Turn on any news channel, and you’re likely to hear about climate change. Step outside and feel the greenhouse effect its created. Go to a local car dealership and see the number of electric vehicles versus gas-powered ones. Suffice it to say, climate change is front and center in our world.
With that said, we already know that the combination of natural forces and the impact of human intervention are quickly transforming temperatures and weather patterns over time. But, it probably seems like a leap to think that climate change and credit unions have some sort of correlation, doesn’t it? How could climate change have anything to do with credit union operations and risk, after all?
Well, think back over the last 20 years or so. Do the names Katrina, Maria, Sandy or Irma ring a bell? Do the intense wildfires along the west coast send any signals? Do you recall the multiple incidents of severe flooding across the south – some happening even now?
These are the risks of climate change. Major environmental disasters are becoming more and more of a reality as the years go on, and in many of the communities where credit unions reside and serve. That’s especially true as we approach the milestone of achieving net-zero emissions in 2050 as set forth by the Net Zero Coalition.
All this information isn’t meant to sound the alarms, but it’s to emphasize the fact that climate change is just not something credit unions can overlook at this point – it’s something we really need to start thinking about. And to take it a step further, I argue this controversial topic is one of the most important things to start focusing on within your enterprise risk management (ERM) program.
Climate Change Risks to Your Business & Members
According to a May 2022 study by Filene and Ceres, climate change puts over 60 percent of all credit unions at physical risk of damage to property and/or harm to people. In case you’re wondering, that accounts for an estimated $1.2 trillion in credit union assets. Yikes!
The physical risks that impact more than half of our country’s credit unions are many. Just a few examples include power outages that disrupt your operations, damages to your brick and mortar branches, road deterioration which could lead to supply chain issues and so on. And the physical risks credit unions face from climate change are even more dire, as many institutions have fields of membership tied to geographic areas or organizations within a certain region. This means the scope of membership is limited and physical risks from climate change are exponentially difficult to recover from.
But physical risks are only one part of the equation. In addition to the tangible consequences of climate changes, there are also what are referred to as the transition risks. These encompass the reputational, compliance/regulatory, policy and other risks that are associated with transitioning your credit union to a climate-friendly operational model.
- Reputational risks – members want to know that you’re taking climate change seriously. Planning ahead for potential risks will show that your institution is being proactive for the future, attempting to be socially responsible and prioritizing the security of your members’ financial wellbeing. Not doing so could mean damage to your credit union’s reputation.
- Compliance/regulatory risks – climate change initiatives are constantly being revised and updated to uphold the latest scientific findings. If your institution isn’t keeping tabs on the newest compliance and regulations surrounding climate change, you put yourself at risk for legal troubles.
- Infrastructure risks – the very fabric of your ERM program is dependent upon the policies you create to deal with risks, including climate change. You’ll need to update and/or design new policies that support a greener outlook. This might look like transitioning to a mostly remote work environment to reduce employees’ commutes and carbon footprint, or implementing new technologies so that members can perform electronic transactions to help lessen the amount of paper you use on a daily basis.
Strategies to Combat Climate Change
Needless to say, climate change most likely calls for a shift in how your ERM program currently works. But what changes need to be made exactly? How can you revise your policies in the most efficient way (because the world is looking to address climate change pretty quickly)? What is the best course of action for your credit union?
There are several tactics you can take to integrate preparations for climate change risks into your overall ERM program. Here are just a few:
- Conduct models and analysis to see what areas are most at risk of being impacted by climate change, from your physical assets (buildings, workstations, equipment, etc.) to your balance sheet and everything in between.
- Evaluate your various portfolios to see where investments and liquidity are originated. If they come from a potentially impacted area, consider backups and alternatives to current financial income streams.
- Make changes to your lending policies, if needed. Does it still make sense to offer 30-year mortgages in coastal areas? How can you make it easier to approve loans for members to make “green” purchases, such as electric vehicles or home solar panels?
- Review your vendors, products and even members to see how “green” they are. Check to see if you are in any way – directly or indirectly – contributing to activities that are not aligned with climate change initiatives. Are you working with vendors who are actively involved in or support fossil fuels or other non-green activities? Are you offering services that benefit non-green organizations, or lend to individual or business members that fund non-green interests? Take note of these situations to your decisionmakers and create policies to address them.
- Regularly review updated climate change news and regulations and make accommodations so that you are meeting (at least) minimum compliance requirements.
- Start strategizing contingency plans for the impacts of climate change so you don’t get caught unaware and unprepared. Take into account the physical and transition risks we mentioned previously.
- Track your climate change-related risks and policy changes within your ERM program and re-evaluate their effectiveness within a given time frame. Look to see if your mitigations are paying off or if you need to make further adjustments to help your institution contribute to the net-zero emissions standards set forth by global climate change organizations.
If you think climate change doesn’t affect credit unions, think again. As global warming continues to change the earth and the communities we as credit unions serve and depend upon for our operations, one thing has become very clear: climate change is a real risk that we need to start acknowledging.
Credit unions aren’t immune to climate change. This means that your ERM program should also change to address any and all risks that stem from this phenomenon. For these reasons, and more, it’s time to start thinking about climate change and what it means for the future of our movement.
Belinda Mumma has over 12 years of experience implementing and maintaining vendor management and vendor due diligence software. During her career, she also has been responsible for policy and legal review processes; implementing, directing and maintaining enterprise risk management software; and implementing and maintaining audit and exam findings software.