The New Risk Premium: How Climate Change is Changing the Real Estate Landscape

July 12, 2023 35 Minute Read Time



Climate change, conflict, growing global populations and urbanization is putting even greater strain on resources. Food, energy and water resources within nations has already begun to adversely impact economic growth via higher prices. These resources within markets will become increasingly significant as constraining factors on economic growth. Tenants and occupiers in markets that are particularly constrained by these resources are likely to see reduced investment, incomes squeezed, corporate profits decline and business activity slow.

Some of these risks are already implicitly included in the risk premium investors place on real estate markets such as population growth and urbanization. Climate change risk is much more opaque and makes it harder to quantify given its long time horizon and unknown reaction of economic agents to its impact. Where investors do look at climate change risk, it is mostly at an asset level and looks at things like flood and fire risk, but less so on the macro impact of climate risk via its impact on food, water and energy security. Hence, it makes it even more important to quantify within our risk models. The varying degrees of food, water and energy security in each market will lead to differing risk premiums, and is likely to widen in the decade ahead as climate change impact amplifies. Not appropriately pricing this risk, could lead to mispricing of assets as well as stranded assets.

The 2022 Global Risks Survey from the World Economic Forum asked investors to identify the most severe risks on a global scale over the next 10 years. 5 of out the top 10 were climate related. (Figure 1).

Figure 1 - Top 10 Global Risks


Source: World Economic Forum Global Risks Perception Survey 2021-2022

More countries are beginning to officially recognize that climate change represents economic uncertainty and risk. In the US, the Federal Reserve listed climate change in their list of financial stability risks (specifically citing real estate as an industry most vulnerable) in November 2020.

Climate change risk can be broadly split into physical risks and transition risks. Physical risks are those that can directly impact buildings such as extreme weather events, sea-level rise, and changing weather patterns. On a macro level, they have the potential to impact the economy numerous ways influencing key economic variables such as output and inflation. Accelerating physical consequences of a changing climate are becoming more pronounced as greater numbers face storms, floods, fires, extreme heat and other risks.

Transition risks refers to those that result from a shift to a lower-carbon economy, and using renewable sources of energy to meet net-zero commitments. These encompass regulatory changes, economic shifts from job losses in certain industries and gains in others, and finally the availability and price of resources.

Rising food and energy prices across the world is severely dampening economic growth prospects, and pushing more of the world’s population into poverty.

The price and availability of these resources (including water) are likely to become increasingly volatile as demand increases, climate change adversely impacts supply, and the transition to a low carbon economy.

Understanding and incorporating these climate risks into our real estate strategy is paramount in the coming decades.

Within this context, we explore security of three key resources- food, water and energy of countries that make up our European model portfolio.

Our current risk model

As a global real estate investor, we need to compare markets across the world in a consistent manner. CBRE Investment Management has therefore developed, improved and applied a proprietary analysis framework to investment strategies over the past years named RARE: Risk-Adjusted Real Estate. RARE evaluates the attractiveness of real estate markets via a comparison of forecasted returns against required returns.

Our investment approach is based on quantifying risk, and whether markets can deliver a return commensurate with risk in that market. This is typically called the ‘risk premium’, and it is the required return above the country’s risk-free rate (the yield on a government bond) to adequately compensate investors for entering that market.

Our model portfolio is based on the expected returns vs required returns, and through that we get our market allocations. The latest H2 2022 model portfolios are shown in Chart 1 below.

Chart 1 – CBRE IM European Model Portfolio


Source: CBRE IM.

Food, water and energy security (FWE) – an overview

Food, water and energy demand is expected to increase worldwide by 55%, 60% and 80% respectively in 2050. In tandem the supply of these resources is being increasingly disrupted, which in turn can diminish resource security. Pressure on FWE systems locally, nationally, and globally is increasing due to a range of factors. This includes increasing population pressure (and associated demands for FWE), ongoing population movements from farms to cities (urbanization), rising incomes (with increased desire to spend those incomes on energy and water intensive goods/varying diets), international trade (shifting trade priorities), but also factors resulting from climate change, such as extreme weather events, water pollution, soil productivity losses (decreased soil moisture) and transitioning to a net zero economy.

Climate change represents the largest risk in terms of the plethora of ways it impacts food, water and energy security and also, it is the hardest to quantify. Additionally, pressure on the food, water and energy security threatens the Sustainability Development Goals (SDGs), as set up by the UN.


