The Specter of Wildfires Looms Large

(Originally published as the preface to Firebreak, Urban Land Institute Fall 2020. Sadly, the continuing drought in the West has made the 2021 wildfire season even worse.)

Wildfires have always been a part of the U.S. landscape, particularly in the drier West. But this year stands out because massive, destructive wildfires—fueled in part by extreme weather and changing climate conditions—have broken records across the region and raised important questions regarding how the real estate industry can help communities thrive despite repeated fires.

The toll on human lives, the landscape, and economies is personal. The specter of wildfires looms large here in Montana, where I live. We’re always on edge as we move toward the start of wildfire season.

When the wildfire smoke blew in this fall, we shut the windows and doors in our non-air-conditioned home and turned on three HEPA filters that ran 24/7. Our air quality index registered at an unhealthy 169. My sister in California readied horse trailers to help whomever needed help evacuating. My 80-year-old parents in Oregon identified an evacuation footpath in the event their one road out is blocked by fire. And, one of the places we spent summers on the McKenzie River near Vida, Oregon, is completely gone, burned by the Holiday Farm fire.

Wildfires became a national concern this season, with smoke reaching friends and colleagues all the way in Virginia. We also saw the compounding effects of wildfires with other conditions, especially the coronavirus pandemic. First responders and evacuees risked contracting the virus as they worked and sheltered in close proximity. Temporary housing for those who needed it was difficult to find amid social distancing recom- mendations, simultaneous multiple large evacuations, and the country’s ongoing housing affordability crisis and housing shortage. In addition, the communities affected by wildfires must recover during a significant economic depression.

And what of economies and real estate? Wildfires cause massive destruction and affect our ability to insure assets, endangering the real estate industry’s ability to secure financing. In the long run, the interruption risk has major impacts on residents and tenants and their willingness to be in wildfire-prone locations. This gets to the heart of the dilemma—whether we have fiscally stable, healthy, thriving, and sustainable communities because municipalities rely on tax revenues. And that leaves those of us living in fire-prone areas with one existential question: Where do we go from here?

In the short term, we hope for a break in the weather and relief for the millions who have been affected by the fires. We also need to make sure that wildland firefighters have the resources to do their jobs safely and effectively. Then, once the worst of the 2020 fire season is behind us, we must take a long, hard look at how we can make our communities safer from and more resilient to future wildfires.

This is where the best practices detailed in the Urban Land Institute Firebreak report and the expertise provided by ULI members are so crucial. Wildfire-resilient development and design choices made at the asset level protect structures and inhabitants, reduce fire spread through communities, and protect value for owners and investors. ULI members are uniquely situated to share lessons learned from their experience implementing wildfire resilience tactics and to build support for wider implementation.

In addition to preparing their own developments, ULI members can partner with their communities to make planning and development decisions—before the fires start—to give communities the best chance to thrive. These discussions may include advocating for best practices related to policy or for design addressing the community scale, but also they are likely to include difficult decisions related to how and where to build, and how to best support housing affordability and access in the face of wildfire vulnerability.

Wildfire resilience, accessibility, community design, and fiscal responsibility should function as windows through which we can see and make future planning, physical design, and ongoing operations decisions. Resilience requires a collaborative process, constantly refined and ever evolving. The time to act is now.

Responsible Investing and ESG as a Growth Strategy

Well before ESG, Net-Zero and Diversity became the concepts they are today –  we viewed “responsible investing” and ESG not merely as good governance, but strategic business practice.  For years I heard the quip -   " what did you say? 'responsible' investing'?   - if you’re investing 'responsibly', does that mean I'm investing irresponsibly'?!"   (perhaps…)  

 Today I still field concerns that actively integrating sustainability, climate solutions and even diversity, into the equation are at best, “nice to haves,” and at worst, impediments to profitability. 

 These comments make me smile because it means there’s still upside.   I know we are simply being thoughtful and strategic in the way we invest.  We invest with an eye toward creating competitive and durable market rate returns.  Call it what you will - my experience is that incorporating a holistic lens drives alpha returns. 

“Triple bottom line" or "people, planet, profit"  is about being smart and intentional about our strategic decisions and investments. The first hurdle to overcome is the notion that investing with an environmental or social lens will naturally result in lower returns or performance. Data shows it is just the opposite.   It’s imperative for growth, durability and longevity.  To put in an economic context, it is not a zero sum game - “you give up economic profitability or returns if you integrate ESG factors.”  In fact, this holistic lens is actually central to business strategy and driving growth.  

This is how firm’s will scale,  how they will gain new market opportunities, attract and retain the best quality human capital/talent.   It weaves through everything, encompassing each facet of business operations and critical to every investment decision.

 ESG and Diversity

As you build a diverse team, the data shows that not only do you open up new markets, you make better decisions.   McKinsey’s most recent research from 15 countries and more than 1,000 large companies show there is positive correlation between diversity of the executive teams and likelihood of financial outperformance.  Their 2019 analysis showed companies in the top quartile for gender diversity were 25% more likely to have above-average profitability than those in the fourth quartile, and 36% more likely with ethnic diversity.

However, progress on diversity in corporate board rooms continues to lag.  Since 2016, the number of women on Russell 3000 boards has risen by by only 4.2%, rising to 22.6 percent  as of September 2020.  On the S&P 500, it’s still shy of 25%.   And, almost 80% of the S&P 500 board members, where race is identified, are white.  

Board and executive staff diversity are imperative.   Why?  Gender, race and ethnicity and age diversity improves board performance and overall governance.  Diverse teams see new opportunities and understand risks from completely different perspectives.  As companies face new strategic challenges, climate change risk, generational wealth transfer, digital transformation, pandemic response, cybersecurity exposure – it’s important to have a wide range of voices at the table.

Two years ago California mandated that any public company having its principal office in the state have at least one female board member.  The state recently passed similar legislation for those considered “underrepresented”  minorities.   If approved by the SEC, which is expected to rule on this by August 2021, NASDAQ’s diversity rule proposal would require listed companies to publicly disclose board-level diversity data and require a diverse slate of directors  - at least one who identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+.  

Triple Bottom Line Investing

We are investors first. Like anyone else, when we deploy capital, we want to get it back with a return - either in yield or appreciation. The TBL/PPP principles are about creating a strong and healthy foundation, be it in the context of a company, a building, neighborhood or city. By consciously using our natural resources, reinvesting in our people and our communities and recognizing that diversity results in better decision making and stronger ties, we putting firms on a trajectory for success and creating a higher quality asset. If we raise the standard of living for all, we will create jobs and healthy and safe places to work and live.  In turn, raising the tax base,  supporting investment in infrastructure and community programs, driving art, music, better education and individual agency and commitment.  As you create vibrant, healthy, desirable neighborhoods you also raise asset values. 

Climate Change and Environmental Equity

I’m currently tracking the overlay between climate change and populations which are disproportionately impacted. Frankly, if we don’t get our act together on this one, we will continue to see rising unrest as our resources are strained to capacity - water fights, food shortages, migration and dislocation; the typical sustainability issues - water, energy, waste, carbon; increasing income disparity. Let’s look at water (or lack thereof). If you invest in infrastructure that delivers clean and accessible water to communities in need you start to tackle gender inequality and economic returns. In many countries, women are the ones who collect water from far away places, often at great risk. By investing in water delivery, you reduce the amount of time and effort they must go to to provide for a basic need - thereby freeing up time for them to go to school, increasing the educated population, reducing health care costs and allowing them the opportunity to engage in commerce, providing a positive benefit into the local economy. 

Investing for Impact and Long Term Growth

With every investment we make (money, time or capacity) we are making a clear statement of what we choose to impact. We can be far more intentional in how we develop and redevelop. Doing mixed-income, cross-generational development. Use responsible contracting to ensure living wages. Reduced resource use. 

How can we motivate more investors, business leaders,  and capital providers to take these concepts into account?  Ultimately, I think it is a shift in focus. Change the questions that are being asked to make them more meaningful and so they are tracking a higher level of significance. Instead of focusing on whether or not returns have increased over the quarter (or some other short period of time), we need to be asking whether or not we are stronger companies, building adaptable and resilient buildings, cities and systems. Are we creating assets that can withstand and flourish given the future?

We are facing unprecedented change - we have narrowed our perspectives needlessly and frankly, to our own detriment. When we only look at investing as what shows up on the most recent P&L, we shrink our field of vision, limiting our opportunities, opening ourselves up to risk and excluding some of the most important factors and consequences. It provides an inadequate and incomplete view of investment returns. And it keeps us in a mode of extraction - which as we all know is unsustainable. (The healthiest plants and food grow in soil that has been tended and replenished.) By expanding our focus, it is easier to see the true cost and profit, which allows us to optimize our investment decisions. Ultimately the capital markets and our investments can be a positive force for change.

