Climate change is a topic we can no longer ignore. Governments and businesses across the world are finally waking up and making big changes to address their role and impact on the earth. Real estate, being a key contributor to global gas emissions, is one industry that will likely be impacted the most as new regulations are rolled out.
Insurance companies, for example, may start requiring additional compliance requirements for property owners as they relate to the property's carbon footprint or charge higher premiums for properties that don't comply, just like they do for outdated electrical or an old roof. Read on to get an understanding of why this is likely and how it may impact your real estate investments.
Why climate compliance in the insurance industry?
The insurance sector is one of the largest pools of nongovernment capital in the world, worth over $5 trillion . And because property insurance is a major percentage of that, it is also the largest provider of capital for infrastructure projects in the world. According to testimony by Dr. Leah Stokes for Congress in September 2021, the insurance industry in the United States experienced 22 distinct “billion-dollar” climate and weather events in 2020. This resulted in half a trillion dollars' worth of U.S. economic damages.
The National Oceanic and Atmospheric Administration (NOAA) states that sea levels have risen eight inches since 1950 at the tip of Manhattan. The price tag of the climate-related changes resulted in an additional $8 billion worth of damages from Superstorm Sandy, according to research published in Nature Communications. With billions in losses becoming ever more clearly related to anthropogenic climate change, it seems inevitable that insurance companies will want to minimize these losses. Add to that the probable financial incentives that the government is planning to roll out to a wide array of industries for reducing carbon footprints, and it seems highly likely that changes are coming.
What climate compliance could look like
It’s not unreasonable to think insurance companies could start issuing standards for homes or commercial real estate to follow as they relate to its carbon footprint. Those that fall within the standard pay a general rate, and those that fall outside of the standards pay more. We see this all the time with real estate, and it's precisely why insurance companies ask when the plumbing, electrical, or roof was last updated when issuing a policy.
While we are in the very early stages of any action being taken by insurance companies, it is still worth understanding so that you can confidently move forward with improvements to a property to help minimize its carbon footprint. Doing things like installing LED lights, using EnergyStar appliances, upgrading insulation, installing more efficient windows, or upgrading the heating and cooling systems are all ways to reduce energy and make a home more "green." Taking little steps over time can reduce the financial burden for the homeowner or investor while also preparing for what very well could be the future of property insurance.