The following is an article written by Trellance’s Director of Strategic Consulting, John Wagner. It originally appeared on CUInsight.com.

After the devastation caused by Hurricanes Helene and Milton here in Florida just a few weeks ago, the effects of climate change on our weather patterns are top of mind. What will be the next devastating weather event, who will it effect and how can we be ready for it? These questions are important for credit unions to consider, especially as they are planning for the future.

The NCUA and Climate Risk

As of now, the NCUA does not require credit unions to conduct climate risk assessments; they do, however, encourage credit unions to consider it, which may mean it will be a requirement in the future.

NCUA has conducted its own climate risk analysis at a macro level for the United States. They found that about 32% of US credit unions have a relatively moderate risk of exposure to natural hazards, and 17% have a relatively high risk. 8% have a very high risk, and only 13% have a very low risk. The risks are higher for low-income credit unions (LICUs) and minority depository institutions (MDIs): 19% of LICUs and 19% of MDIs have a relatively high risk of exposure to natural hazards. 23% of MDIs have a very high risk – that’s 15% more risk than the average credit union.

Risk concentration is higher in some states than others. According to FEMA’s 2021 National Risk Index and the 2021 Q4 NCUA 5300 Call Report, credit unions in California, Texas and Florida have some of the highest risks of being impacted by a natural hazard. In California specifically, 48% of credit union headquarters and branches are in very high-risk communities, while another 44% are in moderately high-risk communities. 60% of the members, assets, loans and credit union deposits in Florida are located in very high-risk or moderately high-risk regions.

What Environmental Risks Are Credit Unions Facing?

Most credit unions are going to be familiar with the risks their communities face. But as climate change continues to impact the weather patterns we’re facing, you may find yourself impacted by new and worsening weather events. The impacts of Hurricane Helene on North Carolina are prime examples of this: the state had never faced a hurricane of that magnitude, and many of the areas impacted by flooding were outside of traditional flood zones. Florida, during Milton, experienced tornadoes of a size that are not usually seen outside of Oklahoma. Be aware of the weather events that could impact your region. Potential natural hazards include:

• Earthquakes
• Hurricanes
• Tornadoes
• Wildfires
• Heat waves
• Ravine floods
• Hail
• Coastal flood
• Strong winds
• Draught
• Avalanche
• Cold wave
• Ice storm
• Landslide
• Lightning
• Tsunami
• Volcanic activity
• Winter weather

What Can a Climate Risk Analysis Tell You?

An ounce of prevention is worth a pound of cure is typically a saying applied to the medical community – but it works for credit unions, too. By conducting a climate risk analysis, your credit union can understand what potential disasters it could face, and what assets and members could be impacted. In 2022 alone, there were an estimated 15 billion-dollar disaster events in the United States.

The NCUA report looks at things from the macro level – it has to be prepared for the potential affects to credit unions across the country. By conducting your own analysis, your credit union can dissect things from the micro level, allowing you to understand which of your assets and members may be impacted by natural hazards down to the zip code level. By partnering with a service provider, you may even be able to drill down further to the census tract level.

The output from this analysis will include risk to property, portfolio and members. You’ll be able to see what branches and loan properties may be impacted by a natural hazard, as well as which members. This will allow your credit union to understand the potential financial loss, as well as member loss.

Member loss could have an even larger impact than financial loss. As communities are damaged or even destroyed, your members may choose or be forced to move away from your area and credit union. After Hurricane Katrina in 2005, two credit unions had to close entirely after members and employees alike were displaced from the storm. As hurricanes continue to grow in size, power and impact, more credit unions in the southeast are at risk for similar outcomes.

Property damage is, of course, also a concern. We’ve all seen pictures of flooded homes and businesses after a hurricane, and the smoldering remains of a community after a wildfire. You may think your credit union’s interest in its properties – whether branches it owns or through mortgage properties – is protected by insurance, and in most cases you’d be right. Insurance, however, is often tricky, and may not cover everything. Flood insurance, for example, is not included in homeowners’ insurance. Florida properties that withstood hurricane-force winds but succumbed to coastal or  river flooding are often not covered. And in Florida in particular, many property insurance companies are pulling out of the state entirely, leaving many without coverage.

How Can My Credit Union Use Climate Risk Analysis Data?

Climate risk analysis allows your credit union to quantify its risk, allowing you to adjust your reserve levels. By CECL standards, it’s allowable to set aside additional or special reserves based on potential climate risk to your credit union’s loan portfolio. This will ensure your credit union is prepared for potential losses after a weather event.

Your credit union can also use this data to create personalized messaging to members. Since climate risk analysis can look at things from a very local level, you can send messages to members warning of them of hurricane, flooding, tornado or fire risk as events happen, or provide them with safety tips ahead of hurricane or fire season. You can also use this data to ensure your credit union’s branches are prepared based on the likelihood they’ll experience any sort of natural hazard.

The NCUA does not require credit unions to conduct a climate risk analysis – but there is every chance they will start requiring it in the near future. By beginning to conduct this analysis now, your credit union can demonstrate to the NCUA and its members that it is prepared for any weather event that comes its way. Additionally, if the NCUA does begin to require it, your credit union won’t need to scramble to get an analysis process in place. Make sure your credit union is prepared for natural hazards, start building a climate risk analysis process today, or partner with a service provider.

John Wagner is the Director of Strategic Consulting at Trellance.