Name: Fortune Global Forum 2023: Future-Proofing Global Real Estate
Uploaded: 2023-11-29
Duration: 13 min 34 s
Description: Presenter: Dr. Parag Khanna, Founder and CEO, Climate Alpha

Presenter: Dr. Parag Khanna, Founder and CEO, Climate Alpha

Fortune Global Forum 2023: Future-Proofing Global Real Estate 

Conferences

Global real estate market is valued at more than $300 trillion. It's the most valuable asset class in the world. But shocks such as mass migration, climate change, and geopolitical strife plus trends such as rapid digital transformation and remote work are influencing where people live and redrawing the map of humanity. So how can we determine which locations are most resilient and offer the best opportunities for business investors and all stakeholders. Our next guest is harnessing data and utilizing A I to analyze hundreds of socio economic demographic and market indicators to get the answers. Dr PAG Kana is founder and CEO of Climate Alpha, an all A I powered platform that forecasts asset values to future proof global real estate. He joins us to share the trends and scenarios that will influence where and how we all live. Please welcome him Park. Good afternoon. Thank you very much, Clay. Well, you're all familiar with the concept of the Black Swan hardly needs to be explained anymore, low probability, high impact event, but the real risk in the world today are the green swans and they are flocking and what's different, of course, between them and a Black swan is that they are not unpredictable or low price ability. In fact, they're happening all the time. So much so that the total annual estimated damage and payouts from climate disasters is increasing by tens of billions every single year. We reached $250 billion last year. So we now know what we have to prepare for but are we, we are not, we have a major collective action problem. And here as we gather on the eve of cop 28 we know over the last several decades that while heroic amounts of resources are being committed to mitigation, decarbonization, greening our industries and supply chains, not enough is being committed to adaptation, which is how we retrofit our infrastructure relocate, populations, invest in climate resilience for our societies for our economies that has not happened yet. And therefore, as the bank of international settlements has warned us without that collective action, climate risks are largely un hedge at a systematic level. And indeed the industry that is most exposed is the largest. Now as if high interest rates, COVID related abandonment of offices and worker relocation after COVID and so forth wasn't bad enough. Now, you have the climate factor, uh potentially decimating certain geographies. Now, for all of us, we've been accustomed to real estate going up and to the right for generation after generation after generation, but not only due to climate change but also a separate topic, but a very important one. The plateauing of the world population means that really there is a zero sum game underway in global real estate and the geography of global real estate. All of these are slamming the global real estate industry as valuable as it is, but it is trapped and immobile as it is by definition all at once. What is to be done now if you take the present distribution of the world population, all 8 billion of us on this map, literally every human being is a pixel and forecast. What happens to the livability, the suitability for human habitation of geographies over the next 5, 1015, 20 years as temperatures rise across the 1.5 degree towards the two degree threshold, you get a picture that looks somewhat like this. Now, I think we all unfortunately have been made aware in recent years that this is not a map of the year 2050 or 2060. We cannot be complacent in believing that if we simply meet the Paris Agreement targets and limit greenhouse gas emissions and try to slow temperature rise, that we can avert certain negative chain reactions that are already well underway in our biosphere generally. And certainly when it comes to the consequences of temperature rise itself. For example, if you look at South Asia, now, the most populous region of the entire world India alone with more people than China. If you take Pakistan, India, Bangladesh, that alone is 1.8 billion people as a subregion. That is one of the most climate stressed regions of the entire world. So it wouldn't be a stretch to posit that over the next 5, 10 years or in the coming decades, the number of people who are going to relocate as a result of climate phenomenon, which is already one third of total dislocated people in the world today is going to cost hundreds of millions of people. That's what the World Bank has already forecast and they're potentially understating the case. So the question becomes not just what to do next, but where is next? Because unfortunately not only the real estate industry, but by extension, our habitats, our settlements, our towns, our cities, our communities are going to be affected and many people are going to move and investors are going to need to anticipate the new geographies that are more climate resilient, more fertile uh to, to uh to build new towns and communities and so forth as we adapt to climate change. Because remember, the climate is not going to adapt to us, we have to adapt to it. But one of the things that we have neglected in the focus on mitigation and decarbonization instead of adaptation is really quantifying financial impact. We simply have these studies and forecasts that say that it will get worse in place X or Y. But without putting a price on that phenomenon, we're not able to really incentivize and share industry behavior. There's a lot of focus on again, the decarbonisation, space and regulations there, particularly in Europe and in a couple of other countries, it's starting to happen more in the United States. But generally speaking, adaptation is considered a private good, not a global public, good like decarbonisation. So you have much more localized impact assessments and calculations and time horizons under which firms operate. What we've done in our research is to think about how spatially geographically you should look not only at the risk indicators from climate where it's uncertain under what time horizon or scale those are going to play out and also layer in the resilience, the local resilience. The truth is that the ground truth in any given place in the world is not going to be determined solely by what the climate models say are going to happen in terms of flood, storm heat, fire, drought, hurricane sea level rise and so forth. The ground truth is going to be determined by how adapted that location is what are its investments in resilience. And