The majority of UK mortgage lenders quantify their climate risk exposure with Hometrack and Twinn

The challenge

Understanding risks associated with climate change

In 2019, the Bank of England issued a supervisory statement on the need for banks to incorporate climate risks into their risk framework. It also launched the Climate Biennial Exploratory Scenario (CBES), an 18-month analysis of the physical and transition risks arising from the journey towards the UK’s 2050 net-zero target.

With this regulatory backdrop – and with their own sustainability agendas gathering momentum – mortgage lenders needed more clarity on climate risk exposure in their portfolios.

“Whilst the effects of climate change are well publicised, the direct impact on property valuation is a more challenging area for lenders. It’s critical for lenders to understand the risk to their portfolios,” said Spencer Wyer, VP of Product and Technology at Hometrack.

Hometrack therefore saw an opportunity: to offer a climate risk solution integrated with its mortgage automation and property valuation solutions. But it needed climate data and domain expertise to bring that solution to life.

The solution

Combining climate data and modelling expertise with Hometrack’s valuation insight

Twinn climate risk modelling (formerly known as Ambiental) has a long-established and proven track in climate resilience, vulnerability and risk assessment solutions for financial services, including launching the first UK climate change model, FloodFutures, back in 2017. It was therefore a natural partner for Hometrack when it came to providing insight on a key risk area for property: flooding.

“We looked at the data available from providers and public sources but quickly concluded that it wasn’t sufficiently granular or accurate. We concluded that we needed access to more specialist data and support,” said Graeme Gillespie, Head of Pre-sales Consultancy at Hometrack. “Twinn had the quality, scale, domain experience, capabilities, depth of data and balance sheet strength we needed to forge an effective partnership for bringing a climate change risk solution to market – fast.”

Hometrack and Twinn, together with ground risk specialists Terrafirma, created the Climate Change Risk Assessment – powered by Twinn’s modelling expertise and data alongside Hometrack’s valuation insight. The product gives clarity on physical and transition risk exposure for individual properties, today and over time.

“Our solution provides lenders with a forensic view of climate change risk, combining scientific expertise across the flood, ground and property value modelling spaces with the ability to seamlessly integrate data and decisioning capability into their mortgage and credit risk platform," said Theo Brewer, Director of Analytics and Consulting at Hometrack.

In addition to using the Climate Change Assessment during origination, lenders can use it to assess their back books – enabling effective ongoing climate risk management in line with the increasing regulatory standards required from the Bank of England.

The impact

Lenders can quantify their climate risk exposure

Within months of going to market, Leeds Building Society, Yorkshire Building Society and HSBC signed up. The Climate Risk Assessment product went from strength to strength, with the tool tailored to HSBC’s requirements even winning Best of Use of Technology at the Credit Awards 2021. Within 2 years of going to market, 6 of the top 10 UK lenders were using the solution.

“Working in partnership with Twinn, we have fundamentally changed the mortgage market's understanding of flood risk exposure. 2 years, ago, many lenders wouldn't have known if their flood risk was 5% or 25%. Now, the majority of the top 10 UK mortgage lenders use Twinn data to quantify their exposure, helping protect the mortgages of more than 5 million households. And lenders can do it through a robust methodology they can point to if a regulator or auditor asks. They can now say: 'We have an answer where we didn't have an answer, and we have it in a way that's explainable.' Without Twinn, this wouldn’t be possible.”

Twinn and Hometrack’s partnership has since expanded, with our coastal erosion and subsidence data added to the Climate Change Risk Assessment.

Andrew Mellor, Risk Director at Leeds Building Society, summed up the solution’s impact: “We are pleased to build on our existing relationship with Hometrack, which has enabled the society to gain invaluable insights into the emerging impacts that climate change could have on our business and has helped to shape our climate risk management framework and response plans.”