks resulting from climate-related risks are identified and examined: credit, market, underwriting, liquidity and operational.
Future‑Proofing Real Estate Investment
Place-Based Risks
Abstract
Location-specific climate-related risks may impact the financial system through five types of financial risks: credit, market, underwriting, liquidity and operational, each shaping how real estate assets are valued, financed and managed.
Credit risk is the inability to meet debt and payment obligations. In the context of real estate, it can arise when climate-related hazards, such as wildfires or floods, damage properties and create losses, increasing the risk of loan delinquency and weakening collateral values.
Market risk refers to the potential for losses resulting from changes in market conditions. In the real estate sector, it can arise from reductions in financial asset values. For example, sudden declines in property values following shocks such as floods, depreciation due to physical damage or obsolescence, or sudden regulatory changes that significantly alter building standards or carbon performance requirements.
Underwriting risk occurs when premiums do not adequately cover losses. This can lead insurers and reinsurers to raise premiums, restrict coverage or withdraw from high-risk areas altogether, widening insurance protection gaps and increasing financing constraints.
Liquidity risk in the real estate sector arises from the inability to sell exposed properties quickly without steep discounts or the complete loss of marketability where assets become unsellable or stranded.
Operational risk in real estate refers to potential losses arising from internal failures or external events driven by climate-related hazards and reflected in income volatility or disruptions to essential service facilities.
Implication for action
Governments and regulators can embed climate-related risk in prudential frameworks, refine stress tests and clarify regulatory timelines to reduce uncertainty.
Financial institutions can adjust lending, valuation and portfolio management to account for climate exposures and stranded asset risks, while investing in internal capacity.
Insurers can close protection gaps through innovative coverage and possibly public-private solutions.
Knowledge gap and next steps
Current analyses tend to treat physical and transition risks in isolation, but there is little understanding of how compounding risks (e.g. hazards coinciding with sudden regulatory tightening) may amplify financial instability. This remains an important area for future research.
Climate-related risks accumulate and can embed potentially irreversible financial threats (Hiebert and Monnin, 2023[1]). As climate-related risks become more prevalent, they can compound, potentially exacerbating existing vulnerabilities. Both physical shocks and transition policies can influence financial systems through complex and interconnected pathways. These risks can therefore affect the entire economy and its stakeholders, including households, businesses and governments.
In the real estate sector, severe climate-related shocks can lead to changes in property asset values, alter lending and investment patterns and place pressure on insurance markets. These impacts can accumulate over time, with potential consequences for investment performance, public finances and the stability of the wider financial system.
As climate-related risks continue to evolve, and the significance of their impacts on economies grow, the need to address them becomes more urgent. Addressing these challenges begins with understanding the nature of these risks and how they can affect real estate. Data needs, analytical pathways and frameworks and relevant risk assessment tools, as outlined in Chapter 2, highlight the gaps in current market practices and the steps required to strengthen and align risk assessment for future-proofing real estate investment.
This chapter considers how climate-related risks become financial risks and how they affect stakeholders in real estate markets both directly and indirectly. It draws on frameworks developed by leading international bodies, including the Bank for International Settlements (BIS) and the Network for Greening the Financial System (NGFS), to assess the relevance of climate-related risks within real estate markets and illustrate how these risks can manifest through five distinct categories of financial risks: credit, market, underwriting, liquidity and operational.
Climate-related risks generate financial risks through complex mechanisms that connect climate-related hazard events to economic impacts across real estate markets. These mechanisms, known as drivers and transmission channels, describe how climate-related risks are created and can lead to financial consequences. Drivers are the underlying factors that initiate or amplify the climate-related risks, while transmission channels are the specific pathways through which those risks affect financial outcomes. The impacts of these mechanisms vary for different stakeholders, depending on the exposure and vulnerability to climate-related risks (BIS, 2021[2]). These channels are generally classified into microeconomic and macroeconomic categories. Microeconomic transmission channels capture the impact of climate-related risks on individual stakeholders and, in turn, how these affect their operations, asset values and investment decisions. Macroeconomic transmission channels operate through broader economic factors, such as productivity, growth, inflation and interest rates, which can influence the performance and dynamics of the real estate ecosystem (BIS, 2021[2]). These channels transmit climate-related risks, resulting in five main types of financial risk (Figure 3.1).
