As discussed on the January 25, 2021 Climate Risk panel at the Environmental Bankers Association conference, the Commodity Futures Trading Commission (CFTC) noted in September 2020 that climate risk poses a major risk to the stability of the US financial system. The CFTC called on US financial regulators to move urgently and decisively to measure, understand, and address the risks.

Our panel covered some potential ways for lending institutions to incorporate climate risk into underwriting and due diligence, using flood risk as an example. We also discussed how disruptions to insurance availability will likely create changes in property values in many parts of the US. In a 2019 study, Deloitte found that more than half of US state insurance regulators “indicated that climate change was likely to have a high impact or extremely high impact on coverage availability and underwriting assumptions.” A 2020 report issued by ULI indicated investors are already seeing increases in property insurance premiums. Some investors “envisioned a future in which properties could not qualify for insurance at all and therefore became ineligible for loans.”

During the EBA Panel, we surveyed the lenders in the audience, and received the following feedback as a potential signal of how the EBA community currently views climate risk:

What factors are likely to cause lenders to include climate risk in transaction due diligence?

  • One third said “physical risk of damage and potential impact to appraised value”
  • One quarter indicated “regulatory pressures/changes to flood insurance requirements” combined with “physical risk”
  • 15% were not likely to include in due diligence

Where within the lending institution does responsibility for evaluating climate risk occur?

  • One third said “None – it is currently not evaluated”
  • One fifth said “ESG or sustainable finance group”
  • One fifth said “Risk Management or Environmental Risk Management”
  • Less than 10% said Appraisal Group

We anticipate many regulatory changes affecting lending institutions in the years ahead, and it will be interesting to see how the responses to the questions above evolve over time.

The panel referenced several resources for further research, as noted below.

Resources:

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