By Monica C. MeinertWith more than 550 miles of coastline, pristine sandy beaches and a rich history dating back to the earliest colonial days, Cape Cod is one of the most iconic destinations in New England. The cape’s total population more than doubles in the summer months as tourists flock to the peninsula and outlying islands, including Nantucket and Martha’s Vineyard.
Jutting more than 65 miles into the Atlantic Ocean and just one mile wide at its narrowest point, however, the Cape has found itself on the physical front lines in the fight against climate change.
“We’re surrounded by water, and with rising sea level—among other things—it’s definitely very high on our radar,” says Matt Burke, co-president of Cape Cod Five Cents Savings Bank, a $3.4 billion institution headquartered in Orleans, Mass. As the number one mortgage lender on Cape Cod and the islands (according to the bank’s 2018 annual report), flood risk and potentially declining property values for flood-prone, coastal homes are always a concern, Burke says.
That situation is not unique to the Cape—communities nationwide are now facing significant flood risks as a result of climate change. In Miami, for instance, between 2007 and 2015, sea levels rose an estimated 3.6 inches—nearly twice as fast than in the preceding 20 years, and more than five times faster than the 100-year global sea level rise rate.
A new research paper from the Federal Reserve Bank of San Francisco—part of a series on climate change—notes that “there is a real possibility that real estate values in some communities will be decreasing due to increased flood risk,” and that “at some point in the next 20 to 30 years, absent substantial new approaches to reducing and managing flood risk, there may be a threat to the availability of the 30-year mortgage in various vulnerable and highly exposed areas.”
That’s a concern for banks like Burke’s that have significant real estate exposures. While Cape Cod Five works to transfer some of that risk by selling off some of the mortgages it underwrites (while retaining the servicing and the customer relationship), “ultimately, we need assets on our books,” he says. “That’s part of the reason why this is such a big focus for us in terms of driving positive change.”
Climate change: A global problem
Flooding is just one of the significant physical risks posed by climate change: others include wildfires—like the ones that raged through California in 2018 during the deadliest and most destructive fire season on record—hurricanes and disruptions to growing seasons and agriculture production.
The net costs of climate change “are likely to be significant and to increase over time” as global temperatures continue to rise, according to the United Nations’ Intergovernmental Panel on Climate Change. And the 2018 National Climate Assessment—a document produced collaboratively by 13 federal agencies in the United States—warned that “without substantial and sustained global mitigation and regional adaptation efforts, climate change is expected to cause growing losses to American infrastructure and property and impede the rate of economic growth over this century.”
As the stewards of the economy, this issue will inevitably affect financial institutions. Banks of all sizes need to understand what climate change means for them—and have the proper risk management framework in place to mitigate related risks, including both physical risk and transition risk as the world shifts toward a low-carbon economy.
Measuring and mitigating climate risk
“Physical impacts are more widely discussed, and include things like frequent or more severe storms, changes in precipitation, wildfire risks and extreme heat,” says Scott Beckerman, SVP and director of corporate sustainability at Comerica Bank. “We understand those pretty well—they can be very difficult to predict, but they’re talked about frequently.”
The 2015 Paris Agreement—an international effort aimed at climate change mitigation—targets a scenario in which global warming is kept to under 2 degrees Celsius above pre-industrial levels. However, current projections suggest that without significant action in short order, warming levels could exceed 4 degrees C by the end of the century.
“One of the interesting things about climate risk is it can materialize in a number of different [ways], and what we do now will influence how it evolves,” explains Alban Pyanet, principal with consulting firm Oliver Wyman. “We could be in a scenario where there is no strong corrective action over the next couple of years and we stay on the global warming path of 4 to 5 degrees Celsius. In that case, societies and businesses will be exposed to additional physical risk—economic damages coming from weather events.”
If, however, there is a strong corrective action—such as a carbon tax—transition risk becomes more significant. A shift to a low-carbon economy could have a disproportionate effect on certain sectors like coal, oil and gas and any other industries that rely heavily on the burning of fossil fuels.
