Climate Risk and Real Estate: Protecting Trust Assets

Climate change was once viewed as a distant concern, but today it is reshaping real estate investment decisions. Rising seas, extreme storms, droughts and wildfires threaten properties across the globe, creating new risks and costs. According to industry analysts, climate‑related disasters caused over $360 billion in global economic losses and $92.9 billion in insured losses in the United States in 2023. Trustees who oversee real estate portfolios must therefore incorporate climate risk into their investment policies to protect assets and preserve value for future generations.

What Is Climate Risk in Real Estate?

Climate risk refers to potential losses or disruptions caused by environmental changes and extreme weather. Key risks include:

• Sea‑level rise:  The global mean sea level reached a record high in 2023. U.S. coastal areas are projected to see another 10–12 inches of sea‑level rise by 2050, increasing the likelihood of flooding and storm surges.

• Extreme weather:  Hurricanes, storms and floods are becoming more intense and frequent, damaging properties and infrastructure. An estimated 14.6 million U.S. properties are at substantial flood risk.

• Wildfires:  The 2020 wildfire season in California burned over 4 million acres, destroying thousands of structures and contaminating air quality. Wildfires affect not only the West Coast but also forested regions globally.

• Heat and drought:  Rising temperatures strain electricity grids and water supplies. Extended drought can reduce crop yields, threaten ranch lands, and lower the value of agricultural real estate.

These risks can reduce property values, increase maintenance and insurance costs, and disrupt rental income or development schedules. For trusts with long time horizons, failing to address climate risk undermines both current returns and long‑term sustainability.

How Climate Change Impacts Trust‑Held Real Estate

Many trusts own real estate directly or through investment vehicles. This may include residential rentals, farmland, timberland, commercial buildings or a family cabin on the coast. Climate risks affect these holdings in different ways:

• Physical damage:  Flooding and hurricanes can destroy structures, require costly repairs or make a property uninhabitable. Fires can devastate buildings and forests.

• Reduced marketability:  Properties in high‑risk zones may become harder to sell or finance as buyers demand discounts and lenders tighten standards. Insurance companies have withdrawn coverage from some coastal and wildfire‑prone regions, leaving property owners to self‑insure at great expense.

• Regulatory pressure:  Local governments may impose zoning changes, building codes or buyouts in vulnerable areas. New disclosure rules could require sellers to reveal flood or wildfire risks, affecting market value.

• Migration and economic shifts:  Climate “havens” with milder weather may see population growth and rising property values, while vulnerable areas could see declines.

In this environment, trustees must evaluate not only the immediate returns but also the resilience of real estate assets to climate threats.

Strategies for Trustees to Mitigate Climate Risk

1. Assess and Map Risk Exposure

Start by reviewing the trust’s real estate portfolio to identify properties in floodplains, wildfire zones or drought‑prone regions. Tools such as FEMA flood maps, wildfire risk models and climate‑risk analytics can quantify exposure. Understanding whether a vacation home sits in a coastal zone projected to flood helps trustees decide whether to invest in mitigation or consider divestment.

2. Diversify Geographic and Asset Exposure

Concentration in one region magnifies risk. Trustees should diversify holdings across different climates and locations. For example, if a trust owns multiple coastal properties, it may add inland apartments or commercial buildings in regions with lower climate exposure. Some investors are reallocating capital to so‑called climate havens—cities with access to freshwater, lower temperatures and fewer natural disasters. Diversification reduces the chance that a single event wipes out a significant portion of the portfolio.

3. Invest in Resilient Design and Adaptation

When holding or developing property, incorporate resilience measures such as:

• Elevated foundations, seawalls or flood barriers for coastal properties.

• Fire‑resistant roofing, siding and defensible space around structures in wildfire zones.

• Improved drainage systems and drought‑tolerant landscaping.

• Energy‑efficient systems and backup generators to withstand heatwaves and power outages.

Although these improvements require capital, they can preserve value and lower insurance premiums over time.

4. Review Insurance and Risk Transfer

Insurance is a vital tool for managing risk, yet coverage is becoming more expensive and harder to obtain. Trustees should:

• Review existing policies to ensure they cover flood, wind and wildfire damage. Standard homeowners insurance often excludes these perils.

• Obtain flood or excess liability insurance where available. 2023 saw $92.9 billion in climate‑related insured losses in the U.S., and some insurers have pulled out of high‑risk areas.

• Explore parametric insurance or catastrophe bonds for large portfolios. These products pay out based on an event’s magnitude rather than actual losses, providing liquidity quickly after a disaster.

5. Consider Strategic Divestiture or Relocation

In some cases, the cost of protecting or insuring a property may outweigh its benefits. Trustees might decide to sell vulnerable properties and reinvest proceeds in resilient markets. For example, a beachfront house with skyrocketing insurance premiums and repeated flood damage could be sold, with proceeds used to purchase rental properties in a growing inland city. Trustees must weigh sentimental ties against fiduciary duties to preserve value for beneficiaries.

6. Incorporate Climate Risk into Investment Policy Statements

A trust’s investment policy should articulate how climate risk factors into real estate decisions. This may include evaluating environmental, social and governance (ESG) considerations, requiring risk assessments for new acquisitions, and setting targets for emissions or energy efficiency. Transparent policies help manage beneficiary expectations and demonstrate that the trustee is acting prudently.

Examples

• A Coastal Vacation Home:  A family trust holds a beach house on a barrier island. Climate models show rising sea levels and increasing hurricane intensity. The trustee invests in elevating the structure and adding flood vents, purchases comprehensive flood insurance, and installs a generator. However, after insurance premiums triple and the property floods twice, the trustee documents the risk and consults beneficiaries about selling and acquiring a cabin in a climate haven instead.

• Agricultural Land:  Another trust owns farmland in a region facing severe drought. The trustee implements drip irrigation, invests in drought‑tolerant crops and explores regenerative agriculture practices. The trustee also diversifies by acquiring farmland in a wetter region to hedge against drought risk.

In both examples, proactive risk management preserves the trust’s assets and demonstrates the trustee’s commitment to the grantor’s intent.

Conclusion

Climate change poses new challenges for real estate investors, and trustees must adapt. By understanding climate risks—rising seas, extreme weather, wildfires and heat—trustees can evaluate their portfolios, diversify holdings, invest in resilience, obtain appropriate insurance and decide when to divest. Incorporating climate considerations into investment policies and communicating with beneficiaries ensures that trust assets remain secure in a warming world. In the long run, proactive climate planning is not only good stewardship; it is essential to fulfilling the fiduciary duty of preserving trust assets for future generations.