Nine of Australia's customer-owned banks have completed the mutual sector's first joint climate scenario analysis, identifying disruption to household income and employment as the biggest threat to both borrowers and lenders' books.
The exercise, prepared by actuarial firm Finity alongside Climate KIC Australia, gives participating institutions a common baseline for complying with AASB S2, the country's new mandatory climate reporting standard.
Rather than each bank building scenarios independently, the group worked through shared workshops to model two plausible future climate pathways, testing how each could affect resilience, credit risk and lending strategy across the sector.
Under both scenarios modelled, disruption to customer income and employment stood out as the primary channel through which climate impacts could flow into arrears and defaults. Insurance affordability emerged as a critical link in that chain, with rising premiums able to erode collateral values and shift risk onto lenders' balance sheets.
In high-risk regions, insurer withdrawals have already affected mortgage eligibility, with one in five northern Australians now lacking home insurance, compared with 11% nationally.
Sharanjit Paddam (pictured left), principal at Finity, said the exposure isn't a distant concern.
"It is insurance becoming unaffordable in the places people already live, and the pressures of higher disaster costs on households, as well as the potential impact on communities that are highly exposed to industries that may decline under a transition to net zero."
The scale is already measurable at the household level: an estimated 5% of Australian mortgage-holding households are currently in insurance affordability stress, representing $57 billion in loan balances, according to Actuaries Institute research.
Paddam added that early preparation was the point of the exercise.
"The value of this work is that it helps the sector get on the front foot, understand these risks early and take proactive steps to support customers, rather than waiting for the impacts to arrive," he said.
Stephanie Elliott (pictured right), chief impact officer at the Customer Owned Banking Association, said the collaboration reflected the sector's community ties.
"Customer-owned banks are closely connected to the communities they serve and are already seeing how climate pressures can affect household finances," Elliott said.
The shared framework is designed to be reusable rather than a one-off compliance task, allowing banks to update scenarios as climate, policy and market conditions shift.
Queensland Country Bank CEO Aaron Newman pointed to the practical value for members, noting that climate scenario analysis was "helping us better understand a range of plausible future climate-related risks so we can make informed decisions that strengthen our resilience."
The report positions trust and community relationships as the mutual sector's strongest asset in supporting customers through the transition, including via green and resilience lending products.
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