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How Regulators Can Help Credit Unions Manage Climate Risk in the Communities They Serve
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How Regulators Can Help Credit Unions Manage Climate Risk in the Communities They Serve

Credit unions and their members are especially vulnerable to multiple and growing climate threats, requiring more guidance from regulators on how to mitigate these risks.

A man walks past homes that collapsed onto the beach due to the storm surge and resulting erosion caused by Hurricane Nicole in Wilbur-By-the-Sea, Florida, on November 11, 2022. (Getty/Paul Hennessy)

Heat domes, record temperatures, flash floods, and wildfire smoke have affected large swaths of the United States and the world during the summer of 2023. These extreme weather patterns are just the latest examples of how climate change is threatening—and proving costly—to communities.

Credit unions—nonprofit financial cooperatives owned by and serving their members—play a critical role in supporting communities, especially in times of hardship. Many are minority depository institutions (MDIs) or community development financial institutions (CDFIs), which support communities that would be otherwise underserved by financial institutions. Federally insured credit unions served 135.3 million people in 2022—more than one-third of the U.S. population. Therefore, credit unions play an essential role in the U.S. financial system and to communities facing the challenges of climate change.

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Credit unions tend to have a concentrated membership base in particular sectors or localities, and as a result, they are more likely than their commercial counterparts to have geographically concentrated assets. This concentration makes it more difficult for credit unions to diversify and makes them more vulnerable to climate-related natural disasters and extreme weather. Therefore, most credit unions face greater challenges managing and mitigating exposure to climate-related financial risk.

The National Credit Union Administration (NCUA), the primary regulator for federally chartered credit unions, recently took the important first step of issuing a request for information to better understand the effects of climate-related risks for credit unions. In order to ensure these institutions have the support and tools necessary to address climate-related financial risks, the NCUA should increase regulatory support to help credit unions address these risks and provide guidance and regulation for green lending so that credit unions can continue to serve their members and communities.

Credit unions are designed to help communities

Federal credit unions were established in 1934 during the Great Depression to meet “the credit and savings needs of consumers, especially persons of modest means.” Credit unions have a unique structure that allows them to play an important role in serving communities. As not-for-profit cooperatives, credit union members are part owners, and their boards of directors are made up of elected volunteers.

Credit unions have different incentives and structures than other depository institutions. Their missions are generally to promote the financial well-being of their members, who have a common bond based on geographic area or occupation, professional or civic association, labor union, or other group. These member communities often include low- and middle-income families and small businesses, and many credit unions receive a low-income designation because more than 50 percent of their members meet a low-income threshold. Credit unions do not operate for profit and do not pay income tax, although they do pay payroll and property taxes, and their members pay taxes on dividends they receive from the credit union. Any revenue a credit union generates above these taxes and the costs of operating is often returned to members through more advantageous deposit and borrowing terms. A 2019 analysis showed that approximately 40 percent of mortgages issued by credit unions were granted to families earning below the median income in their area, compared with 30 percent of mortgages issued by banks. A different study found that credit unions issued a greater percentage of mortgages to Black and Hispanic households—1.6 percentage points and 0.6 percentage points, respectively—than banks.

Credit unions play a uniquely important role in supporting these communities. They build stronger personal relationships with local clients and gain access to “soft information”—such as an applicant’s honesty, hard work, and broader community context—that cannot be found in financial records but can help gauge the quality of loans. Recent research has shown that the value of soft information is even more important after a large natural disaster, such as a hurricane, to provide services to the hardest-hit communities. For example, after Hurricane Ida displaced many Louisianians, OnPath—a credit union with $448 million in assets—was able to adapt its operations to respond to more than 6,000 phone calls within a few days. Credit unions can use their local community knowledge to offer personalized service and coaching around financial literacy and recovery.

Credit unions face heightened financial risks due to increasing climate-related threats

Billion-dollar extreme weather disasters fueled by climate change, which are only becoming more frequent and intense, caused damages totaling about $165 billion in 2022. The effects of a worsening climate crisis can disrupt credit unions’ ability to effectively serve U.S. households, businesses, and communities, with knock-on effects to livelihoods and public health and safety. According to an analysis by Ceres, “60% of all U.S. credit unions and at least $1.2 trillion in credit union assets are at physical risk due to acute and chronic climate-related weather events and hazards.”

The effects of a worsening climate crisis can disrupt credit unions’ ability to effectively serve U.S. households, businesses, and communities.

The threat of physical risk due to climate-induced natural disasters is particularly concerning for credit unions because roughly half of their issued loans are tied to real estate and about one-third to automobiles—assets that are particularly vulnerable to physical damage from climate-related disasters such as flooding and wildfires. Productivity losses and the loss or damage of such assets can prevent borrowers from repaying their loans. A study of credit unions after Hurricane Harvey in 2017 showed that flooded homes and other storm damages were associated with a loan loss increase of roughly 14 percent and a significant devaluation of homes.

Climate-induced or -exacerbated natural disasters and sea-level rise have been found to disproportionately affect low-income communities and communities of color. Decades of discrimination and racist housing policies have segregated people of color, particularly Black people, into neighborhoods with disproportionately high levels of lead exposure, poor air quality, and toxic exposures due to their proximity to landfills, hazardous waste sites, and other industrial facilities. Additionally, low-income and Black and Latino households face greater challenges adapting to climate change because of less access to insurance and credit. CDFIs, of which one-third are credit unions, work to address this scarcity by offering financial services to low-income communities. Moreover, vulnerable populations, including those served by MDIs and CDFIs, are most likely to experience blue-lining practices in which financial institutions refuse to lend in certain neighborhoods due to the area’s heightened risk of climate-related disasters, further reducing their ability to adapt to climate change.