Note: The impact of climate-related risks on real-estate assets can vary by geography and by the presence of amplifiers and mitigants. Geographic heterogeneity can lead to differentiated effects on real estate assets, influenced by factors such as physical risk exposure, local economic structure and insurance availability. Amplifiers, such as unaffordable insurance and increased household losses, further concentrate and intensify these risks. Mitigants, such as adequate insurance coverage and diversified economic structures, help reduce exposure and improve risk management within the sector.
Source: (NGFS, 2022[3]) and (BIS, 2021[2])
Credit risks
Credit risks refer to the possibility that a counterparty is unable to meet their payment obligations. Financial institutions primarily face these risks through their loan portfolios, where climate impacts can directly affect the probability of default (PD) (FDIC, 2024[4]; de Bandt, et al, 2023[5]).
Intensified climate-related physical risks may contribute to higher credit demand and reduced repayment capacity. As climate-related risks emerge and materialise through physical events, households in exposed regions can face high costs to repair, retrofit or adapt their properties. These high costs, combined with limited savings buffers and potentially delayed insurance payouts following a disaster event, may push households to rely on credit to finance their expenditures. Evidence from the US Census Bureau’s Household Pulse Survey suggests that over one-third of Americans affected by a disaster in the preceding year relied on loans or credit cards to meet their spending needs (US DT, 2023[6]). While such borrowing can provide temporary relief, it may also increase associated credit risks if collateral values or income levels do not recover.
Mortgage borrowers are particularly sensitive to changes in property values. When homes are severely devalued or destroyed by climate-related events, borrowers may lose the incentive to continue making payments (Moody’s, 2023[7]). Historical events illustrate this effect: after Hurricane Harvey in 2017, delinquency rates, defined as loans overdue but not yet in default, nearly doubled in the worst-hit flood regions of southeast Texas (US). A similar pattern was observed three months after Hurricane Florence in 2018 in the major metropolitan areas affected by the storm (Wowk, C., n.d.[8]).
Climate exposure may downgrade business creditworthiness through diminished asset values and reduced profitability. Construction and infrastructure companies, which are the upstream suppliers of the real estate market, could face significant regional variations in Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) losses by 2050, depending on climate scenarios. Under a >3°C warming scenario, companies in South America, Asia-Pacific, Africa and the Middle East are expected to face the highest risk with 10-15% EBITDA losses, while Europe and North America are expected to experience moderate losses of 5-10%. Under a more controlled >2°C warming scenario, most regions are expected to see reduced impacts with Europe, North America and South America showing losses of less than 5%, though Asia-Pacific, Africa and Middle East still show 5-10% expected losses (WEF, 2024[9]) (Figure 3.2). These projected profitability declines suggest sectoral credit vulnerabilities that could manifest as rating downgrades, widening spreads and constrained access to financing. As borrower creditworthiness declines, lenders may adjust their lending, pricing and capital strategies.
% annual EBITDA at risk
Source: (WEF, 2024[9]), reproduced by the OECD
Higher physical risks may also prompt lenders to tighten credit. Research suggests that Spanish firms affected by wildfires between 2004 and 2017 saw their outstanding credit decline by approximately 6% more than similar firms in the same municipality that were not affected, indicating that wildfire damages limit access to financing (Alvarez-Román, et al., 2023[10]). This response from the credit suppliers, combined with higher borrowing needs, could heighten solvency pressures for households and firms holding real estate investments and assets.
