JUST GROUP PLC Annual Report and Accounts 2021
SUSTAINABILITY STRATEGY: TCFD DISCLOSURE FRAMEWORK CONTINUED
KEY RISKS TO JUST’S REPUTATION AND ITS LIFETIME MORTGAGE AND INVESTMENT PORTFOLIOS FROM CLIMATE CHANGE
IMPACT
TYPE
TIMESCALE MITIGATIONS
RISK
Residential property values may fall below the level of the loan leading to losses For commercial mortgages, the borrower’s ability to service and repay the loan could be affected by increased costs due to physical and transition risks Unable to meet Responsible Investment Framework aims while meeting investment return needs IFRS balance sheet loss. Income should continue but with increased risk of default if issuers cannot refinance at an affordable price Reputational damage due to not keeping commitments
Transition 5-10 years Potential government assistance for property owners’ energy improvement costs. Seek ways of helping lifetime mortgage borrowers improve energy performance standards. Take energy performance ratings into account when lending on lifetime mortgages.
MORE STRINGENT ENERGY PERFORMANCE STANDARDS – COMMERCIAL AND RESIDENTIAL PROPERTY
Physical
10 years + Potential government action to protect populated areas. Vary lending policy to avoid vulnerable residential and commercial properties.
INCREASED IMPACTS AND THREATS FROM FLOODING, SUBSIDENCE AND COASTAL EROSION
Structure commercial loans to include key performance indicators for energy efficiency and other climate factors.
Transition < 5 years Increase the range of sources of origination for potential investments.
GREEN INVESTMENTS BECOME DIFFICULT TO SOURCE OR PRODUCE LOWER YIELDS
Availability of green investments expected to increase due to government focus.
Transition < 15 years Reduce and avoid such investments in line with the Responsible Investment Framework (as described below).
CREDIT INVESTMENTS SEEN AS EXPOSED TO CLIMATE RISKS LOSE MARKET VALUE
Transition < 5 years Commit to initiatives required to reduce emissions. Monitor progress closely.
TARGETS FOR REDUCED SCOPE 1 AND 2 EMISSIONS ARE MISSED BY JUST TARGETS FOR REDUCED SCOPE 3 EMISSIONS ARE MISSED BY JUST
Reputational damage due to not keeping commitments
Transition 5-10 years Pursue Responsible Investment Framework. Monitor progress closely. Manage supply chain emissions.
Regulatory capital requirements are based on a risk measure over a 12 month period. This approach does not readily accommodate the long-term risks associated with climate change, particularly in the absence of any historical data to help assess probabilities and quantification. There is no material impact on the Group as at 31 December 2021. Property transition risks will be driven by government policy, which is unclear at present, and so will be reflected in the Group’s Own Risk and Solvency Assessment (“ORSA”). IFRS profit is the realisable value in excess of losses on lifetime mortgages and credit defaults over the life of the contracts. The relatively low loan-to-value lending policy on lifetime mortgages means that material losses are unlikely to crystallise at present. Our projections for the liquid credit portfolio show that bond issuers would experience a relatively small increase in costs due to the combination of climate physical and transition risks in a scenario in which our existing portfolio remained unchanged to the year 2080. These costs could increase the risk of credit rating downgrade for the bond or in extreme cases the risk of default. In practice, this position is purely indicative as, well within this period, the bonds we hold will be redeemed for their nominal value, which will be re-invested in new assets in line with our Responsible Investment Framework mitigating potential losses in the long term. The Group’s climate risk processes focus at present on the modelling and scenario analysis explained on page 27. We will evolve our monitoring and management process, as the available data improves and government policy measures become clearer, to update the tools and processes for managing the risks of climate change to the Group. OPPORTUNITIES As part of our sustainability strategy, Just aims to develop innovative products and services to meet customer needs and support a sustainable future. We were the first later life lender to offer a green lifetime mortgage, which incentivises energy efficient homes by offering a discounted interest rate for a loan on a property with a high EPC rating. We will seek to develop further lifetime mortgage products which encourage improved energy performance for the customers’ properties.
Through HUB Financial Solutions, the Group’s corporate solutions and advisory business, we provide both advised and non-advised services to customers of key strategic partners looking for retirement income and retirement lending. A range of ESG investment funds will be made available to meet the expected customer demand for investing responsibly in ESG-style investment options. When investing, we take opportunities to engage directly with commercial borrowers to bring about positive climate outcomes – such as by offering better terms on commercial mortgage loans on buildings with excellent energy efficiency. Through our membership of the ABI, we seek to contribute to industry thinking about climate change. Just does not invest in equities as we require a predictable long-term income from our investment portfolio to provide regular payments to our Guaranteed Income for Life and Defined Benefit customers. Although the Group is unable to use shareholders’ votes to influence investee companies’ sustainability policies, our corporate bond investments are selected based on the ESG credentials of the issuer, including environmental factors, such as the issuer’s transition plan to achieve net zero. CLIMATE CHANGE PROGRAMME Over the past couple of years, we have developed our capabilities to manage the opportunities and risks that arise for the Group due to climate change. The project has been sponsored by the Group Chief Risk Officer, who is responsible for climate-related financial risk under the FCA’s Senior Managers and Certification Regime and accountable for delivery of the Group’s sustainability strategy. As part of the programme, training was carried out in the summer of 2021 for Board members on climate change and its potential implications for Just, followed by similar sessions for the Group’s senior leadership team. Sessions on our sustainability strategy were delivered to colleagues during the year and regular updates will be given going forward.
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