How to lend in a new era of climate risk

Only recently, the UK Government published its response to the Climate Change Committee (PDF) – a report which stated that 2020 was the first year to appear in the top-10 for all three variables: high temperature, extreme rainfall and total sunshine; and extreme weather events have included the UK’s third warmest day and two of the three wettest days on record.

With the Bank of England currently undertaking climate change stress tests to ensure key banks and lenders are ready, there has never been a more crucial time to comprehensively assess the risks associated with these unprecedented changes.

Here, we discuss some of the most significant questions facing the financial sector today – and explain how better data on properties and addresses can help your organisation adapt to climate risks.

Whilst environmental factors such as subsidence, droughts, increased flooding, and soil erosion have long been a part of the lending risk assessment process, it is increasingly imperative to ensure all relevant data available is collated and accessible to inform decisions.

Currently, one in six properties across the country are at risk of flooding. With such drastic climate changes predicted for the near future, it is crucial to understand what this figure may be 10 years from now. It is also widely acknowledged that the UK has a significant aging housing stock. In fact, a 2017 report from the BRE shows that 20% (PDF) of housing in England alone was built pre-1919. All insurers wish to support their customers and offer policies to meet their needs, but they have to also ensure their accumulative portfolio is not over-stretched with high-risk assets which will then prove difficult to insure.

With temperatures rising, it is important to consider how homes that were built for a completely different climate can be efficiently heated or cooled as required.

A subsequent question being asked by the likes of the UK Government, as well as those with a primary interest in the future of the property market is, ‘how can we incentivise homeowners to make energy efficient changes to their properties?’ Some organisations are already looking into billing customers based on their homes environmental rating.

In practice, this could mean lower mortgage rates for buyers looking to borrow for an A-rated EPC home, and lower insurance premiums too. It has been suggested that the UK Government could also offer lower council tax for these greener properties.

Currently, the residential property sector is both flourishing and undergoing huge change. Research carried out by Ordnance Survey (OS) in August 2021 showed that there were just under1.5 million residential housing transactions in the 12-month period ending June 2021. This represents a significant increase relative to the pre-pandemic annual average of 1.2 million.

This contrasts, however, to that of the non-residential market, which saw a steep decline with the drop in demand for office space and more of the population working remotely than ever before. As a result, there was a significant expansion of the rental market, with commercial buildings being converted for residential use.

On the surface, this appears to be a positive response to the current UK housing shortage. But it does pose its own risks, with more properties being cursorily adapted rather than designed specifically for their intended use, questions need to be asked regarding long-term suitability and energy efficiency.

Looking more specifically at upcoming policy changes relating to the rental market, the Government has proposed that all rental properties will need an EPC rating of ‘C’ or above by 2025. Like previous changes, the new regulations will be introduced for new tenancies first, followed by all tenancies from 2028. The regulation changes are hoping to make homes more energy-efficient and reduce carbon emissions as part of the government target to be net-zero by 2050. The penalty for not having a valid EPC will also be raised from £5,000 to £30,000 from 2025.

With the above considerations in mind, it is essential that organisations have access to detailed data and insights that ensure increased certainty in these unprecedented times. Ordnance Survey are proud to offer a wealth of data and insight that can be of great benefit to those in the financial sector.

OS can help organisations identify a range of properties with addressing data that, when integrated with third party datasets, can offer unparalleled context around risk and fraud, through its addressing currency and regular capture, as well as rapid change analysis over time. This can help lenders mitigate environmental risks such as flooding and subsidence, as well as financial risks, both now and in the future.

What effect has Covid-19 had on the property sector?

To find out more, read our insight, 'Covid-19 and the rise of responsible lending'.