NCUA Request for Information: Climate-Related Financial Risk

Summary prepared April 27, 2023

The National Credit Union Administration (NCUA) has published a Request for Information (RFI) on current and future climate-related financial risks to federally insured credit unions (FICUs). NCUA’s RFI seeks public input on 37 specific questions as well as general feedback on potential future reporting requirements, rules, supervisory approaches, or guidance for FICUs related to FICU management of climate-related financial risks and mitigation of risk to the share insurance fund (SIF).

NCUA notes that climate-related financial risks include, but are not limited to, risks to or posed by, or stemming from, field of membership, lending, investments, other assets, deposits, underwriting standards, insurance coverage, liquidity, and capital.

NCUA’s RFI may be read in its entirety here. Comments are due to NCUA by June 26, 2023.

While not a part of this RFI, interested parties may wish to review a newly published NCUA analysis of credit union vulnerability to climate risk, “Estimating Credit Union Exposure to Climate-Related Physical Risks.”

SUMMARY

NCUA believes that climate change is accelerating and that the frequency of events and related costs pose significant risks to the U.S. economy and the U.S. financial system. NCUA notes that in 2021, there were 20 separate billion-dollar weather and climate disaster events in the United States resulting in $153 billion in damage. NCUA further notes:

Overall, 2021 was the 3^rd most costly year on record for these types of events and the 7th consecutive year in which 10+ billion-dollar weather and climate disaster events have occurred.
In 2022, there were an estimated 15-billion-dollar disaster events making it the 8^th straight year with 10+ billion-dollar disaster events.

NCUA divides climate-related financial risks into two broad categories:

Physical Risk – Physical risk refers to harm to people and property caused by discrete, climate-related events like hurricanes, wildfires, and heatwaves, as well as longer-term, chronic phenomena, including changes in precipitation patterns, sea level rise, and higher average temperatures.
Transition Risk – Transition risk refers to stress on institutions or sectors caused by measures taken to move towards a less carbon-intensive economy. This includes responding to public policy changes, adopting new technologies, and adapting to shifts in consumer and investor preferences, which may lead to higher costs and substantial shifts in asset values.

NCUA’s concern is that disruption and uncertainty resulting from both physical and transition risk could adversely affect the credit union system in many ways, noting that that climate-related risks often manifest as traditional financial risks, including credit risk, liquidity risk, market risk, and operational risk. Furthermore, policy and technological changes needed to reduce the environmental impact of human activities and move towards a less carbon-intensive economy may have a wide range of effects on the economy, businesses, consumers, and thus credit unions.

NCUA also notes that shifting consumer preference from gasoline powered vehicles to electric vehicles could affect the existing collateral value of motor vehicles, efforts to reduce greenhouse gas emissions could lead to significant adjustments in sectors of the economy that are greenhouse gas-intensive, and credit union fields of membership tied to specific sectors or communities could be disproportionately negatively impacted by climate. Finally, NCUA discusses the heightened vulnerability of low-income and minority communities to climate-related financial risk.

NCUA believes that given the number and complexity of climate-related financial risks, credit unions must adopt to the conceptual and practical challenges presented by climate risk. In addition, NCUA states that the agency itself will need to evolve its understanding of the impact of climate-related financial risk on credit unions, credit union members, the credit union system, and the SIF.

The RFI Questions

Physical Risk

What climate-related physical risks, if any, are affecting the industry? How might physical risks and the impact of these risks on FICUs and their members change over time?
What risk management strategies could institutions implement to prepare for or minimize the effects of climate-related physical risk? Is there anything regulators should do to help institutions address climate-related physical risks?
What impact are climate-related physical risks expected to have on FICU members, particularly financially vulnerable populations, including lower-income communities, communities of color, Native American, and other under-resourced communities? What steps could FICUs take to mitigate physical risks to ensure continued lending to these populations?

Transition Risk

What climate-related transition risks are affecting or could affect credit unions in the various areas of business activities, including, but not limited to, operations, real estate lending, commercial lending, and small business lending?
What risk management strategies could FICUs implement to prepare for or minimize the effects of transition risk? Is there anything regulators can do to help FICUs address transition risk?
What effects are transition risks expected to have on FICU members, particularly financially vulnerable populations, including lower-income communities, communities of color, Native American, and other under-resourced communities? What steps could credit unions take to mitigate transition risks to ensure continued lending to these populations?

Operations

What adjustments should FICUs make to their operations (including relationships with supply chain and third parties, new product, and service offerings) in response to climate-related financial risks?

Governance

What role should a credit union’s board of directors have in the oversight and analysis of financial risks due to climate change?
How can credit unions incorporate climate-related financial risks into their overall risk management and governance framework?
Do credit unions have board members, committees, or senior management functions that are responsible for climate-related financial risks? If yes, please provide examples.
What are the top barriers/challenges for credit unions in designating board members, committees, and/or senior management functions to be responsible for climate-related financial risks?
Do credit union boards and senior management have, or are they aware of and understand, the tools and resources necessary to evaluate and address climate related financial risk? What, if any, are other barriers for addressing climate-related financial risks?

