Southeastern League: CUs, NCUA Should Take Climate Issues Seriously

Letter says credit unions should integrate environmental risk into strategic planning with guidance from agency.

Climate change is a serious threat to the credit union industry and the NCUA should take steps to manage that risk, the League of Southeastern Credit Unions said last week.

“LSCU believes that the NCUA can play a key role in helping credit unions to become more resilient to climate change by providing guidance on how to assess and manage climate-related risks, developing standards for climate-related disclosures, and encouraging credit unions to invest in green initiatives,” David Pace, the league’s manager of regulatory advocacy, wrote, in a letter to the agency.

He said the league believes that credit unions should integrate climate-related financial risks into their strategic planning processes, but that the NCUA should “take a cautious approach” in developing any rules on climate change.

Backstory and Context

The league represents 311 credit unions across Alabama, Florida and Georgia—states that Pace said are particularly vulnerable to the impact of climate change.

The NCUA has been soliciting comment on if and how the agency should address climate risks, with those comments due Monday.

Two Republican NCUA board members—Kyle Hauptman and Rodney Hood—have made it clear they do not believe the agency should issue rules or guidance on the issue. However, board chairman Todd Harper, a Democrat, has taken a stronger stance on climate issues. Hood’s term expires in August and presumably President Biden is likely to appoint a Democrat who also might want the agency to take a more activist role.

Republicans on Capitol Hill have said that federal financial regulators are ill-equipped to deal with the issue and that they should not take any action on it.

Inside the Letter

Concerns Over Data Loss

Pace said that the three states the league represents are at risk of ever-increasing flooding, devastating tornados and more powerful tropical storms. As a result, the league supports the NCUA taking steps to understand the risk that climate issues pose for the credit union system.

He noted, for instance, that credit union facilities could be physically damaged by extreme weather events and that data could be lost if system backups are not properly managed.

The risks in Florida are especially substantial, according to the league.

“In Florida, a significant portion of both commercial and residential real estate is located in coastal areas or flood zones that are at increased risk from sea level rise, more frequent and severe hurricanes, and storm surge,” the letter states. That property serves as the collateral for many loans and if the property is damaged, their value may decrease, possibly leading to increased default rates and lower recovery rate values.

Impact on Vulnerable Communities

Pace added further that the impact of climate change is varied and also may disproportionately affect financially vulnerable communities.

He said the NCUA and credit union industry can develop strategies for dealing with that problem. For instance, credit unions could establish risk-informed lending practices that would take into account climate risk. In addition, credit unions could offer loan products aimed at assisting members in mitigating those risks.

Transition to a Lower-Carbon Economy

Credit unions and their members also may face risks as a result of a transition to a lower-carbon, more resilient economy, Pace said.

“Transitioning involves considerable changes across all sectors of the economy, and these changes can pose a variety of risks to credit unions, particularly in their business activities such as operations, real estate lending, commercial lending, and small business lending,” he wrote.

Potential Lack of Expertise

The letter also says that a credit union’s board members must take time to better understand climate risks, as such expertise may be lacking in the industry.

Nonetheless, Pace concluded that credit unions must take climate change seriously.

“While the degree to which climate change should be considered will depend on a credit union’s specific circumstances, such as its size, location, and the industries of its members, it’s becoming increasingly clear that climate change is a risk factor that cannot be ignored,” he wrote.