In an era where climate risk is increasingly material for real estate markets, the traditional model of building real estate investment indexes - market-capitalization weighting - faces a critical challenge. For decades, most REIT indexes have simply ranked companies by their total market value and allocated portfolio exposure accordingly. But when the very locations of physical assets move from benign variables to central risk drivers, this approach can overlook deep, structural vulnerabilities embedded in real estate portfolios.
This is where a climate-aware index like the Climate Global Climate-Resilient REIT Index ETF (CLIM) seeks to offer a fresh lens for investors.
The Limitations of Market-Cap Weighting in a Climate-Risk World
Market capitalization reflects investor beliefs about future earnings and growth but not necessarily the physical reality under a changing climate. A REIT with valuable assets exposed to repeated flooding, wildfires, or chronic heat stands to face rising insurance costs, remediation and maintenance expenditures, tenant migration, and even potential property abandonment. Research shows that REITs with higher concentrations of properties in warmer or high-risk counties tend to exhibit weaker valuations and lower cash flow metrics over time, an indication that climate risk may impact firm value, even if it’s not fully captured by price alone. [1]
This type of localized exposure can be hidden in traditional market-cap indexes. A large REIT may carry a massive weighting simply because of its size without accounting for where its properties sit geographically and how vulnerable they are to climate change.
Sector Diversification Isn’t Enough When Location Matters
Many investors believe that diversification across property types such as, offices, industrial, residential, retail, may mitigate risk. But physical climate risk doesn’t respect sectors the way traditional factor models do. A coastal office portfolio and a sun-belt industrial portfolio might look diversified at the sector level, but both could be heavily exposed to flooding or heat stress when viewed geographically.
That’s why a purely sector-oriented diversification strategy may fail to capture the true nature of climate risk embedded in real estate portfolios. Without understanding where assets are and how vulnerable they are to climate hazards, a portfolio might have diversified sector exposure and still be highly concentrated in climate risk. [2]
Enhancing Traditional Index Construction with Climate Signals
The next evolution in index design isn’t about discarding rules - it’s about expanding them. Climate-aware indexes work by embedding signals that reflect climate vulnerability and resilience into the weighting process.
This could involve:
- Using physical climate risk data at the property or location level rather than at a firm or market cap level;
- Adjusting exposures based on future risk projections, not just historical returns or asset size;
- Leveraging climate risk scores to identify and de-emphasize assets in the most vulnerable geographies.
This methodology is similar in spirit to fundamentally weighted indexes, which weight assets based on economic metrics like sales, dividends or book value rather than market price alone. The logic is simple: a deeper signal, whether fundamental or climate-related, can surface important drivers that pure market prices might miss.
Why This Matters to Advisors and Long-Term Investors
What distinguishes the Climate Global Climate-Resilient REIT Index ETF (CLIM) is not simply that it is climate-aware, but how climate risk is evaluated.
CLIM tracks the first and only REIT index to apply insurance-industry climate and extreme-weather analytics directly to index construction at both the property and portfolio level.
This approach leverages climate and catastrophe models developed by the global insurance industry - an industry that has invested hundreds of millions of dollars to quantify physical risk, price policies, and pay claims. These models are designed not for theoretical analysis, but for real-world financial consequences.
Insurance markets operate where climate risk becomes tangible:
• Pricing premiums
• Managing catastrophic losses
• Evaluating exposure concentrations
• Stress-testing future scenarios
By integrating these analytics into index methodology, CLIM introduces a framework grounded in decades of risk-quantification experience.
Because ultimately, real estate risk is not defined solely by company size but by the resilience of the properties themselves.
[1] Feng, Zifeng at al, The Impacts of Climate Risk on Commercial Real Estate: Evidence from REITS, Research Paper, 12/2022.
[2] Climate Check, Green Street: How climate impacts long-term growth for REITS, ClimateCheck.com, 4/13/2023.
Carefully consider the Funds’ investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s Prospectus and Summary Prospectus, which may be obtained by visiting www.climateglobaletf.com. Read the Prospectus and Summary Prospectus carefully before investing.
The Fund is distributed by Foreside Fund Services, LLC. Exchange Traded Concepts, LLC serves as the investment advisor. The Fund is distributed by Foreside Fund Services, LLC., which is not affiliated with Climate Global, Exchange Traded Concepts, LLC, or any of its affiliates.
Investing involves risk, including possible loss of principal. The Fund’s return may not match or achieve a high degree of correlation with the return of the Index. To the extent the Fund’s investments are concentrated in or have significant exposure to a particular issuer, industry or group of industries, or asset class, the Fund may be more vulnerable to adverse events affecting such issuer, industry or group of industries, or asset class than if the Fund’s investments were more broadly diversified. Issuer-specific events, including changes in the financial condition of an issuer, can have a negative impact on the value of the Fund.
A new or smaller fund is subject to the risk that its performance may not represent how the fund is expected to or may perform in the long term. In addition, new funds have limited operating histories for investors to evaluate and new and smaller funds may not attract sufficient assets to achieve investment and trading efficiencies.
Shares are bought and sold at market price (closing price) not net asset value (NAV) and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined) and do not represent the return you would receive if you traded at other times. Brokerage commissions will reduce returns.
