Climate change reporting will impact future mortgage assessments

All UK mortgage lenders need to start planning now how they will map the impact of climate change on their existing and future portfolios, with the Prudential Regulatory Authority’s (PRA) new stress test for lenders likely to impact the ongoing assessment of mortgages, loan to value rates and renewals.

JBA's warning comes ahead of the launch in June of the final details of the PRA’s data requirements on the resilience of banks and insurers to climate change. This year’s stress test, which is part of the Bank of England’s Climate Biennial Exploratory Scenario (CBES) and the culmination of a number of BoE directives, is widely expected to be based on a fairly prescriptive requirement, and call for lenders to adopt multiple time horizons, potentially as narrow as five-year intervals up to 2050.

Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander UK, Standard Chartered and Nationwide Building Society, as well as a select number of insurers, are all set to deliver the results of their climate projection work this September, with the rest of the market expected to be asked to follow their lead. The PRA will publish the results of its analysis in quarter one 2022.

The new stress test recognises the intrinsic link between different players in the financial sector and the need to assess risk in a similar way – mortgage availability often depends on insurability and requires lenders and insurers to be assessing the risk consistently, especially for properties that fall outside of the Flood Re scheme which will also come to an end by 2039.

The impacts of climate change on flood risk can already be felt today, and it’s vital for lenders to start considering the risk. The PRA has indicated that all firms are expected to have embedded their approach to climate risk by the end of 2021, regardless of participation in the stress test, and the direction of travel is clear despite the cost implications for the smaller players. There are similar moves afoot across the world, with the European Union presently consulting on its stress test requirements due to be brought in in 2022, and regulatory activity in the US, Asia, and China. Closer to home, Ireland is also expected to follow the PRA’s initiative.

JBA Risk Management’s Climate Change Analytics (CCA) data suite and global consultancy services help lenders meet the physical requirements of the stress test related to flood, enabling them to assess the long-term impacts of climate change on the value of property, over time. The CCA is being used by two of the UK’s major lenders and includes insights to support long-term LTV mortgage screening, back-book portfolio analysis, impairment forecasts, and default and devaluation insights.

Flood risk is an important element of understanding the wider and longer-term impacts of climate change on our business and ensures we make safe lending decisions today for the future. The flood risk data is a key requirement in being able to respond to the CBES, whilst the drive for this information may be a regulatory one, it also underpins the core climate change lending strategy. It is essential to plan ahead, educate and protect the business and our customers from the impact of climate change over the longer-term.

The CCA data enable lenders to map the impact of climate change across every five-year time frame from 2025 up to 2100 at an individual property level, taking on board a comprehensive range of climate scenarios and the fact that flood risk is very localised unlike other perils. The CCA is underpinned by JBA’s detailed suite of data, which is already used by almost 90% of UK property insurers, six of the top 10 banks and lenders, and a large majority of firms in the home-buying process.

We already know from our data that floods are likely to increase in severity and frequency, with average annual loss from flooding forecast to increase by up to 30% by 2040 for UK residential properties, with strong regional differences, so the potential impact on property devaluation in these areas is clear.