By Ray Birch
SEATTLE—One CU 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 its own role in helping to mitigate the threats of a warming planet.
“Are your loans in areas where there's forest fires, rising sea levels, flooding?” asked Justin Martin, VP and chief operating officer at $740-million Verity Credit Union. “I think we have the responsibility to mitigate this risk. I would call on all financial institutions to look at where their loans are and start to model out what happens to those loans if climate change has an impact.”
As CUToday.info reported, regulators in the Pacific Northwest—an area hit by high winds, storms, wildfires and rising temperatures—want financial institutions to do more than just have disaster preparedness and recovery plans in place. They want banks and credit unions to now consider the business impact from these events. As a result, the state of Washington’s state-chartered credit unions and banks are being urged by their regulator to begin discussions over how to integrate climate change risks into their governance, risk management, and strategic plans.
NCUA Chairman Todd Harper has also made several references to the effects of climate change, and even fielded questions on the issue during a congressional hearing. Harper said one concern would be a CU with a significant portion of its mortgage portfolio in loans on homes in flood zones.
The Washington Department of Financial Institutions said that during upcoming 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.”
‘Unparalleled Threat’
In a letter to institutions regulated by the DFI, Director Charlie Clark said climate change “poses an unparalleled threat to all of us,” and he cited the Biden administration’s recently issued Executive Order on Climate-Related Financial Risk, which he said is intended to “help the American people better understand how climate change can impact their financial security” and “strengthen the U.S. financial system.”
In addition, Randal Quarles, vice chairman of the Federal Reserve, this year addressed the importance of financial institutions addressing climate change.
Justin Martin
At Verity Credit Union, Martin said it is now proactively addressing—as opposed to reacting—threats from climate change.
What the Data Show
According to scientists studying climate change, average global temperatures have increased by 2.2 degrees Fahrenheit, or 1.2 degrees Celsius, since 1880, with the greatest increases taking place in the late 20th century. Land areas have warmed more than the sea surface and the Arctic has warmed the most—by more than four degrees Fahrenheit just since the 1960s. Temperature extremes have also shifted. In the United States, daily record highs now outnumber record lows two-to-one.
“But there is this bogey out there—it's getting harder to predict when trouble might arrive; natural disasters are becoming more unpredictable,” Martin said. “More and more you hear communities saying they never thought a flood would hit their town. Every credit union is trying to mitigate risk, but it is getting harder to mitigate, to plan and prepare for, something that has become so unpredictable.”
Nevertheless, such risk assessment must be done, and Martin said his credit union is attempting to do that by “broadening the lens we’re looking through.”
“We have to consider things that we didn't consider before because there's just a lot more to be concerned about today when it comes to the impact of climate change,” he said. “As stewards of our members’ money, they are putting their trust in us. Therefore, we have to be very purposeful in what we're doing and not just react.”
Significant Step Taken
Martin said one significant step the credit union is taking is making more accurate projections on the costs of writing loans in areas that could be impacted by natural disasters, and the potential loss of collateral and potential defaults.
“We're starting to get a better sense of the rising costs that are associated with doing loans that have more risk in them,” said Martin, who explained that risk may not come from the immediate impact of a natural disaster. “You have the impact of things that arrive after a storm or fire hits. And an economy in a town can be devastated. Companies can be wiped out and people lose their jobs.”
That means even if a borrower’s home or automobile was not damaged by a disaster, their future income could be.
“Unfortunately, often these natural disasters hit the most vulnerable populations,” added Martin. “Our credit union does a lot of mortgage loans with the low-income people in our communities. These areas often have very highly concentrated populations, which can make matters worse when a disaster strikes.”
Doing Its Part
Martin recommended credit unions not only manage their risk from climate change, but also do their part to reduce risk by making more eco-friendly loans.
“We are going to have some nice metrics around how our credit union is impacting climate change through our balance sheet,” Martin said. “This has led to more robust conversations about how do we shift our balance sheet and prepare for the future? For example, in 2019 our solar lending portfolio was $3 million—a small percentage of our balance sheet. This July that portfolio is $52.7 million. We are also reevaluating our auto loan portfolio to do more with dealerships that focus on eco-friendly cars.”