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A more sustainable and resilient financial sector: lessons learned from a Science Practice Lab

“It’s time to work towards an EU level playing field for climate risks.” On Friday 9 December, scientists and professionals from the financial sector came together in a Science Practice Lab. The common goal was to work towards a standardized European approach for climate risks in the real estate sector. During this session, financial parties shared their experiences and challenges with reporting physical climate risk and scientists discussed the latest knowledge on climate risk assessments.

Different results

The financial sector can no longer ignore climate impacts, as reporting requirements are being tightened. According to EU regulation, a financial party must disclose climate impacts they are expecting or currently facing. However, financial parties often find themselves struggling with finding a correct approach to assess and report risks from climate extremes, such as floods, droughts and heat stress. For this reason, a workshop has been organized by Climate Adaptation Services (CAS) in cooperation with the Institute for Environmental Studies (IVM) from VU Amsterdam and pension investor APG as part of the REACHOUT project. This sparked a knowledge exchange between financial institutions and scientists.

“We are the largest investor for pensions in the Netherlands, so it is likely that we also invest for your retirement.” Derk Welling (APG) started. “A large share of these investments are in real estate and we are trying to learn more about climate impacts on these buildings. However, when we contacted external firms to assess these risks for us, we found extremely different results,” where he stresses the importance of a similar approach with a baseline quality across Europe.

Black box

Similar challenges came forward from the presentations of the Dutch Green Building Council and Bouwinvest. “We are currently seeking for more and more very accurate climate data, but we are losing sight of the bigger picture. How are we estimating these climate risks? It is better to be approximately right than to be precisely wrong: we first need to agree on a methodology that captures the current and future risk we are facing in a changing climate.” Current climate risk assessments often lack transparency and are perceived as a black box.

Presentations from the scientists aimed to open this black box. PhD candidate Thijs Endendijk (VU Amsterdam) presented a framework for current flood risk assessments and the way forward to integrate financial risk. He also elaborated on building vulnerability to flooding using data from the flood event of the summer 2021 in the Netherlands. Kees van Ginkel (Deltares) explored worst-case scenarios for flooding in the Netherlands under extreme sea level rise. During these scientific presentations, it came forward that physical climate risk is not the same as financial climate risk. Next to rebuilding costs, investors in real estate may also face further adverse effects of flood events, such as housing price collapses and mortgages defaulting.

Next steps

The workshop ended with a plenary discussion led by prof. Bart van den Hurk, scientific director at Deltares. Next steps have been proposed in the field of real estate climate risks. For instance, a clear goal for risk assessments needs to be formulated and outcomes need to be tailored to financial parties. During a productive afternoon, first steps have been taken towards a EU level playing field for climate risk assessments and to make the financial sector more sustainable. 

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