Parag Khanna wants to help people ‘future-proof’ their properties. The author of more than 20 books, he has long been known for his analysis and macroeconomic forecasting, and his new company, Climate Alpha, an AI-powered analytics platform, leverages data to analyze migration, climate change, We’re tracking financial trends and trying to figure out what impact they’re having. As the world changes, location offers both resilience and benefits. He argues that black swans are not the right way to think about climate risk, but rather that green swans are swarming and headed straight for millions of miles of real estate.
With an estimated value of more than $300 trillion, land and real estate remains the world’s most valuable asset class, but it is directly exposed to climate change and population decline. As Khanna said in a presentation at the Fortune Global Forum in Abu Dhabi, real estate is by definition “locked in and immovable.”
Watch the video interview above or read the full transcript below.
Parag Khanna:
Everyone is familiar with the concept of a black swan, and there is little need to explain it further. It is a low-probability event that has a large impact. But the real risk in today’s world is green swans, and they are swarming. And of course, the difference between them and black swans is that they are not unpredictable or less likely. In fact, they happen all the time. As a result, estimated annual damages and payments from climate disasters are increasing by tens of billions of dollars each year, reaching $250 billion last year.
So I know what I have to prepare for, but I don’t know it yet. We have a big collective action problem. And here, on the eve of COP28, we gather that while enormous resources have been devoted to mitigation, decarbonization, and greening industries and supply chains over the past few decades, adaptation has I know I haven’t put enough into it. How we retrofit our infrastructure, relocate our populations, and invest in the climate resilience of our societies and economies is not yet happening. So, as the Bank for International Settlements warns us, without that collective action, climate risks are largely intolerable at a systemic level.
And indeed, as if high interest rates, COVID-19 office abandonment, and post-COVID employee relocation weren’t bad enough, the industries most at risk are currently the largest. ing. Now you know the climatic factors that can devastate certain regions. We’ve all been used to real estate skyrocketing for generations, but climate change isn’t the only culprit; global population plateauing is a geographically zero-sum game at play. It means something. of real estate around the world. All of this is taking a toll on the global real estate industry, which, despite its value, is understandably trapped and immobilized.
Now, if you think about the current distribution of the world’s population, all 8 billion of us on this map, literally every human being is a pixel, and it’s going to change how livable the geography is, suitable for human habitation, over the next five years. predict what will happen in the environment. As temperatures rise toward her 2 degree standard in 10, 15, 20 years, we get images like this: [points to map].
Now, unfortunately, I think we’ve all realized over the last few years that this is not the map of 2050 or 2060. We cannot be satisfied with simply achieving the goals of the Paris Agreement, limiting greenhouse gas emissions, and striving to: A slow rise in temperature allows us to avoid certain negative chain reactions that are already underway throughout our biosphere. The same is true for the effects of temperature rise itself.
For example, if you look at South Asia, which is currently the most populous region in the entire world, India alone has more people than China, and if you include Pakistan, India, and Bangladesh, the subregion alone has 1.8 billion people. . It is one of the regions most affected by climate change in the entire world. Therefore, it is safe to assume that in the next 5-10 years, or even in the coming decades, the number of people who will migrate as a result of climate phenomena will already reach a third of the total. There are probably hundreds of millions of people around the world who are dislocated today. That is what the World Bank has already predicted, and they may be underestimating this fact.
So the question is not just what to do next. But where next? Because, unfortunately, not only the real estate industry, but also our places of residence, places of residence, towns, cities, and communities will be affected, many people will be on the move, and investors will be new. This is because it is necessary to predict the area. Climate resilience increases and fertility increases. Building new towns, communities, etc. as we adapt to climate change. Remember that the climate does not adapt to us. we have to adapt to it.
But one thing we’ve neglected in focusing on mitigation and decarbonization rather than adaptation is actually quantifying the financial impact. We just have studies and predictions that things will get worse in X or Y region, but if we don’t put a price on that phenomenon, we can’t actually encourage and shape industry behavior. . There has been a renewed focus on the field of decarbonization and its regulation, especially in Europe and some other countries, and something similar is starting to happen in the United States. But generally speaking, adaptation is considered to be a private good, not a global public good like decarbonization. Therefore, it will be possible to set more localized impact assessments and calculations, as well as the period over which the company will operate.
What we did in our research was to focus not only on risk indicators from climate, but also on how to focus on them spatially and geographically when there is uncertainty about how they will evolve over time and at what scale. It’s about thinking about what you should do. Resilience, or community resilience. The truth is that any place in the world is only as good as its adaptation and investment in resilience. One thing we haven’t done yet is quantify resilience. Resilience is a term that comes up a lot, especially during the coronavirus pandemic. What makes a resilient society? How did communities bounce back? But have we quantified it? it’s not.
