Placepoint

Climate risk

Climate risk is the financial, physical and legal risk a building is exposed to as a result of climate change and society's response to it. Banks, insurers, funds and tenants increasingly ask for explicit climate risk assessments as part of due diligence, valuation and insurance renewals. Norway has implemented these requirements through the taxonomy and the CSRD reporting directive, which is being phased in from 2024 to 2026.

Professionally, climate risk is split into two main categories. Physical risk covers direct losses to the building from climate change: flooding, landslides, kvikkleire (quick clay), extreme weather, sea level rise and changes in groundwater conditions. Norwegian hazard maps from NVE show hazard areas for flooding, kvikkleire and landslides at matrikkel level, and are the primary source for physical climate risk assessment in Norway. For buildings outside the hazard zone, the physical risk is typically low. For buildings inside the zone, the insurance premium may rise or the insurer may require specific measures before cover is granted.

Transition risk is the risk that society's climate response (regulation, carbon pricing, customer expectations, tenant demand) makes a building less valuable or harder to finance even if the building suffers no physical damage. Examples include new energy requirements in TEK17, CO2 duties on heating oil, or tenants requiring BREEAM In-Use or another environmental certification. The most dramatic form of transition risk is a stranded property: a building that cannot be upgraded economically to meet new requirements and therefore loses its financing or letting potential.

Banks in Norway use climate risk assessment in the credit process. Since 2022, Finanstilsynet (the Financial Supervisory Authority of Norway) has expected banks to integrate climate risk into their portfolio models. In practice this shows up as higher risk margins or separate climate covenants for exposed buildings. The insurance industry uses similar tools: Tryg, Gjensidige and If publish quarterly updates on natural hazard risk and adjust premiums accordingly.

For institutional investors (pension funds, life insurers, property funds), climate risk is now a mandatory part of the investment analysis. The EU taxonomy requires reporting of how large a share of the portfolio meets the environmental minimum requirements, and funds must answer for this every year. A portfolio with a high share of buildings exposed to transition risk gets a weaker score in the taxonomy reporting, which affects investor relations and future capital raising.

In Placepoint you can compare flood hazard zones, landslide zones and kvikkleire with the property data from the property panel when you carry out a climate risk assessment on a single building or a portfolio. Report: Risk and climate risk gathers the physical risk theme by theme, and Report: ESG and sustainability takes transition risk further with energy labelling and taxonomy requirements.

How it looks in Placepoint

In Placepoint you will find this in Report: Risk and climate risk:

Climate risk in Placepoint

From Placepoint's dictionary: Climate risk

More information: Finanstilsynet: Climate and sustainability, NVE: Climate, Miljødirektoratet: Climate adaptation

English: Climate risk, transition risk, physical risk.

Common questions we come across

What is the difference between physical risk and transition risk?

Physical risk is direct losses to the building from climate change: flooding, landslides, extreme weather, kvikkleire. Transition risk is that society's climate response (regulation, carbon pricing, tenant requirements) makes the building less valuable or harder to finance, even if it suffers no physical damage. Both must be analysed separately in a complete climate risk assessment.

Which maps should I check for physical climate risk in Norway?

The hazard maps from NVE for flooding, landslides and kvikkleire are the primary sources. Miljødirektoratet (the Norwegian Environment Agency) adds climate data and future scenarios. In Placepoint you can switch on these map layers directly from the left-hand menu.

How is climate risk used in a valuation?

As a risk margin in the capitalisation rate or the discount rate: a building in a flood-prone area gets a higher risk margin than a comparable building outside the zone. In long discounted cash flow models, specific future costs are also modelled (upgrades to meet energy requirements, higher insurance premiums, vacancy risk).

What does the taxonomy mean for climate risk reporting?

The EU taxonomy classifies economic activities as "sustainable" based on defined environmental minimum requirements. Institutional property owners must report how large a share of the portfolio meets the requirements, and that share affects investor relations and future access to capital.