ESG Framework and Physical Risk Stress Testing
UK Shariah-compliant mortgage finance provider
The lender needed an ESG framework aligned to its strategic direction, a way to assess ESG performance at the level of individual mortgages, and the capability to stress its real estate exposures for physical climate risk.
Scope of work
Framework and policy built around ESG objectives defined in line with the lender's strategic direction, with an ESG policy setting out its commitments and practices, and reporting processes established with compliance to regulatory standards checked.
ESG scorecard built to assess performance at mortgage level, with parameters across:
- Environmental: energy efficiency, water use, waste management
- Social: community impact, affordable housing
- Governance: board diversity, disclosure
- A questionnaire included to capture parameter data for unlisted and SME borrowers
Metrics and KPIs defined, including share of energy efficient properties, average CO2 emissions per square foot, and mortgage allocation to affordable housing.
Physical risk modelling built as software the lender can rerun, measuring vulnerability using the coordinates of each mortgaged property:
- Flood, cyclone and drought hazards assessed per property
- Three scenarios applied, covering early action, delayed action and no action
- UK residential and commercial real estate price indices included alongside physical variables from CMIP6 climate data
Outcome and value
- ESG performance measurable at the level of the individual mortgage.
- Physical risk translated into probability of default and loss given default impact.
- Loan-to-value projections adjusted for that impact.
- Capability the lender can rerun as the book and the scenarios change.