And that’s what we’ve started to do, to figure out what the positive fiscal effects of having an energy grid powered by renewables to offset climate risks actually have. It’s about discussing. What about the availability of healthcare, the quality of life in a particular place, the quality of infrastructure, public spending, the robustness of society? All of these metrics that can actually be backtested are about climate, and climate change is new However, we can prove that much socio-economic and infrastructure investment can be done and more needs to be done now. [they] Create a historical impact on real estate assets and maintain their value.
Therefore, the convergence of risk and resilience and the translation of their metrics into financial impact creates a highly actionable scorecard dashboard and a series of tools to help real estate investors plan accordingly. We believe that the coefficients are generated. Now, in the real estate space and the built environment, there are many things you can do to address risk. In fact, there are interventions that can be carried out for all physical risks, and where heat stress is likely to occur, further investment in air conditioning and district cooling is required. Areas at risk of hurricanes will need to take additional measures such as coastal flooding and drainage systems. We can do more in areas such as water conservation and water management. But that being said, part of what’s happening is that the demographics and investment environment is changing as a result of everything from the interest rate environment to the relocation of businesses to the migration of people, making certain areas less This is a younger generation that is not attached. This creates competition between locations for the best locations to attract investment to attract people. And this is one of the macro trends when you really reflect on the reality that the climate doesn’t adapt to us, we have to adapt to climate change.
If we go back 7,000 or 8,000 years to the history of human settlement, we find that there has always been competition between regions for the most open places, places to attract talent, places to be centers of industry and innovation. And that process continues today. Some of the world’s most important commercial and economic centers are also areas of high climate stress. And if they do not adapt new centers of excellence, new centers and hubs of civilization will emerge.
During my travels and research. I think there are some places that seem to be making a lot of effort to build microclimates that are not only climate resilient but also energy efficient, places that are trying to renovate their infrastructure, and where they are trying to improve the temperature of the built environment. We have focused the spotlight on places where we are trying to lower the price. They are what make them attractive and livable. That means a lot of materials are needed to make a place resilient. The extent to which they are making those investments and that will make them an attractive destination for global asset management, the global investment industry and indeed for young talent.
Now notice that there is a star above this country, the United Arab Emirates. So remember that climate models say it’s going to be scorching hot here. There is no objection to that. That’s already the case. But think about investing in adaptation. Few countries are doing what this country already does and is starting to do: air conditioning, coastal mangrove forests, water desalination. And that’s another differentiating factor: climate models tell us that many places are doomed. But we have the ability to invest, ingenuity, innovate, and adapt. Therefore, companies need to adapt or they will lose out in the competition for investment and talent.
Now, as we saw in the previous map, there are many geographies in the world that are sadly becoming, or are definitely becoming, uninhabitable for humans. In fact, you can create a simple supply and demand curve. As the supply of climate-resilient assets and regions decreases, demand for them will increase and their prices will rise. It will also rise. So this inevitably becomes something of an investment proposition, pioneering investing in climate-resilient regions and starting retrofitting to build food, water, energy, housing, transportation and other systems. It will be. This is necessary because the population of climate-resilient regions will increase over time. And that time is indeed now.
In fact, I would say resilient geographies are the most valuable asset class in the world. If real estate is already the largest industry, we haven’t quantified it, priced it, located it, and made it an investable proposition. In fact, if you think about how sovereign risk is calculated today, it is often based strictly on regulatory standards and the rule of law. However, it does not take into account whether the country is truly investing in climate resilience. But there are other parts of the world, such as Central Asia and other parts of Asia and even parts of Europe, that may not be loved by investors right now, but are making good investments and benefiting from things like climate change. There are people all over the world who are bringing That’s where you need to allocate your capital.
One of the things we’re doing is guiding asset managers to actually allocate capital to these climate resilient places. This is because not only do these investments generate income, but they actually provide capital growth over the long term. Considering that supply and demand curve.
In summary, we have a very important opportunity. Here we are at a crossroads in the world, with huge disconnects between the geographies of people, the geographies of borders, the geographies of infrastructure, and the geographies of economic activity. And it’s up to us to actually readjust that, and it doesn’t happen in isolation. COP28 does not give us the solution. It’s really up to corporations, CEOs, investors, and world leaders to recalibrate the map by building the places needed to collectively adapt the entirety of human civilization.