investment risk analysis methodology

I N V E S T M E N T R I S K A N A LY S I S M E T H O D O L O G Y

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Introduction to our Investment Risk Analysis

Source: Yardi Matrix

Holistic view on how to analyze markets and factors to consider when making investment decisions

The Investment Risk Analysis combines our previously released national analyses of

political risk, infrastructure and environmental risk

Interactive workbook available for Yardi Matrix clients

Investment Risk Base Case Scenario:

Ranked by Score


LEGEND

Red = High Investment Risk

Yellow = Mild Investment Risk

Green = Low Investment Risk


Investment Risk Alternative Scenario:

Ranked by Score

LEGEND

Red = High Investment Risk

Yellow = Mild Investment Risk

Green = Low Investment Risk

Fundamentals Methodology


To rank a market’s fundamentals we analyzed three different categories based on numerous different factors for each

HISTORICAL SUPPLY/ DEMAND BALANCE

QUALITY OF TECHLABOR MARKET

AFFORDABILITY

Fundamentals Methodology

*Sorted by population sizeSource: Yardi Matrix

Fundamentals Methodology: Historical Supply/Demand Balance


Calculation of oversupply/undersupply (9-year period): Annual Absorption – Annual Deliveries

Calculated the total oversupply/undersupply for an eight-year and one-year period as a percentage of existing stock. For the markets experiencing an undersupply – the absolute value of the deficit was used.

Color Ranking:

• Green (3) = net surplus/deficit of units as a % of existing stock is 0 – 100 bps• Yellow (2) = net surplus of units as a % of existing stock is 101 – 200 bps or net deficit of units as a % of existing stock is 101 – 200 bps• Red (1) = net surplus of units as a % of existing stock is 201+ bps or deficit of units as a % of existing stock is 201+ bps

Each category was given a numerical score for its eight-year and one-year color ranking (green = 3, yellow= 2, red = 1).

The eight-year color ranking contributed to 40% of the overall score and the one-year color ranking contributed to 60%.

Color Ranking of Weighted Average Numerical Overall Score:

• Green = 3.0• Yellow = 2.3 to 2.9• Red = 1.0 to 2.2

Ex: A market was rated yellow for the eight-year category & green for the one-year: (2* 0.4) + (3 * 0.6) = 2.6 – final rating would be yellow

Fundamentals Methodology: Quality of Tech Labor Market

Source: Yardi Matrix; Moody’s Analytics; U.S. Bureau of Labor Statistics (BLS); CBRE Research; Cyberstates.org, CompTIA – Cyberstates 2021

The quality of the tech labor market was based on six different categories (five for the emerging markets):

1. Employment Growth vs. Unemployment Rate • Green (4) = high unemployment rate & high employment growth• Yellow (3) = low unemployment rate & high employment growth• Red (2) = low unemployment rate & low employment growth• Red (1) = high unemployment rate & low employment growth

2. 2021 CBRE Tech Talent Analysis • Green (3) = High Labor Cost & Exceptional Labor Quality, Moderate Labor

Cost & Very High Labor Quality, Low Labor Cost & Very High Labor Quality • Yellow (2) = Moderate Labor Cost & High Labor Quality, Low Labor Cost &

High Labor Quality• Red (1) = Moderate Labor Cost & Good Labor Quality, Low Labor Cost &

Good Labor Quality

3. Percentage of Workforce in Tech• Green (3) = 1.25x + national average• Yellow (2) = 0.90x to 1.24x national average • Red (1) = Below 0.89x national average

4. Percentage of Workforce in Office-Using Sectors• Green (3) = 5.0%, or more, above the national average• Yellow (2) = 0.0% to 4.9% above the national average• Red (1) = Below the national average

5. Educational Attainment• Green (3) = 10%, or more, above the national average• Yellow (2) = 1% to 9.9% above the national average• Red (1) = Below the national average

6. Projected Job Growth We looked at projected job growth in each market in four different employment sectors over a 5-year period. Projected job growth in each market was then rated green, yellow or red based on the difference from the national average:

Financial Activities (+5.7% National Average)• Green (3) = 3.0%, or more, above the national average• Yellow (2) = 0.0% to 2.9% above the national average• Red (1) = Below the national average

Information (+7.9% National Average)• Green (3) = 1.0%, or more, above the national average• Yellow (2) = 0.1% to 0.9% above the national average• Red (1) = Below the national average

Professional & Business Services (+7.1% National Average)• Green (3) = 4.0%, or more, above the national average• Yellow (2) = 0.0% to 3.9% above the national average• Red (1) = Below the national average

Educational & Health Services (+10.9% National Average)• Green (3) = 5.0%, or more, above the national average• Yellow (2) = 0.0% to 4.9% above the national average• Red (1) = Below the national average

Fundamentals Methodology: Quality of Tech Labor Market Cont.