10 Years Later - Have the Fundamentals Changed?

In 2010 I published a book on Sustainable Investment entitled “Practical Greening”. In the preface I wrote:

“We are living in a unique time, facing unimagined challenges: global economic crisis, peak oil, climate change, social and geopolitical shifts. And these are the high-level concerns. At the ground level we are dealing with aging infrastructure, an inadequate energy grid, primary fuel sources in foreign hands, diminishing croplands, a newly regulated playing field and unemployment reaching double digits in some cities. Like a ‘perfect storm’, few could have imagined these events arising in concert. But they have - complexity is increasing, changing the world as we’ve known it.

We need the capacity to evolve, to innovate, be agile and flexible and ultimately, resilient. We need to engage and lead. The imperatives of climate change and resource scarcity will change the way we do business. “

For all extensive purposes, the fundamentals have not changed much. We are still facing epic challenges, and for most part - we haven’t done much - but, that does seem to be changing. Finally.

To quote Jim Collins - “We’re heading into a world characterized by big events, big forces, massive storms. We’re going to be vulnerable little specks on on the mountain when when the storm hits out of nowhere.” [apropos to the 2021 Texas energy grid crisis]. “And if we’re not prepared, we’re going to die up there. Or we’re going to be in real serious trouble.”

Over the next few weeks I’ll begin to unpack what’s still the same (climate risk - on steroids now), what has changed - a pandemic, awareness around racial inequities and the importance of diversity, equity and inclusion, increasing interest in strategies that address climate risk, + a new administration which has named Climate Risk, Racial Justice, Economic Recovery and the Covid Pandemic as their top priorities.

Happy St. Patrick's Day!

On this St. Patrick’s day, we share with you the writings of one of our favorite poets, the remarkable David Whyte.

"Turn sideways into the light as they say
the old ones did and disappear
into the originality of it all.

Be impatient with easy explanations
and teach that part of the mind
that wants to know everything
not to begin questions it cannot answer.

Walk the green road above the bay
and the low glinting fields
toward the evening sun, let that Atlantic
gleam be ahead of you and the gray light
of the bay below you, until you catch,
down on your left, the break in the wall,
for just above in the shadows
you’ll find it hidden, a curved arm
of rock holding the water close to the mountain,
a just-lit surface smoothing a scattering of coins,
and in the niche above, notes to the dead
and supplications for those who still live.

But for now, you are alone with the transfiguration
and ask no healing for your own
but look down as if looking through time,
as if through a rent veil from the other
side of the question you’ve refused to ask.

And you remember now, that clear stream
of generosity from which you drank,
how as a child your arms could rise and your palms
turn out to take the blessing of the world."

David Whyte (from River Flow)

It's March 17th - Sitting on the Edge

Things have shifted dramatically in just the past week (if it’s even been that long).

A week ago Monday: Postponed: the Urban Land Institute Advisory Panel I was to Chair in Sonoma County, California focused on strategies to enhance energy, economic and wildfire resilience in the aftermath of two devastating fire seasons.

Last Thursday and Friday: Investor meetings, truncated in light of the rapidly shifting response to COVID-19.

Yesterday: School cancelled and remote work is in full swing.

Today: Much of the Bay Area is now “sheltering in place” with NYC planning the same in 48 hours.

There is a lot of uncertainty. Businesses of all sizes, but especially small to medium ones, are wondering how they’ll survive. Property owners are wondering how those same tenants will be able to pay the rent. Parents who still have to work are trying to figure out how to do that while they’ve got kids in the next room or, worse, they have to leave them with someone because their job requires them to be there in person.

Tell me, how is it going in your world?

Are your investments at risk?

Facing climate change threats head on in institutional real estate portfolios.

Institutional Real Estate. Americas. January 2, 2020

Climate is redefining every aspect of society - and few, including those in the real estate world, have taken the risk seriously enough. The situation requires we step back and take a whole new look at the world. We must reimagine what the future holds and start from this new reality.

Shero

We’re excited to share that our Founder, Molly McCabe was named by the USGBC as a SHERO, recognizing her Leadership and work in sustainability and green building. A shout out and thank you to the USGBC Mountain Region for the recognition.

Meet eight women from all regions of the U.S. who are making a difference.

At USGBC, we bring together women in our industry who have emerged as respected sustainability leaders. Together, women who encourage and inspire those around them through their actions, conversations and behaviors are moving our industry forward. Female empowerment is an important conversation for women around the world, as we strive to make change happen.

We celebrated International Women’s Day this month in many USGBC communities, with the theme "Each for equal—an equal world is an enabled world."

This is an opportunity for us to reflect on the value of our leadership. Collectively, we can help create a gender-equal world.

We Are Fiduciaries...

