Banks are facing a lot of challenges right now, began Rudi Belli, head of sustainability at Spuerkeess. “But we knew, quite early, that we couldn’t solve all those problems as a bank. That’s why also we decided to work together tightly with science.”
Two years ago, Spuerkeess created a scientific advisory board--which includes two scientists from List--to help them understand how climate can impact the economy and the banking system, Belli explained. But this project pertains more specifically to mortgages.
Spuerkeess has the main share of residential mortgage loans in Luxembourg, said Belli, so it was important for the bank to understand how flooding could have an impact on mortgages and potential changes in customers’ reimbursement behaviours. It would also help the bank to anticipate and mitigate risks.
Climate research that has an impact
At List, “we are doing impact-driven research,” said Patrick Matgen, lead research & technology associate. “We are constantly looking for partners like Spuerkeess that will help us to bring our technologies, our knowhow to the next level and to make a real impact in Luxembourg and beyond Luxembourg.”
“We had, in our group, people working on climate change scenarios: they do mostly the climate modelling to see how different key environmental variables are impacted by different climate change scenarios,” explained Matgen. “We have hydrologists and flood modellers that can tell us, with their models, where the water will be, how frequently a certain area of the Luxembourgish floodplain is going to be flooded, what will be the water depth, and so on.”
But what was a bit the missing part--and that’s where Spuerkeess comes in--is what will be the impact of these floods on assets that are in our Luxembourgish floodplains.
“But what was a bit the missing part--and that’s where Spuerkeess comes in--is what will be the impact of these floods on assets that are in our Luxembourgish floodplains,” said Matgen. “It’s not enough to know if a certain area is going to be flooded 10 times in the next 10 years on average, but it’s also important to know what is then the consequence of this, for a bank like Spuerkeess.”
“And that’s for us the really exciting research question of this project: how we can bring together the knowhow in climatology, in hydrology, in flood modelling with the knowledge of the bank Spuerkeess on how these flood hazards translate into a real flood risk for a company like Spuerkeess.”
“It’s a good opportunity to reinforce the collaboration between the climatologists, hydrologists, flood modellers and the people from the bank who have more the expertise in risk analysis,” added Matgen.
Models, maps and mortgages
“Our main expertise in our group is to use also satellite Earth observation data to monitor these floods at global scale, and to use this information in prediction models to also reduce the uncertainties of flood forecasts,” explained Matgen. This is technology that is interesting on a global scale. “But it’s also of course always nice to find these partners at a more local scale, like Spuerkeess or the water agencies,” he added, “that are also using these technologies and this knowhow to mitigate flood risk here in Luxembourg.”
The idea behind the collaboration is that List would create “future maps” or “forecasted maps,” as Belli called them, where they can see what regions are at risk of flooding in the future. By geolocalising residential mortgage loans and placing them on these maps, Spuerkeess can calculate potential foreseen damages linked to the fact that a house is located in a risk area.
Concretely, List will build a database for climate change assessment, implement regional climate models and compute flood hazard maps for various scenarios, explained a press release published in late March. Spuerkeess will then produce flood risk maps that show assets impacted by floods in each scenario. The bank may share information with regulating authorities such as CSSF or the European Central Bank, but there will be no commercial exploitation of the maps and, thus, no financial gain, noted the press release.
Their goal is to understand regions that may be impacted by climate catastrophes in the future and to contact customers, as well as discuss with the grand duchy’s finance and environment ministries, various sectors and other banks. “We will not only remain here the club of the banks, but we will take contact with all the potential stakeholders,” Belli said during his interview with Delano, offering the construction sector as an example.
Important to understand risks
“We understand relatively well now the current risk of flooding in Luxembourg, given the present climate we have, but there’s a huge uncertainty on how these risks will increase or change as a result of different climate change scenarios,” Matgen said in an interview. “And that’s the research that we are doing here at List, to understand what are the areas, as it was explained by Mr Belli, that will be more severely impacted by floods according to different climate change scenarios, and to reduce the uncertainties of our model predictions.”
When taking meaningful decisions--like changing the way houses are built--it’s important to reduce uncertainties. “It’s better to start by having science-based assessments or projections with reduced uncertainties before you take such decisions,” Matgen said.
Why else would banks need scientists?
Scientists help Spuerkeess understand environmental risks, as well as develop methodologies to measure risks, explained Belli. “We are a signatory of the net-zero banking alliance,” he added. “In this context, we have to fix scientific targets, decarbonisation targets, and to do so, we have to apply science. We aren’t scientists--we need scientists.”
If you call a product green, or you call it sustainable, it’s very important to give a definition.
And science does have an impact on banking. Greenwashing is another example, he said. “If you call a product green, or you call it sustainable, it’s very important to give a definition,” said Belli. “What could we call green? What could we call low-carbon? And all those definitions have to be given by scientists. It’s not the banker alone who could give those definitions, and it remains a difficult area.”
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .