Climate change presents both risks and opportunities for Sirius and the wider real estate sector and was identified as a material issue in our recent materiality assessment.

We are actively working to integrate climate resilience into our long-term business strategy, by assessing physical risk, adapting our buildings, and considering aspects such as carbon pricing. 

Evaluating physical risk and building adaptation

We have undertaken an update of physical risk modelling for the UK and German portfolios to understand how climate-related factors such as extreme weather events, rising temperatures, and flooding could impact our assets. Using climate scenario modelling, aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, we have been able to identify potential vulnerabilities within our portfolio.

During the year, we conducted a detailed analysis of physical risk for each asset across our portfolio, with the support of a third-party specialist. The assessment revealed a low risk to climate stress across all risk types and climate-related scenarios, and on timelines to 2050 and 2100. Only a small number of assets were considered potentially exposed to a ‘100- year event flood’ or a ‘100-year storm surge’, both to 2100, representing under 3% and under 1.5% of the portfolio, respectively. These insights inform our investment and asset management decisions enabling us to enhance the resilience of our properties. Part of this work involves discussions with relevant local authorities to understand actions they are taking on flood mitigation so that we can incorporate this into decisions we make regarding building adaptation measures.

The model can be used in future renovation projects, informing the choice of materials and suppliers. Equally, it provides a platform on which we can engage with our suppliers to improve our emissions performance.

Integrating carbon pricing and financial planning

Incorporating carbon tax considerations into our financial planning and decision-making enables us to prepare for potential financial implications of changes to carbon tax and related regulations. In Germany, we are focused on energy used for heating, in line with the German ETS scheme which is distinct from the EU Emissions Trading System (ETS).

The evolving cost of carbon in Germany influences our investment and asset management decisions in in terms of how we look to reduce our emissions and approach our energy-efficiency upgrades. Our financial modelling considers both current tax rates and potential future tax rates, including changes to the landlord and tenant split. We continue to monitor policy changes in Germany, and in the UK, we are monitoring how the UK’s carbon pricing mechanism evolves, and how we can best incorporate this into our financial planning.

Embedding sustainability into acquisition due diligence

We continue to embed ESG considerations into our due diligence processes. With several acquisitions completed this year this work has been particularly active. For all potential acquisitions reaching the advanced stage of exclusivity, we commission dedicated ESG evaluations to understand the potential implications for our carbon reduction efforts. Our due diligence allows us to identify risks and opportunities and provide an initial view on how prospective additions to our portfolio may impact our decarbonisation pathway, considering alignment with CRREM, and physical risk exposure.