Key Points
- Cities around the world are increasingly recognising and looking to adapt to climate risks. But, fewer have connected that recognition to capital allocation. The gap between the two is where institutional investors should be paying close attention.
- Physical climate risk is increasingly reflected in real estate valuations, with insurance premiums functioning as a leading indicator of underlying asset exposure. A building can score well on a sustainability benchmark and still face material insurability questions.
- Insurance models, urban planning models, and financial decision-making rarely interact in real time. Insurers are repricing and withdrawing from markets faster than that signal is feeding back into land valuations, planning decisions, and investment frameworks.
- Upstream data quality is the foundation everything else rests on. Misalignment between reporting frameworks is the most significant barrier to consistent climate risk disclosure in real estate, and the outputs of risk models are only as reliable as the data feeding into them.
- The next stage for institutional investors is not better disclosure governance — it is ensuring the data quality and model integration that makes disclosures meaningful as risk management inputs, not just reporting outputs.
The questions being asked about climate risk in investment committees have changed. Sharper, more specific, harder to deflect with a sustainability report. The gap between what gets disclosed and what is actually known about asset-level exposure has become the central problem.
Four interconnected issues sit behind this. None of them are new. But the answers, and what they mean for capital allocation, have shifted materially over the last few years.
The Urban Climate Investment Gap
Most cities have climate strategies. Fewer have funded them. That gap is where institutional investors should be paying close attention.
In 2024, 124 US cities reported seeking $62.7 billion for climate projects but only have $22 billion available, leaving a funding shortfall of over $40 billion across 484 projects. That is not a marginal gap, it is a structural one, with direct implications for the long-term resilience of assets that institutional portfolios hold in those cities.
The cities doing this well share one characteristic. They have connected the risk assessment function to the capital allocation function, treating adaptation as an integrated planning input rather than a parallel sustainability workstream.
Copenhagen made this connection after a cloudburst in 2011 caused approximately $1.8 billion in damages. The response was a sponge city programme integrating hard infrastructure, green space, and public areas. The loss event was connected directly to a capital programme. Adaptation became a planning input, not a workstream running alongside planning.
For institutional investors, the practical question is this: how much of the infrastructure resilience underpinning the assets in a given portfolio depends on city-level adaptation investment that has been planned but not yet funded?
Sustainability Reporting Versus Real Resilience: The Growing Gap
Sustainability reporting measures inputs and intentions. Resilience is about what assets and systems do under stress. Those are different questions, and the data required to answer them is different.
The valuation evidence is already here. According to the OECD’s December 2025 Future-Proofing Real Estate Investment report, drawing on Notaires de France data, found energy efficient homes selling for up to 20% more than comparable lower-rated properties, while inefficient small apartments lost up to 8% of value in a single year.
The same dynamic is beginning to operate on physical climate risk exposure, with insurance cost and availability increasingly functioning as the market’s leading indicator of underlying asset vulnerability. This is very much a live topic and we’re seeing examples of this from the UK, U.S., Australia, and New Zealand.
A building can score well on a sustainability benchmark and still face material insurability questions. Those two facts are not yet consistently in the same conversation in investment decision-making, and that gap is where valuation risk is accumulating.
How Climate Risk Data Is Structured — and Why It Falls Short
Three things rarely talk to each other: insurance models, urban planning models, and financial decision-making. That silence is where the systemic problem sits.
Insurance models are built predominantly on historical loss data and are typically structured around single perils, flood, fire, wind, rather than the compound and overlapping hazard events that climate change is producing with increasing frequency and intensity. Urban planning models face the same limitation. Both are being stress-tested by events outside the historical range they were calibrated against.
Insurers are repricing and withdrawing from markets. That signal is not feeding back into planning decisions, land valuations, or infrastructure investment at the speed it needs to. The most accurate current signal of physical climate risk is insurance market behaviour. It is not being systematically incorporated into the capital allocation decisions that depend on it.
The OECD survey data puts numbers on this: 37% of respondents expect to retain significant climate exposure for the entire life of their assets. Only 13% accounted for risks beyond 2050. Just 6% applied a full asset lifecycle perspective. Commercial real estate typically remains in use for 80 to 100 years. The mismatch between asset life and risk horizon is not a nuance. It is the problem.
Upstream Data Quality: The Foundation Climate Risk Models Depend On
Upstream data quality is the foundation everything else rests on, and it is currently one of the weakest parts of the system.
The OECD’s December 2025 report on future-proofing real estate investment is the most comprehensive recent survey of where the constraints sit. Misalignment between frameworks represents the most significant barrier to consistent global disclosure in the real estate sector. The specific constraints were consistent across the research: a lack of granular property-level data, unreliable methodologies, insufficient hazard data, and unclear reporting standards.
The implication for risk modelling is direct. If the asset-level data feeding into physical risk models is incomplete, inconsistent, or based on voluntary self-disclosure, the outputs will reflect that. Decisions that appear analytically rigorous are only as good as the data that sits underneath them.
Standardised, auditable reporting frameworks matter here for a specific reason: not compliance, but data infrastructure. What they enable downstream is more accurate pricing, more credible scenario analysis, and more defensible capital allocation decisions. The value is not in the reports. It is in what the data makes possible.
The climate analytics industry is responding to this demand. Driven by regulatory compliance, ESG reporting and client needs, it was valued at $1.61 billion in 2025 and projected to reach $5.65 billion by 2030. The growth of that market is itself a signal. Investors, insurers, and lenders are all trying to close the same data gap from different directions simultaneously.
How These Four Problems Compound Each Other
These four problems compound each other. The gap between city-level climate investment and resilience delivery affects the physical risk profile of assets. The gap between sustainability reporting and resilience outcomes means asset-level exposure is being underpriced. The fragmentation of risk models means the insurance signal is not feeding back into planning and investment at the speed required. And the upstream data quality problem undermines the reliability of every model that sits on top of it.
The investment community has spent several years building the governance infrastructure for climate risk disclosure. The next stage is ensuring the data quality and model integration that makes those disclosures meaningful as risk management inputs, not just reporting outputs.
For institutional investors and finance professionals working across real assets, the distinction between disclosure and genuine risk visibility is where the most important work now sits.
References
CDP, From Climate Risk to Investment Opportunity, 2024
OECD, Future-Proofing Real Estate Investment: Place-Based Risks, 2025
Munich Re Risk Management Partners / JLL, Preserving Property Value and Managing Insurance Costs in a Changing Climate, 2026
Yale Environment 360, Sponge City: Copenhagen Adapts to a Wetter Future, 2025
This post draws on themes explored in a recent panel discussion on climate risk, urban planning, and investment decision-making. The session covered the gap between sustainability reporting and resilience outcomes, the structure of current risk models, and the data quality challenge that sits underneath both. You can watch the LinkedIn Live Session here.
Keyah advises commercial real estate and residential-at-scale leadership teams on climate risk, insurability, and portfolio financial exposure. If this research reflects conversations you are having internally, or ones you know your board should be having, book a call.