Scottish lender 'takes comfort' as banks begin climate stress tests

Paul Denton said under Scottish Building Society’s new partnership with European climate change analysts Ambiental, the society looked at every property on its books to determine current and future risks over a 10 to 50-year timescale. Under various scenarios assuming different levels of carbon in the atmosphere, and the impact of that on climate, the mortgage lender now has a clearer understanding of the threat level to these properties.

Although he declined to detail the findings, he noted that Scottish Building Society has a relatively small and simple mortgage book that does not include commercial properties. And given that all its lending is against properties in Scotland – which is not as prone to the problems of coastal erosion and rising tides as less elevated parts of the UK – the outlook is not “overly-concerning”.

“Against our portfolio here in Scotland, I did take comfort with what came back, though that it not to say that there is any complacency,” he said.

Mr Denton was speaking just a day after the Bank of England set out its first comprehensive stress test of the ability of the British financial system to cope with climate change. The test will be used to judge the resilience of the UK’s 19 biggest banks and insurers such as HSBC, Barclays, Aviva, RSA and Lloyd’s of London.

A flood risk map from the Scottish Building Society's climate change assessment

The Bank of England’s test is based on three scenarios covering a period of 30 years: early action by governments to cut carbon emissions; action that is late; and no action at all. Each scenario will be applied to two main risks: physical due to fires and floods caused by temperature changes, and the danger of sudden changes in asset values triggered by the transition to more climate-friendly business practices.

The 19 banks and insurers have until the end of this year to submit their findings, with the results due to be published in May 2022.

Because the test is regarded as experimental, the Bank of England will only publish the findings in aggregate, rather than a firm-by-firm basis. For the time being, the results will not be used to determine capital requirements, which set the amount of financial cushion that institutions need to protect them from risky loans and products on their balance sheets.

Ambiental estimates that an additional 1.2 million properties across the UK could be at risk of flooding by 2050. Given that 35% of UK households have property debt, and with an average mortgage value of £137,000, this means some £60 billion in mortgage debt could be impaired by climate-induced flooding alone.

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As a result of this, Ambiental chief executive Justin Butler said organisations need new ways to see and manage their risks, with Scottish Building Society now “well ahead of the curve”.

“They now have an understanding of what the risk profile of their mortgage portfolio is today, but also how that risk profile changes into the future, and that can help them to make adjustments if they need to, or to reflect upon different business decisions to support with a sustainable mortgage book growth over time,” he said.

Mr Denton said the increased likelihood of flooding brought about by climate change will “inevitably” impact on the ability to underwrite insurance on properties in high-risk areas.

“As the world’s oldest building society, with 173 years of history behind us, it is important to ensure that we have a sustainable business for the next 173 years,” he added.

“We are delighted to partner with Ambiental, a world leader in their field. Their predictive technology, combined with expert analysis, models the risk of different climate change scenarios on our £400m mortgage portfolio, whether from flooding or coastal erosion.”