Food security: defined by the Food and Agriculture Organization (FAO) as "availability and access to sufficient, safe and nutritious food to meet the dietary needs and food preferences for an active and healthy life". Adequate food has also been defined as a human right.

Water security: defined as "the reliable availability of an acceptable quantity and quality of water for health, livelihoods and production, coupled with an acceptable level of water-related risks".

Energy security: defined as "access to clean, reliable and affordable energy services for cooking and heating, lighting, communications and productive uses" (United Nations), and as "uninterrupted physical availability (of energy) at a price which is affordable, while respecting environment concerns".

The amount of people living in urban areas is expected to rise from 4 billion currently to close to 7 billion by 2050 (Chart 2) This has huge implications for resource allocation, as historically food, water and energy consumption per capita of a nation increases as a greater proportion of its population move from rural to urban areas.

Chart 2: Urban and rural population projected to 2050, World, 1500 to 2050


Sources: Our World in Data, UN

Before we dwelve into the individual sections on food, water and energy security in the regions, it is important to highlight the strong interlinkages between all three, called the Nexus approach.

The Nexus approach stems from the realization that water, energy, agriculture and natural ecosystems exhibit strong interlinkages (see Figure 2), and that under a traditional sectoral approach, attempting to achieve resource security independently often endangers sustainability and security in one or more of the other sectors. Under the Nexus approach, interlinkages, synergies and trade-offs are analyzed, with the aim of identifying solutions, fostering water-food-energy security and efficiency, and reducing impacts and risks on water-dependent ecosystems.

Figure 2 – Nexus approach


Source: Flores

Water <-> Energy: Water plays a key role in energy production, e.g. in hydroelectric plants, for cooling thermal (fossil-fuel or nuclear) plants and in growing plants for biofuels. Conversely, energy is required to process and distribute water, to treat wastewater, to pump groundwater and to desalinate seawater.

Water <-> Food: Water is the keystone for the entire agro-food supply chain. Conversely, agricultural intensification impacts water quality.

Food <-> Energy: Energy is an essential input throughout the entire agro-food supply chain, from pumping water to processing, transporting and refrigerating food. Conflicts around land use for food production may arise in the case of biofuels or extended solar installations.

Healthy ecosystems are an essential requirement for the sustainability of all the above and are negatively affected if water, energy or food are used in an unsustainable way.

Sources: Flores, World Resources Institute.

Food security

The inaugural UN Food Systems Summit in 2021 acknowledged for the first time the need for a sustainable food system and the noted the interconnection between food, climate and health. In 2020, one in three global citizens did not have access to adequate food.1 Beyond the challenge of feeding humanity on an overheating planet, climate shocks like droughts, heatwaves and floods are threat multipliers in other areas—they increase conflict risks, creating climate refugees, social unrest and insurgency. Multiple studies evidence the relationship of food security of a country and its economic growth. The economic and socio-political shocks of the last few years are exacerbating the systemic issues that are threatening food security and weakening the resilience of the food system, mainly due to climate change.  Data from the World Bank suggests severe food insecurity as a percentage of the global population has increased from 8% to 11% in the five years to 2020.

Chart 3 – Food Prices, % rise in price (Q3 2019-Q3 2022)


Source: Food and Agriculture Organization of the United Nations (FAO)

Pandemic related supply chain issues, the conflict in Ukraine, and increasingly extreme weather events has drastically impacted the price of food staples globally. Relative to three years ago, the FOA Food Price Index (the components of which are in the Chart 3 above) has risen by 43%.

The steep rise in prices not only puts millions of additional people into food poverty and dampening economic growth, but it is also leading to increasingly nationalistic behavior via food export bans. During the summer of 2022, at least 19 countries imposed export restrictions on agricultural goods in part to secure their own food security. This sort of behavior will likely become more common as we go forward as food supply and prices remain volatile. Countries that have a higher dependence on food imports will be most vulnerable to increasing nationalistic behavior (Chart 4).

Chart 4 – Food imports (% of merchandise imports) by country


Source: The World Bank.

A recent study by Stanford University argued that the gains in agricultural total-factor productivity seen between 1961 and 2019 were between 10% and 40% smaller than they would have been over the same period in the absence of climate change. With losses due to climate change likely to rise, the population still increasing (though at a lower rate) and the food that the population wants changing in its nature (as incomes rise, meat consumption increases in developing countries) food security will be more volatile in the coming years.

