a.s.r. real assets investment partners: The impact of climate change on real assets

September 11, 2025

_{This article was originally written by Dutch. This is an English translation.}

Climate change increases the likelihood of severe weather and natural disasters. However, historical risk-return data only takes climate risks into account to a limited extent. It is therefore essential to integrate these risks into expected and required return models.

By Ralf Kooken, Portfolio Manager, a.s.r. real assets investment partners

Investing in real assets (infrastructure, natural capital and real estate) means investing for the long term (more than ten years). A lot can and will happen within such a period. That is why it is essential to take a proactive and fundamental view of global developments.

When building a real assets portfolio, it is good to look at it from two angles.

Fundamental: Assess whether markets are fundamentally attractive for investment based on long-term trends. Megatrends such as demographic shifts and climate change are increasingly influencing the risk-return profile of real assets sectors at global and regional level.

Valuation: Assess the attractiveness of markets in the short and medium term by comparing the expected return with the minimum required return. This provides insight into the extent to which investors are compensated for the risk taken and whether it is interesting to enter the market in the aforementioned term.

Climate risks are not yet fully priced into the real assets market. Historical risk-return data only include climate risks to a limited extent. It is therefore essential to explicitly integrate both physical risks and transition risks into models for expected and required returns. In this way, climate change is structurally included in the assessment of the risk-return profile of real assets investments.

Expected returns decrease when climate change is integrated

Figure 1 shows the valuation of real asset markets, including and excluding the integration of climate change.

As Figure 1 shows, expected returns decrease after integrating climate change. This is because investments must be made to reduce greenhouse gas emissions (mitigation) or as required by legislation and regulations. In addition, investments must be made to adapt assets to changing climate conditions (adaptation). At the same time, the minimum required return increases when climate risks (physical and transition risks) are taken into account.

Figure 1 shows that the attractiveness of real estate and infrastructure is overestimated when climate change is not taken into account. The integration of climate risks makes natural capital relatively more attractive compared to real estate and infrastructure (its attractiveness declines the least). Based on this, and other relevant aspects such as good diversification opportunities and attractive risk-adjusted returns, a slight overweighting of natural capital can be considered.

Major changes at sector level

Significant changes are taking place at sector level that remain invisible at the aggregate level of real assets.

A striking example is the “permanent crops” sector – an important segment within natural capital – in the United States. This sector focuses primarily on fruit and nut cultivation. Within this sector, the relatively high valuations of American assets are striking. In California, a key region for permanent crops, a combination of oversupply and increasing water regulation – a manifestation of climate risks – is currently putting pressure on returns. In the short term, this may even result in low or negative returns.

Nevertheless, the medium-term outlook is more positive. The market is expected to recover within two to four years, which could create an attractive entry point for investors with a longer horizon. A realistic assessment of climate risks is crucial in this regard. When the impact of water regulation and climate change is completely disregarded, the expected return for the coming years increases significantly by several percentage points, while the minimum required return actually decreases. This leads to a considerable overestimation of the current attractiveness of this sector.

The integration of climate risks makes natural capital relatively more attractive compared to real estate and infrastructure.

The expected return on the forestry sector is expected to increase by integrating climate change into the investment analysis. Growing demand for carbon credits provides optionality and additional returns. At the same time, this leads to a reduction in the supply of wood, which also has a positive impact on the direct return on the forestry sector.

Within the real estate sector, the expected return on offices is most influenced by the integration of climate risks. The office market is currently characterised by a high degree of competition, while tenants are increasingly demanding a high level of sustainability. This leads to relatively high climate investments (transition capex) in this sector. As a result, the office sector is less attractive from a risk-return perspective compared to other real estate segments.

Within infrastructure, the transport sector stands out. In this sector, significant investments will be needed in the coming years for both climate adaptation and climate mitigation measures, which will have a negative impact on expected returns. Internal analyses show that the combination of physical and transition risks is highest for this sector (together with fossil energy). By completely disregarding climate risks, the transport sector appears more attractive than other infrastructure sectors.

The above examples underline the importance of detailed sector analyses within real assets and explicitly including the effects of climate change in investment analyses.