Credit risk basics: why lenders need comprehensive climate-related data… now more than ever

How exposed is your portfolio to climate change?

It’s a question lenders ask themselves quite often. But that doesn’t mean it’s an easy one to answer.

Nevertheless, as the world around us continues to change rapidly, having a comprehensive understanding of what the potential impacts could be is essential to managing a sustainable portfolio.

Here’s why…

Why climate change matters to your portfolio

When it comes to climate change, there are two main types of risk: physical risks and transition risks.

Physical risks are probably more obvious. They refer to the real and visible dangers of climate change, including extreme weather events, higher temperatures and rising sea levels. Depending on their location, different assets in your portfolio might be more exposed than others to such physical risks. Plus, with our climate changing faster than ever before, the threat of these physical risks is equally variable.

Transition risks refer to the financial and business risks that arise from the process of shifting toward a low-carbon economy. These risks can be driven by government policy and regulation, and may have negative effects on a business adapting and transitioning to a net-zero future. For example, the introduction of carbon tax may make some profitable businesses no longer viable, and a change in public sentiment may lead to some businesses struggling to maintain market appeal.

Both types of risk have the potential to substantially impact an asset’s overall returns. That’s why it’s important to have an understanding of your portfolio’s exposure to climate change.

And it all starts with better climate-related data.

Why climate-related data is so important

As its name suggests, climate-related data is any information that relates to the identification of climate risks, such as identifying the risk of flooding, subsidence, coastal erosion, and much more.

In other words, it’s data that reveals the potential impact climate change could have on your portfolio, which you can then use to develop more comprehensive models, integrate climate risk frameworks, and ensure accurate reporting for climate disclosures.

Without comprehensive climate-related data, there will always be a sizable blind spot in your portfolio.

What you can do with it

With better and more comprehensive climate-related data, you can begin to address a number of key challenges. Here are just a few of the benefits…

• Identify physical risks: At the very least, you should be using your climate-related data to build a comprehensive overview of your portfolio’s exposure to physical risks, and which assets could potentially be impacted.
• Understand transitional risks: As mentioned, climate-related data will also give you deeper insights into relevant transitional risks. For example, factoring in EPC ratings will be essential for evaluating the long-term returns of a property.
• Respond to those risks: Once you understand the risks, you can start putting strategies in place in order to mitigate them. If you need help, just get in touch with 4most.
• Improve affordability modelling: Energy costs make up a significant chunk of people’s spending, and are therefore a crucial component of affordability modelling. By understanding how climate change might impact these costs, you can assess a customer’s ability to afford their purchases more accurately.
• Make better decisions: The simple truth is that better data enables more informed decision-making. For your portfolio, that means weighing up property efficiency measures and their associated costs in particular.

How 4most can support you

You might be thinking… if climate-related data is so great, why isn’t everyone using it?

The main issue for lenders is that sourcing this data takes time, money and effort. And that’s before you even start to validate it. Mapping each address is complicated, and the data itself is far from easy to access.

That’s why, at 4most, we built a service to help you map out your climate risks without breaking the bank.

Using advanced natural language processing and state-of-the-art spatial mapping algorithms, 4most’s Climate Risk Data Mapping service links residential or non-residential properties in England, Scotland, and Wales to open-source climate risk data. This provides users with invaluable, actionable insights into both physical and transition climate-related risks. 

To learn more about the service, read our dedicated flyer, or complete our short contact form to tell us how 4most can support you.