How can surveyors approach climate risk in valuation?

Consider, for illustration, a valuation instruction for a modern office building overlooking the Thames at Canary Wharf. The valuer will examine rental evidence from nearby transactions, assess lease structures, consider covenant strength and apply an appropriate yield based on comparable investment sales across the London Docklands market.

Few valuation reports, however, explicitly deal with a more difficult question: what happens to the value of that asset if the market begins to price long-term climate exposure across the wider Thames Estuary corridor?

The building sits downstream from the Thames Barrier. Its long-term protection depends on the evolving defence pathway outlined in the Thames Estuary 2100 Plan (TE2100) and the Environment Agency's adaptive flood management strategy designed to safeguard London and surrounding boroughs, such as Tower Hamlets, Greenwich and Barking and Dagenham, in the 21st century. For the moment, the market treats this infrastructure as background context rather than a core valuation variable.

My research suggests that this treatment of flood defence infrastructure as background context rather than a core valuation variable deserves closer scrutiny. The study examined whether the TE2100 adaptation framework has been capitalised into property values across the Thames Estuary corridor. 

The findings reveal that climate exposure is not yet fully reflected in market pricing. Indeed, the result is a quiet but important tension between climate policy and property valuation. The research examined thousands of residential property transactions across the Thames Estuary corridor, linking them to flood exposure data and the policy units defined in the TE2100. 

Using a combination of climate value-at-risk modelling, elastic net regression and machine-learning analysis, the study tested whether flood exposure, adaptation infrastructure and energy performance were reflected in property pricing. The results revealed a striking asymmetry: although energy efficiency is consistently capitalised into property values, flood exposure shows a much weaker relationship with property prices, despite the estuary's long-term vulnerability.

However, the long-term resilience of these assets ultimately depends on infrastructure decisions embedded in a climate adaptation strategy up to 2100. 

The Thames Barrier and the wider TE2100 defence framework should, in theory, be a strong market signal. However, the empirical evidence suggests that adaptation infrastructure does not automatically generate pricing premiums. 

Properties in defended zones do not consistently command higher values than those outside them. Investors appear cautious about translating long-term policy commitments into current pricing assumptions. 

The implication is that adaptation infrastructure reduces physical risk, but unless the policy framework behind it is perceived as durable and credible, markets may hesitate to capitalise that protection into asset values.

These areas are currently protected by the Thames Barrier and associated tidal defences, which were designed for 20th-century flood probabilities and are expected to require significant upgrades or replacement later this century. 

In other words, the long-term viability of billions of pounds of property assets in these districts is contingent not only on existing infrastructure but also on the successful implementation of future adaptation phases in TE2100.

The empirical analysis suggests that this dependence is not yet strongly reflected in market pricing. In the pricing models, energy-efficiency variables, including EPC-related indicators that proxy the energy performance of the dwelling, consistently emerge as statistically significant drivers of property value, while flood exposure indicators and adaptation-zone variables remain weaker or insignificant predictors. 

In practical terms, valuation evidence today may therefore reflect confidence in existing infrastructure rather than a fully articulated pricing of the adaptation pathway on which that protection ultimately depends. 

The eastern Thames regeneration corridor thus functions as a real-world test of how slowly property markets translate long-term environmental risk into present asset values.

From this, it estimated potential downside exposure for property assets in the Thames Estuary corridor. Under moderate mid-century climate scenarios, portfolio value losses could range between 6% and 13%. Under more severe long-term trajectories, potential losses approach 25%. 

These estimates emerge from the same class of probabilistic risk modelling increasingly used in banking and insurance sectors to evaluate systemic climate exposure. Such metrics rarely appear in conventional valuation reports and the reason lies partly in the institutional logic of valuation practice.

This creates a professional dilemma: if markets have not yet fully priced climate exposure, should valuations merely record existing transaction evidence, or should they begin to interpret forward-looking environmental risk more explicitly?

Red Book Global Standards does not currently prescribe a forward-looking adjustment methodology for climate risk. However, its emphasis on professional judgement and transparency leaves space for valuers to incorporate emerging risk information in their advisory role. As climate risk becomes increasingly visible in financial markets, the ability to interpret such signals will become an important part of valuation expertise.

