Climate scenarios – risks and opportunities

Through climate scenario analyses, Castellum evaluates which climate risks and opportunities can impact the company, its properties and investments, both at present and in the future. The aim is to prepare Castellum for various societal trends and to future-proof its property portfolio.

Analysis of future scenarios – the world in 2050

For two years, Castellum has been reporting in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD). In 2019, an analysis was conducted to evaluate climate risks and opportunities based on two different climate scenarios developed by the UN International Panel on Climate Control (IPCC): RCP 8.5 and RCP 2.6.

RCP 8.5 – here called “On the beaten path” – is a business-as-usual scenario in which the world has failed to make any changes and greenhouse gas emissions continue to increase at the current rate.

RCP 2.6 – here called Fulfilling the Paris Agreement – is a scenario in which we have succeeded in limiting the temperature increase to 1.5–2 degrees Celsius.

Both scenarios entail risks for Castellum, but opportunities as well. The company needs to be resilient, adapting its operations based on changed climate conditions both locally and nationally.

Evaluating climate risks

Castellum conducts an annual survey of all the company’s risks and their likelihood, impact, priority and development for a period of up to ten years. In addition to this, for climate risks we also analyse risks from a long-term perspective in accordance with the climate scenario described in this chapter. As regards climate risks, both physical and transition risks that could follow from a changed climate are assessed.

Ahead of investments in new production, the climate risks are evaluated for a building during its technical service life, with emphasis on precipitation, extreme weather and the risk of flooding. The IPCC’s middle scenario, RCP 4.5, is then used in addition to RCP 2.6 and 8.5. Ahead of decisions on investment, the Head of Sustainability assesses the investment from a sustainability perspective, in which climate change is an important issue.

The resistance of properties to climate change

Castellum is investigating the possibilities of evaluating the resistance of its property portfolio to climate change through participation in the EU-financed Carbon Risk Real Estate Monitor (CRREM) research project. This project will define scientifically-based measures to reduce carbon emissions in commercial properties and housing in the property sector for the purpose of achieving the Paris Agreement.

“Fulfilling the Paris Agreement” (RCP 2.6)1)

  • Greenhouse gas emissions halved by 2050.
  • +1.5–3° C national temperature increase in Sweden.
  • New renewable energy technology introduced on a large scale.
  • Low energy intensity.
  • Dramatic changes made to society, the infrastructure and buildings.
  • The countries of the world succeed in collaborating on shared initiatives.
  • Political decisions, taxes and regulations regarding greenhouse gases introduced.
  • Increased regulations with sustainability requirements regarding land use and construction codes.
  • Changed demands from customers and investors.

Risks

  • Increased regulation, taxes and fees for carbon emissions, land use, construction codes, etc.
  • Older properties could become obsolete.
  • Risk of unprofitable investments if unproven technology is used to rapidly initiate the transition.
  • Requirements for zero emissions of greenhouse gases throughout the value chain; the circular economy requires major changes in the business model.
  • Price increase for construction materials, transportation and energy owing to political restrictions.
  • Volatile or steeper energy prices.
  • Increased need for investments in new technology, new construction and existing properties.

Opportunities

  • Increased production of solar energy and increased use of renewable energy.
  • Increased demand for innovation and new technology.
  • Increased urbanisation and need for consolidation in core city areas make the portfolio attractive.
  • Decreased energy needs owing to more efficient resource use.
  • Changed customer and investor preferences, as well as increased sustainability requirements make Castellum an attractive property owner and investment.

Potential impact on Castellum’s financial performance

  • Increased investments in the transition.
  • Increased costs for climate adaptation.
  • Increased operating costs.
  • Decreased value of properties that are not climate-adapted or are located in risk areas.
  • Increased value of climate-adapted properties.

“On the beaten path” (RCP 8.5)1)

  • Greenhouse gas emissions continue to increase at current rates.
  • +2–4° C national temperature increase in Sweden.
  • Rising ocean levels.
  • More days with extreme weather and flooding.
  • Increased number of forest fires.
  • Unchanged behaviour and demands from customers and investors.
  • High energy intensity and heavy dependence on fossil fuels.
  • Political climate initiatives and collaboration fails.
  • Poorer indoor climate impacts peoples’ health.
  • Increased population and immigration to Sweden.
  • Operations become more event-driven owing to extreme weather

Risks

  • Water damage owing to flooding in ocean-front constructions and low-lying zones.
  • Damages to roofs and façades owing to extreme weather such as storms, heat waves and fires.
  • Decreased demand for properties located in areas at risk.
  • Risk of obsolete properties, since the cost of climate adaptation measures exceeds the value.
  • Increased need for maintenance, repairs and periodic building closures, as construction materials and technology are negatively impacted by increased temperatures and a moist climate.
  • Increased shortages of electricity and energy, which is strongly driven by increased electrification and the need for more energy in society.
  • Increased competition from low-price operators who lack sustainable agendas.

Opportunities

  • Increased production of solar energy and increased use of renewable energy.
  • Measures to enhance energy efficiency become more profitable to carry out.
  • Increased requirements for indoor climate place demands on more adaptable properties and districts.
  • Climate-adapted properties make Castellum a more attractive property owner.

Potential impact on Castellum’s financial performance

  • Dramatically increased investments in managing climate changes.
  • Dramatically increased costs for climate adaptation.
  • Volatile or reduced rental incomes.
  • Volatile or increased energy costs.
  • Dramatic increase in operating costs.
  • Increased insurance costs.
  • Decrease in or eradication of value of properties that are not climate-adapted or are located in risk areas.
  • Increased value of climate-adapted properties.

Strategies that deal with climate risks and climate opportunities

  • Net-zero carbon emissions according to the Science Based Targets initiative.
  • Climate-proof properties.
  • Production of renewable energy and energy storage.
  • Enhancements to energy efficiency and limitation of effects.
  • Sustainability programme for investments.
  • Climate requirements for larger projects.
  • Environmental certifications and environmental inventories of buildings.
  • Portfolio analysis of climate impact (planned)

Castellum’s “100 på sol” (100 on Solar) solar cell programme

Read more on Strategic risks

Financial impact on rental income and the portfolio’s value in the event of obsolete properties

The following sensitivity analysis illustrates how Castellum will be impacted financially if 10% of its properties become obsolete, i.e. unusable or unlettable owing to climate changes (e.g. owing to flooding or properties that have not been adapted to climate change becoming unattractive in the market). The reason that we use 10% in the example is because during a demonstration in 2020 we stress-tested a number of properties in Castellum’s portfolio. During the demonstration, approximately 10% of the selected properties analysed will be affected by physical climate risks in climate scenario RCP 8.5. There are plans to refine this analysis over the next several years. According to the IPCC’s climate scenario, the Nordic countries are generally less affected by physical climate changes compared with countries further south.

1. Sources: smhi.se/klimat/framtidens-klimat and TCFD The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities

Castellum

 

Reduced rental income (MSEK)

 

Reduced total property value (MSEK)

If 10% of properties become obsolete

 

600

 

10,992