OLYMPIA, Wash.—One credit union that has integrated climate change risk into its governance, risk management, and strategic planning processes says the business impacts from weather events can no longer be set aside.
“We realize that addressing weather events is no longer just a nice to have; it’s something that really needs to be addressed—we can’t ignore this anymore,” said Randy Gunderson, chief financial officer at $4.4-billion Washington State Employees Credit union.
As CUToday.info reported, regulators in the Pacific Northwest—a region increasingly hit by high winds, storms, wildfires and rising temperatures—want financial institutions to do more than just have disaster preparedness and recovery plans in place. They want banks and credit unions to now consider the business impact from these events.
As a result, the State of Washington’s state-chartered credit unions and banks are being urged by the regulator to begin discussions over how to integrate climate change risks into their governance, risk management, and strategic plans.
The Washington Department of Financial Institutions said that during upcoming examinations it plans to begin talking to its regulated financial institutions about whether they are contemplating climate change and, if so, what steps they are taking to begin to address the “risks and opportunities climatechange brings.”
In a letter to institutions regulated by the DFI, Director Charlie Clark said climate change “poses an unparalleled threat to all of us,” and he cited the Biden administration’s Executive Order on Climate-Related Financial Risk, which he said is intended to “help the American people better understand how climate change can impact their financial security” and “strengthen the U.S. financial system.”
Risk Appetite Guidelines
“The board has created a number of risk appetite guidelines that we use to manage the credit union and the risk management policies and procedures we follow for the year,” explained WSECU’s Gunderson.
Gunderson said the credit union believes that climate change aligns with several risk areas, including compliance risk, strategic risk and reputational risk.
“In 2022 we will update our risk appetite guidelines to take climate change head on,” Gunderson said.
Gunderson said the DFI’s statements dovetail with the CU’s own vision for the kinds of risks for which it must prepare.
“We will incorporate it into our operations and practices, but we will be asking our board questions to get their sense and feeling around climate change and how they would like to see the credit union manage this risk,” he said.
An ‘Emerging Risk’
Wilkes Hardin, WSECU VP of lending compliance, called climate change an “emerging risk.”
That emerging risk can be seen in the forecast from climate scientist, who report the planet's average surface temperature has risen about 2.12 degrees Fahrenheit (1.18 degrees Celsius) since the late 19th century, driven largely by increased carbon dioxide emissions into the atmosphere and other human activities. Most of the warming occurred in the past 40 years, with the seven most recent years being the warmest. The years 2016 and 2020 are tied for the warmest year on record.
As CUToday.info has regularly reported, natural disasters, such as wildfires, flooding, tornadoes and hurricanes, have been occurring more often and threatening not just credit union offices but members’ livelihoods and homes, even in areas typically traditionally considered at low risk from such threats.
“Trying to predict emerging risks…that is something that is not simple to do,” said Hardin. “We look out into the horizon and try to identify the things that we're going to have to address in the next three to five years.”
Feedback Being Gathered
In addition to direction from the state regulator, Hardin said WSECU is gathering feedback from others in the business community that risk associated with climate change is an important part of business continuity.
“There is a tremendous amount of opportunities for climate to create problems,” noted Hardin. “You can have air quality issues, flooding, extreme heat. You've got lots of different things that can impact infrastructure and impact our ability to continue to function. Our overwhelming concern isn't about individual events and having inability to react. While that is always a concern, a bigger concern is the longer-term impact to our economic stability and the economic stability of our communities.
“So, is our infrastructure prepared to deal with those things, from branch staffing standpoint and from a service standpoint?” asked Hardin.
Hardin said that a heat wave the credit union faced this summer—in a state largely known for its cool summers compared to the rest of the country--caught Washington State Employees CU off guard, and is a good example of how not seeing what climate change can do can impact the ability of the credit union to serve its members, and maintain its strong reputation within its communities.
“It got so hot that the air conditioners in some of our branches could not keep up. They could not cool the offices effectively and we had to shut those locations down for a short period,” Hardin explained.
Where There’s Fire, There’s Smoke
Wildfires too, especially the smoke, were not a significant concern for the credit union in years past, but now they can be an everyday issue during the summer, Gunderson said.
“The smoke we had two years ago, you could barely see across the street,” Gunderson said, adding the credit union is now prepared for those situations with air scrubbers in their offices. “That definitely impacted our service and membership. The effects of climate change, they are so unpredictable, but we have to try to predict them and how the business will respond, not only from coping with the problem at the moment, but also how the credit union will function as a business.”