FINMA has specified the transparency obligations for climate risks. From July 1, 2021, large banks and insurance companies will be required to provide qualitative and quantitative information on climate-related financial risks. This also has implications for real estate portfolios.
FINMA has recently determined the transparency obligations for financial institutions with regard to climate risks. This means that banks and insurance companies (initially supervisory categories 1 and 2) must inform the public about the climate-related financial risks to which they are exposed. Specifically, they must describe the main climate-related financial risks and their impact on the company’s business strategy, business model, and financial planning (strategy). In addition, companies must disclose the process for the identification, assessment, and treatment of climate-related financial risks (risk management), as well as quantitative information (including their methodology).
Finally, institutions must formulate the key features of their governance structure in relation to climate-related financial risks. This obligation is closely aligned with the existing, globally established framework for the voluntary disclosure of climate risks as defined by the Task Force on Climate-related Financial Disclosures (TCFD). It can be assumed that other financial institutions, such as cantonal banks, will also be affected by the transparency obligations in the future.
The impact of climate risks on the real estate sector
Climate risks refer to threats arising from climate change which can be divided into physical and transitory risks. Physical climate risks are threats that arise directly due to the exposure of properties – e.g. damage resulting from storms, floods, or extreme heat. Transitory risks are threats that arise from the transition to a climate-resilient and “net-zero” economy – e.g., political, regulatory, and reputational risks. A current example is future changes in CO2 taxes on fossil fuels.
The disclosure of climate-related financial risks creates new challenges for the real estate sector. This is because climate risk considerations are important for risk management, as well as for the disclosure obligation. For example, they can be used to better understand the credit risk of mortgage portfolios or the risk of stranded assets in real estate portfolios.
Data and models as the key to achieving goals
Wüest Partner has the expertise and models to perform a holistic risk analysis, meaning that climate risk models can be seamlessly integrated into risk management assessments. The key to this is diverse, high-resolution, and area-wide data sets. On this basis, it is possible to understand and concretely name physical climate risks such as the impact of storms, extreme precipitation, or heat on building portfolios. Transitory risks can be quantified, for example, by modeling the CO2 emissions of properties and scenarios on the future CO2 price.