In recent years, climate change has left increasingly significant marks. The risks associated with it are difficult to assess. Especially in the real estate and financial sector, where risk assessments are part of daily business, BaFin President Mark Branson states that it is now time to include not only transitional risks but also the material effects of climate risks in risk analyses.

BaFin sounds the alarm

In a press briefing, Branson emphasised the need to appropriately consider physical climate risks—such as major fires, droughts or flooding—in property lending. Until now, financial supervision has focused too heavily on transitional risks, meaning the uncertainties and costs associated with the transition to a low-carbon economy, resulting in physical risks from climate change being largely underestimated. ESG scoring, used and issued by banks for loans, has so far offered only limited informational value. Significant data gaps also exist on the part of insurers, for example regarding building regulations or flood protection for towns and municipalities.

The BaFin President calls for physical risks—and thus the consequences of climate change—to be more strongly incorporated into the risk models of real estate companies in the future. Otherwise, the likelihood of “bad loans” that cannot be repaid after natural disasters will increase. According to Branson, a precise risk assessment could also create an incentive to transfer or mitigate these risks.

Germany “under water”

Germany has experienced an increasing number of extreme weather events in recent years, which may become more frequent and more severe due to climate change. Heavy rainfall and flooding in particular pose an increasing threat to cities and surrounding regions. This not only heightens the risk of significant property damage but also the financial risks for lenders and insurers.

With regard to BaFin's Minimum Requirements for Risk Management (MaRisk), the latest warning from BaFin could also affect property financing in the future. It is conceivable that banks will increasingly be required to carry out comprehensive climate risk analyses to minimise potential losses within their portfolios. This may lead to stricter lending criteria. Financial institutions are therefore encouraged not only to understand the risks of the collateral properties but also to ensure a wider diversification within their portfolios to better distribute risk potential.

Assessing climate risks correctly – but how?

To better address the challenges of climate change, users receive comprehensive support through Lora and Geoport. Via Geoport, for example, data from the zoning system ZÜRS Geo can be ordered. ZÜRS Geo is a geoinformation system developed by German insurers to assess the risk of flooding, backwater and heavy rain for properties and their locations. Repeated rainfall or melting snow often leads to rivers and streams overflowing their banks, resulting in minor or severe flooding. However, not all houses in Germany are equally exposed to flood risk. This is where ZÜRS Geo comes into play, helping to better assess regional risk levels.

In addition, the so-called K.A.R.L. data can be purchased. K.A.R.L. stands for Köln.Assekuranz Risk Solutions and is a tool for natural hazard risk analysis. It enables precise identification, analysis and calculation of risks caused by natural hazards such as storms, flooding, heavy rain and earthquakes. This makes it possible to generate an automatic location analysis for any desired address and integrate it directly into Lora valuation reports.

In addition to the data from K.A.R.L. and ZÜRS Geo, a wide range of further data is usually collected during property valuation to assess a property according to ESG criteria in market and mortgage lending value reports. Optimised use of all these data results in a precise and comprehensive risk assessment of properties and their locations.

Lora also offers a detailed yet standardised valuation model that uses the available data to highlight and quantify the sustainable characteristics of a property within an ESG score. The method focuses on location-relevant environmental and climate risks, energy characteristics and environmentally relevant impacts arising from the property. To assess potential environmental and climate risks at a location, Geoport provides a data product specifically tailored to the risk types included in ESG scoring, enabling automated completion of the physical risk category. The results of such a standardised scoring process are intended to support banks’ risk management systems in making and developing well-founded strategic decisions.

This provides valuation experts, surveyors, and mortgage lenders with the necessary data foundation to address the challenges of climate change early and effectively and to make informed decisions.

No one should be left out in the rain — least of all on-geo’s customers.