Source: Yardi Matrix; Moody’s Analytics; U.S. Bureau of Labor Statistics (BLS); CBRE Research; Cyberstates.org, CompTIA – Cyberstates 2021

The total ranking for the quality of the tech labor market was then weighted:

Tech Hub Markets• Employment Growth vs. Unemployment Rank = 16%• 2021 CBRE Tech Talent Analysis = 16%• Percentage of Workforce in Tech = 16%• Percentage of Workforce in Office-Using Sectors: 16%• Educational Attainment = 16%• Projected Job Growth = 20%

Emerging Markets• Employment Growth vs. Unemployment Rank = 19%• Percentage of Workforce in Tech = 19%• Percentage of Workforce in Office-Using Sectors: 19%• Educational Attainment = 19%• Projected Job Growth = 24%

Markets were then rated red, yellow or green based on the total weighted average of all categories:

Tech Hub MarketsGreen = 2.61+ Yellow = 2.10 – 2.60 Red = 1.00 – 2.00

Emerging MarketsGreen = 2.40 + Yellow = 2.00 – 2.39 Red = 1.00 – 1.90

Tech Hub MarketsAtlanta New York

Austin Orlando

Boston Philadelphia

Charlotte Phoenix

Chicago Pittsburgh

Dallas Portland

Denver Raleigh-Durham

Houston Salt Lake City

Kansas City San Diego

Las Vegas San Francisco

Los Angeles Seattle

Miami Tampa

Minneapolis Washington DC

Nashville

Emerging MarketsAlbuquerque Indianapolis

Boise Madison

Colorado Springs Oklahoma City

Columbus Omaha

Grand Rapids Savannah

Huntsville Tulsa

Based on a survey conducted by the Joint Center for Housing Studies (JCHS) of Harvard University.

We based our ratings on the following statistics:- % of cost-burdened (paying from 30% - 50% of their income) middle-income households (earning $45,000 - $75,000 per year) - % of severely cost-burdened (more than 50% of their income) middle-income households (earnings $45,000 - $75,000 per year)

Markets were then color categorized corresponding to the percentage of middle-income renters that were moderately or severely cost burdened.

Rating Scale – Moderately Burdened Rating Scale – Severely Burdened

Green (3) = 0.0% - 19.9% Green (3) = 0.0% - 2.9%Yellow (2) = 20.0% - 30.0% Yellow (2) = 3.0% - 5.0%Red (1) = 30.0% Red (1) = 5.0% +

The score for the moderately burdened households in each market was weighted 40% of the total score and the severely burdened ranking was weighted 60% of the total score.

Color Ranking of Weighted Average Numerical Overall Score:

• Green = 3.0• Yellow = 1.01 – 2.90• Red = 0.00 – 1.00

Ex. A market was rated yellow for moderately burdened households and red for severely burdened households: = (2 * 0.40) + (1 * 0.60) = 1.4 – final rating would be yellow

Fundamentals Methodology: Affordability

Source: Yardi Matrix; JCHS tabulations of US Census Bureau, 2019 American Community Survey 1-Year Estimates

Infrastructure Methodology


To rank a market’s quality of infrastructure we analyzed four different categories based on numerous different factors for each

TRANSPORTATION

ENERGY

SCHOOLS

WATER

Infrastructure Methodology

*Sorted by population size Source: Yardi Matrix

Infrastructure Methodology: Water

Source: Yardi Matrix; RentCafe Blog, "What Are Apartment Utilities & How Much Will They Cost Me?"; The World Resources Institute (WRI) Aqueduct Water Risk Assessment; Various Qualitative Research Sources

Infrastructure Methodology: Water

Source: Yardi Matrix; RentCafe Blog, "What Are Apartment Utilities & How Much Will They Cost Me?"; The World Resources Institute (WRI) Aqueduct Water Risk Assessment; Various Qualitative Research Sources

Markets were rated in terms of their water infrastructure based on five different factors, which included several different statistics and qualitative research.

