Climate Transition Risks – What are they and how are they Relevant to Conveyancers?

In the first of a two part blog, I want to explore the growing importance of climate transition risks in the property transaction, what the role of the conveyancer or commercial property lawyer is in the process and consider how to advise the client effectively. 

What is the “Transition” in respect of Transition Risks? 

Increasing greenhouse gas emissions are driving climate change around the world. The built environment – so, heating, cooling and constructing homes, offices, and other buildings – contributes almost 50% of global emissions.  The UK Government (1) has a legal duty under the Climate Change Act 2008 to reduce the country’s greenhouse gas emissions by at least 100% of our 1990 levels (known as Net Zero) by 2050. 

Hence, the period between now and 2050 is when we need to make the transition to Net Zero. 

The risks arising during this period are generally known as transition risks. 

What is a “Transition Risk”? 

Transition risks are the changes which policymakers, businesses such as insurers and lenders, as well as individuals and others are making in response to the climate emergency and which will have negative financial consequences. They may take various forms, including changes to professional, commercial market practices (e.g. lending and insuring) as the impact on climate change becomes ever more serious. 

The Bank of England describes transition risks as the “changes that governments, industries and consumers, make in pursuit of a greener (lower carbon) world”.(2)

How do Transition Risks relate to ‘’Physical Climate Risks’’? 

Transition risks are a reaction from policymakers, insurers, banks etc., to the physical impacts of climate change to land, buildings, businesses etc. Climate change is already impacting UK land and buildings in a number of physical ways, including: 

• Sea levels around our coasts are increasing by 4mm per year (3), leading to an increase in the risk of coastal flooding and coastal erosion. 

• Wetter winter weather in the UK increases the risk of pluvial flooding (flash flooding, surface water and groundwater flooding). 

• Drier summer weather in the UK increases the risk of shrink swell subsidence and heatwaves making homes and other buildings uncomfortable to live or work in. 

These are all examples of physical climate risks.

What does the Law Society’s Climate Guidance say about transition risks?

The Law Society’s groundbreaking ‘’Guidance on the Impact of Climate Change on Solicitors’’ contains a great deal of helpful information about climate change, including an explanation of transition risk as: ‘’Policy, legislative, regulatory and market changes to support a just transition to a net zero economy’’. 

Of most relevance to conveyancers is the following statement in the Guidance that exhorts us to:

‘’Take account of the risk that certain properties become uninsurable or ones for which mortgage finance cannot be obtained’’ – in other words, to take account of these key transition risks.

The Guidance lists the following as an example of climate legal risks which impacts on client advice ‘’In conveyancing, changes in homeowners’ views on issues such as properties on flood plains could impact property values’’.

The Guidance also refers to ‘’shifting client expectations, duties of care, and competency requirements’’. There is a specific transition risk for solicitors. As professional standards and practices evolve with input from The Law Society and the SRA, we increasingly need to take climate risks into account in our advice. 

It is important to note that the April 2023 Guidance provides an overarching framework for the management of climate risk.  The Law Society has just completed a consultation on the scope and contents of guidance for real estate lawyers (October 2023). 

When the Law Society’s real estate-specific climate guidance is finalised, it will be a hugely important document for conveyancers, perhaps even eclipsing the Law Society’s and other environmental practice notes that relate to contaminated land and flood risk.  We will clearly need to be alert to this prospect over the coming months. 

How do you advise clients about transition risks? 

“An experienced conveyancer should be aware of physical and transition climate risks and should as part of their retainer take steps to warn client about them, and advise on steps to respond to that risk”: Stephen Tromans KC in the Matter of Conveyancer’s Duty of Care to Advise Clients about Climate Risk, and How to Discharge such Duty, July 2022.

Conveyancers and commercial real estate lawyers are already very familiar with traditional environmental due diligence for contaminated land risk, but also for flood and ground stability risks as there are prevailing practice notes in play. 

Following the publication of the Law Society Climate Risk Guidance, many firms have now automatically adopted this for the physical risks (including coastal erosion) as they are reporting on the same potential issues, just projected into the future. 

This has been driven by Groundsure adding ClimateIndex™ ratings automatically to the core residential and commercial searches, as there is logically no difference in terms of due diligence and reliance. 

Transition risks can play an important role as a material factor in the negotiation. ClimateIndex™ includes not only the energy performance certificate (EPC) matched to a Unique Property Reference Number (UPRN), but it compares individual residential and commercial properties with others in the area. This will enable your client to consider the existing EPC rating, along with potential improvement measures to bring it in line with others in the area. This can have a material bearing on the retrofit costs that need to be considered, as well as possible price renegotiation. 

For commercial transactions, it is also important to identify multiple units on site and match these to the UPRN and their respective EPCs. Again, ClimateIndex™ does this and ranks from worst to best for up to 50 units, so the client can easily assess the risk across the assets. This includes mixed residential and commercial as well, such as flats above retail outlets. 

For properties in a flood risk area, transition risk means understanding the cost implications of building up flood resilience. Investing in flood resilience to protect the property from flooding may result in obtaining insurance when it otherwise might be unavailable, or obtaining insurance on improved terms. This is a vital requirement for securing a loan or mortgage. 

This will be especially important for residential properties given that the Flood Re scheme tapers off to 2039, after which time flood resilience measures will need to be increasingly demonstrated.  

In line with physical risks, conveyancers and commercial real estate lawyers just need to highlight to their clients the key points that arise from the findings of the assessment. There is extensive commentary and advice in the ClimateIndex™ transition section to read through and relay to the client, including the advantages of investing in for resilience and other improvement measures. 

In my next blog, I will explore how responding to transition risks could create positive change across the property sector in its contribution to net zero.  

Find out more information about ClimateIndex here, email info@groundsure.com or call  01273 257755 to access training and support for your team.

References

1. Scotland plans to reach net zero by 2045.
2. https://www.bankofengland.co.uk/climate-change
3. https://rmets.onlinelibrary.wiley.com/doi/10.1002/JOC.7787