Disclaimer: This article is republished with permission from the authors. The original article was published on Finity’s website and can be found here. Finity is a strategic analytics firm that applies an actuarial approach, practical insights, and human perspective to support organisations in analysing and applying their data for informed decision-making. Any views expressed in this article are those of the original authors and do not necessarily reflect the views of Altiorem.

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It is getting warmer in Australia, and it will change the way we live

Australia has warmed by about 1.5°C since reliable records began in 1910ⁱ. An increase of one or two degrees Celsius may not seem like much, but the frequency and intensity of heatwaves has been rising faster than average temperatures – projections suggest that at 1.5°C of global warming, the hottest days could be 3°C warmer than preindustrial times and at 2°C they could be 4°C warmerⁱⁱ.

Increasing heat will affect where people want to live, influencing property values, the cost of living, adaptation, and higher energy costs. For banks, this may represent a new set of challenges. Though most home loans turn over in 7-12 years, they can have 30-year terms. Properties under climate stress might hold onto loans longer, making traditional short-duration assumptions questionable for high-risk properties. A hotter world is going to change how and where we live, which will be reflected in how investment values evolve. Banks will be central to financing adaptation, resilience, and the transition to a net zero economy, including helping customers adapt to a hotter climate.

In Australia, heat is the biggest killer of all natural disasters and by far the largest contributor to natural disaster-related injuries. Between 2011-12 and 2020-21, there were 677 extreme weather-related deaths, of which 297 were caused by heat. There were 7,104 heat-related hospitalisationsⁱⁱⁱ. Heat affects the human body by increasing circulatory system stress, for example by making the heart work harder to push blood towards the skin for cooling. Heat also increases sweating, which can lead to dehydration and at extreme levels, cause kidney damage^iv.

If we are unable to sweat and cool down our bodies, body temperature may increase to a dangerous level and, if left untreated, result in permanent disability or death. And while heat is dangerous, combining it with high humidity is even worse. High temperatures can affect labour productivity, learning, mortality, mental health. All of this can lead to conflict or migration. This information may not seem relevant to banks on the surface, however – as we will explain – it could prove to be vitally important, and it begins with Wet Bulb Globe Temperature.

Wet Bulb Globe Temperature and other health impacts

To measure the occurrence of heat stress, we use a metric called the Wet Bulb Globe Temperature (WBGT), the most widely used metric^v to calculate and monitor heat stress on the human body. It is designed to provide a measure that better reflects human perception of thermal comfort.

WBGT incorporates air temperature, humidity, sun angle, cloud cover and wind by measuring the temperature read by a thermometer covered in a wet cloth. As water evaporates from the cloth, the thermometer is cooled, mirroring how the human body cools itself with sweat.

The Bureau of Meteorology provides WBGT observations for each state in Australia every day[vi]. Table shows temperature (°C), relative humidity (%), and WBGT (°C). On a day with temperatures of 29°C and relative humidity of 80%, WBGT is about 33°C from the table.

Exposure to WBGT of more than 28 °C reduces the effectiveness of sweating in cooling the body, while exposure to WBGT of 35 °C can be fatal, especially for more vulnerable individuals.

Direct health effects of extreme heat include heat stroke and the exacerbation of pre-existing conditions such as heart and kidney disease. Heatwaves also cause deterioration of air quality (often from bushfires), causing respiratory problems. Indirectly, increasing heat can also reduce water availability and alter the spread of vector-borne diseases.

Materials like asphalt and concrete amplify heat and can elevate temperatures by as much as 10 degrees^vii. This, combined with heat generation from human activities such as traffic, industry, and electricity usage, creates what is known as a “heat island effect” in urban areas.

But heat does not impact everyone equally. Vulnerable populations, such as the elderly, chronically ill, children, outdoor workers, and those from lower socio-economic backgrounds, are at heightened risk^viii.

Mental health is also impacted indirectly, through factors such as economic hardship, domestic violence^ix, or reduced productivity^x. As discussed in our previous blog, higher nighttime temperatures can change the behaviour and distribution of disease carriers and affect the quality of our sleep^xi.

Some parts of Australia could become challenging to live in

For these reasons, increasing temperatures mean some locations in Australia will be less hospitable in future, based on projections under future climate scenarios. Broadly, we consider three scenarios:

• A low emissions scenario (RCP 2.6) that results in global warming of less than 2°C
• A moderate-emissions scenarios (RCP 4.5) that results in global warming of around 2.5°C by 2100
• A very high emissions scenario (RCP 8.5) that results in global warming of greater than 4°C by 2100.

A study in Nature Sustainability showed that the northernmost third of Australia will be outside the “human climate niche” under the moderate emissions scenario (SSP2-4.5)^xii. The researchers defined human climate niche as optimal for human thermal comfort, which is between 22°C to 26 °C WBGT, with wellbeing declining above 28 °C WBGT. The human climate niche is shrinking rapidly due to climate change. Climate change has already put around 9% of people outside this niche. By the years 2040-2060, 20% of the global population (one-third by 2080-2100) is projected to be outside the human climate niche under SSP2-4.5.

Fig.2b from Lenton et al. (2023). Global population exposed outside of the temperature niche at different points in time under different SSPs.

Northern parts of Australia are already experiencing more than 80 days in the year with above 28°C WBGT. These areas could see another 30-40 days over 28°C WBGT by 2050 under the high emissions scenario, with some parts of Queensland experiencing a further 50 days over 28°C WBGT. By 2050, heat stress days are projected to increase by at least 10% across Australia under a high emissions scenario.

 

Average number of days above 28°C WGBT in a year is projected to increase across Australia under high emissions scenario; effects are worse on Australia’s East coast, especially southeast QLD.

 

There are ways to adapt to increasing temperatures and many parts of the world are already doing so. For example, changing working hours for outdoor labour, increased installation and use of air conditioning (which is costly as it represents higher energy usage, which may also exacerbate global warming), as well as adapting building practices and materials, and upgrading and building new infrastructure.

Why is this important for banks?

The populated areas of Australia impacted by this heat stress are increasing. Finity identifies properties at risk from heat stress in locations that exceed WBGT of 28°C both in terms of absolute numbers of days and in at least a 50% increase by 2050 from today under the low and high emissions scenarios.

This table shows how Finity defines heat stress and risk for banks

Therefore, increasing heat is a slow but burning problem with real impacts for banks. Heat stress will affect where people live in the long-term, which may impact property values and the cost of living. To cope with heat stress, adaptations will need to be implemented, installed, retrofitted and built (for example, solar panels in conjunction with air-conditioning to improve thermal comfort indoors) – adaptations that will require financing from banks. Heat stress can strain the adaptive capacity of communities, and in particular more vulnerable communities^xiii.

Heat stress can impact banks due to:

• Lower productivity at work or home, which can have negative impacts on income and serviceability.
• Decrease in demand for property and reduced land value in regions with severe heat stress.
• Higher cost of living due to increased energy use or the cost of adaptation, which could lead to lower serviceability of loans.

It is therefore vital that banks understand, assess and consider their risks relating to heat stress. When measuring the impact of heat stress on residential lending, banks should assess how risk could increase as heat stress increases. While some Australians have potentially already adapted to living in areas with high heat stress, banks must assess whether those who have not yet experienced these conditions have the capacity to adapt.

Assessment of this kind is new and relatively uncharted territory for many banks, and the requisite assessment criteria and methodologies may be new and unfamiliar. Finity has provided climate risk assessments that include heat stress considerations for many Australian lenders, including mutual banks^xiv. We can work with you to understand and measure the exposure of your residential lending portfolio to physical climate risk under a range of climate scenarios, including the impact on credit risk.