May 2nd 2023
New study identifies climate-related mortgage slump
Research conducted by a leading management consultancy shows major lenders are not adapting to reflect the growing risk of a climate-related mortgage slump.
The analysis from Bain & Company and Jupiter Intelligence involved 50 of the largest banks from across the world which adhere to the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure.
Overall, just 18% were found to have started integrating physical risks to property within their mortgage lending strategies. The vast majority had also neglected to include this in strategy definitions, target frameworks, product ranges or customer and client communications.
This is despite the growing threat posed by climate events such as flooding to many properties. In many countries, the proportion of land that is at risk from so-called ‘physical perils’ is already substantial, and will grow exponentially in the near and medium-term. The US, for example, has 43% of its landmass considered to be in danger, rising to 65% by 2050. In Indonesia, 31% of land is at risk, increasing to 97% within the same period.
European countries also follow the same pattern. Germany currently has 33% of its area under threat, but this will hit 68% within the next 30 years. For Italy, this is 40% rising to 62%. Based on this, and using modelling for a simulated bank with Italian-focused portfolio, the value of mortgage collateral could drop by as much as 15% by 2050 without mitigation efforts, hitting profitability by up to 10%.
‘Climate change will have a profound impact on property across the globe, and no market is immune to this. Currently, banks’ strategies for addressing their exposure to climate change are far too limited,’ said Camille Goossens, senior partner at Bain & Company, who lead’s on the firm’s Sustainability and Responsibility Financial Services.
‘Many banks are aware that they face considerable exposure to climate change-related risks but have not yet made the changes required to adapt their business strategies to mitigate these future risks. Without a comprehensive approach to dealing with the risks in their portfolios, they could find themselves very substantially compromised,’ they continued.
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Image: Chris Gallagher