“Given that nobody knows where the world is going in terms of transition scenario, the idea here for financial institutions to look at all the different scenarios and make sure they understand the potential risk associated with that,” Pyanet advises. “It’s not the issue of forecasting precisely what’s going to happen, it’s more a question of looking at what could happen and making sure the institutions are prepared.”
As the head of Comerica’s sustainability practice, Beckerman says he views his role as that of a “translator”—someone who identifies the environmental issues facing the bank and the economy and translates those risks into financial terms.
One useful tool that can help a bank get its arms around its exposure to climate change-related risk is a voluntary disclosure; Comerica works with CDP, a global nonprofit that helps companies assess and report information related to sustainability.
In 2018, CDP had more than 7,000 companies worldwide reporting climate-related information using its questionnaire, representing more than 50 percent of global market cap, says CDP North America President Bruno Sarda. That more companies are voluntarily disclosing their climate-related exposures is a positive step because, as Sarda puts it, “what gets measured gets managed.”
Comerica’s 100-page 2019 climate response provides a snapshot of how the bank views its relationship to climate risk and the strategies it is employing to mitigate them. The benefits of doing so are manifold; as Beckerman observes, “we believe we’ve significantly improved our operational efficiency by going through the process of inventorying and reporting on things like our greenhouse gas emissions.”
While disclosure of climate-related risk is done on a voluntary basis, there have been efforts to standardize how information is reported. The Financial Stability Board is leading an effort through its Task Force on Climate-Related Disclosures to make recommendations for a voluntary, consistent disclosure framework. Sarda adds that for the first time in 2020, CDP’s questionnaire will reflect all the recommendations from the TCFD.
Speaking at the Bloomberg Sustainable Business Summit in October, Alexandra Basirov, global head of sustainable finance for financial institutions at BNP Paribas highlighted the importance of climate-related disclosures. “You think about ultimately your reputation and what do you want to stand for as an organization going forward—especially with the change of generations and where people want to put their money,” she says. It also “boils down to your ability to retain and recruit your best talent. They want to work for organizations which are also taking this agenda very much to the heart of their company and their values.”
And it’s not just large, publicly traded companies that should be working to understand their relationship to climate change and sustainability, adds John Kolas, partner and vice chairman for financial services in the Americas at Oliver Wyman. “All institutions, whether they be small-sized banks, small corporates or large corporates, should be prepared to answer two questions: how climate resilient is your organization, and how do you know?”
Climate change presents many daunting challenges to local communities, countries and the planet. But alongside those challenges, there will also be opportunities for banks during a the transition to a lower-carbon economy. “There are a lot of climate-related issues where the financial services industry [has]the ability to move and move swiftly, because it makes good business sense,” Beckerman observes.
Basirov anticipates that “as we see impact investing also growing,” there will be increased demand “to ensure that the sustainable development goals are incorporated into financial products.”
And in Massachusetts, companies like Cape Cod Five are working to achieve a statewide goal of reducing emissions by 80 percent by the year 2050. Working together with MassSave, a state agency, the bank has been offering heat loans since 2011—a financial product that allows consumers to finance energy efficient upgrades to their home or business at zero percent. “The interest is basically covered by the state, prefunded to the financial institution,” Burke explains. “We’ll fund up to $25,000 to consumers and $50,000 for businesses.” Since 2011, the bank has made more than 3,000 of these loans for about $30 million.
Cape Cod Five also recently launched a new solar loan program that provides financing for homeowners of up to $50,000 for solar insulation. Within the Cape community, Burke notes that he’s seen solar gaining significant traction. In fact, one of the highest yielding investments the bank makes are equity investments in solar tax credits.
And when constructing the bank’s new headquarters in Barnstable, which was completed in 2019 and boasts, among other things, 16,000 feet of solar panels, the bank was intentional in creating an environmentally sensitive and sustainable workplace, Burke adds. “If we can set a good example for others in our region, if other community banks and companies can do the same thing in our region, we can really start moving the needle.”