As well as net-zero, we must plan for a more volatile climate

Bevan Jones is an associate director at consulting firm Turner & Townsend

Many businesses in the built environment sector have made clear corporate commitments to deliver net-zero carbon emissions. But considerably less airtime and focus has been placed on tackling climate risk: the physical resilience of built assets when facing the worsening effects of climate change.

Net-zero has become part of our industry’s lexicon, but – investor community aside – few clients and contractors have highlighted or indeed developed strategies for managing climate risks across real estate and infrastructure projects.

“Contractors will need to prove that a built asset will not simply become obsolete in a changing climate’

With assets typically having a predicted lifecycle of 30-60 years, all parts of the investment and construction supply chain need to understand the physical risks of climate change. In the UK, over a number of years, we have seen extreme flooding as well as increasingly hot and more sustained heatwaves. Today’s extremes will become our normal climate patterns over the coming couple of decades.

While physical resilience is often neglected, the concept of transition risk is even more poorly understood. This term refers to the potential for assets to become stranded due to their reliance on fossil fuels. Understanding exposure to transition risk is vital. The aim should be to protect clients and their investors from a situation where a high-carbon asset, too reliant on fossil fuels, is built in spite of these foreseeable risks.

In 10-15 years’ time, we might expect to see society rapidly transitioning away from fossil fuels. Any building that cannot be economically adapted to join this transition could become a stranded asset, seeing its value fall significantly.

Investors and some clients are now assessing transition risk using the Task Force on Climate-related Financial Disclosures (TCFD) framework, which helps to assess transition risk through the different lenses of technology, policy, litigation, market and consumer sentiment, and reputation.

Supply chains can prompt change

What are the implications of these risks? One scenario could be a new building completed with a gas heating system. In this circumstance, the building owner and investor will be exposed to a technology risk related to a fuel that is being phased out, a policy risk due to the government’s decarbonisation goals, and a reputational risk associated with reliance on fossil fuels.

Responsibility for assessing both physical and transition risk currently sits most obviously with clients and investors, but an informed supply chain is critical to reshaping the industry so that  it is prepared to withstand these threats. On a practical level, contractors will need to demonstrate that their work will support long-term resilience and prove that a built asset will not simply become obsolete in a changing climate and shifting policy environment.

In a rapidly evolving market, new design specifications will come forward, and new low-carbon materials will need to be sourced and understood. A degree of future-gazing and hypothesising will be needed, to forecast what might happen to a building in 15-20 years’ time. For example, are the design and construction techniques sufficient to manage dramatically increasing rainfall, or extended periods of extreme temperatures, both hot and cold?

New workstreams

These questions will become even more significant for contractors working in joint ventures, as part of public-private partnerships, in design and build contracts, and where ongoing management responsibilities exist in models such as DBFO (design, build, finance, operate). As the industry increasingly focuses on retrofit and refurbishment over new-build, there are openings for new workstreams, too.

Understanding the likely changes, threats and opportunities will require greater understanding of climate modelling and the implications for assets. There is more data available now than ever before on the climate risks faced in specific locations, and these resources should become a first port of call when embarking on any project.

Consideration must also be given to different climate futures. Based on the latest globally agreed targets and outcomes from the COP26 climate-change conference, the world seems set to experience a global temperature rise of over 2°C. However, if global policies to reduce emissions prove ineffective, we may face a world with 4°C warming. This could in turn accelerate government and business action, creating policy changes, different market behaviours and fundamental increases in costs.

Contractors now recognise the commercial and reputational challenges of not committing to net-zero carbon. Understanding and developing strategies for climate risk is also critical to ensuring our built environment is fit for the future. It is time to make climate risk part of the contracting playbook.