Masterclass: Data-driven strategies to address climate risk in real estate

How are residential and commercial real estate using climate risk data in decision-making?

Climate Risk is a locational risk that resonates in a tangible way for home buyers and investors. It is an important aspect of the due diligence process and also a way to respond to consumer demand for sustainability as well as corporate ESG imperatives and government regulations.

In this masterclass, Cal Inman, Founder & Principal at ClimateCheck, and Sara Maffey, Head of Corporate Strategy & Business Development at Local Logic, discuss their views in a conversation moderated by Andrea LeMay, Professional Services Lead at Building Minds.

Transcript

Andrea LeMay, BuildingMinds:

Thank you very much. I’m very excited to be here with Sara and Cal. So thanks, everybody, for joining. And we’re here to talk a little bit about climate risk as the locational risk that resonates in a tangible way for buyers and investors as an important aspect of the due diligence process and a way to respond to consumer demand for sustainability but as well, as this broad topic of the corporate ESG focus and regulation.

So my name is Andra LeMay. I’m from BuildingMinds. We are a Berlin-based tech startup, and we’re focused on making an integrated data platform for commercial real estate portfolios, really focused on ESG from a reporting and analytics through risk and cost prediction and then actions and impact simulation, but really believing that data foundation is how we do it.

So very excited to hear from Sara and Cal today, from your perspective, so Sara, maybe to start with you to introduce your company and your role.

Sara Maffey, Local Logic: Thanks, Andrea. I’m Sara Maffey, I’m the Head of Corporate Strategy and Business Development at Local Logic, and Local Logic is a location intelligence company. We were founded by urban planners, and we are able to quantify everything outside the four walls of the asset from retail, transportation, schools, and then things we think of as being a little more subjective, like the vibrancy and wellness of an area.

AL: Thank you. And Cal, if you’d like to introduce your company and your role as well.

Cal Inman, ClimateCheck: Yeah, thanks for having me. Cal Inman, founder of ClimateCheck. ClimateCheck provides insights into climate risk on a local property level, and it’s really about understanding the risk of climate-related events. So within the E of the ESG, you have very specific needs, and it’s considered physical climate risk. But we’ve been having fun and looking forward to the conversation.

ClimateCheck provides insights into climate risk on a local property level

AL: Great, then I guess kind of continuing on those lines, Cal, if you can, to tell us a little bit more in-depth on what kind of data and insights does climate check provide?

CI: I think we throw around a lot of jargon like climate risk, physical risk, but fundamentally what we’re looking at is weather events and how they’re changing into the future with the event of climate change. So specifically, what does that mean: we look at natural hazards like flood, fire and high wind, and I kind of categorize these as real shock hazards that cause loss to homes or commercial properties.

And then there’s more stress hazards or ongoing chronic hazards like extreme heat which we’re just talking about, extreme precipitation and drought. So kind of ongoing stressors to your home, to your investments, to your portfolio. So on a high level, that’s where we look at risk today and then in the future and five-year increments, it’s kind of the big benchmark at 30 years. And so we provide insights to really any stakeholder in real estate, so commercial real estate investors, lenders and then down to the homeowner is really part of our mission to create transparency around this, provide the information to everyone. And we include the homeowner in that bucket.

Local Logic quantifies everything outside the four walls of the asset

AL: That’s great. Thank you for sharing that. And Sara, a little bit, if you could share about Local Logic, what insights and products are you guys offering?

SM: Sure. I think it’s similar to how we’re really covering both the consumer and those listing portals on the residential side and commercial developers and investors in real estate. So we’re covering the full gamut. I think that another kind of similar way of looking at it is we’re looking at locational risk, risk and opportunity. So we understand everything around the asset.

And I think if you link it to climate risk, it’s really understanding the transitional risks associated with climate change and how that’s going to eventually impact how these ecosystems of cities are going to change over time. So we have our location scores, which are really giving you a snapshot in a quantitative way of what’s happening around the asset.

So all of those things can be impacted by climate change over time. They also impact the transportation necessary to get from place to place. So I think as we start to think about the E in ESG, even just understanding sort of the scope three emissions that are really the impact of the location choices that you’re making really, really have a huge impact on your environmental impact over time.

How locational risk and ESG fit with climate risk data

AL: And Cal, do you think people are thinking more about locational risk or ESG when we’re talking about ingesting climate risk data?

