An ASTM Standard for Climate Resilience

An ASTM Standard for Climate Resilience –Progress Report

Holly Neber, Task Group Chair, CEO of AEI Consultants

Those of us in the property due diligence fields have seen firsthand how regulatory requirements and risk management needs have influenced standard property assessment and disclosure processes over the last few decades. In most US-based commercial real estate transactions, it is considered standard to conduct a Phase I Environmental Site Assessment. Other examples of standard physical risk assessments that are already included in the typical commercial real estate transaction are the Property Condition Assessment, or PCA, which is related to capital expenditures needed to maintain the condition of the building over the life of the loan or hold period and seismic risk assessments, often performed for buildings in high-risk seismic zones. These assessments are all described by an ASTM Standard, and the existence of an ASTM Standard benefits the user and provider community by providing a common language regarding the scope of these assessments, the minimum acceptable qualifications, transferability, and other benefits.

We are now seeing greater pressure to evaluate and disclose climate risk at the property level and to align that with the existing due diligence processes. Real estate investment trusts (REITs) and other equity investors are already obtaining these types of assessments and embedding these considerations into their risk management processes. REITS are evaluating this information in relation to insurance costs, tenant desirability, business continuity, and property values, as well as a potential risk to exit strategies as knowledge of climate risk becomes more widespread.

Lenders have begun reviewing their portfolio for climate risk or have already added a climate risk component to their ESA or PCA scope. In addition, many lenders have signed on to voluntary climate frameworks, many of which recommend evaluating the physical risk posed by climate change within their portfolios. Signaling from the Federal Reserve and other agencies suggests that some sort of disclosure may be required in the future. However, we are lacking an ASTM standard on these types of assessments. Collectively, the lending, investment, and consulting community have identified a need for a property resilience-focused standard within ASTM.

Our vision is that the ASTM guide will be an umbrella to reference other climate guides outside of ASTM, as well as any resilience and climate-related guides within ASTM. We believe our efforts will identify gaps in current ASTM assessment standards related to specific hazards. We feel delivering a standard to the marketplace is urgent as we know these assessments are already occurring and pressure is growing to create a standardized approach.

Our Task Group is not attempting to cover all Environmental, Social and Governance (ESG) reporting or assessment of physical climate risk across a business, community, region, or a supply chain. This is solely focused on physical climate risk to the building itself.

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We envision the Property Resilience Assessment (PRA) to be initiated during the standard due diligence period for a commercial real estate asset. Resilience, in the context of this standard, is the ability of a building to withstand the impacts of the natural hazards that may act upon it. A more resilient building is better able to withstand the hazard, resulting in better outcomes for investors, lenders, insurers, occupants and users. Our PRA will include natural hazards that are caused by climate change, those made more extreme by climate change, and those unrelated to climate change because the concepts of resilience apply regardless of the cause of the hazard.

The PRA is envisioned to consist of three main stages as depicted below.

The first stage of the PRA is a natural hazard screening to determine which hazards are likely to be a concern for the building. This natural hazard screening consists of leveraging commercially available hazard maps and models, as well as publicly available sources of this information.

Second is the risk assessment stage to understand the building characteristics, such as type of building materials, age of construction, and on-site sensitivities and vulnerabilities. A site inspection takes the hazards identified in the first stage and compares that to the building attributes, nature of occupancy, and any existing adaptations that may have already been made at the property. We are still debating the finer points within our ASTM Task Group; however, we believe we may be able to provide a risk rating as an outcome of Stage 2, and a probable maximum loss for at least some hazards (such as flood).

Stage 2 consideration examples:

• Two buildings may both be subject to flood risk, and both may have similar building elevations; however, one has critical equipment in the basement and the other has situated critical equipment above projected flood levels. The two buildings would experience the hazard differently. • One building is utilized for assisted living and another for self-storage. Considerations for hazards such as extreme heat would be different for these two sites based on the nature of occupancy.

The third and final stage of the PRA is the identification of basic resilience best practices at the building depending on the nature of the hazard. Adaptations such as temporary or permanent flood barriers, moving critical equipment, fortifying the building against fire hazards, upgrading HVAC equipment, and so on would be identified, and cost estimates generated. Assuming the costs to make the building more resilient are reasonable to the value of the building, we imagine the deal would proceed with the costs noted as a post-closing requirement.

It is important to note that our PRA does not attempt to cover adaptation engineering beyond a certain point. We are still working through the dividing line between our PRA and advanced resilience engineering, and we will discuss the need for advanced engineering if the basic best practices are insufficient to address the hazard of concern. We have a great deal of respect and humility about the decades work on the topic of natural hazard adaptation, and we intend for our standard to point to that work in our resources and references.

Our ASTM Task Group, known as Task Group WK62996, began a few years ago and has developed real traction this year. One key hero in our story is Damian Wach at PGIM Real Estate, Chairman of the ASTM E06.25 Committee on Standards for Whole Building Performance. Other key leaders include Willy Accame with Panatonni Development, Jessica Weyandt with Marx Okubo, Brett Farbstein with Cannon Design, and Albert Slap with Risk Footprint, among many others who have jumped in to contribute.

The Task Group includes a balance of the potential users for these assessments, such as financial institutions and real estate developers, as well as the providers of such assessments, including many EBA members such as Bureau Veritas, EBI, Envirosite, Lightbox, Nova, Partner Energy, as well as hazard screening and modeling companies. In addition, representatives of the American Society of Civil Engineers, which is influential with respect to building codes, The Institute for Sustainable Communities, the US Resiliency Council, BREEAM US, and the National Center for Atmospheric Research are involved, along with representatives of the CPACE lending community, Fannie Mae, and Freddie Mac. We have nearly 90 participants and welcome additional interested parties, or those who would like to share information with us or simply stay informed.

As a result of the Phase I ESA being incorporated into commercial real estate due diligence, countless releases of hazardous substances and petroleum products have been addressed in our communities over the last several decades. The Phase I ESA process also brings certainty to the marketplace with how to handle environmental concerns, and this facilitates lending activities. We imagine this PRA could have similar possibilities in terms of improved resilience across the nation and facilitating property transaction activity for those currently struggling with how to assess and report on climate risk. We know that climate risk and resilience assessments are already occurring for investors and lenders in the absence of an ASTM Standard, and we hope that our work will provide the needed clarity provided by the ASTM process. We appreciate offers to collaborate or simply share information as we move forward through the ASTM process.