Physical Climate Tail Risks in US CMBS
As sustainability targets, net-zero commitments and climate change risks move higher on the agenda of investors, companies and other stakeholders and reporting standards are being developed, more focus is being put to understand the potential impact of these transitions and hazards on asset pricing to avoid a significant risk of mispricing of investments and portfolios.
This note is a second in the series on physical climate tail risks in global real estate markets, covering US CMBS and highlights main results. The universe analysed here is based on Non-Agency US CMBS (ERISA only) issued since 2017 with fixed-rate coupon and excludes single-borrower, single-asset bonds.
For details regarding results for individual CMBS issuer pools, individual securitised loans and underlying collateral property assets, please request report and data.
Methodology
Klimetrics provides distributions of a range of both acute and chronic physical climate risks based on CMIP and other official scientific climate models. All climate hazards are calculated over land measuring both the occurrence of the specific event (projected non-zero event) and its severity. We use RCP8.5 scenario for the analysis also known as ‘business as usual’ which represents the high-emissions scenario (SSP585: with an additional radiative forcing by the year 2100, SSP585 scenario represents the upper boundary of the range of scenarios, it can be understood as an update of the CMIP5 scenario RCP8.5, now combined with socioeconomic reasons).
Given the maturity of CMBS loans, climate hazards evaluated are the following targeting time horizons until 2030;
Sea Level Rise (SLR) and Coastal Floods: extent and inundation depth, 100-year flood return period.
Riverine Floods: extent and inundation depth, 100-year flood return period.
Extreme Heat: number of days with maximium temperatures above 30°C and more extreme above 35°C, calculated from daily, biased-corrected climate data
Extreme Cold: number of days with minimum temperatures below 0°C and more extreme below -5°C, calculated from daily, biased-corrected climate data
Heavy Precipitation: number of periods with days of heavy daily precipitation above 20mm, calculated from daily, biased-corrected climate data
Fire Weather Index (FWI); number of periods with index values above 50, FWI is a combination of Initial spread index and Build-up index and is a numerical rating of the potential frontal fire intensity; indices are based on meteorological conditions favourable to the start, spread and sustainability of fires.
Hurricane Index (HI): Hurricane Index is calculated by aggregating all hurricane paths at a given location accounting for the intensity of each based on the Saffir-Simpson Hurricane Scale; data is provided by IBTrACS by the US NOAA.
To assign risk exposures for individual assets (asset events), we map the specific geolocation of each asset to individual hazards (layers) measuring the projected occurrence of the event at the specific location and the severity of the event.
Secondly, we map all asset events onto the relevant hazard distribution and assign a risk group to each asset based on deciles of that hazard distribution globally, 10 being the most severe projected exposure.
Results
Sample results for riverine floods and hurricanes are presented here, please contact Klimetrics for detailed risk report, data or climate hazards information.
Based on the climate scenarios and time periods outlined above, the US CMBS sector as defined above is projected to experience some impact related to physical climate change risks, however it is projected be relatively limited.
Riverine Floods are projected to potentially affect c. 10.4% of collateral by asset value in the more severe risk groups of 6 and higher with the extreme tails of risk groups 9 and 10 potentially impacting c.4.6%.
Assets at risk of more severe hurricane paths represent c. 7.5% of collateral value (risk groups 6 and higher) with the extreme tails of risk groups 9 and 10 potentially impacting c. 5.6%.
Get data CSV
About Klimetrics
Klimetrics is provided by Kania Advisors, a quantitative analytics and technology firm focused on real assets. Kania Advisors is formally supporting the TCFD framework and is included in the TCFDs list of supporting companies in the Information Technology category.