From Climate Change to Climate Alpha

This decade marks the beginning of climate change taking a permanent place in our headlines — and humanity taking seriously the need to adapt to it. While climate consciousness has risen over the past 20 years and more, concerted diplomatic and industry efforts to reduce greenhouse gas emissions and other damage to our vital ecosystems are phenomena of the past decade only. Climate mitigation now dominates the international agenda. Indeed, an overwhelming 95% of total climate related spending is focused on reducing the carbon intensity of industry, greening supply chains, and other measures.

The onus to adapt to climate change is on us

Yet the blunt reality is that global warming and sea level rise continue apace, and even the most ambitious geo-engineering schemes will not return our climate to the familiar conditions of 1990, 1900, or 1800. Our environment is a complex system undergoing modification and lurching in new directions. It will not adapt to us — we must adapt to it.

That is why, as existentially vital as mitigation investments are, an equivalent emphasis is needed on climate adaptation. Adaptation measures include building coastal defenses and flood control measures, retrofitting buildings with more passive heating and cooling technologies, relocating critical infrastructure to less volatile geographies, and large-scale population resettlement. As I explain in my new book MOVE, the number of climate migrants may exceed one billion in the coming decades as the ‘climate niche’ of locations for optimal human habitation shifts.

Multiple factors at play when considering where to invest

Climate adaptation is made even more complicated by the fact that it is not the only variable shaping our future geography. Covid and the search for quality healthcare it provoked, remote work and the desire for a better work–life balance, economic shocks and supply chain vulnerabilities, political risks such as domestic and international conflicts — all of these factors must also be weighed when considering where to invest in personal property and commercial real estate assets.

Given the illiquid nature of real estate, this USD 200 trillion market is relatively unprepared to adapt to such rising complexity. Indeed, the Bank of International Settlements warns of “green swan” events, namely, unexpected environmental catastrophes linked to global warming, that would cause a financial crisis with worldwide consequences, and Canadian economist and former Bank of England governor Mark Carney fears that a “climate Minsky moment” — a sudden change in investor expectations about future climate policies and the resulting fire sale of affected assets — is coming that portends a significant reckoning for today’s assets. New regulations around both transitional and physical risk are raising compliance costs and forcing the industry to adjust. Recently, a bevy of climate risk related companies have made clear which geographies are most vulnerable and should not be held for too much longer, but this is insufficient for a constructive asset allocation strategy.

Climate Alpha identifies future ‘climate oases’

At FutureMap, we launched Climate Alpha to provide the marketplace of asset managers, insurance firms, real estate developers, and others — whether pension funds or family offices — with a data-driven approach to navigating property markets in light of the unpredictable future that lies ahead. Rather than merely telling you where to sell, Climate Alpha guides you on where to buy, based on geographies that are relatively less affected by — or even benefit from — climate change, as well as demographic, fiscal, and other key trends.

Climate Alpha thus identifies the ‘climate oases’ of the future — and luckily there are many, whether in North America, Europe, or Asia, the epicenters of the world economy and real estate markets. Fortunately, some of the more climate resilient states also offer investment migration programs, whereby investors can acquire and secure an alternative residence or second citizenship in a different jurisdiction in return for investing in a host country, including Canada, Switzerland, the UK, and the USA.

The ingredients in our AI-powered formula are hundreds of datasets covering all the variables that have historically shaped property prices, melded together with geolocated climate models. We calibrate future price forecasts according to the risk, vulnerability, and readiness characteristics of each location. Machine learning is essential for this task because of the large number of indicators and the relative nature of outcomes. For example, four cities in close proximity may have similar climate profiles, but the one with higher preparedness will gain population and thus appreciate in value at the expense of others.

Investors should use this data to consider which assets to dispose of, which geographies to increase exposure in, and what time horizon to invest for. Furthermore, they should look closely at the immigration policies, investment regulations, and other characteristics of potential destinations for themselves and for their capital. These strategies together are the playbook to generate higher real estate yield despite the many potential climate, political, and economic scenarios with which we must grapple.

Climate adaptation should not be a matter of emergency response

Our vision goes far deeper than returns, however. We believe that big data can enable a gradual and peaceful new map of human geography. We have the geospatial tools, technical foresight, financial instruments, and logistical capacity to empower the world population to be both more mobile and more sustainable at the same time. We therefore believe in a world order beyond today’s sovereignty. While the globe will always be divided among sovereign nations, our geography can be programmed to optimize resources, industry, and demographics. This is the kind of thinking the world needs if we wish not only to mitigate climate change, but to successfully adapt to it as well.