CI: It’s an interesting question. I think we’ve seen our data use as an industry climate risk data price starting by equity investors. The equity part of the capital stock within commercial real estate. And I think the impetus originally was really ESG kind of guidelines, right? Your LPs, your investors, whether they’re pension funds or insurance companies, are saying, hey, we have these ESG mandates for everything we’re investing in.

And then E stands for environmental. Right. Environmental, multiple pieces. You all look at emissions and track that. And we’re very specifically looking at how climate change is affecting a particular property. And that risk analysis fits cleanly into existing due diligence that investors do. They’re looking at all sorts of risk factors from entitlement, construction risk, environmental risk, and demographic risk.

So that already kind of fits cleanly into it. I think it’s kind of been adopted since becoming best practice, even for folks outside of the ESG space. And I think homeowners the same thing, right? We all get a termite report when buying a house or a home inspection, just investigating an asset you’re buying and understanding what the risk is This kind of data separates cleanly into that.

Homebuyers are using climate risk data to understand environmental impacts

AL: And how is this data being used? Why are homebuyers using this data?

CI: Folks want to know this information, there’s demand for it, opening conversation. We’re all experiencing a different frequency and intensity of these events, whether they’re floods, or fires. So it’s tangible and real to all of us. You know, we’re all sitting across the country, and we’re all kind of experiencing different things.

And we read about it in the paper every day, right? There’s climate change this, a new study is coming out, it’s top of the fold and the news cycle, and so people want to know people want to quantify these things that they’re curious about. A lot of times, the answers are intuitive, so I think that’s really how it’s being used on all levels.

SM: I think on the homebuyer side, though, I think there’s also just this increasing demand by consumers to understand their environmental impacts on the world and being able to actually quantify that and see that as part of your home search process, I think is really key. You know, you’re trying to make these more socially and environmentally responsible decisions in all aspects of your life.

And I don’t think home buying is any different. And I think that’s also why we’re seeing some of these home search portals really adopting the climate risk data because it’s allowing consumers to feel empowered to understand that impact of their home buying decision. And it’s also I think, on the portal side, creating more of like an SEO and stickiness to those portals because it’s really engaging customers with what they want to know today, you know, when they’re making that location decision.

And I think it’s the same thing kind of goes for all of our locations for information. So it’s like climate risk is one piece of understanding your location decision, whether that’s a home or a much larger asset that you’re investing in.

CI: Yeah, that’s a good point. Within the residential space, with your realtor broker franchise listing portal, there’s a big movement for transparency around data and information in the home buying process from selling process. And I think this is a natural evolution of that new data sets come out. Folks want to understand this information.

They’re hungry for, you know, the big portals aren’t stupid. They do a lot of qualitative and quantitative research on what people want to know. And I think the numbers of they’re on user engagement. You know, we’re integrated on quite a few residential portals. And, you know, people are interested. They’re clicking on it. They’re reading through it, the page engagement is up, and to Sara’s point, you know, people want to know. That’s the value. But it alters how you quantify it as a kind of engagement or SEO value, and that definitely benefits the portals and brokers themselves.

SM: I think the other piece of it is, you know, there’s so much out there right now about population migration. And so that’s adding like more risk, more uncertainty to those home-buying decisions. If you’re even moving within a market, you don’t really understand your new neighborhood as well and all that sort of long-term risks to this major investment that you’re making as an individual.

But I think the other piece of it is there are also implications with, you know, your mortgage underwriting and the insurance that you might be getting because all of those kinds of companies are also really being mandated and considering that climate risk in those decisions and it’s going to drive rates. So I think you know, it really impacts so many different aspects, whether it’s your sort of personal responsibility in the world or even just the financial impacts of the decisions you’re making.

AL: Yeah, I think that makes a lot of sense. And I always love hearing this conversation because I remember walkability was such a big deal to me when I bought my house, but to be able to understand what I can do as a consumer from a climate perspective and even understand when I looked at my address in your platform, it’s so different. And it was different than I would have expected being in the Midwest, you know, from when I lived in Colorado. So I think it is really interesting to have that power as a consumer and then also to see that broader impact from the investment side and agency side.

CI: Yeah, totally. And look, this isn’t something like doomsday. We all need to move to some location, but I think it’s really about kind of protecting your asset, mitigating risks. And I think the first step to that is understanding what those risks are. And then, yeah, actions, it’s not saying you necessarily need to move, or this asset has some risks that the buyer is not aware of.

