Article originally published in Mortgage Introducer Febraury 2022 – page 22
You might naturally expect me to be supporter of the power of data to improve our lives – after all technology and data have been a growing presence in our daily existence since the 1970s when the mainframes of the 1960s gave way to the ethernet. We use data in nearly every walk of modern life today and its power to help us make better decisions continues to grow and evolve.
The Task Force on Climate Related Financial Disclosures (TCFD) is the source of nearly all the requirements of financial services with regards the management of climate risks. Born of the Financial Stability Board, it requires that financial markets possess clear, comprehensive, high-quality information on the impacts of climate change. This includes “the risks and opportunities presented by rising temperatures, climate-related policy, and emerging technologies in our changing world.”
To do this, the TCFD is clear that banks should be able to show their workings in assessing the impact of climate risk on their assets and liabilities. This effectively means they need to provide the metrics or data points they use to assess the impact of these climate-related risks. In our world of mortgage lending, this amounts to understanding the ‘physical risks’ to things like originations and back books and the ‘transitional risks’ of conducting business in a lower carbon or net zero carbon environment.
There is unsurprisingly a huge amount involved in delivering the above. The temptation is to try and address everything at once, but the transition to becoming a more sustainable financial business is not an overnight process and no regulator expects that. They do, however, expect explanations of how we propose to eventually get there.
Data is crucial in this process because providing metrics or data points and staging posts to understanding and delivering a more sustainable businesses model is key. Ultimately, boardrooms know too that it affects business value as well. Ratings agencies and investors alike are keen to understand what is known and what is being done. The opportunities and risks of complying effectively are huge. Improved data understanding and analytics may in due course impact the cost of capital used for lending decisions, insurance pricing or investment decisions. There is much to play for.
As we know, the provenance of data is also important, because there is no doubt that using it to underpin decisions is happening already. Availability and its application are only part of the equation for users of data. The quality of the data has to be accurate, timely and complete. Robust data underpins better decisions. The rush to meet regulatory obligations may encourage some short-term decisionmaking which in turn may deliver poorer outcomes for the long-term.
Climate data is complicated and changes over time. Integrating it easily into transactional systems requires huge effort and understanding – even if it was desirable . This means developing ratings and scoring based on assessment of factors is attractive. How you put that together is key. Energy Performance Certificates are a case in point. As a benchmark for understanding a property’s performance, EPCs are a key starting point for lenders but they are a work in progress. As the government continues to review their efficacy and sharpen their effectiveness, their impact on our understanding will further evolve and complement other behavioural elements for example how a home owner or resident uses energy.
A modern data strategy should involve much more than the output of a transaction. It is about the collaboration of the various and often numerous parties using data whether they are performing the latest scientific risk analysis or packaging it into information tools and services. Only by collaboration can we empower all the parts of the value chain that contribute to understanding property risk today to effectively understand the impact of property climate risk tomorrow.
It’s no exaggeration to say that without the right data, we cannot manage climate risk on any level. Some issues are so big and complex that they require new data sets to even begin to quantify the issue let alone drive action to resolve it. Data is key in delivering the change we need and so is the role of those who bring it in market. Companies like ours, which source and provide vast amounts of data to underpin lending decisions, make it our business to fully understand the value and gaps in what is available. We have a duty to not only provide data but curate it and contribute to its success in business application.