Water statistics used – condition of existing infrastructure:

1. Average cost of water utility bill by state

2. State water pressure based on use and availability

Qualitative research used – future infrastructure capabilities:

3. Water supply condition, quantity and quality:if nothing is done, can the water supply handle growth?

4. Condition of existing water infrastructure: if nothing is done, can it handle growth?

5. Efforts and/or funding to improve current conditions for future growth

Each factor in each market was given a green (3), yellow (2) or red (1) score and the scores were weighted as follows:

Average score of all the following categories weighted at 40%:

- Average cost of water utility bill by state- State water pressure based on use and availability


- Water supply condition, quantity and quality: if nothing is done, can the water supply handle growth?

- Condition of existing water infrastructure: if nothing is done, can it handle growth?

- Efforts and/or funding to improve current conditions for future growth

The resulting total weighted average (“overall score”) for each market was assigned a final color based on all scores divided into 33rd and 66th percentiles as follows:

Green = overall water scores in the top 66th percentileYellow = overall water scores between the 33rd and 66th percentilesRed = overall water scores in the bottom 33rd percentile

Infrastructure Methodology: Energy

Source: Yardi Matrix; U.S. Energy Information Administration (EIA), "Electric Power Monthly”; EIA, “Average Price of Natural Gas Delivered to Residential Consumers”; AAA Gas Prices, "Oil Price Information Service (OPIS)“; Eaton Blackout Tracker, "United States Annual Report 2018“; Various Qualitative Research Sources

Infrastructure Methodology: Energy

Source: Yardi Matrix; U.S. Energy Information Administration (EIA), "Electric Power Monthly”; EIA, “Average Price of Natural Gas Delivered to Residential Consumers”; AAA Gas Prices, "Oil Price Information Service (OPIS)“; Eaton Blackout Tracker, "United States Annual Report 2018“; Various Qualitative Research Sources

The markets were rated in terms of their energy infrastructure based on seven different factors, which included several different statistics and qualitative research.

Energy statistics used – condition of existing infrastructure:

1. State average residential price of electricity (cents per kilowatt-hour)

2. State average residential price of natural gas (dollars per thousand cubic feet)

3. State average price of regular gasoline (dollars per gallon) 4. Total number of power outages statewide 2008 through 20175. Average duration of power outages statewide 2008 through 20176. Total number of people affected by power outages statewide 2008

through 2017


7. Conditions of existing energy infrastructure and projects and/or funding for energy infrastructure growth



- State average residential price of electricity (cents per kilowatt-hour)- State average residential price of natural gas (dollars per

thousand cubic feet)- State average price of regular gasoline (dollars per gallon)- Total number of power outages statewide 2008 through 2017- Average duration of power outages statewide 2008 through 2017- Total number of people affected by power outages statewide 2008

through 2017

The following category was weighted at 60%:

- Conditions of existing energy infrastructure and projects and/or funding for energy infrastructure growth

The resulting total weighted average (“overall score”) for each market was assigned a final color based on the all scores divided into 33rd and 66th percentiles as follows:


Infrastructure Methodology: Transportation

Source: Yardi Matrix; TRIP, "Urban Roads Report"; U.S. News: Best States: Transportation Rankings; Center for Neighborhood Technology, AllTransit™; American Road & Transportation Builders Association (ARBTA), "2021 Bridge Report," Bureau of Transportation Statistics (BTS), Airport Snapshots, On-Time Performance; Airfarewatchdog, Airline Hub Guide; Various Qualitative Research Sources

Infrastructure Methodology: Transportation

Source: Yardi Matrix; TRIP, "Urban Roads Report"; U.S. News: Best States: Transportation Rankings; Center for Neighborhood Technology, AllTransit™; American Road & Transportation Builders Association (ARBTA), "2021 Bridge Report," Bureau of Transportation Statistics (BTS), Airport Snapshots, On-Time Performance; Airfarewatchdog, Airline Hub Guide; Various Qualitative Research Sources

The markets were rated in terms of their transportation infrastructure based on eleven different factors, which included several different statistics and qualitative research.

