Climate risks could impact loans

Financial institutions are including climate change risk when considering rural loans, but most are working with farmers to help them address these challenges.

Climate change is not yet a significant consideration for lenders, but all say they are closely monitoring the sector’s environmental impact, including climate change, and it will have greater prominence in the coming decades.

Last September the Government introduced a requirement for the financial sector to disclose their exposure to climate risk.

The new rule is based on a “comply or explain” basis and applies to all financial businesses that have total assets or investments over $1 billion.

Businesses meeting the criteria are required to make annual disclosures covering governance arrangements, risk management and strategies for mitigating climate change impacts.

Westpac New Zealand’s Head of Agribusiness, Tim Henshaw, says the bank is not “at this stage” changing its rural lending consideration to include climate change risks, but it is a consideration for all lending decisions.

“However, we’re looking closely at the potential risks of climate change and we expect our policies will evolve to account for changing impacts over time,” Henshaw said.

A Westpac report released last November detailed exposure to climate-related financial risks based on 2018 data.

The bank had a $10.17 billion of agricultural lending and noted the sector faced “complex physical and transition risks from drought, storm flooding, erosion, consumer preference and regulation.”

But it identified opportunities from selling premium products to environmentallyconscious consumers or from forestry expansion. The bank’s credit policy is that any loan over $1 million is subject to an assessment of climate change risk and those loans considered high risk are elevated to senior management for consideration.

Westpac is also reducing its own emissions and has provided $2 billion of lending to businesses to fund climate change solutions.

ASB’s Rural Manager, Ben Speedy, says the bank has not changed its lending criteria to the rural sector but offers environmental compliance or low interest loans for onfarm environmental improvements and to meet environmental legislation.

“As part of that, we’re also working closely with customers providing support to make sure they are prepared for the level of investment needed going forward to maintain appropriate environmental standards,” Speedy said.

A Rabobank spokesperson says managing climate challenges are not new for farmers and it is helping them adapt to these challenges.

“Our approach is to get alongside clients individually and support them to make their businesses more sustainable commercially and environmentally rather than simply changing our lending criteria,” they said.

That involves developing a snapshot of their business’ ability to meet regulatory requirements and consumer expectations.

“This includes how they’re faring with their agronomic, environmental, including climate change impacts, social and workplace performance,” they said.

From this information the bank has learnt more than half their clients have a comprehensive farm environment plan, about a third are voluntarily monitoring and protecting plant and wildlife biodiversity on their farms, two-thirds have completed at least half their applicable riparian planting and a third have forestry plantation eligible for carbon credits.

An ANZ bank spokesperson says environmental impacts were a consideration when assessing loans.

“For example, in the agriculture sector when customers buy properties in areas of low rainfall, we ask about their financial resilience to climatic events like drought and rainfall variation,” they said.

The bank is working on an enhanced climate risk management framework that aligns with regulatory requirements and will include estimates of the potential financial impact of future extreme weather events.

“In coming years, we will seek to identify geographic areas most exposed to climate change risks,” they said.

“This may help us identify higher incidences of a lack of insurance or under insurance.”

FMG’s chief product and pricing, underwriting and claims officer Nathan Barrett says the specialist rural insurer will continue to rely on its own modelling and assessment of areas exposed to heightened natural risks.

As an “advice-led insurer” it views each case on its merits and in accordance with established risk appetite

“Given we take an advice-led approach and price each client’s insurance based on their individual needs, we haven’t had a need to change any of our cover criteria at this stage,” Barrett said.

“That said, we’ll continue to monitor clients’ needs and adapt any policy in the future if need be.

The Insurance Council of NZ Chief Executive, Tim Grafton, says it’s inevitable premiums and excesses will rise in the coming decades due to the effects of climate change, but those increases will be incremental.

“Insurance costs will increase year-onyear to reflect the changing climate risk, particularly to risk of frequency or severity to any sector or individual,” Grafton said.

Agriculture’s exposure to the effects of climate change was no different to other sectors and Grafton says those seeking cover will need to take steps to reduce their risk, such as ensuring buildings and stock are not exposed to flooding.

Neal Wallace, Farmers Weekly Journalist