Specifically, this issue is becoming increasingly relevant as climate-related financial reporting moves rapidly into the mainstream of investment decision-making. Institutional investors are now expected to disclose climate exposure under frameworks such as the Task Force on Climate-related Financial Disclosures and emerging international sustainability standards.

Consequently, chartered surveyors are increasingly asked to interpret climate risk in valuation advice, portfolio due diligence and investment strategy. The ability to assess environmental exposure and translate it into financial implications is becoming a matter of professional competence rather than optional expertise.

First, valuation practice is inherently evidence-based. Where recent transaction evidence does not reflect environmental exposure, valuers face difficulty incorporating forward-looking risk without departing from observable market behaviour. 

Second, adaptation policy operates across long time horizons. Strategies such as the TE2100 outline defence pathways extending to the end of the century, while most investment decisions operate across cycles of five to 15 years. 

Third, climate information is not easily translated into financial metrics. Flood probability, defence standards and sea-level projections must be converted into impacts on rents, yields and liquidity before they influence investment behaviour.

Many assets along the eastern Thames corridor derive their apparent security from the presence of large-scale flood defence infrastructure rather than from inherently low exposure. A commercial asset in the Royal Docks or a residential scheme at Barking Riverside appears secure today because the Thames Barrier and associated tidal defences currently protect against storm surge events. 

The long-term effectiveness of that protection depends on future upgrades and replacement infrastructure envisaged in the TE2100. I therefore suggest that valuers and advisers treat major flood defence systems as valuation-relevant infrastructure dependencies, in much the same way that transport connectivity or planning designation is considered in professional advice. Explicitly identifying such dependencies clarifies the environmental assumptions that sustain current market value.

A second response lies in defence-pathway sensitivity analysis. The TE2100 strategy is structured around adaptive pathways in which different engineering interventions are triggered under different sea-level rise scenarios. This framework creates an opportunity for valuers advising institutional investors to explore how asset values might behave under alternative defence trajectories. 

A portfolio concentrated in boroughs such as Newham, Tower Hamlets or Greenwich could therefore be assessed not only against current flood protection standards but also against the future defence phases on which its resilience ultimately depends.

 Such analysis begins to examine how the credibility of adaptation policy may influence investor sentiment. Property markets are not yet fully pricing long-term climate adaptation risk, creating a gap between scientific evidence and transaction-led valuation practice.

The third response concerns location-specific climate liquidity risk. Real-estate markets adjust slowly to environmental information until a threshold event alters investor perception. When that shift occurs, the first effect is rarely an immediate fall in capital value. 

The more common initial signal is a contraction in market liquidity. Fewer buyers are willing to transact in locations perceived as environmentally exposed. Valuers advising clients in parts of the Thames corridor may therefore find it increasingly relevant to consider whether climate exposure could affect future marketability rather than simply price levels. 

For valuers operating in climate-exposed urban corridors such as the Thames Estuary, recognising these signals may become increasingly important.

Integrating climate-risk evidence into valuation practice doesn't mean applying a mechanistic climate discount to market value. It would risk moving the valuer from observing the market to making it. A more defensible use is as an assumptions-governance tool in existing valuation approaches.

Where flood exposure, defence dependency or adaptation uncertainty is material, the modelling can help test whether the adopted rent, yield, exit yield, capital expenditure allowance, insurance assumption, void risk, refinancing risk and terminal value remain credible under alternative climate and infrastructure pathways.

In a DCF, this may sit most naturally in sensitivity analysis and scenario commentary rather than in a single asserted adjustment. In comparable or residual approaches, it can help explain why two apparently similar assets may carry different risk profiles if one is materially dependent on future defence upgrades, continued insurability or public adaptation delivery.

The valuer remains anchored to market evidence, but the report becomes clearer about the climate assumptions on which that evidence currently rests.

This article is based on Pricing the unseen, research recognised by the Emeritus Professor Sarah Sayce Sustainability Research Award in 2025