A 2019 report by the UN Food and Agriculture Organisation (FAO) said that the number of shocks such as drought and flooding rose significantly in the 21st century. Indeed, whereas climate-induced shocks to the food system used to happen once every 12 years on average, they are now occurring about every 2.5 years.

Food security is affected by factors including:

  1. Mean temperature
  2. Mean precipitation
  3. Drought
  4. Heatwaves
  5. Heavy rainfall and flooding
  6. Melting glaciers
  7. Tropical storms

Climate change is impacting all the factors listed above, with various regions being impacted by certain factors more than others. According to the Intergovernmental Panel on Climate Change (IPCC), the amplitude of climate change impacts on individual regions will vary over time, and different societal and environmental systems will have varied abilities to mitigate or adapt to change.

We have already begun to see climate effects on yields in a number of regions, including Europe. It is the populations in many tropical zones such as Southern Europe and Northern Africa who are most vulnerable to failing harvests, higher prices and malnutrition in the near future. This crisis will only increase pressure on other parts of the world to increase production. Countries in the Northern Hemisphere, especially Scandinavian countries, are currently experiencing some positive effects from climate change in terms of crop yields. This is mostly due to low levels of warming extending the growth duration of mainly perennial crops such as grass pastures. However, these effects are not permanent and will not balance the global negative effects of climate change. Certain industries such as fishing are predicted to see severe disruption with salt water and freshwater fishing at risk.

Future projections in global yield trends of both maize and wheat indicate a significant decline, these can be attributed to the negative impacts of climate change arising from increasing greenhouse gas emissions. With nearly 700 million metric tonnes consumed annually on a global basis, wheat alone provides over 20% of the world's calories and protein. To ensure food security for the predicted population of 9.6 billion people by 2050 the FAO predicts that food production must increase by at least 60% to meet the demand.

Food security is assessed by four measurements :

  1. Availability of food through either domestic supply or imports/ food aid.
  2. Affordability – Ability of households to afford food.
  3. Quality and safety of food in terms of individuals’ ability to absorb and metabolise the nutrients.
  4. The stability/ sustainability of food supply.

Figure 3 – Biggest Challenges to Global food security


Source: The Economist.

Based on these four pillars, the Economist has produced a food security score for nations. We have ranked the countries in our European Model Portfolio based on this index below (Chart 5).

The Western and Northern European countries score the highest based on availability, affordability, quality and safety and sustainability. Germany, Spain and Italy are on the lower side, as are the majority of CEE countries. Although the majority of European countries have relatively high food security scores, they are still at risk from medium to longer term impacts of climate change. A recent report from the UK Department of Environment and Rural Affairs highlights this, suggesting the biggest medium to long term risk to the UK’s domestic production comes from climate change and other environmental pressures like soil degradation, water quality and biodiversity. Wheat yields dropped by 40% in 2020 due to heavy rainfall and droughts at bad times in the growing season. Although they have bounced back in 2021, this is an indicator of the effect that increasingly unreliable weather patterns may have on future production.

Chart 5 – Food Security Score


Source: Economist.

Water security

Secure water supply can no longer be assumed by developers in many parts of the world. Climate change coupled with unsustainable withdrawals are proving to be highly disruptive, worsening the supply deficit in many countries. Global water use has increased by a factor of six over the past 100 years and continues to grow steadily at a rate of about 1% per year. Combined with a more erratic and uncertain supply, climate change will aggravate the situation of currently water-stressed regions and generate water stress in regions where water resources are still abundant today. Physical water scarcity is often a seasonal phenomenon, rather than a chronic one, and climate change is likely to cause shifts in seasonal water availability throughout the year in several places.

A secure and sustainable water supply is now rising up the legislative agenda, bringing stricter regulation around water usage.

Developers will soon face stricter water usage conditions, meaning buildings will need to be far more efficient in their water usage. An example of stricter regulations is the nutrient impact from developments that feeds into the water supply. This pollution and eutrophication reduce water quality, causing environmental concerns. Regulators are responding to this with laws to enforce nitrate neutrality from wastewater in new developments in some countries.

Recent examples of more extreme and frequent weather patterns impacting water supplies include the UK’s sewage system unable to cope with floods and spewing raw sewage into its clean water. In France, over 100 municipalities in the past summer were without drinking water leading to irrigation bans for farmers in those areas.

