Assessing climate risks to target mitigation efforts, improve sustainability, and report on ESG and financial materiality
One of the greatest challenges for banks today is assessing their physical and financial risks due to climate change.
Recently, one of the nation’s leading regional banks, with over 400 banking branches, more than $25 billion in assets, and a reputation for proactively addressing climate risk, decided to address these challenges.
The bank established an Environmental, Social, and Governance (ESG) working group in 2021 to investigate climate change risks and examine opportunities to achieve their long-term sustainability goals. The bank also created an Enterprise Disaster Recovery/Business Continuity Strategy to address unplanned business interruptions due to climate change and to actively explore mitigation strategies to reduce physical risks to their properties. However, to be confident they were reducing their risk and building resiliency the bank needed robust climate change risk data to allow quantitative and qualitative analysis.
See Your Portfolio’s Climate Risk
As a user of CoreLogic’s data and analytics for over 20 years, the bank was familiar with CoreLogic’s comprehensive nationwide property data but was not aware of our climate-change-related solutions. After a visit to the CoreLogic Discovery Center, where clients can see climate data come to life with state-of-the-art visualizations, the bank was convinced that our Climate Risk Analytics (CRA) solution could provide the climate risk analysis they needed to understand their current and future climate-change-related risks fully.
“Our goal is to proactively determine how to improve
property resilience, and to minimize or altogether prevent
damages or losses caused by these extreme weather
events.”
— The bank’s V.P. of ESG and Sustainability
This case study explores how a leading regional bank came to identify and address its physical and financial risks due to climate change using Climate Risk Analytics (CRA) from CoreLogic. It shows the adaptability of the collaboration process and the multiple use cases for the climate data, from targeting mitigation efforts to expanding ESG offerings to reporting financial materiality for regulatory agencies and customers.
Clarifying the Bank’s Needs
With its strong focus on risk mitigation and future sustainability goals, the bank knew it had to understand its risks fully in order to address them. The bank wanted to:
- Identify their financial risks due to climate change using accurate climate data and modeling.
- Understand the physical hazard risks to all their commercial properties and the resulting damages.
- Alleviate these risks by addressing insurance and other mitigation steps required for the future.
- Understand their own current and future climate footprint.
- Implement sustainability and ESG actions throughout their operations.
- Be able to report financial materiality to regulators.
- Use climate data to inform and support Environmental, Social, and Governance (ESG) efforts in the communities they serve.
Solution
Once the bank’s requirements were clarified, we began the climate risk analysis. The bank provided the list of addresses for the hundreds of commercial properties to be assessed. Our data scientists then matched the bank’s portfolio with our extensive proprietary CRA data to create the bank’s CRA data set. This allowed us to identify the properties at elevated risk for severe weather events caused by climate change. A risk score was determined for each property, assessing the monetary loss resulting from damage to structures and their content.
We then proceeded with a full portfolio analysis, estimating the risk to the bank’s portfolio for seven natural perils (Hurricane Wind, Inland Flood, Hurricane Storm Surge, Severe Convective Storm, Wildfire, Earthquake, and Winter Storm.) The properties were assessed at the current climate conditions and the projected future climate (to 2050) considering the impacts of climate change.
- We estimated the potential impact of future climate change using proprietary models and climate scenarios established by the United Nation’s Intergovernmental Panel for Climate Change (IPCC). We modeled risk using a vast amount of detailed parcel and structure data (such as construction materials), regional information (such as flood zone areas), and geographic information (such as distances from rivers or earthquake faults).
- For each climate peril, we provided various geographic metrics and the potential financial loss as a percentage of the bank’s total portfolio, based on the reconstruction value of each asset.
- Arranging the data into maps and graphs to visually tell the story of risk, our data scientists also created a detailed ESG report on the bank’s specific peril risks. The report highlighted ways to support the bank’s ESG goals and how the bank could help support sustainability and mitigation efforts in the communities they serve.
- CoreLogic collaborated with the bank’s tech and legal teams to clarify language, review recommendations, and confirm all requirements were satisfactorily met.
The time from the original Scope of Work to the final delivery took two months. CoreLogic provided three deliverables:
- Current and future CRA data with loss estimates for each location.
- In-depth portfolio analysis which provided financial losses and damages for each location, based on internal datasets, detailed structure data, hazard, vulnerability, and financial models.
- A climate change ESG report which quantified risk and included recommendations to improve resilience and support throughout the community.
Noteworthy Results
CoreLogic evaluated the bank’s portfolio using multiple climate scenarios up to the year 2050. Climate change portfolio analysis identified the risks to the bank’s portfolio using a low, medium, or high-risk score for each climate peril. The financial materiality was determined by the Average Annual Loss of each property and the reconstruction costs required, as a percentage of the bank’s total portfolio value (low for percentages ≤ 30%, medium for percentages ≤ 60%, and high for percentages > 60%). The bank discovered they had no high-risk scores for any of the climate perils and only a couple of medium-risk scores.
The highest peril risk for the bank, though only a moderate risk, was Hurricane Wind, due to the number of properties in the geographic areas at risk for hurricane damage.
Resulting Changes
With data driving their decisions, the bank can now confidently implement the following:
- Address the properties at greatest risks due to climate change, by adding more insurance where necessary, making preventative repairs and improvements to buildings, upgrading building materials for greater resiliency and loss mitigation, and addressing potentially hazardous surroundings, such as weak tree limbs.
- Report financial materiality more easily to regulators. All data provided align with the Task Force on Climate-Related Financial Disclosures (TCFD) guidelines.
- Put resources where they matter most. They are better prepared for climate challenges and can support local communities during disasters. They can enrich their disaster recovery and business continuity plan to further protect their assets and the surrounding communities, including clarifying evacuation paths, supporting shelters, and supplying emergency supply kits where necessary.
With the data CoreLogic provided, the bank can more clearly tell the story of future climate change risk. This risk can now be easily demonstrated to investors, regulators, customers, and employees, to help support and unify their response to climate challenges and help build resiliency.
Conclusion
The bank was pleased with the thorough climate change risk summary and in-depth ESG report from CoreLogic, with the responsive and timely support they received, and easy collaboration with the CoreLogic team. “When it comes to climate change, we need all assets and resources. Good partnerships are key,” said the bank’s VP of ESG and Sustainability. “It’s all about using data, improving your data, and capturing data to make sound strategic decisions.”
See Your Portfolio’s Climate Risk
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