Credit Unions Need to Manage Climate Risks

And seize business opportunities to protect their financial stability and the communities they serve.

An aerial view of flames destroying a home as a wildfire burns through land near Possum Kingdom Lake in North Texas, 2011.

During the unprecedented 2011 fire season around 31,453 fires burned 4,000,000 acres of land, 2,947 homes, and over 2,700 other structures in the state.
An aerial view of flames destroying a home as a wildfire burns through land near Possum Kingdom Lake in North Texas, 2011. During the unprecedented 2011 fire season around 31,453 fires burned 4,000,000 acres of land, 2,947 homes, and over 2,700 other structures in the state.
Credit: National Guard of the United States

Climate risks significantly impact credit unions and the communities they serve, and these risks will continue to threaten the financial stability of these communities if left unmitigated. As extreme weather events become more frequent and severe, they will lead to physical damages, losses due to the transitions and disruption of operations, severely affecting the financial health of many credit unions. 

In recognition of these existing challenges, the NCUA issued a request for information seeking public input on current and future climate and natural disaster risks to federally insured credit unions and the development of potential future guidance, regulation, reporting requirements, and/or supervisory approaches for the management of climate-related financial risks.

Floods, hurricanes, and wildfires can damage operational infrastructure, which include branch offices and ATMs, leading to service interruptions and increased recovery costs. Natural hazards have already caused liquidations of credit unions. Hurricane Katrina led to the closure of two credit unions: Orleans Public Schools Federal Credit Union and Chalmette Refinery Federal Credit Union. In both cases, employees and members were displaced across the country. Communications challenges, paired with the displacement of members and employees, led to the closures of these credit unions due to the impacts from Hurricane Katrina.

According to the National Credit Union Administration’s (NCUA) own analysis on credit unions’ exposure to the negative effects of natural hazards, 25% of credit unions—representing 34% of all credit union assets—are situated in areas that are in relatively high or very high risk of experiencing devastating impacts from natural hazards. More importantly, minority depository institutions (MDI) are especially vulnerable, as over 50% of MDIs are located in relatively high or very high risk areas. Given that more than two thirds of MDI assets are concentrated in these areas, these vulnerable communities will continue to face severe health and economic security challenges, as well as long-term financial impacts such as delinquent debts, bankruptcies, lower credit scores, unemployment, and decreasing wealth, exacerbating existing inequities. 

Credit: Photo by Maxim Hopman on Unsplash

In response, NRDC submitted comments to emphasize the importance of managing climate-related financial risks to ensure the financial standing of credit unions, without ignoring the impacts that the incorporation of such risks will have on their local communities. Given the wide range of institutional asset sizes, our comments focus on small credit unions that don’t possess the resources and financial flexibility to implement the measures appropriate for larger institutions. Tailoring guidance specifically for smaller institutions will result in wider adoption of climate considerations into their operations and can also help decrease the burden on these less-resourced institutions.

To mitigate climate-related financial risks, credit unions need to incorporate climate risk considerations into their risk management frameworks, such as scenario analyses. However, given the cost and resource burdens on less-resources credit unions, we recommend approaches where the NCUA can decrease the burden by centralizing data gathering efforts, conducting more site visits, and holding more trainings/knowledge-sharing events for the member institutions.

When credit unions begin incorporating climate risk into their internal processes as part of their ordinary business operations, they must also consider the impacts on local communities once climate risk is reflected in pricing, especially in climate vulnerable communities—which are mostly comprised of communities of color. The affordability of loans (largely higher interest rates) in climate vulnerable areas will likely significantly decrease as banks price in the risk due to climate considerations. Credit unions, in conjunction with regulators and other parts of local, state, and federal governments must respond accordingly. For example, credit unions can consider providing incentives and suggesting existing programs that reinforce resilience, such as rate discounts to borrowers that implement mitigation measures. 

Furthermore, considering climate change and a transition to a low-carbon economy, there are opportunities for credit unions to realign their operations to design a more resilient and financially stable business model. Taking advantage of funding and clean energy tax credits opportunities provided by the Inflation Reduction Act, combined with financing from credit unions, communities can begin work decarbonizing and preparing for a changing climate. Credit unions could take this moment to set themselves to provide these much-needed types of loans to their members and build resilience in the communities they serve.

As the demand for green and sustainable financial products and services increases, credit unions can develop innovative offerings to meet the evolving needs of their members. By aligning their activities with the transition to a low-carbon economy, credit unions can seize competitive advantages and position themselves as leaders in sustainable finance to mitigate climate risks and maintain financial solvency to serve their member communities.

Credit unions have a unique role in promoting sustainable and responsible finance. As member-owned institutions, they often prioritize the well-being of their communities and aim to create long-term value. By integrating climate risk management into their operations and capitalizing on green business opportunities, credit unions can contribute to the transition towards a low-carbon economy, supporting environmental sustainability and social responsibility.

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