Transportation statistics used – condition of existing infrastructure:

1. Road conditions: percent of major roads in urban area in poor condition2. Commute: state rank based on average commute time3. Transit: AllTransit Performance Score4. Bridges: 2018 state rank based on percent of deficient bridges5. Aviation: airport rank based on number of scheduled flight departures6. Aviation: efficiency of airport based on percent of on-time departure

flights7. Aviation: efficiency of airport based on percent of on-time arrival flights


8. Aviation: international flights and airline hubs at major metro airport9. Road conditions: efforts to improve and expand infrastructure10. Transit: efforts to improve and expand infrastructure11. Aviation: availability of land surrounding airport for growth, and projects

underway to expand airport flight operations



- Road conditions: percent of major roads in urban area in poor condition- Commute: state rank based on commute time- Transit: AllTransit Performance Score- Bridges: 2018 state rank based on percent of deficient bridges- Aviation: airport rank based on number of scheduled flight departures- Aviation: efficiency of airport based on percent of on-time departure flights- Aviation: efficiency of airport based on percent of on-time arrival flights- Aviation: international flights and airline hubs at major metro airport


- Road conditions: efforts to improve and expand infrastructure- Transit: efforts to improve and expand infrastructure- Aviation: availability of land surrounding airport for growth, and projects

underway to expand airport flight operations



Infrastructure Methodology: Schools

Source: Yardi Matrix; WalletHub, "States with the Best & Worst School Systems“; National Center for Education Statistics (NCES); National Alliance for Public Charter Schools; Various Qualitative Research Sources

Infrastructure Methodology: Schools

Source: Yardi Matrix; WalletHub, "States with the Best & Worst School Systems“; National Center for Education Statistics (NCES); National Alliance for Public Charter Schools; Various Qualitative Research Sources

The markets were rated in terms of their school infrastructure based on six different factors, which included several different statistics and qualitative research.

The largest school district in each market was focused on for the school district specific statistics and qualitative research.

School statistics used – condition of existing infrastructure:

1. Score for public school systems in state based on 15 quality factors and 14 safety factors

2. State school spending rank vs. state school system quality ranking3. State adjusted cohort graduation rate (ACGR) for public high

school students 4. Charter school enrollment share in city5. Overall student/teacher ratio in largest school district in city


6. Current capacity and utilization rate within school district and projects and/or funding to meet future needs and growth



- Score for public school systems in state based on 15 quality and 14 safety factors

- State school spending rank vs. state school system quality ranking- County-level high school graduation rate - Charter school options within school district and district support for

local charter schools- Overall student/teacher ratio in largest school district

The following category was weighted at 60%:

- Current capacity and utilization rate within school district and projects and/or funding for future growth



Political Risk Methodology


To rank a market’s political risk we analyzed three different categories based on numerous different factors for each:

TAX BURDEN/ PENSION LIABILITY

PHILOSOPHY TOWARD AFFORDABILITY

URBAN POLICING/SECURITY RISK

Political Risk Methodology


Political Risk Methodology: Tax Burden/Pension Liability

Source: Yardi Matrix; The Pew Charitable Trusts, “The State Pension Funding Gap: 2017 (June 2019)”; Tax Foundation, “2021 State Business Tax Climate Index”

Tax Burden

Based on the state rank score of each market from the Tax Foundation’s 2020 State Business Tax Climate Index.

Major tax components and their weighting:- Individual Income Tax: 30.2%- Sales Tax: 24.0%- Corporate Tax: 19.7%- Property Tax: 16.6%- Unemployment Insurance Tax: 9.5%

The index’s rank score for each market’s state were arranged low to high, then assigned a color score of green, yellow, and red, as noted below. Secondary research on the local tax burden of each market was then completed to corroborate or contradict these color scores.

Color Ranking:• Green (3) = Ranks 1 to 16• Yellow (2) = Ranks 17 to 34• Red (1) = Ranks 35 to 50

Pension Liability

Unfunded pension liability data on the city and state level were collected through various resources including the official government city websites, comprehensive annual financial reports, and other local or state sources.

Color Ranking:• Green (3) = Funded Ratio between 80% to 100%• Yellow (2) = Funded Ratio 70% to 79%• Red (1) = Funded Ratio below 70%

The following weights were given to each ranking to determine the overall scores for tax burden and unfunded pension liability: • Tax Burden: 40% • State Pension Funded Ratio: 20%• City Funded Ratio: 40%

Overall scores based on the above weighted averages were then assigned a color ranking per the following ranges:• Green = 2.6+• Yellow = 1.8 - 2.5• Red = 1.7 and below

Political Risk Methodology: Philosophy Towards Affordability

Source: Yardi Matrix; Grounded Solutions Network: Inclusionary Housing Database Map; National Multifamily Housing Council (NMHC); Various Qualitative Research Sources

Factors we based our ratings on:

- Rent control initiatives and laws- Extended eviction moratoriums enacted due to the COVID-19 pandemic- Inclusionary/exclusionary zoning policies- Permitting and entitlement requirements- Supply restrictions

Using the information found through qualitative research, the market’s stance on each focused topic was viewed as positively or negatively affecting the area’s affordability.

