The Climate Change Challenge for Fintech

There is a new financial inclusion gap and that is due to extreme weather events. Fintech needs to address this, both to fulfil it’s often-stated goals as well as to remain relevant in the face of significant global changes. This requires a repurposing in order to become a deeper, more consequential actor in a rapidly changing world. 

How do we quantify the inclusion gap? 398 Natural Disaster events occured worldwide in 2023, resulting in a loss of USD 380 Bn. To put things in perspective, the total global losses were USD 162.3 Bn in 2013, USD 247 Bn in 2020 and USD 270 Bn in 2022(https://www.munichre.com/en/risks/natural-disasters.html). In other words, the losses from such events are growing at a considerable rate. In Asia, the combined bill was around USD 65 Bn. A lot of this has been linked to droughts  in India and floods in China. (Source: https://www.aon.com/apac/in-the-press/asia-newsroom/2024/natural-catastrophes-caused-usd-65-billion-economic-loss-in-asia-pacific-in-2023). 

Let us look at what has happened over the last week in ASEAN and more specifically, in The Philippines. Severe Tropical Storm Kristine generated agricultural losses in excess of 80 Bn PHP, which is well over USD 1 Bn, as per the Department of Agriculture in The Philippines(https://news.abs-cbn.com/business/2024/10/25/da-initial-agricultural-damage-due-to-storm-kristine-reaches-p80m-2258). The forecasted value of rice production is expected to see a decrease from 20.8 Million metric tonnes to around 19.4 Million metric tonnes. Rice is, of course, the basic cereal for The Philippines  and for much of the rest of Asia. Given that around 20 typhoons or more on an average move through the country every year and flooding is a matter of grave concern in the wider region as well, the vulnerability of communities and the economy cannot be over-estimated. This is further excerbated by the low percentage of insurance and the high reliance on informal sources of credit at short notice.

Beyond agriculture, lending itself is likely to get impacted over time as uncertainty and severity of storms and precipitation increase. Do keep in mind that Kristine was not classified as a typhoon. Yet the problem faced by rescuers as well as local people was that the volume of water on the ground made things unmanageable. Of course, it also laid waste a lot of resources. Kait Parker, meteorologist at weather.com has pointed out that one does not need a particularly “big" storm to get a lot of flooding. (https://weather.com/news/climate/news/2024-01-17-mortgage-defaults-after-hurricanes-flooding). According to her, more rainfall is coming from shorter, non-tropical events. But her comments also hold true for tropical regions.Let us look at research carried out by the University of Edinburgh(https://www.ed.ac.uk/news/2024/extreme-weather-influencing-mortgage-payments) using a dataset of 70,000 mortgages and 3.5 Million single payments to model the impact of tropical cyclones and heavy flooding on mortgage payments in Florida. Their research found that the relationship between default risk and intensity of cyclones is statistically significant. The stronger the storm, the more the chances of defaulting. Early repayment was likely to lessen in flood-prone places with heavy rains. This piece of research is likely to assume great importance in  our part of the world. 

What can fintech do? Anticipatory community financing to build capacity well in advance and continue to build and reinforce the same through turbulent months may be the key. This needs the creation and running of an ecosystem of maths and technology and delivery on ground that is outside much of what fintech does today. Yet it is not alien. What needs to be built? Capacity refers to new kinds of crop, new uses of land that has been repeatedly impacted, building of new housing and commercial infrastructure and providing finance to those who are likely to be vulnerable-ahead of time. The future of land itself has to be assessed. The term vulnerable should not be associated with poverty alone. A well-to-do businessman can lose everything if stock gets ruined, supply chains are wiped out and cash disappears. 

It is reasonable that we have  to relook  risk ratings of individuals and commercial enterprises. We often talk about the dreaded thin file. Natural calamities that repeatedly hammer a place will make even the most endowed files thinner.  The economy of a city, province or region can change either way based on what impact happened at what frequency over time. Resilience may be admirable but survival and growth needs creation. Fintech can play a significant part in risk assessment. The variables that need to be used for measuring risk need to change. The survivability of a business and it’s potential growth post an extreme event can be predicted. This needs a knowledge base and that has to involve the encoding of anecdotal evidence alongside more structured input from multiple sources. The change in the way risk is measured and then communicated to connected players can alter the stacks that determine who is to play what role in the value chain of fintech. For instance, the role of real-estate becomes very pertinent. Is there opportunity for a developer to build a new category of housing, shops and offices? Probably. Can that company build future scenarios for that land and the development they wants to undertake there? This is possible. Someone has to provide the developer the wherewithal. If that firm indeed sees merit, then it will need tools to forecast a strong case to it’s financiers. There may be co-funding from government agencies. The financing criteria and cost for the end-customer will then come up. As we can see, core systems, lending books, research and risk management now start to assume different positions within a stack.   Data graphs can start to become central to the knowledge base.  This can lead to a new architectural framework for fintechs. It can help fintechs and their bank partners create completely new financial products that are truly integral to the fight for sustainability.