CEO reveals what lenders are woeful with
As the co-founder and CEO of climate risk data analytics provider, Climate X, Lukky Ahmed (pictured) knows full well what happens when the banking sector makes the wrong call on risk assessment.
“I spent a lot of my time and career within stress testing. This was off the back of eight or nine financial crises, and we saw what happened when bankers got it wrong when it came to risk management. Generally, it’s the more vulnerable in society who are paying the price for these types of issues,” he told Mortgage Introducer.
Watching extreme weather events like the devastating wildfires in California and the Amazon rainforest two-and-a-half years ago finally spurred him into action. Driven by his expertise in the field, including 15 years’ experience in risk assessment, he set about creating his pet project.
The end result was Climate X, a novel platform for climate-related risk data and analytics that’s powered by Artificial Intelligence and geospatial modelling. Designed to deliver asset-level risk ratings and climate adjusted loss estimates, the platform is aimed at enabling mortgage providers to take climate risk into account as part of new lending/originations.
However, in Ahmed’s view, the mortgage industry has been slow to incorporate climate risk assessment in its calculations, despite the fact the UK government released its first report on the subject back in January 2012.
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“Two years ago, nobody wanted to really know. There wasn’t really any intent to adopt this type of data. It was too complex,” he said, adding that the industry treated the issue as though it was “a can of worms”. This was especially so when the COVID pandemic came along.
“Banks and mortgage providers are being increasingly exposed to these risks in the real world, (but) they haven’t appropriately adjusted their strategies, and they’re sleepwalking into disaster.
“Luckily for us, something called the Network for Greening the Financial System (NGFS), which is a collective of 114 central banks, are all working together to deploy regulations now that are forcing the accounting of climate-related risks for the first time.”
Founded in 2017, the NGFS aims to fast track the scaling up of green finance as well as develop recommendations for central banks’ role in climate change. Among the big hitters to have signed up to the initiative is the Reserve Bank of India (RBI), which joined the NGFS in April last year.
For Ahmed, momentum is building behind climate change policies, and that means that the London-based firm can only grow.
“People understand that it’s going to fundamentally change the way that they do business,” he said. “Banks need to account for these things; they need to have budgets unlocked to respond to these types of risks and help their customers to become more resilient in order to protect their own positions and protect the shareholder’s interests.”
But is it really possible to accurately predict climate change risks decades in advance?
“What we are not trying to do is to say that on a particular date in the future, at this particular time, in this particular location, this is exactly what’s going to happen,” he said.
“What we’d like to do instead is to say that based on certain conditions…we set expectations for what might happen in the future, decades in advance.”
That might mean obtaining an accurate model on floods or subsidence based on general trends and macro level studies that incorporate data related to temperature changes and sea level rise - and Climate X can pinpoint a specific location and UK address.
“(As a lender) what I care about is what’s going to happen to my specific assets that I lend against. How might those assets or properties be affected? This is where we come in,” he said.
Explained simply, Climate X has recreated - block by block, street by street and building by building - the entirety of the UK. It then includes vegetation and the area’s topography across high-resolution grid squares.
“When we combine those things, it gives us a really accurate view and representation of how risk will materialise in a given area, tied to these types of weather events, it means that there’s very little left to chance,” he said. “We’re literally saying that if you believe in the laws of physics and you believe in weather conditions that are going to interact with these environments, we are quite confident that this is not only an area where a flood will happen, but this is how it’s going to manifest.”
Ahmed claimed around 74% of accuracy for floods, and with one in every three business properties in the UK at risk of flooding, 40% of which fail to reopen after suffering a flood, according to data provided by insurer Aviva, there’s an obvious advantage in being able to plan ahead, business-wise.
But it’s not just flooding that’s a potential danger. Ahmed went on to say that he expected up to 25% of properties in the UK to be affected directly as a consequence of subsidence in the next 30 years.
“That is important and it’s something that’s been a blind spot because it’s been notoriously difficult to model, and therefore a lot of people haven’t been looking at it. It’s also a longer-term risk.”
While he understood the reticence among banks to incorporate climate risk data because of fears that it could lead to a drop in new business, he reasoned that a drop in an asset’s value from climate change would be of even greater concern for a financial institution.
“The value of the asset over time changes and when you’re exposed to different types of risk - the property itself becomes less appealing to prospective buyers,” he noted.
And a lender or broker with this tool at their disposal would be in a position to make a more educated business decision, Ahmed argued.
Ignoring the risk was however no longer an option, he concluded.
“Imagine that you’re in a little boat and you’re rolling along the ocean,” he said. “If the surge is pushing you towards the coast, you can do one of two things. You can either row really hard and get yourself safely on to the beach, or you just let destiny take its course, hope for the best and smash against the rocks.
“Either way, you’re moving in one direction, and that direction is inevitable. The question is, how do you respond to those risks? And I don’t think there’s been a moment in history where foresight has proven to be a bad thing.”