- Each market was assigned a color (green, yellow or red) based on how all its standpoints are deemed to collectively negatively or positively impact affordability. Green markets equated to a value of 3 and yellow markets equated to a value of 2.

- While markets that were considered a red rating were given a value of 1 or 0.5 to differentiate the markets with stances negatively affecting affordability that have also enacted long-term eviction moratoriums due to the novel coronavirus pandemic.

- Markets with a red score that have rent control in place and enacted a long-term eviction moratorium as a result of the pandemic were given a 0.5 score value.

- Markets with a red score that have enacted a long-term eviction moratorium due to COVID-19, but do not have rent control restrictions in-place were given a 1 score value.

Political Risk Methodology: Urban Policing/Security Risk

Source: Yardi Matrix; Moody’s Analytics; U.S. Federal Bureau of Investigation; Various Qualitative Research Sources

The markets were rated based on several different crime statistics and secondary research on their local urban policing and security risk.

Crime states included in ratings:- CAGR of crime index per capita 1977 – 2018 (Crime Index equals

number of property crimes plus number of violent crimes)- Most recent crime index per capita- Most recent crime per 100,000 population

Each market was evaluated based on their individual crime statistics, their comparison to other markets, and their comparison to the national average.

For example, looking at the crimes per 100,000 population in 2018/19 (dependent on available data by market)Green = markets with <2,499 crimes per 100,000 populationYellow = markets with 2,500 to 2,999 crimes per 100,000 population Red = markets with 3,000+ crimes per 100,000 population

The national average of 2,758 crimes per 100,000 population is consistent with these ranges and falls near the center of the range.

The color rating for each crime statistic was then assigned a numerical value as follows: Green=1, Yellow=2 and Red=3.

Overall scores for the crime stats were then calculated as the average score of the three different stats. Markets overall scores were assigned an overall color rating based on the following ranges: Green (3) = 1.0 – 1.4 Yellow (2) = 1.41 – 2.2 Red (1) = 2.3 +

We then conducted secondary research on the overall landscape of a market’s urban policing and security risk, which may not be shown through crime statistics alone.

We focused our secondary research on the following:- Police enforcement of public nuisances and low-level crimes- The attitude of the local police force toward protests and

maintaining general orderliness - Public policy response to police funding - Reform of policing policies- Initiatives to improve police training and disciplinary process- The public view of the police force - Issues or events resulting in officers not wanting to go to work

Taking into consideration each market’s crime statistics from 1977 to 2018/19; how they rank in terms of crime in comparison to other cities; and the supplemental information gathered on the market’s urban policing scene, we determined a color rank for each market.

Environmental Risk Methodology


To rank a market’s environmental risk we analyzed three different categories based on numerous different factors for each

NATURAL DISASTERS POLLUTIONSTATE & LOCAL GOVERNMENT

Environmental Risk Methodology


Environmental Risk Methodology: Natural Disasters

Source: Yardi Matrix; National Oceanic and Atmospheric Administration (NOAA); Urban Land Institute (ULI), “Firebreak Resilience Strategies for Real Estate”; ArcGIS

Environmental Risk Methodology: Natural Disasters

Source: Yardi Matrix; National Oceanic and Atmospheric Administration (NOAA); Urban Land Institute (ULI), “Firebreak Resilience Strategies for Real Estate”; ArcGIS

Markets were rated based on the prevalence of three different natural disasters: hurricanes/tropical storms/tornadoes, wildfires and rising sea levels.

1. Hurricanes/Tropical Storms/Tornadoes Data from the National Oceanic and Atmospheric Administration was used to look at the historical hurricane and tropical storms that occurred in each metro based on the track of each storm.

Color Ranking:• Green (3) = 0 – 1 hurricane or tropical storm track through metro • Yellow (2) = 2 – 3 tracks through the metro • Red (1) = 4 or more storm tracks through the metro

This metric was then combined with the average annual number of tornadoes by state, using data from the Storm Prediction Center.

