By Ray Birch
MADISON, Wis.—Credit unions have a growing role to play in what feels like a growing number of natural disasters, according to Juan Fernandez Ceballos, and not just for their affected members but for their own operations as the nature of risk is changing.
According to two people who addressed a Filene Research Institute webinar on climate change and its growing effects on credit union communities and CUs themselves—including the collateral inside loan portfolios that is increasingly at greater risk—many CUs remain unprepared.
For one person, just how risk is changing and quickly can be seen in an up close and personal way.
“Credit unions can be that beacon, where your members look to for hope and for resources when they lose everything,” said the president and CEO of the Credit Union Association of New Mexico. “Let's keep things in perspective. When you are affected by one of these natural disasters, oftentimes you are left without anything. Your home is gone. Your belongings are gone. Your identification is gone. So, having a plan and having the resources to be there for your members and your community can be so powerful.”
Fernandez Ceballos doesn’t need to look far to see how climate change is affecting an environment, as New Mexico is currently suffering through a record drought.
A Permanent State
“We’re basically in what's appearing to become a permanent state of drought,” Ceballos said. “We have been in a period of drought for probably the last 10 years. And, in the last couple of years we've had some of the worst droughts we have ever seen.”
Indeed, Ceballos noted many of the communities throughout New Mexico are running out of water.
“But our fire season is starting earlier, which is particularly dangerous, which is what happened this year,” he explained, referring to the McBride Fire which began burning in April. “We typically do not have wildfires until early in the summer. Well, this year we started having wildfires in the spring, and for those of you who are not from New Mexico or the Southwest, that's our windy season. What ended up happening is we had two of the largest wildfires ever recorded in New Mexico’s history this year. They spread like crazy because of the wind. That's having a profound effect on credit unions and their members.”
Credit Union Forced to Close
The Calf Canyon/Hermits Peak Fire earlier this year was the largest in the state’s history and destroyed more than 900 structures.
Ceballos said the fires also closed one credit union several weeks.
“Thankfully, another credit union offered support for the members of that credit union,” Ceballos said. “The credit union that had to close was able to operate out of that other credit union while its offices were closed, which was wonderful. It was great to see that collaboration among credit unions.”
From what was a terrible experience in which credit unions and their members lost buildings and lives, the crisis demonstrated the power of cooperation, according to Ceballos, which he said is going to be critical in the future across the country as natural disasters strike in larger numbers and in areas in which they never previously been a threat.
While credit unions have been busier addressing members’ needs when a disaster occurs, they have also been formulating plans that address risk to the CU that climate changes brings. As CUToday.info has reported, two CUs already have detailed plans in place to address climate change and its threat to the bottom line.
Determining Risk
Jim Scott, senior advisor at Ceres, a nonprofit focused on sustainability and a partner with Filene, told webinar attendees that as he spends a great deal of time working closely with financial regulators and financial institutions. One question he said he hears again and again is how does climate risk translate into risk for the financial institution.
“It's, unfortunately pretty simple,” explained Scott. “Unlike other traditional risks that banks and credit union face, climate change risk is systemic, and as such it acts to amplify your existing enterprise risks. It does this through two main mechanisms.”
Citing a joint report from Ceres and Filene, Scott explained one significant risk lies in how climate change “altering the commercial landscape.”
‘Unexpected & Disruptive’
“This can happen in unexpected or disruptive ways,” said Scott. “One real-life example of this is the risk that residential mortgage insurance prices increase dramatically, or that insurance is no longer available at all—as insurance companies withdraw coverage due to climate change.”
And, then, there is physical risk.
“This is the disruption to your borrower's ability to repay a loan arising from physical damage to property, processes and people,” explained Scott. “For example, catastrophic damage due to intense heat, floods, wildfires…I think the key takeaways center around the opportunity for enhanced risk management.”
Digging deeper on the need for risk management due to climate change, Scott said the new research reveals that more than 60% of all U.S. credit unions—representing more than $1.2 trillion in credit union assets, are exposed to the physical risk from climate change.
CUs Unprepared
Yet, with all those assets at stake, Scott said credit unions are not well prepared in this area.
“Our interviews for this report reveal the level of climate change risk preparedness in the credit union system, to date, is by and large limited,” said Scott. “That said, there are several credit unions that are engaged in proactive climate risk management, and they are highlighted in our report.”
But being climate risk preparedness does more for the CU than protect assets, stressed Scott.
“It will provide a competitive advantage, as, for example, green lending programs continue to experience strong demand, especially in the electric vehicle and solar market,” he said.