To minimise their credit risks, lending institutions integrate climate-related risks into lending strategies primarily through loan interest rate adjustments and higher internal capital buffers or loss provisions. For example, an analysis of 30-year US mortgages issued between January 1992 and June 2018 demonstrates that lenders charge approximately 7.5 basis points higher interest rate spreads for residential properties exposed to sea level rise compared to unexposed areas (Nguyen et al., 2022[11]). Similarly, loan-level data from eight Eurozone countries (Belgium, France, Germany, Ireland, Italy, the Netherlands, Portugal and Spain), for mortgages between 2010 and 2023, indicate that properties in high-risk areas face interest rate increases of 4 to 37 basis points per standard deviation of climate exposure. This reflects a shift toward recognising climate-related risk as a material factor in mortgage lending (Fontana, et al., 2025[12]). Moreover, lenders impose substantially higher interest rates on bank loans granted to firms facing environmental concerns (Chava, 2014[13]). These repricing mechanisms can effectively internalise climate-related credit risk into borrowing costs, making climate exposure a material factor in loan pricing.
Capital adequacy requirements play a significant role in shaping a bank’s lending strategies, as they measure the bank’s eligible capital relative to its risk-weighted assets (Tankler, 2017[14]). Under the Basel III framework, Pillar 1 sets the minimum capital requirement for banks of 8% of risk-weighted assets (RWA), while Pillar 2 serves a complementary layer in the presence of underestimated or not fully captured risks, in the EU implemented through the Supervisory Review and Evaluation Process (SREP) (ECB, 2025[15]). As climate-related risks become more material, supervisors can respond by adjusting capital adequacy requirements through Pillar 2. For example, when climate-related inputs affect Supervisory Review and Evaluation Process (SREP) scores, this may require some banks with significant exposures or weak climate-risk management to hold more capital relative to their risk-weighted assets (ECB, 2022[16]).
Energy-efficient properties demonstrate a lower probability of default than inefficient assets. In residential markets, the transition to a low-carbon economy creates clear winners and losers, with energy-efficient homes showing lower probabilities of default across countries and various measurement systems. Research using a micro-level dataset of more than 1.8 million mortgages in the UK at the end of 2017 shows that around 0.93% of residential mortgages on energy-efficient homes were overdue, 0.21% lower than less energy-efficient properties (Guin and Korhonen, 2020[17]). Similarly, Dutch loan-level mortgage data from 2014-2018 shows that buildings with provisional energy efficiency ratings have 34-basis point lower default probabilities compared to less efficient properties. This may reflect personal borrower characteristics associated with choosing energy efficiency, improvements in building performance and higher dwelling value (Billio, et al., 2022[18]).
The banking sector’s transition risk exposure hinges on real estate lending. Banks’ loan books, the aggregate value of all loans issued to various borrowers (Bundzen, 2024[19]), reveal exposure to transition risks by sector and region, forming an important part of overall credit risk. Real estate accounts for roughly 17-32% of banks’ exposure, with the most concentrated exposure in the Americas (MSCI, 2025[20]). This positions real estate as a central sector in climate-transition strategies, with major implications for banking stability (Figure 3.3). Bank vulnerability is expected to increase as transition policies impact the wider economy, particularly in high-exposure regions.
Note: Data as of December 2024
Source: Reproduced by the OECD, (MSCI, 2025[20])
Market risks
Market risk refers to the potential for losses resulting from reductions in financial asset values as a result of climate-related impacts (BIS, 2021[2]). In the context of climate-related risks, these traditional market risk factors can be intensified by additional sources of volatility specific to real estate markets. These include direct property destruction, structural shifts in asset valuations and changing investment preferences, all of which reshape market dynamics.
Physical climate risks can damage buildings and directly reduce their value. For example, the Los Angeles (US) wildfires in January 2025 are estimated to have destroyed more than 10 300 properties, causing expected losses of USD 135 billion (Sherman and Hoskins, 2025[21]). Similarly, according to Morningstar Dominion Bond Rating Service (DBRS), the 2024 floods in Valencia and Alicante (Spain) caused substantial property damage, leading to estimated insured losses of more than EUR 4 billion (Reuters, 2024[22]). UNEP FI evidence indicates that extreme hazard events like these can reduce property values by between 5-20% (UNEP FI, 2018[23]). The European Central Bank (ECB)’s 2022 Climate Stress Tests for EU countries assessed the impact of flood risk on real estate asset prices under different levels of intensity using predefined price-shock parameters set by the ECB as part of its scenario design. The exercise indicates that commercial real estate assets could experience drops of approximately 3% in value in minor flood-risk areas, 8% in low-risk, 16% in medium-risk and up to 43% in high-risk under these ECB-imposed assumptions. Residential assets are slightly more sensitive, with potential losses of 4% in minor-risk areas, 10% in low-risk, 19% in medium-risk and 45% in high-risk (Table 3.1).
ECB Climate Stress Test 2022
Note: The assessment focuses on EU countries and is based on the NUTS3 classification (Nomenclature of Territorial Units for Statistics), which refers to small regional divisions. The stress test was carried out in 2022.
Source: (ECB, 2022[24])
As governments worldwide implement stricter environmental regulations, non-compliant properties face the risk of becoming stranded assets. Approximately 90% of commercial real estate asset managers surveyed in France, Germany, Italy, Spain and the UK in 2024 expect that at least 20% of their real estate portfolios may become stranded assets over the next three years due to inadequate energy performance (Wintermeyer, 2024[25]). Asia-Pacific markets face progressive asset stranding risks, with 60% of studied assets projected to become non-viable by 2030 and near-total portfolio impacts projected by 2050. North American markets demonstrate even more immediate vulnerability, with the majority of stranding risks materialising in the baseline year of the assessment period (UNEP FI, 2022[26]).
Carbon pricing and related climate policies are reshaping transition risks for the real estate sector, particularly through rising costs, stranded assets and investor pressure. Carbon pricing refers to the monetary charge applied to the level of greenhouse gas emissions associated with an organisation’s activities (Self and Wolfenden, 2024[27]). It contributes to higher construction, refurbishment and demolition costs as these activities rely on carbon-intensive materials. Construction costs are likely to rise as these materials become more expensive, driven by carbon prices that rose from around USD 4.45 to USD 40.65 per tonne of CO₂for heavy industry plants in OECD countries between early 2015 and late 2021 (Teusch, et al., 2024[28]). Real estate companies also face growing regulatory pressure through carbon pricing, taxes and efficiency standards, which can reduce asset value and require costly retrofits. Given the long lifespan of buildings, carbon lock-in is a significant concern, as inefficient properties may become stranded assets. Investors must increasingly account for the risk of high-emitting properties and may need to offset emissions or shift toward low-emitting assets (UNEP FI, 2023[29]). This underscores the need for clearer policy guidance and more robust, standardised frameworks to accurately price and manage transition-related exposures.
Buildings that fulfil higher energy standards are more modern and well-equipped, making them more attractive to tenants and potential buyers. This advantage is also reflected in market values. Studies from Australia, Denmark, France, Germany, Ireland, Japan, the Netherlands, Singapore, Spain, Switzerland, the UK and the US collectively show energy-efficient residential properties typically presenting 3-8% higher sales price and 3-5% higher rents compared to similar, less efficient buildings. In the commercial sector, studies on Australia, Japan, the Netherlands, the UK and the US show that the premium is even more significant, with sales prices exceeding those of comparable properties by over 10% and in some cases more than 20%, while rents increase by 2-5% (Zancanella, Bertoldi and Benigna, 2018[30]). In the European markets from 2022 to 2050, real estate prices are projected to rise, with energy-efficient properties (EPC A) appreciating more than inefficient ones (EPC G), especially under an orderly transition scenario. This trend is driven by rising energy costs, which make efficient buildings more attractive (ECB, 2022[24]). A closer look at the valuation of assets from France confirms this pattern: in 2023, the median price of energy-efficient dwellings (classes A-B) increased despite an overall market contraction (+1% for apartments, +2% for houses), while inefficient dwellings (classes F-G) saw sharp declines (-6% for apartments, -3% for houses). Econometric estimates show that energy efficient homes sold for up to 20% more than comparable properties with lower labels, while inefficient small apartments lost up to 8% of value in a single year (Notaires de France, 2025[31]). However, these value premiums coexist with widening valuation gaps between efficient and inefficient assets, intensifying segmentation across real estate markets.
Underwriting risks
Underwriting risk is the risk arising from insurance pricing and terms that do not adequately cover expected losses of insurers, particularly where premiums are set too low to absorb future claims. As climate-related risks intensify, existing strategies may underestimate future claims and lead to structurally underpriced risk and rising underwriting losses. Unless they face regulatory restrictions on pricing or severe competitive pressures, non-life insurers can seek to recoup losses by changing premiums and/or coverage upon the annual policy renewal. With insurers reporting record losses in high-risk regions and assets, many insurers have been responding by increasing premiums on high-risk properties and/or reducing coverage in order to restore underwriting profitability (Möhr, Yong and Zweimueller, 2025[32]). However, this continues to widen existing protection gaps: within the EU market, only about 20% of economic losses from climate-related events (e.g. flood, droughts) were covered by private insurance between 1980 and 2024, with coverage rates falling below 3% in some countries (EEA, 2025[33]).
Individual properties may become uninsurable as their location-specific climate-related risks go beyond insurers’ ability to absorb it. Rising premiums can make coverage unaffordable even when technically available, while some insurers may withdraw from high-risk areas if they expect limited demand at higher pricing levels. These shifts have significant consequences for individuals, including reduced property values, restricted access to credit and increased vulnerability at the household and community level. By 2030, around 4% of properties in Australia are expected to be classified as high-risk due to escalating annual damage costs from extreme weather and climate-related risks, which could limit their insurability. A further 9% of properties are projected to fall into a medium-risk category, facing annual damage costs equivalent to 0.2-1% of their replacement value which increases the likelihood of gaps in insurance coverage (Climate Council, 2022[34]). The OECD Future-proof Real Estate Investment Survey supports these trends with 36% of respondents (15 out of 42) citing increased insurance premiums as a primary climate-related financial impact affecting individual asset performance.
Table 3.2 presents examples of flood insurance affordability challenges. Beyond affordability, capacity challenges within reinsurance markets can also amplify these effects across entire regions and asset classes.
Source: Data from (OECD, 2026[35]), the data for Australia is from Paddam, Liu and Philip (2024[36]), Home Insurance Affordability Update; and ICA (2025[37]), Insurance Catastrophe Resilience Report 2024–25. The data for Romania is from EIOPA (2024[38]), Dashboard on insurance protection gap for natural catastrophes. The data for New Zealand is from Lilly (2024[39]), Insurance availability and risk-based pricing; and Finity Consulting (2023[40]), Insurance Price Monitoring. The data for the United Kingdom is from BMG (2022[41]), Availability and affordability of flood insurance: Integrated household report; BMG (2022[42]), Availability and affordability of flood insurance: Small and medium-sized enterprises (including agricultural businesses); and correspondence with Flood Re. The data for the United States is from GAO (2023[43]), Flood Insurance: FEMA's New Rate-Setting Methodology Improves Actuarial Soundness but Highlights Need for Broader Program Reform; and Mindock (2024[44]), US judge refuses to block new FEMA flood insurance rate overhaul.
Insurance underwriting can be used as a strategic tool to incentivise sustainable investment in real estate and climate resilience, yet this approach remains underutilised. By embedding sustainability criteria into underwriting portfolios, insurers can actively shape market behaviour and steer capital allocation toward sustainability. In Germany, insurers have collaborated with households at high flood risk to identify tailored mitigation measures and granted premium reductions to those that implemented them. Similarly, in Barbados, one insurer provides significant premium discounts, ranging from 25-40%, to households and businesses that retrofit buildings to withstand hurricane-force winds (OECD, 2023[45]). These examples suggest that proactive measures taken to reduce risk could be incentivised, when recognised by insurers through savings on insurance premiums and deductibles (UNEP FI, 2025[46]).