Approximately 97.5% of all water on the planet is either salt water or water that has become polluted. Of the remaining 2.5%, nearly 70% is frozen in glaciers and the polar ice caps. Less than 0.01% of all water worldwide is available for human use in lakes, rivers, reservoirs, and easily accessible aquifers.

Water security is affected by a range of factors including:

  1. Climate change: Climate change will affect the availability, quality and quantity of water for basic human needs, threatening the human rights to water and sanitation for potentially billions of people. The hydrological changes induced by climate change will add challenges to the sustainable management of water resources, which are already under severe pressure in many regions of the world. Food security, human health, urban and rural settlements, energy production, industrial development, economic growth, and ecosystems are all water-dependent and thus vulnerable to the impacts of climate change. 
  2. Rising global population: The World Bank estimates that people generally require 100 to 200 liters of water daily to meet basic needs (36.5–73.0 m3 of water per person annually). If one includes other uses of water, such as agriculture, industry, and energy production, the total annual average requirement of water per person is 1,000 cubic meters. However, one billion people do not even have access to safe water, a problem that will likely increase as the world population grows from 6.8 billion people now to about 9.7 billion by 2050 (UN estimation). This problem likely will become especially severe in countries with high population growth rates that share a major source of freshwater with other countries. 
  3. Changing diets: Alongside improved socio-economic conditions for many people globally, there is a significant move away from a mainly starch-based diet to an increasing demand for more water-intensive meat and dairy as income grows in many countries.
  4. Human conflict: Conflicts over water, both within countries and between countries, are sharply increasing. However, few of these conflicts have led to violence.

One in four people globally live in regions at high risk of water scarcity, with water demand exceeding supply, according to the World Resource Institute (WRI). Many countries are extracting freshwater quicker than it can replenish, leading to declining water basins.

As showed in Chart 6, Belgium is the country in Europe that is experiencing the highest level of water stress. A smaller ratio translates to less freshwater being withdrawn in proportion to total renewable freshwater resources, i.e., less water stress. Across Europe, water stress is relatively low, with smaller economies (mostly Nordics and Alpine/CEE region) experiencing very low levels of water stress. Water stress is generally more pressing for regions with lower water resources and/or larger population pressures.

That said water stress does not insinuate that a country has water shortages but does give an indication of how close it maybe be to exceeding a water basin’s renewable resources. If water withdrawals exceed available resources (i.e., greater than 100%) then a country is either extracting beyond the rate at which aquifers can be replenished or has very high levels of desalinization water generation (the energy intensive conversion of seawater to freshwater). Variance in levels of water withdrawal across the world can depend on a range of factors, including latitude, climate, and the importance of a country’s agricultural or industrial sector. There are strong links between the structure of economies and how much water is being used. For example, globally, 70% of freshwater withdrawals are used for agriculture. Agriculture’s share of total water withdrawals tends to decrease at higher incomes, i.e., poorer countries are using more water for agriculture. In 2017, the sectoral breakdown of water consumption was agriculture (58%), cooling water for electricity production (18%), mining, quarrying, construction and manufacturing industries (11%), households (10%) and services (3%). However, there are significant regional differences in the breakdown of water consumption. In western, eastern and northern Europe, the major consumers are industry and electricity production (2017: 67%). In southern Europe, the major consumer is agriculture (2017: 80%).

Chart 6: Level of water stress: freshwater withdrawal as a proportion of available freshwater resources* (2019)


Source: The World Bank. *The ratio between total freshwater withdrawn by all major sectors and total renewable freshwater resources, after taking into account environmental water requirements. Main sectors, as defined by ISIC standards, include agriculture; forestry and fishing; manufacturing; electricity industry; and services. This indicator is also known as water withdrawal intensity.

Between 1990 and 2017, the amount of water available per inhabitant decreased in southern, western and northern Europe. An increase was observed in eastern Europe. These changes were largely driven by trends in population rather than climate change. In all of the EU, climate variability is expected to increase, while urbanization concentrates demand for water in urban areas. Water stress in Europe is expected to worsen in the future, as a result of climate change and socio-economic development. The expected outcome is that in southern Europe water stress problems will become more pressing than they already are, while in an increasing area of the EU water stress will be experienced irregularly but with increasing frequency and impact.

