Client: UK Asset Resolution
UK Asset Resolution (UKAR) commissioned Acclaro Advisory to assess the risk of climate change on the business to ensure it meets its statutory risk reporting requirements via its enterprise risk management process. By identifying the main climate risks affecting its mortgage portfolio and understanding how they
might impact the business, UKAR is able to manage the risk and identify opportunities to be resilient to the effects of climate change.
Acclaro delivered three workshops and conducted in-depth research and analysis to identify UKAR’s most material physical and transitional risks through scenario analysis. As a result, UKAR was able to embed climate risk into its enterprise risk framework and integrate climate risk into its reporting, in line with the related Streamlined Energy and Carbon Reporting (SECR) statement within its Annual Report.
UKAR is a West Yorkshire-based Financial Services company established in 2010, comprising government-owned lenders NRAM and Bradford & Bingley. Its mortgage book is closed as its purpose is to dispose of the Government’s remaining investments in B&B and NRAM whilst ensuring customers are appropriately protected. The sale of its remaining mortgage portfolios to private investors has since been agreed, which will see the taxpayer fully repaid and the legal and regulatory responsibility for the operating companies returned to the private sector.
This identification of key climate risks was necessary as climate reporting will be mandatory for large companies in 2022. As a financial services company, UKAR is also influenced by the Task Force on Climate-Related Financial Disclosures (TCFD). From a commercial perspective, UKAR wanted to be prepared with the knowledge of how different risks, both through regulatory and physical impacts, could affect its mortgage portfolio, for example, by reducing property values or restricting the repayment ability of its customers.
Applying one of its core services of helping companies to plan and understand, Acclaro undertook a climate risk assessment which was then developed and communicated to UKAR using a three-stage approach. Each stage consisted of tailored research followed by a workshop hosted by Acclaro for key UKAR executives to examine the data and its implications.
When considering climate-related risks, Acclaro took into account both physical and transitional risks. A physical climate risk is a weather-related event that causes material damage and can be further categorised as either acute (higher frequency or severity, e.g. a flood) or chronic (longer term climate changes e.g. sea level rise). Conversely, a transitional risk can manifest through policy, technological and market shifts. For example,
the extensive policy, legal, technology and market changes that are required to make the transition to a low-carbon economy could lead to increased taxation or regulatory burden.
To identify a list of risks pertinent to UKAR’s portfolio, Acclaro identified several acute and chronic physical risks as well as transitional risks. Considerations of their probability, timeframe and severity were used to devise a list of five material climate risks. This included examining current and upcoming environmental legislation to see what transitional risks are present for an organisation involved in the domestic mortgage market. For the physical risks, Acclaro mapped UKAR’s portfolio against risk maps, conducting scenario analysis for each identified physical risk to select those that were likely to have the most significant potential effect for UKAR.
Following this, Acclaro conducted further research to identify postcode level data for physical risks, such as flooding, and gave UKAR the tools which allowed it to analyse the risk against individual properties in its portfolio going forward.
To help prepare UKAR for its climate risk reporting, Acclaro conducted a benchmark analysis on climate risk across various high street banks in public reports. This provided the client with an overview of current practice in public disclosure.
Using a three-stage approach established continual stakeholder dialogue in-between workshops, allowing Acclaro to provide bespoke research into UKAR’s most material, physical and transitional climate-related risks. The use of scenario planning based on reliable climate risk data sources, as well as benchmarking against industry peers gave UKAR confi dence that the approach taken would be in line with both stakeholder expectations and its regulatory obligations.
In addition to key deliverables, throughout the project Acclaro shared its expertise and awareness of the long-term implications of climate related risks with UKAR executives. UKAR is now prepared with the knowledge of how different risks, both through regulatory and physical changes, could affect its mortgage portfolio by reducing the value of properties or restricting the repayment ability of its customers. The outcomes of the three workshops are that UKAR fi rst identifi ed its climate risks, then embedded them into its risk management process and fi nally could quantify the climate related risks to its mortgage portfolio. This prepared UKAR to integrate climate risk into its external reporting, in line with the related SECR statement within its Annual Report and the recommendations of the TCFD.
“Acclaro facilitated a cross-function series of workshops delivering integration of environmental risk management within the lending portfolio rather than merely focussing on the direct operational environmental impact of UKAR. Workshop slides prepared by Acclaro promoted discussion, engagement, and debate whilst Acclaro also recorded the decisions taken by the group providing a clear process trail. It leaves UKAR in a better holistic position to manage climate risk and related statutory reporting.”Ian Campbell, Property and Facilities Manager, UKAR