It is clear we will undergo an extraordinary amount of change, in an exceptionally short time frame and at a magnitude we have not experienced in our lifetimes. We must fully decarbonize our economies by 2050. Impacts of climate change are affecting the real estate markets - hurricanes, extraordinary rain events, out of control fires and extreme heat. Increasingly assets are at risk of becoming ‘stranded’ due to direct impacts of the changing climate and devaluations related to the transition to a low carbon economy.

We face sweeping and long-term consequences for the global economy, biodiversity and human development. How do we assess the risk? How do we stave off what appears to be inevitable and what can be done to shore up our portfolios in order to remain good stewards of capital? it is no longer an abstract exercise.

How will you reallocate capital in the face of climate change?

•  "Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? 

• What will happen to the 30-year mortgage — a key building block of finance — if lenders can't estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? 

• What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? 

• How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?"  

 Larry Fink, CEO Blackrock

https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

Market Perspective: Are your investments at risk? Facing climate change threats head on in institutional real estate portfolios. Institutional Real Estate Investor, Americas. January 2020. Molly McCabe https://irei.com/publications/article/investments-risk-facing-climate-change-threats-head-institutional-real-estate-portfolios-2/

Rinse, Repeat...Reprise

I recently watched a presentation by Spencer Glendon at the Sohn Investment Conference on the impact of climate change on our way of life and our economic fortunes. It got me thinking about some of my past posts. I thought it might be worth a reprise this one I did back in 2016 on Responsible Property Investing. It was pretty good back then and holds true today.

We invest with an eye toward creating competitive and durable market rate returns.  Call it what you will - my experience is that incorporating a holistic lens drives alpha returns.

I believe that the Responsible Property Investing is the leading edge. Call it "triple bottom line" or "people, planet, profit"  - it is about being really smart and intentional about our investments. The first hurdle to overcome is the notion that investing with an environmental or social sense will naturally result in lower returns or performance. I think it is just the opposite. We are investors first. Like anyone else, when we deploy capital, we want to get it back with a return - either in yield or appreciation. The TBL/PPP principles are about creating a strong and healthy foundation, be it in the context of a building, neighborhood or city. By consciously using our natural resources, reinvesting in our people and our communities and recognizing that diversity results in better decision making and stronger ties, we are creating a higher quality asset. If we raise the standard of living for all, we will create jobs and healthy and safe places to work and live.  In turn, raising the tax base,  supporting investment in infrastructure and community programs, driving art, music, better education and individual agency and commitment.  As you create vibrant, healthy, desirable neighborhoods you also raise asset values.

I’m currently tracking the overlay between climate change and populations which are disproportionately impacted. Frankly, if we don’t get our act together on this one, we will continue to see rising unrest as our resources are strained to capacity - water fights, food shortages, migration and dislocation; the typical sustainability issues - water, energy, waste, carbon; increasing income disparity. Let’s look at water (or lack thereof). If you invest in infrastructure that delivers clean and accessible water to communities in need you start to tackle gender inequality and economic returns. In many countries, women are the ones who collect water from far away places, often at great risk. By investing in water delivery, you reduce the amount of time and effort they must go to to provide for a basic need - thereby freeing up time for them to go to school, increasing the educated population, reducing health care costs and allowing them the opportunity to engage in commerce, providing a positive benefit into the local economy. 

With every investment we make (money, time or capacity) we are making a clear statement of what we choose to impact. We can be far more intentional in how we develop and redevelop. Doing mixed-income, cross-generational development. Use responsible contracting to ensure living wages. Reduced resource use. 

How can we motivate more investors, developers and lenders to take into account these topics?  Ultimately, I think it is a shift in focus. Change the questions that are being asked to make them more meaningful and so they are tracking a higher level of significance. Instead of focusing on whether or not returns have increased over the quarter (or some other short period of time), we need to be asking whether or not we are building adaptable and resilient buildings, cities and systems. Are we creating assets that can withstand and flourish given the future.

We are facing unprecedented change - we have narrowed our perspectives needlessly and frankly, to our own detriment. When we only look at investing as what shows up on the most recent P&L, we shrink our field of vision, limiting our opportunities, opening ourselves up to risk and excluding some of the most important factors and consequences. It provides an inadequate and incomplete view of investment returns. And it keeps us in a mode of extraction - which as we all know is unsustainable. (The healthiest plants and food grow in soil that has been tended and replenished.) By expanding our focus, it is easier to see the true cost and profit, which allows us to optimize our investment decisions. Ultimately the capital markets and our investments can be a positive force for change.

Capital is Just a Tool

Check out my discussion - Capital is Just a Tool - with Eve Picker on her new Impact Investing in Real Estate podcast.