Kiwibank estimates 1.2% of its home lending portfolio is exposed to coastal flood risk, with climate change expected to see this portion rise to 1.8% by 2050.
The bank published these figures in a Sustainability Report released on Tuesday, using modelling done by the National Institute of Water and Atmospheric Research (NIWA).
NIWA’s chief scientist for Climate, Atmosphere and Hazards, Andrew Tait, said: “There are 72,000 New Zealanders currently exposed to present-day extreme coastal flooding [risk], along with about 50,000 buildings worth $12.5 billion.
“With sea level rise, this exposure could easily double by the end of the century. We are extremely vulnerable.”
Westpac NZ, in its 2020 Climate Risk Report, elaborated on how this issue affects banks.
“In the next five years, property owners may face insurance premium increases, higher excesses, or exclusions of some hazards. In some cases, property owners may be unable to renew insurance,” Westpac NZ said.
“Higher premiums may impact customers’ ability to service debt, while inability to adequately insure properties could lower their value. This could create a credit risk to Westpac NZ.
"In relation to the bank’s commercial property and agricultural lending portfolios the potential credit risks are lessened by the terms of lending in these sectors, i.e. lower loan-to-value ratios, shorter loan terms and the different nature of property use."
A fundamental issue is the mismatch between the terms of insurance and mortgage contracts. Banks issue mortgages on terms of up to 30 years, whereas insurers issue policies annually. A property insurable at the time a bank agrees to secure a 30-year loan against it, may no longer be insurable in 10 years’ time.
Banks and insurers have been wary of these issues for years.
Regulators want asset prices to more accurately reflect climate risk - be it coastal property or debt/equity in high-emitting companies.
The Reserve Bank’s head of Financial System Policy and Analysis, Toby Fiennes, last week said work is underway internationally to require banks to hold more capital for loans particularly exposed to climate risk.
“The Basel standard setters are working on it and we will be a fast follower," he said.
"Having said that, our big four banks have a responsibility to work out the riskiness of their own loans. So, we would really put the onus on them if they see a particular risk in a high carbon industry at the moment; a high transition risk, then they should be attaching high capital to that. We'll be encouraging them to do that.”
The thinking is that if there is to be more granular pricing of climate risk, disclosure of that risk also needs to be more granular.
The Government has just amended the Financial Markets Conduct Act to require around 200 NZX-listed issuers, banks, insurers, credit unions, building societies and fund managers to start disclosing their climate risks from 2023.
Standards will be issued by the External Reporting Board, and reporting will be monitored by the Financial Markets Authority.
Until these standards are issued, banks that choose to proactively release climate risk figures will do so using slightly different approaches. This makes it difficult to compare Kiwibank's figures with those in Westpac NZ's 2020 report.
Kiwibank said its numbers have been modelled using a “scenario basis of Representative Concentration Pathway (RCP) 8.5H+ (which equates to at least 3°C warming by 2100) and a one in one-hundred-year inundation event”.
Whereas Westpac NZ measured “heightened risk” of coastal flooding and erosion, which it defined as “annual exceedance probability of 10% or more, as well as general exposure to coastal erosion under NIWA’s Coastal Sensitivity Index”.
According to this measure, Westpac NZ said 2.3% of its residential mortgage portfolio, 2.1% of its commercial mortgage portfolio and 2.9% of its agricultural mortgage portfolio were potentially subject to heightened risk from coastal flooding and erosion.
Westpac is expected to release its 2021 Climate Risk Report in coming weeks.
ANZ hasn't released similar figures, but told interest.co.nz: “We are currently undertaking a comprehensive programme of work across our business to assess our climate-related risks and those of our customers. This work is in preparation for our requirement, along with all New Zealand banks, to report on climate related financial risks from 2023.”
Interest.co.nz has asked ASB and BNZ whether they are able to release any figures/modelling they've done, akin to that of Kiwibank.
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19 Comments
Great piece.
They'll have to factor in more than flood events as time marches on, but this is a good start. What has happened, is that real (physical) threats are beginning to be factored in to a system which has been 'externalities' blind. This is a major step forward, seen in big-picture, Limits-to-Growth terms. The more that gets factored in, the closer we are to eliminating physical overshooting (with attendant collapse potential).
Wait for the offloading from the surf-threatened; elites demanding that rate/tax payers bail them out.....
Good to see this trend, but.
They will definitely need to factor in more. Although climate change in many cases is simply escalating/expanding the impact of an existing issue rather than creating an entirely new issue. As humans we are quite good at ignoring history/events that are before our direct memory. Coasts have always eroded, estuaries/deltas have always flooded, and fires are common when it is dry.
I feel many industries are now aknowledging climate change not as a valid concern but as a scapegoat to provide a free pass on consistently poor planning.
Poor, poor pitiful you. If you'd stuck to the issue rather than try and take a stab at owners of beach houses and try and link overpricing to the argument, then it would have been a reasonable comment. But no, you couldn't help but have a whinge. Only because you don't have what they have.
Assuming you're not a troll
The precautionary principle has to apply - the lead-times and ramifications are so big. It is a little like not believing the Titanic will sink - or at least, not in two hours time. So you work on a longer time-frame, and slow whatever preparations you were making. The only result, can be that you run out of time. Indeed, maybe you didn't have time anyway. Precaution says you address the worst, and by a safety margin.
