Dutch pension funds need to better monitor the climate risks of their foreign real estate portfolio, according to regulator DNB.

“It’s important for pension funds to become more aware of the physical climate risk of their real estate portfolios,” said DNB president Klaas Knot at a press conference today, discussing the regulator’s latest Financial Stability Report.

He added: “Sometimes this is not taken into account sufficiently, though admittedly the importance you attach to climate risk also depends on your investment horizon.”

Dutch pension funds have a sufficient overview of the climate risk of their domestic real estate investments, according to Knot. In the Netherlands, the main climate-related risks are limited to floods and storms while internationally, these are much broader.

Some 90% of the €250bn real estate investment of Dutch pension funds are located abroad. According to DNB, pension funds often lack data about the vulnerability of these investments to risks such as forest fires, hurricanes or extreme rainfall.

“It’s important to get a better idea of this. When several investors have a large allocation to one single region [with a specific climate-related risk], concentration risks may build,” he said.

Klaas Knot

Klaas Knot

Large investors dispute findings

It’s not clear what data have led DNB to conclude that Dutch pension funds lack an overview of the climate risks their real estate portfolios are exposed to.

The largest Dutch real estate investors for pension funds, PGGM, APG an Bouwinvest, all claim they each have developed a data-led system to measure the climate risks of their investments.

APG has, for example, built a model to measure the exposure to nine different forms of climate risk of 100,000 buildings it invests in.

A spokesperson told IPE: “This way, we have provided insight into climate risk in a consistent way for every building.”

APG also recently hired a meteorologist to boost its physical climate risk expertise. Bouwinvest also claims to have analysed the climate risks of both its domestic and international real estate portfolio.

‘Financial market vulnerable due to high valuations’

The high valuations of both equity and bond markets mean financial markets are vulnerable to a correction, especially if inflation stays high for longer, according to Klaas Knot.

The DNB president specifically said high-yield markets were currently “highly speculative”. He said: “The risk spreads are irresponsibly low at the moment. People know this will go wrong, and that losses are unavoidable at some point.”

Knot still expects “the current inflation shock” to be temporary, because its main causes are high commodity prices and disrupted supply chains. But the chance of inflation staying high for longer has increased in the past couple of weeks, he said.

“An increase in inflation expectations makes financial markets nervous, as they fear monetary tightening and higher interest rates. This is exactly what we’ve seen in financial markets in the past few weeks. Sentiment is less exuberant now,” Knot said.

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