A global insurance firm powers ESG strategy with novel risk modeling

With regulatory and reputation considerations on the rise, organisations around the world are setting their sights on ambitious new sustainability targets. While many companies have publicly committed to Environmental, Social and Governance (ESG) goals, few have a clear understanding of the investment risks and benefits associated with delivering on those principles.

Recognising that environmental programs can only succeed when the business does, too, a leading global insurance company sought ESG risk management modeling counsel across a large European portfolio.

The company’s leaders wanted to understand the ESG-related risks and opportunities of implementing a net-zero carbon strategy across a range of assets under management. They wanted to understand the full picture of how their assets could be decarbonized, what the cost of decarbonization was and how the improvements in performance would impact asset values. They also wanted to be able to assess the valuation and operational cost impacts of a business-as-usual scenario in which they chose not to make these ESG investments.

Ultimately the firm sought the comprehensive perspective needed to shape a balanced ESG-forward asset management strategy that fuels both financial and environmental performance.

Assessing impact across a large portfolio

As a global firm, the insurance company needed to understand the risk exposure across a large and geographically diverse portfolio. The project included three asset classes—office, industrial and residential—with 80 total properties spread across five European countries. Each of these 80 properties came with its own specific requirements and potential pathways to decarbonization. The company turned to JLL to identify and model the risk and benefits of an ESG strategy at each property and portfolio wide. The JLL Value and Risk Advisory team worked alongside the Sustainability Consulting, Project & Development Services, and Capital Markets teams to deliver the project with a depth of technical and market expertise.

The process started with JLL-produced research reports detailing the relationship between sustainability and value within each of the company’s asset types. The firm gleaned an understanding of the unique sustainability trends for both investors and occupiers as well as legislative pressures specific to each asset class. These reports created the foundation for value impact modeling.

Creating a new model

JLL’s team of advisors created a framework for analysing a range of factors, including the micro-location, property-level energy performance, hold periods, rental rate growth, intervention date, income trends and more.

To assess the valuation adjustments of these factors across the company’s global portfolio, JLL experts developed a novel cash flow modeling system that demonstrated 132 separate cash flows. JLL then incorporated the value adjustment into the bespoke cash flow model, adjusting it with respect to the impact of the green premium and brown discount.

This innovative approach benefited from close partnership between the company stakeholders and JLL’s risk advisors so there could be a clear understanding of the research, property variables and data. Together, the team looked at valuation data as well as internal rate of return (IRR) to assess both the decarbonization and business-as-usual scenarios.

Managed risk and enhanced performance*

Armed with in-depth information and predictive models, the company now has clearer visibility into the impact of decarbonization on asset value, and which properties have the most significant value enhancement opportunity. Findings also addressed where inaction would increase risk exposure.

This approach delivered a targeted asset management strategy that delivers on ESG initiatives and financial performance alike.

_{*This solution was forward-looking, but many firms share questions about the operational and financial risks of investing in decarbonization—or not. Learn more about how a complete risk assessment can help you uncover ways to drive sustainability while minimising risk exposure.}