Lenders With the Best Climate Data Will Be in a Position to Discriminate

(Bloomberg) -- We now live in a world where climate gentrification exists: People and institutions are starting to assess and appraise properties based on their susceptibility to climate impacts. The idea was largely hypothetical as recently as 2016, but over the past two years a decent body of work has emerged, much of it from U.S. academics, showing that both mortgage lenders and property buyers are pricing in some forms of climate risk. 

It’s tempting to assume that more information about the impacts of climate change leads to greater efforts to quickly cut emissions and build resilience. But the evidence of climate gentrification points in a different direction: Regions and people most affected by climate change will face higher barriers to get financing and investment. The money will simply leave.

Knowledge about climate change impacts, whether accurate or not, is already driving decisions by financial institutions that in turn affect livelihoods. Research by Jesse Keenan, an associate professor at Tulane University, and Jacob Bradt, a Ph.D. candidate at Harvard, found that lenders in some coastal and flood-prone areas are already requiring higher deposits before providing mortgages. They are also more likely to move such mortgages off their books via securitization, including to the government-sponsored entities Fannie Mae and Freddie Mac.

There’s an awkwardness here for the world of sustainable finance, which abides by concepts such as “doing good by doing well”—but it’s also the home of, and the market for, these new climate data services.

Information arbitrage is a big driver of market activity. If I, as a trader, know or think I know something that others don’t, then I’ll try to profit from that. I’ll buy low so I can sell high, or I’ll sell out before everyone else does. That information bought for making financial decisions can range from technical analysis of stock price movements to data gathered by helicopters wielding infra-red cameras at key oil storage tanks in Cushing, Okla. Producing and selling such information is a big part of the financial services sector.

Climate services technology, however, raises sharper ethical questions than other forms of financial information. 

This is partly because climate impacts, by nature, are location-specific and climate services technology aims to identify exactly
which areas are most exposed. Yet affluence and disadvantage are very strongly correlated to geography and mobility. That’s true within cities and countries and across the world. 

A second reason climate impact risk information is different is that these services are often drawing upon publicly funded climate science models, combined with commercially gathered information such as locations of assets, supply chains, and financial risk models. Another paper by Keenan, published last year, highlights a need for policymakers to “assert a claim to the fundamental principles of the public domain—of science and data—to advance society's collective mitigation of, and adaptation to, climate change.”

My previous column looked at the risks that this data is not robust or gives a false sense of precision. But the social equality problems can persist. Both good and bad information can drive changes in prices  as assets in actual or perceived climate-exposed areas are sold off and big capital investments are directed toward safer areas. The potential for opaqueness, and for perpetuating and magnifying discrimination, might have some similarities to redlining—the practice of U.S. mortgage lenders making credit less available, or less affordable, to those in areas that were home to Black communities.

Some people will know that their area is already vulnerable even in the current climate, and there are initiatives to make this more accessible, such as the nonprofit First Street Foundation in the U.S. and Climate Valuation in Australia. That knowledge of direct climate risks might not be enough to make an informed decision.

Individuals might know their risk of flood or wildfire will rise, but they have no way of predicting second order effects, such as when they can no longer get insurance or a mortgage on affordable terms. It will be similarly hard to predict when larger businesses begin withdrawing services or local governments become stretched by falling revenue and tighter credit. People who’ve built up lives in what seemed like a safe area over many years may find themselves economically and financially stranded long before they are hit by water, heat, or fire.

It’s reasonable to think that all efforts to discuss and incorporate climate change will be good, especially when the shadow of climate “skepticism” still looms in the minds of many. The potential of combining climate science with other forms of analysis is exciting, but if it’s limited to those who can afford it and shaping decisions that are hidden from view, it will just entrench disadvantage.

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