To maintain sustainable levels of water resources, rates of water withdrawals must be below rates of freshwater replenishment. ‘Renewable internal freshwater flows’ refer to internal renewable resources (internal river flows and groundwater from rainfall) in the country. Renewable internal flows are therefore an important indicator of water security or scarcity. If rates of freshwater withdrawal begin to exceed the renewable flows, resources begin to decline.

Again, as showed in chart 7, the Nordic countries are at the top of the list in terms of renewable internal freshwater resources per capita, Norway being the best resourced. That said, the top countries on this list are relatively small economies with a smaller population, a key factor whenever looking at per capita data.

The spatial and temporal variation in available freshwater resources is affected by numerous factors, such as global and regional climate circulation, hydrometeorology and local weather patterns, topography, land cover and use, and hydrogeology. Thus, low water availability can be a local issue that is not compensated for by high water availability in another part of the same country or region. Similarly, low water availability can be a temporary issue that is not compensated for by high water availability in another month or season of the year (e.g. a dry summer followed by a wet winter). National and regional aggregates of freshwater availability should therefore be treated with caution, as they may obscure the local or seasonal realities encountered by European citizens. However, it is important to highlight that climate change is a major factor influencing the availability of renewable freshwater resources.

Chart 7: Renewable internal freshwater resources per capita (cubic meters)* (2018)


Source: The World Bank. *Renewable internal freshwater resources flows refer to internal renewable resources (internal river flows and groundwater from rainfall) in the country. Renewable internal freshwater resources per capita are calculated using the World Bank's population estimates.

This need to innovate for water security is not an isolated case. With 80-90% of new operations globally now being built in water-scarce areas, companies are increasingly competing against each other, domestic consumers and agricultural users for freshwater alike. Environmental operating permits are becoming increasingly difficult to obtain in areas where water resources have been fully allocated, unless it can be demonstrated that water withdrawal levels will be near zero, or that the catchment or basin will not be adversely impacted. In Europe alone, the value of newly built industrial and commercial real estate investment in 2021 was €38.3 billion, meaning that €30.64-€34.47 billion of investment is at risk of becoming stranded assets due to water scarcity locally and in the upstream supply chain.

As operations face greater water-related business risks, especially those caused by climate change, the need for better water management and supply chain practices is gaining attention. The business case is clear. CDP, an international non-profit organization that helps companies and cities disclose their environmental impact, reported that globally, almost across all sectors, the cost of responding to water risks is far outstripped by the cost of not responding. The CDP shows the potential monetary impact of water risks to businesses is over five times higher than the cost of addressing them, and that potential budgetary impact of water risks outweighed the cost of acting on those risks for more than three-quarters of companies across all industries, including retail, transportation, hospitality, and services.

Case Study: Water deficit in Almeria

Almeria is already seeing the impact of unsustainable farming practices, with a severe water deficit. 30,000 hectares of greenhouses in this arid region means it is consuming water at four times the rate of replenishment. This is leading to severe water shortages in some settlements in the region.  85-90% of all water in Southeast Spain goes towards agriculture, according to the OECD. The depleting water supply has implications for the whole of Europe, with Almeria along with Granada supplying around 50% of all tomatoes, peppers, cucumbers and melons consumed in Europe.

Energy security

Energy security means having stable access to energy sources on a timely, sustainable and affordable basis. Access to energy is not only crucial in supporting the provision of basic needs (such as food, lighting, water, and essential health care) but it is first and foremost a requirement for economic growth, political stability and prosperity.

As touched upon in the previous section, there are strong links between energy security and water security. According to the UN, 90% of global power generation is water-intensive, while power plant cooling is responsible for 43% of total freshwater withdrawals in Europe (more than 50% in several countries), nearly 50% in the USA, and more than 10% of the national water cap in China. Further, by 2035, water withdrawals for energy production could increase by 20% and consumption by 85%, driven by a shift towards higher efficiency power plants with more advanced cooling systems and increased production of biofuel (IEA, 2012).

One factor contributing to a country’s energy security is its domestic energy production, or put differently, a country’s independency on energy imports from other countries. The less need for imports, the higher domestic energy security. Data from the World Bank indicates that Norway is the only net exporter of energy in Europe with net energy imports accounting for net negative (581%) of its energy use. Countries that are in greater risk of unstable energy security, through higher foreign energy imports, are Southern Europe (Portugal, Italy, Spain etc.) and some smaller economies like Belgium and Luxembourg as shown in Chart 8.

Chart 8: Energy imports, net (% of energy use) 2015


Source: The World Bank.

Domestic energy security has really come to the fore as a result of Russia’s invasion of Ukraine, and the effects it has had on Europe’s access to cheap energy. It is a stark reminder that energy security remains a critical challenge for Europe since European nations are particularly reliant upon Russian gas supply (Russian gas imports accounted for 31% of European supply in 2020).2

Russia’s invasion of Ukraine has unsettled global energy markets and interrupted the flow of oil and natural gas to Europe, Russia switched off the Nordstream 1 gas pipeline due to international sanctions, and as a result caused a widespread energy crisis.3 The price of crude oil has increased from an average of $68 per barrel in 2021 to as high as $124 in 2022, while the price of natural gas in Europe jumped to a record high of €345 per megawatt-hour, which is the oil equivalent of $600 per barrel. At the same time, price volatility has hit new heights as a result of the uncertain output of renewable assets and a tight supply and demand balance in the European power system.4 Consequently, the EU member states have already taken clear actions to diversify gas supply, moving away from dependency on Russian gas supply, and recently announced a commitment to further reduce gas demand by 15% next winter. For the coming winter, the entirety of the levers available to the European Union would be needed in order to come close to offsetting Russian gas demand. Hence, completely closing the gap without affecting industrial energy use would require significant behavioral change.5

By diversifying your energy mix would ensure less reliance on fossil fuel supplies, countries will be less vulnerable to geopolitical challenges such as the current Russia Ukraine crisis.6

As mentioned, the European Union is planning to become independent from Russian fossil fuels by 2027 which is a promising step toward achieving energy security and sustainability in the bloc. The REPowerEU Plan highlights major ambitions among European policymakers: saving energy, diversifying gas supplies, and reducing Europe’s dependence on fossil fuels from Russia as soon as possible.

Similar to the emergence of energy security as a policy concept after the first oil shock of the 1970s, the latest geopolitical tensions in Europe have reawakened the awareness of the critical importance in ensuring an adequate supply of energy at a stable and reasonable price. While it appears like a dilemma, strengthening energy security and addressing climate change are two sides of the same coin. Policies and structural reforms aimed at reducing dependence on fossil fuels would therefore deliver not only a significant reduction in CO2 emissions, but also help improve energy security throughout Europe.7 More about that topic in the next section.

Transition risk to energy security 

The transition risk aspect of climate change will have the biggest impact on energy security in Europe. Changing the energy matrix and improving energy efficiency could bring a significant reduction in CO2 emissions and strengthen energy security. Moving away from fossil fuels is certainly necessary to mitigate climate change, and that requires global CO2 emissions to peak by 2025 and reach net zero by 2050.

Unfortunately, the current pace of CO2 emissions is still not consistent with the goals of the Paris agreement (IPCC, 2021). Using a panel of 39 countries in Europe over the period 1980–2019, the empirical analysis presented in a paper by the International Monetary Fund (IMF) (Climate Change and Energy Security: The Dilemma or Opportunity of the Century? 2022) finds that increasing the share of nuclear, renewables, and other non-hydrocarbon energy and improving energy efficiency could contribute to a significant reduction in CO2 emissions and imported sources of energy. The results show that the share of non-hydrocarbon sources of energy and energy efficiency are associated with lower CO2 emissions and energy imports in the long run, after controlling for economic, demographic, and institutional factors. These statistically significant effects are particularly more pronounced in emerging European economies, indicating potentially substantial gains in both environmental outcomes and energy security.

The larger challenge will be countries meeting there 2030 Climate pledges to reduce greenhouse gases. Some countries are better placed than others to transition to renewable sources. Norway already produces close to 100% of its electricity from renewable sources, whilst others such as Italy and the Netherlands will face a steeper challenge (Chart 9).

Chart 9: Share of energy in electricity production


Sources: The FT, Climate Watch Data, IEA.