Color Ranking:• Green (3) = State with annual average of 0 – 33 tornadoes• Yellow (2) = State with annual average of 34 – 67 tornadoes • Red (1) = State with annual average of 68 or more tornadoes

2. WildfiresStates were ranked by the number of properties at high or extremely high risk from wildfires based on data from the Urban Land Institute’s report titled ‘Firebreak Wildfire Resilience Strategies for Real Estate,’ which used data adapted from Verisk.

Color Ranking:• Green (3) = all other states • Yellow (2) = states ranked 11 to 15 in the report • Red (1) = states ranked in the top 10 for fire risk

3. Rising Sea LevelsThe threat of rising sea levels was evaluated using data from ArcGIS, which measured the cumulative changes in relative sea level from 1960 to 2018.

Color Ranking:• Green (3) = Cities with change in sea level of -8 to 2 inches • Yellow (2) = Cities with change in sea level of 2.01 to 4.0 inches• Red (1) = Cities with change in sea level of 4.01 inches plus

Overall scores for natural disasters were then calculated as the average score of the three different factors. Markets overall scores were assigned an overall color rating based on the following ranges: Green = 3.0 Yellow = 2.1 – 2.7 Red = 2.0 and below

Environmental Risk Methodology: Pollution

Source: Yardi Matrix; U.S. Environmental Protection Agency (EPA), Air Quality System Database, Toxics Release Inventory (TRI); Environmental Working Group (EWG), Tap Water Database; Centers for Disease Control and Prevention (CDC), Environmental Health Tracking Network

Environmental Risk Methodology: Pollution

Source: Yardi Matrix; U.S. Environmental Protection Agency (EPA), Air Quality System Database, Toxics Release Inventory (TRI); Environmental Working Group (EWG), Tap Water Database; Centers for Disease Control and Prevention (CDC), Environmental Health Tracking Network

Markets were rated based on four different factors: air quality, toxic chemicals, pesticides and water contaminants.

1. Air QualityThe EPA’s Air Quality System Database was used to add the number of days per year in each market the Air Quality Index was at the “unhealthy for sensitives groups” or worse to the number of ozone days per year from 2016-2020, then averaging the days for each market.

Color Ranking:• Green (3) = Average less than 170 days• Yellow (2) = Average between 171 to 230.27 days• Red (1) = Average greater than 230.27 days

2. Toxic Chemicals Data from the Toxics Release Inventory Program was used to evaluate the total pounds of toxic chemicals released in each metro’s environment (inc. air, water, land and off-site releases) in 2019.

Color Ranking:• Green (3) = less than or equal to 2,000,000• Yellow (2) = 2,000,000 to 10,000,000• Red (1) = more than 10,000,000

3. Pesticides Using data from the National Environmental Public Health Tracking Network, markets were rated based on the average rate of pesticide exposures per 100,000 residents in each state annually from 2008-2017.

Color Ranking:• Green (3) = fewer than 30 avg reported exposures per 100,000 ppl• Yellow (2) = 30-40 avg reported exposures per 100,000 ppl• Red (1) = more than 40 avg reported exposures per 100,000 ppl

4. Water Pollution Markets were rated based on the number of contaminants detected in the largest local water utility system that exceed the amount scientists say are safe.

Color Ranking:• Green (3) = 0-8 contaminants that exceed recommended amounts• Yellow (2) = more than 8 and less than 10 contaminants that

exceed recommended amounts• Red (1) = 10+ contaminants that exceed recommended amounts

Overall scores for pollution were then calculated as the average score of the four different factors. Markets overall scores were assigned an overall color rating based on the following ranges: Green = 2.3+ Yellow = 1.9 – 2.0 Red = 1.8 and below

Environmental Risk Methodology: State & Local Government

Source: Yardi Matrix; Columbia Law School, Sabin Center for Climate Change Law, “State Hazard Mitigation Plans & Climate Change: Rating the States 2019 Update”; NOAA, National Centers for Environmental Information (NCEI); University of Notre Dame, Notre Dame Global Adaptation Initiative, Urban Adaptation Assessment (UAA)

Environmental Risk Methodology: State & Local Government


1. Hazard Mitigation Plan

Using the “State Hazard Mitigation Plans & Climate Change: Rating the States 2019 Update” report written by the Sabin Center for Climate Change Law, we factored in a state’s planned efforts to prepare for natural and man-made disasters via their State Hazard Mitigation Plans (SHMPs). This report analyzes SHMPs issued since 2014 and assesses their compliance with the 2016 FEMA Climate Guidance, as well as how states have changed their consideration of climate change compared to their past SHMP versions. The SHMPs were assigned into five broad categories ranked 1 to 5 based the report’s assessment.

