Mortgage-backed securities face “imminent” risks from climate change
Structured finance products face “imminent” transitional risks from climate change, as eco-property regulations ramp up in Europe.
Industry stakeholders at Morningstar DBRS’ European Structured Finance Credit Outlook 2024 event said that the move towards net zero could present greater issues for property-related products such as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), than physical risk such as floods and winds.
Governments across the continent have implemented regulations to improve the green credentials of housing and commercial properties, measuring factors such as carbon emissions and energy use.
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Buy-to-let landlords and the owners of commercial property will need to comply with certain standards to be able to rent out their properties, for example.
One stakeholder said that they are already seeing the impact of transitional risks on the valuations of CMBS portfolios where properties do not meet the requirements.
Investors have to assess whether the capital expenditure needed to bring those properties up to standard is worth it, the stakeholder added.
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In contrast, industry speakers did not see physical risks from climate change as a short-term issue for the European structured finance sector.
One panellist at the London event, held today, said that physical risk “is not expected to be higher over the next decade”, adding that it will be more of a focus for the second half of the century.
While winds and wildfires could impact properties, for now these risks are covered by insurance which removes the risk from structured products, the panellist added.
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While it is seen as a smaller risk than transitional risk, one stakeholder noted that they assessed geographical concentration in RMBS portfolios to assess exposure to physical risks such as flooding.