By Ray Birch
MADISON, Wis.—How many of the homes along America’s coasts will be there in 30 years as sea levels continue to rise and shorelines erode? Or, how about the credit unions themselves?
It’s a serious question for many credit unions. According to the federal government, 87-million people, or 29% of the U.S. population, live in coastline counties, including more than 41 million in Atlantic and 32 million in Pacific counties.
And it isn’t just an issue for credit unions that hold mortgages or other loans in those areas, as it could affect credit unions far from the coast that may purchase loan participations. But CUs can’t wait 30 years to start worrying about the potential problem, according to the Filene Research Institute, which recently released a report on climate change and how it may impact the credit union industry.
The report offers insights into the risks credit unions must watch—but also identifies potential opportunities.
“Climate change can create tangible risks to credit unions, whether that’s risk to physical infrastructure, balance sheets and operations, or the communities that credit unions serve,” said Filene Acting Chief Product Officer Christie Kimbell, who emphasized she does believe CUs are preparing for the challenges ahead. “We think that this is part of credit union DNA. Credit unions have a history of being first responders for their members in the aftermath of natural disasters.”
What is becoming apparent to credit unions, according to Kimbell, is that the risk scenario plans put on paper over the years are actually been called into use, and that became clear to the movement over the last several years.
An Increased Appetite
“We also think there is an increased appetite to prepare for once-in-a-lifetime events,” said Kimbell. “As a result of COVID-19, although many credit unions did risk scenario planning which included pandemics, I think we all feel that some of the scenarios we thought were just exercises now could actually happen. As a result, I think many leaders are more focused on longer-term strategic scenario planning and ensuring they have stress tested their organizations against future impacts.”
As CUToday.info has reported, climate change may be controversial, but it’s something a number of credit unions are already tackling.
Verity CU in Seattle, for example, is recommending every credit union look closely at where its loans are made geographically and model out the impact climate change could have on them—and perhaps also consider their own role in helping to mitigate the threats of a warming planet. Verity, which has a detailed plan to address climate change and its impact on the CU, said it is doing both.
Also in Washington, Department of Financial Institutions last year stated that during examinations it plans to begin talking to its regulated financial institutions about whether they are contemplating climate change and if so, what steps they are taking to begin to address the “risks and opportunities climate change brings.”
An ‘Unparalleled Threat’
In a letter last year to institutions regulated by the Washington DFI, Director Charlie Clark said climate change “poses an unparalleled threat to all of us.”
The Filene study, The Changing Climate for Credit Unions, conducted in conjunction with Ceres, found that more than 60% of all credit unions—and at least $1.2 trillion in credit union assets—are at physical risk from climate change. It provides a foundation for credit unions to better understand and act on the opportunities and risks of climate change, Kimbell said.
According to Kimbell, there are two key risks:
- Physical risk: Risk of harm to people and property arising from acute, climate-related disaster events and longer-term chronic shifts in climate and weather patterns.
- Transition risk: Risks arising from the technological, legal, regulatory, policy, and reputational stresses and disruptions of transformations required by organizations, economic sectors, and communities to adapt to climate change and transition to a less carbon-intensive and, ultimately net zero carbon economy and society.
“Expectations of businesses to prepare for climate change and help support a transition to an economy with net zero carbon emissions are changing rapidly,” said Kimbell. “This includes financial institutions. In October 2021, the U.S. Financial Stability Oversight Council stated that climate change is an ‘emerging threat to the financial stability of the United States,’ and called on its member organizations, including NCUA, to begin planning to develop the data and methods necessary to assess climate-related risks. Consumer sentiment is also evolving as well. We found there is uncertainty among credit union leaders about how best to approach this topic, and the diversity of credit unions means that a collective effort is required.”
Not So Golden
Kimbell pointed to concerns around mortgages on homes along the California coast.
“In 2019 Filene Fellow Bill Mauer (head of Filene’s Center of Excellence on Emerging Technology), shared research and did a presentation at a Filene research event involving models of rising sea levels along the California coast that, if accurate, may threaten high-value real estate in the next 30-years—the average term of today’s mortgages. He termed these areas under risk as Blue Zones,” she explained.
Mauer observed in the report, “We have to start thinking about things like whether the 30-year mortgage makes sense anymore.”
But Mauer’s observation was well ahead of new thinking being kicked around in Washington—the 40-year mortgage. As CUToday.info reported, the long tradition of the 30-year mortgage in the U.S. may be on its way to becoming the 40-year mortgage.
Both CUNA and NAFCU have told the Department of Housing and Urban Affairs (HUD) they support its notice of proposed rulemaking that would allow mortgagees to modify a mortgage insured by the Federal Housing Administration (FHA) by recasting the total unpaid loan for a new term limit of 480 months (40 years) to cure a borrower’s default.
According to HUD, the changes would allow mortgagees to reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame.
Insurance Companies Respond
Kimbell noted Filene has learned that major insurance companies are modeling scenarios based on an increase in natural disasters based on changes in experience ratings including hurricanes, fires and flooding.
“We are having discussions with CU CEOs whose members, financials and employees have been impacted by natural disasters in recent years,” said Kimbell. “We are working with Callahan & Associates on modeling the opportunity numbers on the upside for credit unions. Climate change offers opportunities for credit unions to differentiate in a crowded financial services market, diversify their lending portfolios and other business, and ultimately grow by adapting to economic and social change.”
As am example, Kimbell pointed out that electric vehicle (EV) sales nearly doubled between 2020 and 2021, but credit unions only accounted for around 12% of the market for EV financing. Banks and captives together produced 86% of loans and leases for new electric vehicles in the last three months of 2021, according to Experian data.
“Our analysis of the NGFS Net Zero 2050 scenario suggests that about $275 trillion in cumulative spending on physical assets, or approximately $9.2 trillion per year, would be needed between 2021 and 2050,” said Kimbell. “That means $3.5 trillion in new spending per year on low-emissions assets and enabling infrastructures like electric vehicles and charging stations, or solar panels and residential and commercial property retrofits. Cars and homes are a significant part of this estimate—and these are exactly the areas where credit unions currently play best.”
The NGFS, or Network for Greening the Financial System, is a network of 114 central banks and financial supervisors that aims to accelerate the scaling up of green finance.
Seven Action Steps
As Filene recommended in a previous report, there are seven action steps it says credit unions can take to understand and assess the impacts of climate change for their organization:
- Publicly acknowledge that climate change poses a risk to their balance sheet and to their members
- Conduct research and educate themselves, their members, and other stakeholders about climate-related risks and opportunities facing their organizations
- Begin collecting climate-relevant data for their organization
- Adopt the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD)
- Conduct climate scenario analysis of their loan portfolios
- Invest in their organizations while leveraging partnerships and building system-wide resources
- Foster proactive communication among credit unions, national trade associations, state leagues, policymakers, and state and federal regulators