It’s there for the consumer to provide a simple list of things that you can do to help protect your home from wildfire, harden your home, and keep fire away from the house. So what can we do ourselves?

Home search portals are creating value with climate risk and location data

AL: And how are the home search portals kind of creating value within this climate risk and locational data space?

CI: Yeah, I think the fundamental value is providing information that consumers want to know. And I think the value for them is, again, engagement, SEO, new, unique, rich content. But I think that all that really comes down to is that folks are engaging with data and getting more information, and it makes those platforms stickier?

Developers and investors consider climate and location risk as part of due diligence

AL: And Sara, I think, started to touch on this a bit. But then, when we think about the commercial real estate developers and investors, how are they considering climate and location risk?

SM: You know, I think it is similar because I think they’re being squeezed on both sides. They’re getting that tenant, that customer pressure to actually be transparent. And I think this is only going to increase, which with some of the SEC proposal language that’s out there, but really being transparent about the climate risks that they have considered.

I think it’s also a piece of: are you going to be able to get that loan, get that investment in the property based on the location, the risk that’s considered? Because as we talked about before, this needs to be a part of due diligence now, considering climate risk and really considering location risk. Like just as you would want to understand how the submarket or market that you’re investing in is going to change over time and that potential upside or any kind of risk associated with that. I think climate risk is now going to be part of that table stakes, due diligence that needs to happen at the beginning.

AL: So this, you know, to pivot, especially being an American and a European company that’s looking at ESG regulations, we talk a lot about ESG in Europe and how it’s driven a lot by regulations, and maybe they’re a bit even ahead of us in that way from the regulatory side. So what’s happening with government regulation in the U.S., and how are these lenders and investors responding?

CI: Yeah, I’ll take that. You know, I think, like I said, within that kind of investor or version of commercial real estate, this is kind of like best practices. And everyone doesn’t trust just the data. And I don’t think it maybe it’s the start of the impetus. Was ESG, what we saw with phase one reporting environmental due diligence, these things quickly become best practices and want to be the last landowner with underground storage on your property and, you know, be slammed about when we sell the property, so we’re thinking the same evolution.

But it has definitely accelerated with, you know, the SEC signaling in this proposed climate risk disclosure. What does that mean that means that companies, you know, look at what their risk is to climate change is one of the pieces. And what does that mean for the investor down to the homeowner? I think as we see lenders start ingesting this data, it’s going to be imperative that we look at it too.

The biggest part of the capital stack is the debt, you know, whether it’s your mortgage or your commercial loan. And if your biggest partner is looking at this as a risk factor, it’s important that we look at it, too, as investors. So we’re seeing a lot of, you know, quick evolution in that part of this business.

SM: And I would think, Cal, your scoring of this makes it so much easier to digest and actually get this kind of data in a way like earlier on in the process, at least that’s what we found is we’ve incorporated your data into our platform that people are really appreciating being able to understand that risk earlier on an acquisitions process.

CI: Yeah. I think looking at a rating, or some type of red flag is important. But I also think, you know, beyond that kind of screening, it’s important to be able to dive deep and understand what 62 out of 100 means, and we’ll see lots of rating systems and stuff. What we really pride ourselves in is providing deeper information that’s actionable so you can understand it.

So what is the probability of what’s happening? What’s the depth of the flood on the property? And so I think communicating that information is key. We’re not all climatologists, and providing it and making it actionable is, I think, something that’s resonating with a lot of our customers.

SM:  And it seems like that kind of consideration and reporting is really going to be required if this goes through with the SEC proposal.

CI:  Who knows with government regulation, but we’re seeing a lot of traction regardless. I’m curious, I mean, you guys have been in the European market, right? Their regulations are much further out of the US, and obviously, you guys have a lot of traction, their big foot hole. And how do you see that playing out in the US?

AL: Yeah, that’s a good question, and we’re watching that really closely. I think there’s still a lot of regulation being clarified in Europe, and we’ll even see since we focus on global portfolios, the need to focus country by country, you know, there’s also French standards compared to SFTR. So there’s these different, and we’re really trying to figure out how to tackle that with our customers.

And they also have assets in the U.S., and I think they’re expecting some of this to follow when you think about GRESB and some of these broader, more widely accepted standards. But it’s still quite fragmented, and we’re seeing those who decide to be first movers able to get ahead of that, and then it’s much easier to adapt for your local standard, but we’re watching it closely.