Business Strategies

How should credit unions consider climate-related financial risks in developing business strategies? How do these risks impact product and service offerings?
In what ways may credit unions need to incorporate climate-related financial risks into business strategies and product and service offerings?
If you are a credit union, has your board and management assessed the impact of climate change on the credit union’s products and services? If yes, please briefly describe how you have assessed the impact of climate change on your credit union’s products and services.
What barriers or challenges do credit unions face in considering climate change in business strategies and product offerings? Does your board or senior management believe climate change is a material risk to the credit union’s business?
Do credit unions have sufficient expertise or are they aware of and understand the tools and resources necessary to address the financial risks and opportunities associated with climate change and their impact on credit union performance? Do you think considering climate-related financial risks may put credit unions at a competitive disadvantage?
Do credit unions take steps to assess, reduce, or mitigate its climate impact? If you are a credit union answering this question, please describe what your credit union has done. If your credit union has not taken such steps, do you plan to do so and what is your time frame? If your credit union does not plan to take such steps, please briefly describe the reason(s) for not doing so. What barriers exist that prevent your credit union from taking 202 such steps?

Risk Management

What methods can credit unions use to identify, measure, monitor, manage, and report on their exposure to climate-related financial risks? Please provide a brief description of the risk management process credit unions should take. If you are a credit union, please provide a link to your climate policy. If you are a credit union and do not have a risk management process, do you plan to develop a process? What is the anticipated time frame for developing such a process? If you do not plan to develop such a process, please explain your rationale for this decision.
Credit unions typically evaluate credit risk, interest rate risk, liquidity risk, transaction risk, strategic risk, reputation risk, and compliance risk. How do climate-related financial risks impact these traditional risk areas? To what extent should a credit union consider climate change in analyzing these and other existing risk factors?
What risk mitigation strategies can credit unions use to transfer some of the financial risks associated with climate change? Are these mitigation tools cost effective?
When credit unions consider climate change in analyzing existing risk factors, should they include the risk of adverse effects of climate change on financially vulnerable populations, including lower-income communities, communities of color, Native American, and other disadvantaged or under-resourced communities? If you are a credit union, are you considering climate-related financial risks specific to financially vulnerable populations?
If your credit union does not currently consider climate change in analyzing its existing risk factors, do you anticipate doing so? How long will it take to do so? If you do not plan to do so, please briefly describe your reasons or barriers.
What are the top barriers for credit unions to consider (or that credit unions have encountered) in creating a risk management process for climate-related financial risks and/or including climate change in its analysis of existing risk factors? Does your board or senior management not consider climate change as posing a material risk to your credit union’s business?
What types of data or products are necessary to assist credit unions in evaluating exposure to climate-related financial risks?
Do credit unions have sufficient understanding of the climate-related risk management process? Do credit unions have sufficient understanding of how climate change affects existing risk factors? Please specify any other barriers credit unions face in assessing climate-related risk.
If your credit union is involved in the mortgage business, what tools does your credit union use to manage flood risk? What additional tools would be helpful to your credit union?

Reporting and Targets

What internal reporting systems are you aware of that would assist credit unions in evaluating climate-related financial risks? Please provide a brief description of these internal reporting systems. If provided by third parties, what are the costs of these reporting systems?

Climate-Related Opportunities

Climate change and efforts to address climate change may also present new opportunities for credit unions. What products and services do credit unions offer in response to physical and transition risk (for example renewable energy loan products and services, such as loans for solar power generation or biodiesel development)? What are the top drivers for offering these products and services?
Are you aware of credit unions or does your credit union finance clean energy projects such as residential or commercial energy efficiency upgrades and solar installations? Is this financing of clean energy products just one of many services provided by the credit union or part of an overall business strategy? If you provide clean energy products, please provide the estimated size of your clean energy portfolio and what percentage it represents of your overall lending. If not, please briefly describe any challenges for credit unions to offering this type of lending as well as the barriers to underwriting clean energy loans within under-resourced communities.
Each type of lending involves various areas of expertise such as underwriting, guidance for loan loss reserves, and/or technical assistance such as how to lend or acquire interest in climate-related and environmentally conscious loan products. What kind of support do credit unions need to expand products and services? Please describe any barriers to entry as well as the types of information or resources needed to facilitate a credit union’s ability to offer climate-related and environmentally conscious loan products.
Are there any climate-related opportunities, in addition to renewable energy, that credit unions should consider?
What regulatory changes would be necessary to encourage credit unions to develop products and services designed to capitalize on opportunities presented by the transition to clean energy and a less carbon intensive economy?

Suggestions for NCUA

The NCUA understands that managing the financial risks of climate change is an evolving field and new to some credit unions. The NCUA is exploring several options to support credit unions in these efforts, including sharing industry best practices, providing guidance on how to manage the potential financial risks from climate change, convening workshops with the industry to discuss climate-related financial risk topics, and hosting educational seminars on how climate change may impact the financial system and individual credit unions. What efforts would be the most beneficial to credit unions?
Should the NCUA modify its examination procedures and supervisory posture in relation to climate-related financial risk? This would include, but not be limited to, Flood Disaster Protection Act, Disaster Preparedness reviews, CAMELS ratings, and assessments of the level and direction of the various areas of risk.

Data Gathering

How can the NCUA support efforts to develop standards of classification and data reporting on climate-related financial risks?
What data could the NCUA collect to improve credit unions’ understanding of climate-related financial risks and support credit union efforts to manage these risks?

NCUA also solicits any additional comments on climate-related financial risk.