ABN AMRO quantifies the consequences of climate change

ABN AMRO’s aim is to accelerate the transition to sustainability. Furthering that aim is a noble pursuit, but it’s also important to understand just how the climate crisis is impacting the bank’s clients and, consequently, the bank itself. Evidence-based scenario analyses provide precious insight and are based on underlying data and calculation modules provided by the Chief Architecture Data Management Department (CADM).

To quantify the consequences of climate change, the bank started with the biggest asset on its balance sheet: mortgages. ABN AMRO’s portfolio contains over 760,000 financed homes representing a total mortgage value of EUR 145 billion – homes that could well be at risk if severe weather conditions become more frequent such as extreme rainfall, flooding or – at the other end of the spectrum – prolonged drought.

Calculating damage

The bank considers various scenarios in order to calculate outcomes. Hakan Guldas, a data scientist with ABN AMRO, says, “Reliable scenario analyses have to be based on hard numbers. It’s important we get it right, so we use data on climate and weather patterns. We also consult with external scientists and experts about things like houses and their foundations. We then convert all available knowledge and information into mathematical models, which we use to construct and substantiate certain scenarios. Next, we rely on others at the bank to turn our scenarios into hypotheses and practical next steps.”

If the models indicate that the foundations of certain homes may not withstand prolonged drought, for example, the bank could opt to take steps to mitigate those risks. These might include looking at ways to help clients prevent or repair damage, thereby reducing financial risk for boths clients and the bank.

Forecasts in respect of the mortgage portfolio were recently prepared based on internal and external data to predict potential costs arising from damage caused by a flood level of half a metre and by prolonged drought in the Netherlands. Similarly, the impact of climate change on commercial real estate and agriculture can also be quantified.

Complex

“Data can teach us so much,” says Siamak Hajizadeh when asked why he’s so enthusiastic about data. “You learn about buildings, about how dikes and dams work and about flooding. But the best part of all is that you ultimately find out what’s true and what’s not. That’s the real value of data.”

Although an indispensable tool, climate data do present challenges, especially since there’s so much of it around. “One factor always affects another. That’s why we take great pains to work as thoroughly as possible. Obviously, the aim is to analyse all aspects of a given problem. At the same time, though, you have to be careful not to include every single detail, because the models simply become too complex. It’s a constant balancing act.”

Openness

“It’s complex and still very much evolving,” Siamak agrees. “Since this use of climate data is so new, there are lots of uncertainties. But by sharing challenges and exchanging ideas with experts and other banks, we’ll continue to improve our data and methodology.”

Hakan says, “The infrastructure at ABN AMRO’s disposal to analyse vast amounts of data is tremendous. But with that ability comes a certain responsibility. The ethics of data science is a top priority in our department – and that means honesty and transparency. We have a strict monitoring system in place. Privacy is of the utmost importance, and violations are not tolerated.”

ABN AMRO includes data on climate risks in its Annual Report, a fact that has not gone unnoticed. In fact, the international Task Force on Climate-Related Financial Disclosures recently cited ABN AMRO’s openness in this area as an example to other banks. Hakan and Siamak look forward to continuing to contribute to the implementation of climate scenarios. “ABN AMRO is working very hard to define climate risks and support our clients in making the transition to sustainability.”