Reinsurance market disruptions can further amplify insurance protection gaps by constraining primary insurers’ capacity to underwrite climate-related risks across entire geographic regions and property sectors. Reinsurers play a significant role in absorbing climate-related natural catastrophe (NatCat) losses by spreading and diversifying risks globally. However, like primary insurance firms, rising insured losses and other contributing factors prompt some reinsurers to increase premium rates, lower coverage limits, or withdraw coverage for certain regions altogether. Alarmingly, this trend may then restrict primary insurers’ capacity to underwrite climate-related risks, contributing to the overall insurance protection gap (Möhr, Yong and Zweimueller, 2025[32]). These insurance dynamics can primarily transmit into credit and market risks via collateral quality and financing conditions.
Liquidity risks
Liquidity risk in the real estate sector is the potential losses when properties exposed to climate or market pressures cannot be sold quickly without substantial price discounts or when they become unmarketable or stranded (Foerster, Ryan and Scheid, 2025[47]). Climate-related risks create both property-specific liquidity constraints and market-wide disruptions that can alter real estate market dynamics and transaction patterns. These effects are expected to first materialise at the property level, where climate risks distort pricing dynamics and marketability.
Individual properties in climate-vulnerable areas may face extended time on the market and forced price discounts as buyer demand weakens. Climate-related risks raise liquidation costs as fewer buyers pursue riskier properties and selling periods lengthen. Research reveals that property values typically suffer from an initial sharp decline in market activity, followed by price adjustments. This pattern emerges because sellers reduce their offers more slowly than buyers reduce offers (Foerster, et al., 2025[48]). For example, in Baton Rouge, Louisiana (US), properties located in flood-risk areas tend to stay on the market longer and sell at discounted prices (Turnbull, Zahirovic-Herbert and Mothrope, 2012[49]). As buyer demand contracts and sale durations extend, liquidity premiums can rise, effectively reducing the relative value of climate-exposed assets.
Severe climate-related hazard events can cause temporary liquidity stress in local real estate markets. Where acute physical risks severely damage residential and commercial properties, transaction activity may contract sharply as buyers withdraw and valuations become uncertain. This reduction in trading volumes is typically localised but can persist for months, slowing recovery and increasing financial losses for affected owners. For example, the 2022 floods in Pakistan caused USD 5.6 billion in housing damages, with future recovery needs estimated at USD 2.8 billion. This amount covers both short-term losses and medium- to long-term recovery, with the overall recovery period spanning 12 months to 5 years (WB, 2022[50]). These concentrated losses may signal that when many local properties are damaged or harder to finance, buyers and lenders withdraw, listings decrease and gaps between supply, demand and prices widen. In these cases, sale times can lengthen, possibly signalling temporary liquidity stress. While these events rarely trigger system-wide crises, they demonstrate how concurrent local shocks can constrain transactions, depress collateral values and temporarily increase credit exposures.
The real estate sector can face reduced market liquidity when sudden regulatory shifts and compressed compliance timelines leave market participants unprepared. Increasing climate-focused regulation, such as climate-related risk disclosures, stricter building codes, carbon pricing and carbon credits, can significantly impact real estate assets and markets (UNEP FI, 2022[51]). The sudden or disorderly introduction of regulations can increase market uncertainty which may slow transactions, decrease demand and reduce prices.
The OECD Future-proof Real Estate Investment Survey (2025) showed that respondents experience a lack of clarity in regulatory timelines for energy and carbon performance standards in buildings. Only 5% of respondents (2 out of 43) find these timelines "very clear" with a strong legal framework and detailed guidance. 37% (16 out of 43 respondents) report that timelines are "somewhat clear – general direction is known," indicating a degree of ambiguity. 21% (9 out of 43 respondents) describe them as "unclear – fragmented or evolving rules," directly contributing to market uncertainty and investment paralysis. Compounding this issue, 5% (3 out of 43 respondents) state that timelines are "very unclear – no clear deadlines or targets," underscoring a profound deficiency in actionable guidance (Figure 3.4). This regulatory opacity discourages long-term investment and can temporarily reduce liquidity by making assets harder to price or trade. When owners and investors cannot accurately assess compliance costs or future regulatory exposure, they tend to postpone transactions and delay capital deployment, resulting in fewer market participants, slower deal flow and wider pricing gaps. Over time, these dynamics can suppress asset values and increase financing costs, particularly in markets already facing physical climate risks.