Using the rank assigned to each state in this report, we assigned each market a color score based on the following color ranking:

Color Ranking:• Green (3) = 4 or 5 State Category Ranking • Yellow (2) = 3 State Category Ranking• Red (1) = 1 or 2 State Category Ranking

2. Cost of Weather & Climate Disasters

To understand financial risks related to the environment, we used state-level data on the total cost of billion-dollar weather and climate disasters events per million residents available through NOAA. We pulled state-level data on the total cost of billion-dollar weather and climate disasters (all event types) from 2010 through July 9, 2021 per million aggregate residents (CPI-Adjusted).

Color Ranking:• Green (3) =Less than $1B per Million Residents • Yellow (2) = $1-5B per Million Residents• Red (1) = Greater than $5B per Million Residents

The markets were rated for environmental risk in terms of four different types of state and local government policies and affairs: hazard mitigation plan, cost of weather and climate disasters, climate adaption readiness and renewable energy tax incentives.

Environmental Risk Methodology: State & Local Government Cont.


3. Climate Adaptation Readiness

We compared the climate readiness of each city by using the Notre Dame Global Adaptation Initiative’s Urban Adaptation Assessment (UAA) database tool. The Urban Adaptation Assessment scored the “readiness” of cities was based on the capacity of an urban society has to mobilize adaptation investments from private sectors, and to target investments more effectively.

Color Ranking:• Green (3) = Readiness Score greater than 61.92• Yellow (2) = Readiness Score between 39.21 to 61.91• Red (1) = Readiness Score less than 39.20

4. Renewable Energy Tax Incentives

We looked at the number of tax incentives each market provides for renewable energy initiatives, using information from the Database of State Incentives for Renewables and Efficiency. We assigned each city was assigned a corresponding color score based on its number of tax incentive programs they provide for renewable energy initiatives, based on the below ranges for the color rankings

Color Ranking:• Green (3) = 4+ city tax incentive programs for renewable energy

initiatives• Yellow (2) = 1 to 3 city tax incentive programs for renewable energy

initiatives• Red (1) = 0 city tax incentive programs for renewable energy

initiatives

Overall scores for state & local government were then calculated as the average score of the four different factors. Markets overall scores were assigned an overall color rating based on the following ranges:

Green = 2.5+ Yellow = 2.0 – 2.4 Red = 1.9 and below

O V E R A L L I N V E S T M E N T R I S K S C O R E

• The total score of each of the four risk categories — fundamentals, infrastructure, political and environmental risk — was firstcalculated based on an average of its factor’s scores. With each factor being assigned a numerical score based on its previously determined color rating, whereas Green = 3; Yellow = 2; Red* = 1.

*As previously mentioned, the Philosophy Towards Affordability red color ratings may be assigned a value of 1 or 0.5

• An overall investment risk rating for each market was then calculated based on the weighted average** of the score of each of its four risk categories— fundamentals, infrastructure, political and environmental risk.

**NOTE: The weight of each of the four categories is subjective and can be altered based on one’s own opinion on the importance of each of the individual categories. For the purpose of this presentation, we used a “base” scenario, with each of the four categories equally weighted at 25% of the overall score. We also used an "alternative” scenario whereas the overall score used the following weights for each of the categories: fundamentals = 40%, infrastructure = 40%, political = 10% and environmental = 10%.

• The resulting total weighted average (“overall investment risk rating”) for each market was given a final color based on all of the market’s scores divided into 33rd and 66th percentiles, whereas: Green = overall water scores in the top 66th percentile; Yellow = overall water scores between the 33rd and 66th percentiles; Red = overall water scores in the bottom 33rd percentile.

Investment Risk Analysis Methodology: Overall Rating


Factors included within each of the four risk categories:

FUNDAMENTALS INFRASTRUCTURE POLITICAL RISK ENVIRONMENTAL RISK

- Historical Supply/Demand- Quality of Tech Labor Market- Affordability

- Water- Energy- Transportation- Schools

- Philosophy Towards Affordability

- Urban Policing/Security- Tax Burden/ Pension Liability

- Natural Disasters- Pollution - State & Local Government

investment risk analysis methodology

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