I think it’s exciting in a way to see some movement from the U.S., but if we can kind of be that first mover and lead with the market a bit more, maybe we can even get in front of some of the fragmentation or even seeing with different standards in Europe.

CI: Yeah, I think that’s interesting because it is fragmented, and there are different things going on in different countries, and there are a lot of different frameworks right across those. You mentioned GRESB, there’s UNPRI, and the list of acronyms goes on.

It’s the Wild West right now, which makes it fun. But I think it’s important to have partners that are tracking all of that and keeping aware of it as it develops.

SM:  Yeah. It does seem like there are a lot of options out there. We’ve really been thinking about how our insights apply to many of those different acronyms, especially GRESB, as you mentioned, Andrea, I think that’s really like sort of rising to the top and what we’re seeing with how people are choosing to report. And so I think a lot of our insights around livability and transportation access, affordable housing, all kind of tie into some of that reporting that’s being required.

I think the other part about this proposed SEC regulations is around climate risk. The other piece of it is the emissions piece. And I think all of this to me is just making it even more important that we decide the location, you know, like the location where we build, what we build, where is just becoming really critical because it has that impact on not only your climate risk but also your energy consumption or what is accessible around you.

Like there’s just so many different rings of impacts that actually come from where you end up actually building something and what you choose to program that site with, so it’s kind of exciting to just think about how location was always, you know, that adage of location, location, location. But it was really about like creating demand and experience. But now it’s really location, location, location from a risk perspective. So it’s, it’s definitely a critical piece of the process here.

AL:  Yeah. And I think you both kind of mentioned this idea of how do we make it actionable and understandable and even down to being able to make that location decision. I think that’s a really important step in avoiding greenwashing. You know, that’s something we talk a lot about at BuildingMinds, but these standards are important, and the intentions are definitely there, and we’re starting to see that momentum.

But I think keeping it actionable in the way you’re both talking about really helps us avoid overselling the Go Green Movement. So it’s good to hear that it’s keeping it in this really tangible space that we can see down the value chain.

CI: The greenwashing is interesting because it’s like there’s some box checking out there, but I think it’s good for folks, organizations, and individuals to ingest the data and start understanding and get familiar with that. I do think that will change over time here, but it needs to start somewhere.

What’s on the roadmap

AL: Absolutely. So kind of along those lines of what’s available now, but maybe a little bit of time on what’s on your roadmaps.

CI: Yeah, we’ve got a lot of stuff cooking, and we’re going to roll out in Canada right now. A lot of interest there. And then for the kind of geographic expansion and then just focusing on hazards that our customers are looking for this month rolling out, high wind which is, you know, a big factor and caused a lot of loss in buildings and a myriad of other hazards.

And then how we’re communicating the information, displaying it, and just making it easy to understand. So just kind of focusing on the product in a very iterative process.

SM: I think from the Local Logic perspective, the first thing coming in a roadmap is really more on the S side of ESG where we’re rolling out our wellness score, which I’m very excited about. It’s a really important piece of these location decisions. And the next piece will be unveiling our

historic location scores for understanding how location has changed over time and then getting into more predictive modeling, understanding how that ecosystem of plays is going to change over time, because it’s really, I mean, as we’ve talked about today, so interconnected, it’s climate risk, but it’s also just so many other aspects of the economy and all the different pieces that make up place.

So that’s really something that I’m looking forward to. And I think the last piece is just some of our more E-focused pieces of the roadmap where we’re going to be automating pieces of GRESB reporting that I mentioned earlier and really trying to understand the scope three emissions impacts of location.

AL: What is the best way for attendees to learn more about each of your products?

SM: I think the best way for us is just checking out locallogic.co, we’ve got lots of information in there, and you can easily get in touch with us.

CI: Yeah, if anyone’s interested, you can visit our website and type in any address and get an instantaneous data feed on what the risks are to your property. You can pull a free report and understand more about the product and our partners.

AL: We do have a question for Sara, what are the target partners for Local Logic? Is it commercial real estate investors? So two questions.

SM: We partner with both the residential and commercial sides of the industry. So we have a variety of consumer-facing products that you can see on sites like Redfin and Remax. And then, yes, we do have a platform that was developed specifically for commercial real estate developers and investors. And as Cal was just saying earlier, I think that’s such a beautiful visual way of combining all those data sources, including the ClimateCheck data, so that you can understand all these different aspects of place and, of course, all of our data is available via API as well.