one of the things we have not done is to quantify resilience. Resilience is a term that gets talked about a lot, especially during COVID, what made for a resilient society. How did communities bounce back but have we quantified it? We haven't. And that's what we've started to do is to say what is, in fact the financial impact, a positive financial impact to offset climate risk of having an energy grid powered by renewables. What about the the the availability of health care and the quality of life in a given location, the quality of infrastructure, the public spending, the social robustness, all of these indicators that you can in fact back test the climate stuff. Climate change is new but a lot of the socio economic and infrastructural investments that we can and need to make more of Now, you can prove have a historical impact on real estate assets, retaining their value. So it's at the confluence of risk and resilience and turning that index into financial impact that we believe creates a very actionable scorecard dashboard and set of coefficients that we generate that help real estate investors plan accordingly. Now, there are a lot of things you can do in the real estate space, the built environment to cope with risks. In fact, for every single physical risk, there is an intervention that you can make with, there's going to be heat stress, you have to invest more in air conditioning or district cooling where there's hurricane risk. You want to do more around coastal inundation protection, drainage systems and so on and so forth. We can do so much more with water conservation, water management and so forth. But that said part of what's happening, as I mentioned earlier is the demographics and the investment landscape changing as a result of everything from the interest rate environment to relocations of companies to human migration and a young generation that is um that is less wedded to any particular geography. And so you have a competition among locations to be the most adapted to attract investment, to attract people. And this is one of the macro trends that if you really pan back and think about this reality of us having to adapt to climate change rather than the climate adapting to us. You realize that if you go back 15,000 years, the history of human settlements, there's always been a competition among geographies to be uh the places that are the most open that attract talent that are the sort of centers of industry and innovation and that process is underway today as well. Some of the most significant commercial hubs and economic centers of the world are also very climate stressed geographies. And if they don't adapt new centers of excellence, new civilizational centers and hubs are going to arise in my travels and research, I've spotlighted and this is just a artistic rendering, you might say of some of the locations that I see as being not only climate resilient but doing a lot to build microclimates of energy efficiency, places that are trying to retrofit their infrastructure, trying to keep temperatures down in their built environment and all of these kinds of things that make them attractive and livable. So it's a lot of things that are going to make a lot of ingredients that are going into, make places resilient. And I'm ranking judging, scoring them according to what extent they are making those investments and that's going to make them attractive destinations for the global asset management, global investment industry. And indeed for young talent now note there is a star right there over this country, United Arab Emirates. And so let's remember that the climate model is saying it's going to be searing scorching hot here, right? Can't argue with that. It already is however, think about the adaptation investments, right? Not nearly enough countries are doing what this country has already done and started to do everything from air conditioning, coastal mangroves, water desalination and so on and so forth. And that again is the differentiator. The climate model tells us many places doomed, but we have that capacity for investment and ingenuity and innovation to adapt and so places have to adapt or they will lose out in this competition for investment and talent. Now, as you saw on that previous map, we have many geographies in the world that are sadly becoming unlivable or certainly less suitable for human habitation. And so really, you can create a simple supply demand curve, right, the supply of climate resilient assets and geographies is getting smaller and therefore the demand for them and as the demand for them rises, their prices, their price is going to rise as well. So this inevitably becomes something of an investment proposition to be the first movers to invest in those climate resilient geographies to start to retro at them to build the food, water, energy, housing, transportation and other systems that are necessary as the populations of climate resilient geographies grow over time. And that time is in fact, now, indeed resilient geography, I would say is the most valuable asset class in the world if real estate is already the largest industry, but we haven't again, quantified it priced it located it and made an investable proposition. In fact, if you think about the way in which we calculate sovereign risk today, so often it's based strictly on regulatory norms or rule of law. But it doesn't take into account whether a country is really investing in climate resilience or not. And yet there are entire swaths of the world that you can see here on this map. It might be Central Asia or other places in, in, in, in, in Asia or even parts of Europe. That may not be investor darlings right now, but that are making the right investments or climate propitious and more capital should be allocated there. One of the things that we're doing is to help to guide asset managers to really allocate capital, these climate resilient locations because indeed, not only is their income generation off of those investments, but there's actually capital appreciation, capital appreciation as well in the long term, given that supply demand curve. So in summary, we have a very important opportunity. Here we are at a crossroads in the world where this massive misalignment that we have in the world between the geography of people, the geography of borders, the geography of infrastructure, the geography of economic activity is terribly misaligned and it's up to us to actually realign it. It's not going to happen on its own. The COP 28 is not going to give us that solution. It's really up to the Corporates, the ceos, the investors, the leaders of the world to realign the map by building where we need to build, to adapt all of human civilization collectively. Thank you very much.