To some extent, investors have already begun to address transition risks at the asset level as a part of broader environmental, social, and governance (ESG) agendas around carbon reduction. These have been easier to justify because many strategies to improve energy efficiency and decarbonize buildings have an immediately quantifiable return on investment that enhances real estate values.8

Policies aimed at improving energy efficiency can deliver on both climate and economic development objectives. The Intergovernmental Panel on Climate Change (IPCC) highlights energy efficiency as one of the critical channels that can enable the transition of the energy sector and contribute to the reduction of greenhouse gas emissions. Not only that, but energy efficiency improvements can also help reduce fossil fuel import dependence and make energy systems more resilient, as well as lower costs for vulnerable households and contribute to sustainable and inclusive development objectives. Still, improvements in energy efficiency need to intensify to align with the ambition for Net Zero Emissions by 2050. In the scenarios reported by the International Energy Agency (IEA), the rate of improvement in global energy intensity would need to double from current levels. This compares to very slow progress so far at 1.3% per year on average between 2016-21. The real estate sector in particular is a heavy energy user with significant scope for efficiency gains, buildings account for about one-third of total energy consumption worldwide, essentially because of the use of electricity for heating, cooling, lighting and use of domestic appliances. Energy consumption also depends on the thermal capacity of buildings, as well as habits and behavior. As a result of its energy consumption, the real estate sector accounts for a large share of emissions of greenhouse gases.

Energy security has a strong relationship with economic growth. A recent study9 of 74 countries globally showed the energy security of a nation (measured broadly around availability, accessibility, acceptability and affordability showed energy security enhances economic growth. It also evidenced that energy insecurity has a negative impact on economic activity. The recent spike in energy costs is having a direct impact on occupiers, as total costs for office tenants has risen 13% in the UK, according to data from LSH.

As geo-politics hastens the climate-driven energy transition, it does not make the transition risk any less. The move will adversely impact some economies and cause new dependencies on others. Th Economist modelled how different resources will be impacted as we move to a net zero world. By 2040, spending on oil and gas will be half relative to now as a percentage of GDP, and spending on green metals (the commodities required for renewable sources of energy) will triple in absolute terms in the same time period, with 75% of revenues being concentrated within 10 countries. This implies similar to fossil fuel production today, green metal production will be highly concentrated.


ESG and in turn climate risk has rapidly climbed up real estate investors’ agenda, with a particular focus on the energy efficiency of assets feeding into net-zero goals. This is reflected in the increasing number of institutional investors submitting to a GRESB assessment on their assets. The GRESB Real Estate Assessments capture information regarding ESG performance and sustainability best practices for real estate funds.

In this report, we have argued that investors need to look beyond asset level, and also consider climate risk on a more macro-scale, and how it is likely to impact economic growth in individual national and regional markets.

Through the lens of food, water and energy security, we have examined how climate risk is impacting each resource and how the risks are likely to amplify and differ within European countries we currently invest in.

The recent spike in both food and energy prices has highlighted the adverse impact food and energy insecurity has on economic growth. Whilst water security is a slightly longer-term risk, it is directly connected to the other two via the Nexus model.

Our investment approach is based on quantifying risk, and whether markets can deliver a return commensurate with risk in that market. As shown in this report, the degree of food, water and energy security in each market varies, and is likely to diverge more in face of climate risk. Explicitly quantifying this risk and including it in our risk premium for each market will gain increasing importance in the face of both the physical and transition risks from climate change. The opaque nature of these risks is daunting, but the accelerating physical consequences on risk from climate change, and the rising transition risks associated with achieving many countries’ net zero targets means it is becoming increasingly paramount that we begin to understand and incorporate these factors into our risk models.

If we ignore these factors, on an asset level it would lead to mispriced and stranded assets. On a macro-level, ignoring climate risk can impact financial stability and dampen economic growth prospects in nations.

Climate change adds a layer of economic uncertainty and risk that we have only begun to incorporate into our analysis of financial stability. Different sectors of the economy and geographic regions face different risks that will diverge from historical patterns.

Climate risks such as water scarcity in Southern Spain and Italy’s high dependence fossil fuels will only increase as we move towards lower emission targets in the decades ahead. Knowing the unknown risks is only the first step. As investment professionals, appropriately pricing that risk is the aim.

1 Source: UN Food and Agriculture Organisation. 2021
4 IMF Report Climate Change and Energy Security: The Dilemma or Opportunity of the Century? 2022
7 IMF report Climate Change and Energy Security: The Dilemma or Opportunity of the Century? 2022
8 ULI report
9 C.Nguyen, ‘Is energy security a driver for economic growth? Evidence from a global sample’, Energy policy, Vol.6, 2019