Climate risk in the investment committee memo

ESG as capital allocation discipline

Investment committees exist to allocate capital under uncertainty.

Cash flow assumptions are tested. Capex is scrutinised. Yield and exit scenarios are debated. The purpose is to ensure that risk is understood before pricing is finalised.

Climate risk should be assessed within that same framework.

ESG is often discussed as reporting or disclosure. For investors, however, ESG refers to external conditions — such as climate exposure, regulation, insurance markets, and tenant expectations — that can influence earnings, risk exposure, financing terms, and liquidity.

When those conditions affect financial outcomes, they become part of the investment case.

The question is not whether ESG matters. The question is whether it is reflected in the capital allocation process.

Climate exposure as a financial variable

Climate exposure influences assets through concrete financial channels.

Physical risk can increase insurance premiums, deductibles, or capital expenditure requirements. Energy performance and regulatory tightening can accelerate upgrade cycles. Market preferences can affect vacancy risk and long-term liquidity.

These developments influence:

• Net operating income

• Capex timing and magnitude

• Financing and insurance conditions

• Exit valuation and buyer appetite

They are therefore underwriting variables, even when labelled ESG.

If they are described separately from the financial model, committees may lack a clear view of whether risk has been fully priced.

The investment memo as the integration point

The investment committee memo is where assumptions are consolidated and challenged. It is therefore the natural integration point for climate risk.

Integrating climate risk into the memo does not require a new process. It requires a structured translation of exposure into financial implications.

A disciplined section in the memo may include:

1. Material climate exposure

A concise assessment of asset-level exposure that could affect performance during the investment horizon. The focus is on material risks rather than completeness.

2. Financial implications

Explicit connection between exposure and financial assumptions, including:

• Mitigation capex and timing

• Insurance sensitivity

• Operating cost implications

• Regulatory-driven upgrade risk

Structured ranges and scenarios improve transparency when precise estimates are not available.

3. Impact on valuation and liquidity

Assessment of whether climate exposure:

• Influences yield assumptions

• Affects long-term liquidity

• Narrows the potential buyer universe

• Changes the asset’s position in the market

This connects short-term exposure to long-term value logic.

4. Mitigation and monitoring plan

A clear outline of how identified risks will be managed during ownership, including budget, timing, and responsibility.

This ensures that exposure is not only acknowledged, but integrated into the investment strategy.

Beyond the memo: lifecycle implications

When climate risk is embedded in the investment memo, it naturally influences the full lifecycle.

At acquisition, it reduces the risk of mispricing.

During ownership, it supports structured capex planning and risk reduction.

At exit, it strengthens liquidity and buyer confidence.

The memo is therefore not the end point. It is the control mechanism that connects risk assessment to capital decisions.

From ESG reporting to capital discipline

Treating ESG as a parallel reporting exercise separates it from pricing decisions. Treating climate risk as a financial variable embeds it in capital allocation.

For real estate investors, the discipline lies in translating external developments — such as climate trends, regulatory tightening, and changing insurance conditions — into financial assumptions before capital is committed.

If climate exposure affects value drivers, it belongs in the investment committee memo.