Note: Question from the survey: “Clarity of compliance timelines for energy and carbon standards”. The survey respondents could select one option.
Source: The OECD Future-proof Real Estate Investment Survey
Operational risks
Operational risk is the risk of losses resulting from weaknesses or failures in internal processes, human errors, system malfunctions or external events (EBA, n.d.[52]). Climate-related hazards can amplify operational risk by directly damaging physical assets, straining economic conditions and exposing critical gaps in organisational preparedness. The OECD Future-proof Real Estate Investment Survey shows that 35% of respondents (15 out of 43) identified “limited internal expertise or capacity” as a primary challenge in assessing physical climate-related risks (Figure 3.5). This can hinder the accurate identification, measurement and mitigation of climate-related threats, increasing the risk of unforeseen disruptions within real estate operations.
Note: Question from the survey: “Main challenges in assessing climate-related transition risks” The survey respondents could select the three most applicable options.
Source: The OECD Future-proof Real Estate Investment Survey
Growing climate-related risks can raise required capital expenditures (CapEx) as firms invest in resilience measures to upgrade and protect asset values. Despite growing awareness of climate-related risks, misaligned investor or shareholder priorities and limitations in current financial reporting frameworks contribute to market inertia, slowing progress in sustainable real estate investment. If the focus remains on short-term financial gains without adequately factoring in long-term climate-related risks and opportunities, the firms might struggle to adapt effectively as delaying these investments often result in higher, urgent future costs that strain budgets, profitability and liquidity. Even highly resilient buildings remain exposed to service interruptions if surrounding infrastructure fails, highlighting the interconnected nature of climate-related risks. On the other hand, well-structured CapEx plans can boost building performance, strengthening climate resilience and cash flow of companies.
According to the The OECD Future-proof Real Estate Investment Survey, 15 respondents indicated that "Misaligned investor or shareholder priorities" is a barrier to directing CapEx towards climate adaptation goals (Figure 3.6). Additionally, "Limitations in financial reporting frameworks for climate investments" was a concern for 6 respondents, suggesting that a shift in investor perspectives and an evolution in reporting standards is needed to drive and embed climate resilience into core real estate investment strategies. In real estate markets, multiple, often voluntary, standards and frameworks exist, each tailored to different needs and stakeholders (see Chapter 2). However, the lack of standardisation in definitions and metrics can lead portfolio owners to present distorted ESG performance to investors, effectively greenwashing their investments and assets (GRESB, 2023[53]).
Note: Question from the survey: “Main challenges in directing CapEx to align with climate adaptation goals” The survey respondents could select all applicable options.
Source: The OECD Future-proof Real Estate Investment Survey
Climate-related physical risks pose a significant operational challenge for local and national authorities by threatening the functionality of essential services facilities. Facilities such as hospitals, schools and administrative offices are essential for maintaining public health, education, governance and order, both daily and during emergencies. Damage to these buildings from extreme weather events can disrupt operations, interrupt service provision and weaken the capacity of governments and communities to effectively respond to urgent events. Recent analysis highlights the urgency of this issue, estimating that by 2100, one in twelve hospitals worldwide (equivalent to 16 245 facilities) will face a high risk of closure due to extreme weather events. The risk of hospital damage has already risen by 41% since 1990 and, under a high-emissions pathway, it is projected to increase more than four-fold by the end of the century. 71% of the hospitals most at risk are in low- and middle-income countries, placing the greatest strain on health systems with the fewest resources to adapt (XDI, 2023[54]). This highlights the need for location-specific strategies and investments to keep services operational amid escalating climate-related risks.
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