Additionally, credit unions face climate-related transition risks as consumers and investors increasingly prefer greener companies and governments implement policies that facilitate the transition to a low-carbon economy. This transition to clean, renewable energy sources is changing labor markets, infrastructure, and technology and may affect borrowers’ ability to meet their financial obligations. For example, falling demand for workers in carbon-intensive industries could lead to local and regional increases in unemployment, leaving some borrowers unable to repay their loans in a timely manner.

Climate change affects regions and populations unequally. Because the membership of credit unions is often concentrated in a particular sector or physical locality, they are more likely to have loan portfolios with a higher concentration of assets that are vulnerable to physical and transition risks. One analysis found that $141 billion in assets held by credit unions—likely underestimated due to the exclusion of the compounding effects of physical and transition risk—face significant risk due to their close alignment with carbon-intensive industries and are especially vulnerable to transition risk. Figure 1 below shows how potential risk can be visualized using the Federal Emergency Management Agency’s National Risk Index (NRI). The NRI is calculated using three factors: risk of natural hazards based on historical data, community resilience, and social vulnerability. This holistic view shows that many credit unions operate in high-risk communities, where social vulnerability—“the susceptibility of social groups to the adverse impacts of natural hazards, including disproportionate death, injury, loss, or disruption of livelihood”—can worsen economic outcomes during and after climate-related events.

Credit unions need increased support to address climate-related risk

Credit unions are often small and can face capacity constraints that limit their ability to address climate-related financial risks and their interactions with other risks. As risks and losses rise, the cost of and demand for credit increase. Credit unions play an important role in financial inclusion for underserved populations, providing credit to a larger share of low-income, Black, and Latino members than most other financial institutions. Credit unions’ mission to serve their members requires the NCUA to provide more robust education and guidance to these important institutions.

The NCUA should adapt and expand traditional regulatory measures. For example, the agency could look to proposed climate-related financial risk management principles and guidance for larger depository institutions, which could be adapted with some tailoring to better fit the unique needs of credit unions. By utilizing existing guidance for banks, the NCUA can support credit unions with tools that all credit unions, especially those with limited institutional capacity, can benefit from, such as integrating climate-related risk management into their CAMELS ratings—a system in which the NCUA gives each credit union a rating to “account for and reflect all significant financial, operational, and management factors that examiners assess in their evaluation of a credit union’s performance and risk profile.”

As they build capacity to analyze and assess climate-related financial risks, the NCUA could require credit unions to publicly disclose information about their climate-related financial risks through call reports. This would incentivize credit unions to reduce exposure, better manage risks, and help the NCUA monitor and regulate climate-related financial risk.

Regulators should provide active support to credit unions, including MDIs and CDFIs, in balancing fair lending and climate risk mitigation. For example, as part of any new guidance, regulators should discuss balancing climate risk mitigation and the duty to ensure continued access to affordable credit in climate-affected communities. Regulators could also train examiners to recognize where discrimination may occur to help prevent fair lending violations. Finally, increased data gathering on climate risk, products, and underserved populations could be used to identify trends and risks.

See also

Green lending can help credit union members through climate-related disasters

The NCUA can help credit unions understand and educate their members about climate-related government resources and encourage credit unions to find creative ways to leverage those resources for their members’ benefit. For example, members and communities that are motivated to develop innovative climate solutions could benefit from green lending opportunities.

Evidence shows that climate adaptation and mitigation efforts can improve outcomes for low-income and nonwhite populations in certain U.S. regions. Combining and leveraging new and existing federal programs—for example, clean electricity tax credits, electric appliance rebates, programmatic grants, weatherization funding, and the Greenhouse Gas Reduction Fund can help credit union loans go further and provide complementary or secondary financing.

Providing direct loans for local projects—such as energy-efficient and climate-resilient affordable housing, installation of community solar energy projects, and other activities—can reduce local pollution and build community resilience to climate change. For example, special purpose credit, financial products that lend for climate resilience and clean energy, can help working-class communities mitigate and adapt to rapidly changing conditions. These loans can be especially useful for low- and moderate-income members because financing clean energy can require upfront investment, and it can be difficult to navigate the options and incentives. Loans for products that reduce emissions, such as electric vehicles, or clean energy sources, such as solar and geothermal, can have special terms and rates. Credit unions can also provide loans for weatherization or other climate adaptive measures.

Additionally, credit unions can gear depository products, such as money market accounts, to responsible investing, with deposits used to fund energy efficiency products. Credit unions can also play an important role in educating and coaching their members on making the most of energy efficiency programs and avoiding predatory contractors.

Conclusion

Credit unions have a vital function in both the financial system and the localities they serve. They provide important support to communities that would otherwise lack access to financial services and the resources to contribute to lower emissions. Although credit unions may encounter more difficulties in addressing and reducing exposure to climate-related financial risks, it is crucial for them to do so due to the populations and communities they help. Consequently, credit unions require additional regulatory support to meet these needs.

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Authors

Crystal Weise

Former Research Associate

David Correa

Research Assistant

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