Trans­parency oblig­a­tions on climate risks – What does this mean for the real estate industry?

FINMA has specified the trans­parency oblig­a­tions for climate risks. From July 1, 2021, large banks and insurance companies will be required to provide quali­tative and quanti­tative infor­mation on climate-related financial risks. This also has impli­ca­tions for real estate portfolios. 

FINMA has recently deter­mined the trans­parency oblig­a­tions for financial insti­tu­tions with regard to climate risks. This means that banks and insurance companies (initially super­visory categories 1 and 2) must inform the public about the climate-related financial risks to which they are exposed. Specif­i­cally, they must describe the main climate-related financial risks and their impact on the company’s business strategy, business model, and financial planning (strategy). In addition, companies must disclose the process for the identi­fi­cation, assessment, and treatment of climate-related financial risks (risk management), as well as quanti­tative infor­mation (including their method­ology).

Finally, insti­tu­tions must formulate the key features of their gover­nance structure in relation to climate-related financial risks. This oblig­ation is closely aligned with the existing, globally estab­lished framework for the voluntary disclosure of climate risks as defined by the Task Force on Climate-related Financial Disclo­sures (TCFD). It can be assumed that other financial insti­tu­tions, such as cantonal banks, will also be affected by the trans­parency oblig­a­tions in the future. 

The impact of climate risks on the real estate sector

Climate risks refer to threats arising from climate change which can be divided into physical and transitory risks. Physical climate risks are threats that arise directly due to the exposure of properties – e.g. damage resulting from storms, floods, or extreme heat. Transitory risks are threats that arise from the transition to a climate-resilient and “net-zero” economy – e.g., political, regulatory, and reputa­tional risks. A current example is future changes in CO₂ taxes on fossil fuels.

The disclosure of climate-related financial risks creates new challenges for the real estate sector. This is because climate risk consid­er­a­tions are important for risk management, as well as for the disclosure oblig­ation. For example, they can be used to better under­stand the credit risk of mortgage portfolios or the risk of stranded assets in real estate portfolios.

Data and models as the key to achieving goals 

Wüest Partner has the expertise and models to perform a holistic risk analysis, meaning that climate risk models can be seamlessly integrated into risk management assess­ments. The key to this is diverse, high-resolution, and area-wide data sets. On this basis, it is possible to under­stand and concretely name physical climate risks such as the impact of storms, extreme precip­i­tation, or heat on building portfolios. Transitory risks can be quantified, for example, by modeling the CO₂ emissions of properties and scenarios on the future CO₂ price.