Physical Climate Crisis in the ESG Process

Factors determining real estate value include location, building characteristics, zoning status, and market conditions, as well as environmental risks. Climate-related risks such as floods, waterlogging, extreme temperatures, and drought can affect the use of properties, operating costs, and long-term investment decisions. Therefore, in the ESG approach, which encompasses environmental, social, and governance factors, it is essential to assess the extent to which properties are exposed to physical climate risks.

The floods and waterlogging that occurred in the Marmara Region in October 2026 brought the importance of the location of buildings and surrounding infrastructure back to the forefront. On October 14, heavy rainfall in Istanbul flooded homes and workplaces, causing disruptions in transportation. Such events are evidence that the conditions surrounding a property must be examined alongside the characteristics of the building during the valuation process.

However, it is not accurate to reach the same conclusion regarding the risk or value loss for all properties in a region based on a single flood event. The nature of the hazard must be considered alongside the property's location and existing technical information.

What is Physical Climate Risk within ESG?

Physical climate risk refers to the negative impacts that climate change-related events or long-term climate changes can have on assets and activities. These risks are categorized as acute and chronic based on their manifestation.

Acute physical risks are associated with specific events such as floods, storms, wildfires, and heatwaves. Chronic physical risks encompass long-term changes such as rising average temperatures, desertification, drought trends, changes in precipitation patterns, depletion of water resources, and rising sea levels. This distinction is also used in climate-related financial disclosure frameworks.

In terms of real estate, assessing these risks requires understanding the relationship between the structure and its environment. Disruptions in transportation, water, or energy services can affect the use of a property as much as direct damage to the property itself.

How Do Physical Climate Risks Affect Real Estate Value?

The impact of climate risks on real estate value can manifest through various channels. The need for repairs following a flood, temporary unavailability of the property, cessation of activities, or the need for protective investments are among these. In commercial real estate, interruptions in use can also be significant for the continuity of rental income and operational activities.

It is not a correct approach to use a general acceptance that "every property at risk of flooding loses value to a certain extent." The impact of the risk on buyer and tenant preferences at the time of valuation should be examined with comparable transactions and property-specific information. The degree to which the existence of risk reflects in market prices is a separate evaluation topic.

What Climate and Location Data Can Be Considered in Real Estate Valuation?

In examining physical climate risks, it is important to evaluate regional information alongside property-specific data. The conditions of two buildings located in the same neighborhood regarding exposure to flooding may differ.

Flood Risk and Historical Event Records

Previous floods and waterlogging incidents in the vicinity of the property can provide an important starting point for the assessment. However, the absence of damage records in the past does not mean that there will be no risk in the future.

Flood management plans prepared by the Ministry of Agriculture and Forestry include risk pre-assessment, flood hazard and risk maps, and necessary precautions. These studies help understand areas that may be exposed to flooding and potential impacts. The history, scope, and relationship of accessible maps with the property being examined are important from a valuation perspective.

Characteristics of the Land and Building Placement

The slope of the land, the elevation of the building relative to its surroundings, the direction of surface water flow, and the density of impermeable surfaces can affect water accumulation and drainage conditions.

Therefore, when examining the location advantage of a property, environmental conditions should be considered alongside views, central location, or transportation connections. Proximity to a stream or shore, for instance, is not sufficient on its own to determine the risk level; it should be evaluated with technical information specific to the land and building.

Building Use and Environmental Infrastructure

The usage of basement levels, the placement of technical equipment, the location of entrances, and existing water drainage arrangements are factors that may be significant in technical examinations related to the property. Similarly, the condition of surrounding roads, drainage systems, and basic infrastructure should also be evaluated for the continuity of use.

For example, hypothetically, even if a workplace itself does not get flooded, the closure of access routes may disrupt its operations. This example illustrates why considering climate risks solely within the boundaries of the building may be insufficient.

Why Should Construction Be Prevented in Areas at Risk of Waterlogging?

Resilience to climate risks begins at the site selection stage for the project. Avoiding new construction in areas deemed unsuitable for development as a result of flood risk and technical assessments is a fundamental planning approach aimed at reducing future loss of life and property.

The suitability of an area for construction cannot be determined solely by looking at a general risk map. Valid planning decisions, opinions from relevant institutions, and necessary technical studies should be examined together. In real estate valuation, these data are considered in terms of their effects on the property's use and development opportunities.

How Are Sustainable Buildings Evaluated Against Climate Risks?

Sustainability in real estate encompasses not only energy and resource use but also the ability of the building to maintain its function under changing environmental conditions. Therefore, the resilience of a building with high energy efficiency against physical risks such as flooding or extreme temperatures should be examined separately.

Preserving natural water flow, implementing appropriate green infrastructure practices, and planning that considers the ecological characteristics of the environment can support risk reduction efforts. AFAD's ecosystem-based disaster risk reduction approach also highlights the role of preserving natural systems in mitigating disaster impacts.

In terms of ESG, it is important not only to identify environmental risks but also to ensure user safety, maintenance responsibilities, and the integration of risk information into decision-making processes. The impact of measures taken on value should be assessed based on documentation of implementation, technical adequacy, and market equivalence. A sustainability practice does not automatically imply an increase in value on its own.

How Should a Valuation Expert Approach Physical Climate Risks?

The role of a real estate valuation expert is to analyze the effects of accessible information related to the property on its value. Conducting detailed flood modeling or determining the technical safety of a building against a specific disaster requires relevant areas of expertise.

International Valuation Standards also state that "ESG factors should be considered in valuation work to the extent that they are measurable and can be reasonably accepted by the valuation expert using their professional experience."

ARGE Gayrimenkul Değerleme evaluates the location, physical and legal characteristics, environmental conditions, and market data of properties together in the valuation process. Assessing existing information on physical climate risks within this whole supports that decisions regarding real estate are based on concrete and justifiable data.