By
Gustav Haaland
-
Mar 9, 2026
A practical checklist for climate risk due diligence
Due diligence is designed to surface risks before capital is committed. Financial assumptions are stress-tested, technical inspections are conducted, legal exposures are reviewed, and market conditions are analysed. Most due diligence processes are rigorous. Climate exposure is often assessed less systematically.
As physical climate risk, insurance dynamics, and regulatory expectations evolve, understanding how an asset may be affected over its holding period becomes part of prudent underwriting. The objective is not to create a parallel sustainability process. It is to ensure that exposure is identified early, translated into financial implications, and incorporated into pricing and decision-making.
A structured checklist can help investment teams integrate climate risk into existing workflows without adding unnecessary complexity.
Material exposure is the starting point
The first step is to determine whether the asset faces material physical climate risk. This includes reviewing address-level exposure to flood risk (river, coastal, or surface water), landslide or ground instability, heat stress and cooling demand, extreme precipitation patterns, and coastal erosion or sea-level rise where relevant.
The goal at this stage is signal detection. If exposure is negligible, that conclusion should be documented clearly. If exposure is material, it may affect pricing, negotiation strategy, financing assumptions, or whether the deal proceeds at all.
For example, a property located in a low-lying area may show elevated flood exposure under forward-looking projections. Even if no recent incidents have occurred, increased probability of extreme rainfall events may influence long-term risk and investor perception. Material exposure should trigger deeper financial assessment.
Insurance conditions reflect climate exposure
Insurance conditions increasingly reflect climate exposure. Due diligence should include confirmation of current insurance coverage, review of premiums and deductibles, and assessment of whether coverage terms may change over the holding period.
If underwriting assumes stable insurance costs over a ten-year investment horizon, that assumption should be stress-tested. In regions experiencing repeated extreme weather events, premiums may increase materially or deductibles may rise. In some cases, coverage terms may tighten. If projected net operating income depends on stable insurance conditions, this becomes a financial variable.
Insurance availability and pricing are not static. They respond to risk signals from the market.
Mitigation costs belong in financial modelling
If exposure is identified, the next question is practical: what would it take to reduce or manage the risk? This may include flood protection measures, drainage improvements, reinforcement of building elements, energy efficiency upgrades, and technical adaptations to meet future regulatory standards.
Due diligence should estimate whether mitigation is required within the expected holding period, a reasonable cost range, and the impact on capex planning and return assumptions.
For instance, if flood protection measures are likely to be required within five years, that investment should be reflected in capex projections and internal rate of return calculations. Mitigation cost is not a secondary consideration. It is part of financial modelling.
Regulatory trajectory affects capex timing
Physical risk is only one dimension. Transition risk may arise from tightening building standards, energy performance requirements, carbon pricing mechanisms, and investor and lender expectations.
An asset that meets minimum standards today may require significant upgrades within the holding period if regulatory thresholds tighten. Energy performance requirements, in particular, may accelerate capital expenditure timelines.
Due diligence should examine current energy classification, likely regulatory trajectory, estimated cost of compliance, and impact on leasing attractiveness and marketability. Assets that appear financially attractive today may require substantial investment to remain compliant and competitive.
Translate exposure into financial impact
Once exposure and mitigation needs are identified, they must be translated into financial implications. Key questions include: How would increased operating costs affect net operating income? Does mitigation capex change projected return metrics? Would exposure influence exit yield assumptions? Is liquidity risk higher for exposed assets?
Climate exposure rarely affects value directly. It affects value through cash flow, cost structure, financing terms, and market perception. These effects belong in the same financial model as other risk variables.
Clear documentation enables comparison
Climate-related assumptions should be documented with the same discipline as legal, technical, and financial findings. This includes exposure summary, financial impact estimates, mitigation strategy, and sensitivity considerations.
Clear documentation enables consistent comparison across deals and strengthens investment committee discussions.
A simple internal test
Before investment committee approval, it can be useful to ask:
Have we assessed address-level climate exposure?
Have we translated exposure into financial impact?
Have we stress-tested insurance assumptions?
Have we estimated mitigation cost within the holding period?
Have we reflected this in valuation and return assumptions?
If the answer to any of these is unclear, the due diligence process may be incomplete.
Climate risk as part of disciplined underwriting
Climate risk due diligence does not replace traditional analysis. It complements it. The objective is straightforward: identify risks that may affect cash flow, capex, insurance, or valuation before capital is committed.
When climate variables are reviewed systematically across transactions, investment teams gain comparability and clarity. Over time, geographic patterns become visible. Recurring mitigation needs become predictable. Exposure concentration can be managed proactively rather than reactively.
Capital discipline depends on identifying risks before they affect value. Climate exposure is no different.
A closing reflection
What happens when a competing bidder has already priced climate exposure into their offer — but your team hasn't assessed it yet?
How do investment committees maintain underwriting discipline when material exposure is discovered after pricing is agreed?
And which organisations will retain investor confidence when climate risks surface at exit instead of being identified at entry?
These questions reflect a shift already underway. Climate exposure is moving from optional due diligence to essential underwriting practice. The organisations that integrate it earliest will have clearer visibility, stronger capital discipline, and fewer surprises.
Sources and references
This article builds on themes explored in:
