Red&Blue Lab November 2024
Navigating Climate Risks Through Real Estate Finance’s Approach: Lessons From Practice
Author: Abdi Mehvar
The Red&Blue Lab in November 2024 was hosted by ING’s real estate team at ING Amsterdam. This event offered a valuable opportunity for Red&Blue researchers and ING Real Estate team to share insights on the impact of climate change on the real estate sector, with a particular focus on real estate climate finance in the Netherlands.
The day kicked off with a presentation from Ellen van Bueren, the Red&Blue program lead, which provided an overview of the program, highlighted various research-practice interactions within the Red&Blue consortium, and shared key research findings from the past 2.5 years. This was followed by inspiring presentations from Sophie Kraaijeveld, Real Estate Sector Banker at ING, and her team, who discussed their approaches to real estate finance in relation to climate risks, both within the Netherlands and internationally. These presentations sparked meaningful reflections and discussions among participants, which are summarized in this report.
Understanding Real Estate Climate Risks
The ING team emphasized the critical intersection of climate change and real estate, underscoring the unprecedented challenges and opportunities these issues present for financial institutions. In their presentation, ING highlighted its approach to managing these risks, focusing on sustainability and innovative financial strategies to mitigate climate-related impacts. The first presentation by the team stressed that real estate is vulnerable to climate change, with risks categorized into physical risks, such as flooding, heat stress, and drought, and transition risks stemming from shifting regulatory and market dynamics. These risks have a direct impact on property values, the financial stability of clients, and ING’s lending portfolios. It is also highlighted that real estate is an important component of ING’s balance sheet, particularly in global loans, and residential mortgages in the Netherlands.
A Key Challenge in Addressing Climate Risks
A key challenge highlighted during the discussion was the financial sector’s focus on individual property value and client repayment ability, versus the broader need for collective, area-based adaptation strategies. While the latter could mitigate systemic risks, it requires collaboration across banks and stakeholders—a challenging feat given the sector’s current structure. In addition, participants underscored that policy changes addressing climate risks should be carefully implemented to avoid unintended consequences, such as market destabilization or restricted financing for vulnerable areas, which could harm the financial ecosystem.
One recurring theme was the need to balance systemic climate risks—impacting broader communities—with the individual risks tied to specific properties and clients. While systemic risk management requires cooperation with ministries and other banks, ING’s primary responsibility remains credit risk assessment at the individual level. This dual approach underscores the complexity of integrating climate adaptation into financial decision-making.
Collaboration for a Sustainable Future
The discussion emphasized the importance of partnerships among banks, policymakers, and regulators to develop governance frameworks that address climate risks holistically. The first presentation concluded with a call to action: fostering innovation and collaboration to create resilient, sustainable financial systems capable of withstanding the growing pressures of climate change. By proactively addressing climate risks, ING demonstrated its commitment to not only safeguarding its financial interests and investments, but also contributing to a sustainable and climate-resilient future.
ING Real Estate Finance (REF) Approach
Sustainability is at the heart of ING’s operations. The team emphasized the need to account for climate risks when financing properties, incorporating strategies that align with both client needs and environmental goals. This approach ensures properties are not only profitable but also resilient to climate challenges.
During the second presentation, the ING Real Estate Finance (REF) team outlined their strategic approach to addressing physical climate risks, emphasizing their commitment to sustainability and proactive risk management. As one of the largest real estate financing banks in the Netherlands, with over €10 billion in lending focused on residential assets, prime retail, offices, and logistics, ING REF plays a pivotal role in shaping sustainable real estate practices.
The team highlighted their REF’s strategic approach, which focuses on four themes (i.e., energy transition; physical climate risks; material use; and social aspects), and the following three pillars: (i) inspiring and raising awareness, highlighting the urgency of sustainable practices; (ii) advising and steering: providing clients with valuable insights and knowledge; and (iii) supporting actionability, offering tailored sustainability finance products. The team is currently in the exploratory phase, scanning climate risk to gather location-based insights and portfolio analyses. The goal is to translate this research into actionable guidance for clients and stakeholders, as stated during the presentation.
Climate Risk Analysis
The team highlighted that identifying climate risks is central to ING’s strategy for both regulatory accountability and raising client awareness. However, the limited technical data on financed assets poses challenges. Through research and partnerships, ING is working to develop metrics, monitoring techniques, and actionable insights to integrate climate risk assessments into its operations.
ING’s initial climate risk analysis focused on four major physical climate risks: (i) extreme precipitation; (ii) flooding; (iii) drought; and (iv) heat stress. The team emphasized that while flooding risk is relatively low in the Netherlands due to national mitigation measures, a considerable extent of ING’s portfolio is in high-risk areas for extreme rainfall damage. With respect to heat stress, participants agreed that while this issue does not directly impact property structures, it affects residents’ well-being, influencing the social and economic value of residential real estate.
Advancing Climate Adaptation in Real Estate
The third presentation of the day focused on integrating climate adaptation into real estate. Key points discussed include the importance of incorporating biodiversity and greenery into property value assessments and the life cycle costs of buildings. Additionally, factors like social well-being and the mental health of residents were identified as crucial elements for long-term sustainability. The ING team highlighted examples of climate adaptation actions, such as greening property areas, alongside the traditional improvement of the building characteristics. Participants agreed that financing adaptation measures rely on a long-term investment vision, with energy labels and longer-term rent contracts contributing to property value. It is concluded that by working with tenants on long-term leases, owners can secure funding for sustainable improvements, promoting a shared responsibility for both environmental and financial success.
Flood Risk and Real Estate Pricing in the Netherlands
The day continued with a presentation by Philibert Weenink, Red&Blue PhD candidate at Maastricht University, who presented his latest research findings and insights on how flood risk impacts real estate prices in the Netherlands. His analysis showed a relationship between market awareness and the pricing of properties at risk of flooding. Philibert highlighted two main approaches for bearing the costs of flood risk: (i) ‘Disaster Damage Compensation Act’ which provides partial compensation to those affected by a disaster, but only in cases where the damage is not reasonably insurable; and (ii) ‘Flood Insurability’ which is not the same for un-embanked and regional dike areas. Using ‘Hedonic Price Models’, he evaluated how flood risk affects real estate value. The main findings revealed that properties exposed to flood risk trade at an approximate 2% discount. This discount is primarily observed in un-embanked and primary dike areas, where flood risks are highest.
Disclosure of Climate Risk Information
The day concluded with a fruitful discussion on the need for (mandatory) disclosure of information on potential climate risks in real estate transactions. A key point raised was who should determine what constitutes a “potential” risk, given the variability of climate projections. While there was consensus on the importance of transparency, concerns were raised about the clarity and consistency of risk assessments. Some participants felt that buyers should take responsibility for investigating climate risks, but emphasized that sellers should also provide transparency. It was also noted that climate risk information should be tied to policy solutions, such as shared renovation costs, particularly for issues like foundation damage for which both homeowners and commercial real estate owners cannot bear these costs alone, hence collaborative solutions between the public and private sectors are needed.
Participants also discussed the idea of providing insurance to sellers of properties with high climate risk exposure as a way to avoid properties becoming unsellable. However, concerns arose over the potential market disruption if such sensitive information is disclosed by public sector. The discussion wrapped up with the proposal of scenario development as a method to simulate potential disruptions and explore the division of responsibilities between the public and private sectors in various recovery scenarios, helping to ensure a coordinated response to climate-related challenges in the real estate market.