If I had, or intended to buy, a coastal property subject to inundation or insurance increases (or refusal) then I would like to know that was based on sound assumptions / current thinking. All ships will sink eventually - knowing when lets one decide whether to board or not. Knowing the Titanic will hit an iceberg eventually is different to knowing it will hit one when I am on it.
Also why would you think one a troll for pointing out that modelling based on less good models / assumptions gets us anywhere we are not going to regret?
Less good models? "RCP8.5 (is) in close agreement with historical total cumulative CO2 emissions (within 1%)......RCP8.5 is also the best match out to midcentury under current and stated policies with still highly plausible levels of CO2 emissions in 2100." The unknowns could include whether there are enough fossil hydrocarbons left to economically extract and burn, and the rate at which feedbacks kick in, which in many instances are ahead of model predictions. "Recent comments in the scientific community as well as in magazine-style pieces and the gray literature argue that contemporary emissions forecasts from the International Energy Agency make it increasingly unlikely that RCP8.5 describes a plausible future climate outcome. RCP8.5 is characterized as extreme, alarmist, and “misleading”, with some commentators going so far as to dismiss any study using RCP8.5. This line of argumentation is not only regrettable, it is skewed." Will your property purchase be guaranteed to flood? The percentages increase with time. You may be lucky and expire before such an event, or it may happen tomorrow. https://www.pnas.org/content/117/33/19656
Thanks Palmtree. Also for the link. My issue is not with historical predictions, and future predictions are subject myriad unknows as you say, but the IPCC in the recent AR6 backs way from RPC8.5 in few spots eg " the likelihood of high emission scenarios such as RCP8.5 or SSP5-8.5 is considered low ". I remain curious as to why it is the go-to scenario in this report's modelling. RCP8.5 as I understand it was conceived as a worst case / do nothing / no policy scenario so why it used so frequently in a "cyclones likely this Christmas holiday" sort of way. This sort of thing... Emissions – the ‘business as usual’ story is misleading (nature.com)
RCP 8.5 assumes no action is taken to control greenhouse gas emissions, and that industry keeps developing at current rates. It may be conservative, given that global action seems to be almost definitely committed to reducing GHG's. However we can't ever fully account for the future, and where wealthy countries are making commitments, other countries will do what they need to do to survive, and there are certain large countries that are wealthy but don't necessarily share the same values. It is not possible to dictate appropriate practice to everyone.
Feed-back loops make a mockery of all predictions.
The Titanic is sinking at X feet per minute. Then it sinks to the point the lower portholes are immersed - some were open. X becomes X+Y. Then they go under to the point the closed ones implode. X+Z - except not the hatches are letting in water from above. The Greenland ice-melt and the arctic tundra and the CO2-sink capacity of the ocean, are 3 such feed-back loops.
SLR is an extremely local phenomenon. The East coast of the Middle Island, Oaro to Marfells Beach, has had a recent uplift of between 1.5 and 6 metres thanks to an always unpredictable Gaia, so KB mortgages in this area are safe for a millennium or so.
Generalities just don't apply. Syd Cormack's book 'Four Generations from Maoridom' notes historical East Coast uplift at Kakanui - maybe the 1717 Alpine Fault shift? - which rendered the canoe landing place there unusable, and that the Pourakino River used to flow out into Colac Bay until...another earthquake changed its course into the Aparima.
Try predicting earthquakes....and insuring for them. Recent poster children: Wellington, Christchurch, Kaikoura...
...
Ah I'm sure the sky will fall in sometime maybe 50 maybe 100 years. No modelling needed. The UN/IPCC have had to back pedal, change their langauge over the last ten or so years. Take it with a pinch of salt.
Notarise all title deeds in the most likely affected areas with no mention of climate change but tide levels and sea level rises at which the property could be at risk and for flooding the one in 250, 500 and 1000 year events.
Leave to the individual to decide. If councils want to be risk averse then these properties can be included as a no service if the levels rise to specific points. This will add further to don't buy this property. If in 50 years not much has happened to them then it'll be a case of well its over re-action 50 years ago.
Seem to recall the last major flood in Wanganui was the highest flood level recorded (to be verified) and was a one in 25 year event. Something not quite right. Flood levels would go back at least 25 years so if it was the highest it would then be greater than 1 in 25.
Au contraire - every report has upped the urgency.
And we have no time left. How can you see 50-100 years?
As for one-in-whatever - that's a self-justifying nonsense too; linear just like economists who talk of 'cycles' ....... atop exponential growth. Feed-back loops are rendering 1:100 events down to 1:5 or even 3:1. Those ratios are not locked in stone, they were observations thus far.
That's where economics fall over too - observations this far.
Laughable. As if insurers haven't already priced flooding into their policies, particularly if a property is in an area prone to flooding. It's under riverine flooding, flash flooding, storm surges and tsunami. And if they don't have the clauses, you can bet that if it's not excluded, it's specifically priced into the policy.
Sounds to me like Westpac and the insurers they recommend want to make a few more dollars.
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