Smart lenders regard climate change as a tier 1 risk

Article originally published in Mortgage Finance Gazette – 10th June 2022

“Who cares if Miami is six metres underwater in 100 years?” asked Stuart Kirk, head of responsible investing at HSBC Asset Management, during a recent conference.  “Amsterdam has been six metres underwater for ages, and that’s a really nice place. We will cope with it.”  Climate change, he declared, was simply “not a financial risk that we need to worry about”. 

He compared the climate crisis to the Millennium bug and complained that throughout his career, there has always been “some nut-job telling me about the end of the world”.  He ventured that central bankers and policymakers are attempting to “out-hyperbole the next guy”. He argued the constant prophecies that humanity is doomed are getting out of hand.  One slide said: “Climate change is not a financial risk that we need to worry about. Unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings are ALWAYS wrong.”

His flippant remarks, rubbishing the consensus that investors should try to encourage a more environmentally responsible capitalism by factoring climate risks into their calculations, went down badly in the press – and with his employer.  HSBC responded by saying it regards climate change as “one of the most serious emergencies facing the planet, and is committed to supporting its customers in their transition to net zero and a sustainable future”.  Given climate risk will affect companies and businesses, it seems it should be a risk that investors ought to be concerned about.  The argument jarred so much with the public positions that banks have adopted that Kirk was quickly suspended.

Mark Carney called climate change “an existential threat”.  The UN’s Intergovernmental Panel on Climate Change had modelled a worst-case scenario whereby climate change causing temperatures to rise by 3.6C would knock 5 per cent off GDP by 2100.  The vast majority of people agree that man-made climate change is real and a serious problem.

This is why smart lenders regard climate change as a tier 1 risk.  They are actively reviewing portfolios and are already assessing the future effects of climate change on commercial property transactions.  The mood music is strongly in favour of residential property gaining the same scrutiny both in terms of physical and transitional risks, as part of their own regulatory compliance.  The geo-environmental risks that are most sensitive to climate change – flooding, subsidence, coastal erosion – now merit far greater consideration. They are increasing significantly in frequency and magnitude and ongoing engagement with lenders on security for the lifetime of the loan and potential resale will become a key compliance focus.

And it’s not just about how you operate in a world affected by climate change.  It’s also about ESG and whether you operate ethically.  Do lenders – and their partners in the property transaction space – have a legal duty of care to borrowers on climate-related risks? 

There will be forthcoming guidance to consider, too.  What data should lenders be mandating as part of their compliance regimes?  What tools will help conveyancers ensure better compliance with lendes’ requirements?  What data will lenders need to de-risk their borrowing?