Climate Alpha Aims to Mitigate Climate Risk for Developers and Investors

Proptech startup uses AI to assess regional environmental threats around the world

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As if more evidence was needed to demonstrate the risk to real estate and human life caused by climate change, along came Hurricane Ian into Florida.

Leaving a death toll in excess of 100, as well as still-untold billions of dollars in damages to homes, businesses and infrastructure, Ian’s legacy will live on not only by its ultimate costs, but also in the fear of what further extreme climate activity will mean for real estate values and human lives.

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One proptech startup that is focused on predicting and mitigating climate risk for developers and investors is Climate Alpha, which bills itself as an AI-powered platform to steer investment toward more resilient regions.

“What we do is use data science to produce risk-adjusted valuations on property assets,” said Parag Khanna, founder and CEO of the Singapore-based Climate Alpha, which covers the United States and Canada, and plans to soon add the United Kingdom, Australia, Japan, Western Europe and, ultimately, the entire globe to its platform. “We want to be able to ascribe what we call a climate price to each asset.”

Looking to build the first sustainable REIT index, Climate Alpha wants to bring price transparency to the highly fragmented real estate industry, said Khanna of his company, which was formally unveiled earlier this year.

“We are taking climate change into account in valuations, which are done by a pretty arcane methodology involving cap rates, NOI, occupancy, comparative performance of location, and those kinds of things,” he said. “It’s linear at best, with progression modeling, but there’s certainly very little relative to performance of locations according to different climate models.

“We solve for those weaknesses in the valuation ecosystem by bringing in climate, using machine learning, and bringing together the complex interactions of climate variables with the traditional socioeconomic, demographic, fiscal and other factors.”

Currently, Climate Alpha’s index of REITs deemed sustainable is licensed only to the startup’s client Atlas Capital, said Khanna. “We’re not reselling that analysis, which we provided to them to explain the mechanics of it.”

However, given the $1.5 trillion of institutional and other savings invested in the 150,000 buildings in the S&P REIT database, many if not most of which are highly concentrated in areas that are not climate-resilient, Khanna sees the opportunity to offer the index widely soon.

“What we’ve done is to offer our risk-adjusted valuation to all the 150,000 buildings in the S&P REIT, allowing the user to dynamically weight their REIT portfolio bias towards those that have the highest or strongest sustainability characteristics,” said Khanna. “As a derivative of this index, we would like to work with REITs to help them build their next REITs in climate-resilient zones. We would like ETFs [exchange-traded funds] to be designed in this way. We’d like private equity and real estate private equity to be building their next funds as what we call climate oases funds.

“I believe in preemptive, systematic adaptation, using software to price and identify resilient geography, ideally to relocate vulnerable populations to those geographies, as part of the moral mission of this company.”

In addition to the private sector, Climate Alpha is used by governmental entities, as well.

“We’re offering the resilience index scores to the public sector,” said Khanna. “For example, land management, where we have done some research on mapping the land held by federal agencies, particularly the Department of the Interior, or other government agencies, and correlating that at the ZIP code level using our resilience index scores.

“That way those states and cities can better think about what that land is worth. And if they’re going to do privatization, or what are known as urban wealth funds, they can better price those assets, attach some strings and conditionality to how those areas are developed.”

In formulating its algorithms, Climate Alpha incorporates heat risk scores, which can be found at the county or ZIP code level in the U.S., along with flood data through geospatial modeling and technologies.

“You can get super granular with flood data,” Khanna said. “We’ve actually taken the same data sets that First Street uses on fire and flood, and, in some cases, we’ve gone beyond them. For each of the climate variables, floods, storm, heat, fire, drought, sea level rise, we’ve taken the best-in-class data and the IPCC [Intergovernmental Panel on Climate Change] scenarios and wrapped those onto the administrative geography of the United States. We’ve downscaled as much as possible in order to achieve the most granular level of coverage.”

The result of that work is what Climate Alpha calls its resilience index, which takes climate risk scores and either amplifies or channels them through vulnerability scores, said Khanna.

“For example, if you take two places that have equal climate risk — so two places for fire, storm, heat, drought, or sea level rise — there are still differences at the community level,” he said. Among the factors the company looks at are communities with high versus low mortgage delinquency rates, percentage of an elderly population, high degree of surface porosity, susceptibility to urban heat island effects, and the like, he added.

In addition to climate information models, a wide range of data sets including census-based assessments of health issues, life expectancy, quality of medical system, obesity levels, smoking rates, vehicular ownership and mortgage delinquency inform Climate Alpha’s machine-learning analytics platform, said Khanna.

Building on all these factors, Climate Alpha offers a readiness score that relates to the client’s fiscal spending and per capita income.

“There is already a whole wave of climate tech 1.0 companies that specialize in risk,” Khanna said. “They’re the ones that tell you to sell Miami, that it’s all going to hell. They just look at the downside indicators: heat waves will be scorching and the sea levels will rise and engulf us. They don’t tell you when, what pace, or the impact on price incrementally between now and that 2050 year of disaster. They don’t offset that risk through these mitigation measures.

“We model reality in a much more comprehensive and complex fashion because we’re not just climate tech, we’re valuation. And valuation shouldn’t be done without involving climate tech, because then it doesn’t guide you on what to do on Monday morning.”

Philip Russo can be reached at prusso@commercialobserver.com.