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TCFD - climate risks in the UK mortgage market

  • United Kingdom
  • ESG - ESG Climate Litigation
  • Financial services and markets regulation - ESG


One could be forgiven for asking what the residents of Fairbourne, North Wales, and Florida have in common. The answer lies beneath the waves. Both coastal communities are being affected by climate change as sea levels are projected to rise and this is an issue which will be of concern to mortgage lenders under increasing pressure from regulators and investors to consider and disclose climate related risks.

In recent briefings we have reported on the Financial Reporting Committee’s Climate Thematic Review and Financial Conduct Authority rules requiring premium listed companies to disclose climate risks in accordance with the Task Force on Climate Related Disclosures (TCFD) framework.  We also noted action by Client Earth to hold companies to account in respect of climate disclosures.  The risks to mortgage lenders’ security presented by climate related factors is something which firms must carefully evaluate as part of the financial reporting process, particularly where they are now required to report to TCFD standards.

TCFD – mortgage climate risk

Fairbourne in Snowdonia National Park has made the news in recent years as the flood defences of the village, which is just above sea level, are expected to become untenable.[1] The local Council has had to make the unenviable decision that it cannot defend homes in the village from rising sea levels. In the decades to come, or sooner if required, Gwynedd Council will take steps to help the residents of Fairbourne to leave the village.

It is unclear whether they will be compensated as part of the exit, if so whose responsibility it will be to do so and how they will rebuild their lives elsewhere. Current estimates are that it will become unsustainable for flood defences to defend Fairbourne at a point between 2042 and 2072. This presents clear risks to lenders exposed to areas like Fairbourne whose security will in time become worthless.  If borrowers are not compensated in a way which enables them to repay their mortgage as well as relocate, lenders are likely to struggle to recover those debts as most customers will not have the means to satisfy that liability.  The negative publicity likely to surround recoveries action in these circumstances may mean that there will be little appetite to pursue repayment in any event.

On a small scale such as that seen in Fairbourne, coastal flood risk is unlikely to present a significant risk to a lender’s financial position. However, this will be an issue which affects large parts of the UK market in the decades to come andthe risks presented by flooding and other climate risks nationally will need to be thoroughly assessed and, where appropriate, made the subject of climate disclosures in financial reports.

A Committee on Climate Change report in 2018[2] found that:

  • “in England, 520,000 properties (including 370,000 homes) are located in areas with a 0.5% or greater annual risk from coastal flooding”; and
  • “by the 2080s, up to 1.5 million properties (including 1.2 million homes) may be in areas with a 0.5% of greater annual level of flood risk and over 100,000 properties may be at risk from coastal erosion”.

In Fairbourne the effect of the projected rise in sea levels is already affecting house prices and the ability of residents to secure sales. Some villagers are reported to have sold to cash buyers at a discount and potential purchasers have found it difficult to secure a mortgage.   Lenders committed to long term mortgages in affected areas could find themselves in a similar position in the future – if customers fall into negative equity as a result of these factors and feel forced to relocate they might opt to abandon or voluntarily surrender their homes, leaving lenders to sell the property (if indeed that is possible) at a significant discount with large shortfall debts.  

The effect of rising sea levels on the mortgage market may be felt sooner by equity release lenders due to the long term commitment required by those lenders. However, other lenders may also find themselves stuck with higher risk security as the appetite for lending against them reduces – a climate risk equivalent of the ongoing “mortgage prisoners” quandary triggered by stricter Financial Conduct Authority (FCA) rules on affordability assessments.

As well as considering the risk to existing mortgage books, lenders will need to carefully assess their strategies for future lending as a result of climate risks to security and the impact that these risks could have on their future performance.  A 2020 Mortgage Strategy article[3] noted the significant effect that climate change risks are projected to have in mortgage valuations and banks’ lending decisions – lenders should be looking to understand how these climate related factors might affect their future performance.  For example, will such underwriting decisions translate into lower volumes of lending in future decades?  How will that affect the lenders’ profits and dividends for investors?

The impact of climate change is unlikely to be confined to rising sea levels. Warmer climates may also result in property damage and greater prevalence of extreme weather events. The UK property market may be affected by subsidence and ground movement linked to a change in climate as well as by the risks associated with sea level rise. A recent article in the Mortgage Finance Gazette warned of the risk of increased subsidence claims in areas, including the North East, where soils are likely to dry out as average temperatures rise.[4]

TCFD – response to climate risk

In the USA mortgage lenders have been seen to recognise these risks.  UK lenders can look to the example of Florida where banks are already considering whether they should offer mortgages in areas where sea levels are projected to rise over the coming decades.[5] It has been reported that smaller USA banks have begun selling 30-year mortgages on their books to the government-backed Fannie Mae and Freddie Mac to seek to avoid climate related risks.[6]

In the UK, a 2018 survey by the Prudential Regulation Authority (PRA) concluded that 70% of UK banks considered that climate change may lead to financial risk.[7] Lenders in the mortgage market should now be considering the risks posed by climate change on their mortgage books and preparing to provide full, TCFD compliant, disclosures in respect of the same.  Whilst TCFD is currently only required on a “comply or explain” basis for premium listed companies, the government is committed to it being mandatory across the economy by 2025. 

During 2021 and in coming years, financial institutions can expect greater government, regulatory and investor focus on environmental issues including climate risks. Mortgage lenders and firms exposed to mortgage based assets will be no exception.

[1] Guardian, This is a wake-up call: the villagers who could be Britain’s first climate refugees 

[2] Committee on Climate Change, Managing the coast in a changing climate

[3] Mortgage Strategy, New analysis: climate change threatens values 

 [4] Mortgage Finance Gazette, Climate change: The demise of our white winter is the tip of the iceberg

[5] Guardian, Weatherwatch: do 30-year mortgages make sense as sea levels rise faster annually?

[6] The New York Times, Rising Seas Threaten an American Institution: The 30-Year Mortgage 

[7] Bank of England, PRA review finds that 70% of banks recognise that climate change poses financial risks