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Climate change is exposing banks to new risks. (Photo: Sigmund)
APAC banks face time bomb of risks amidst new climate change policies
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sia-Pacific banks must step up their climate change and ESGcompliance policies as climate change and related government policies expose them to an array of new risks, both financial and reputational, according to Moody’s Investors Service. New standards and regulations will increase compliance costs for banks, whilst engaging in or facilitating activities with a significant negative environmental impact can inflict reputational damage on banks and tarnish their brands. “Asia-Pacific economies with weak infrastructure are particularly vulnerable to physical climate risks, which can hurt banks’ asset quality because a natural disaster can damage borrowers’ assets or disrupt their cash flow. Many banks in the region also face asset risks from large exposures to sectors susceptible to carbon transition risks,” says Alka Anbarasu, a Moody’s vice president and senior credit officer for the region. Climate change is altering the costbenefit analysis of banks’ lending and investment options, increasing compliance costs for banks and exposing lenders to the risk of fines or litigation in the event that 8 ASIAN BANKING AND FINANCE | Q3 2021
market players do not comply. For example, Anbarasu notes a study published in 2017 by International Renewable Energy Association, which estimates that between 25% up to 45% of Chinese and Indian power generators’ assets by value could become stranded by 2030. This, in turn, would lead to impairments of banks and financial providers’ exposures to such borrowers. Despite the time bomb of impairments creeping closer towards D-Day, only a few large banks in Australia, Korea, Japan, Singapore and Malaysia, as well as foreign banks with large operations in the region-notably Standard Chartered and HSBC Holdings--currently prohibit financing new coal-fired power plants. Banks in the rest of the region are even more exposed to this time bomb of impairments as they have yet to clearly articulate such policies. Other carbon-intensive sectors include coal mining; oil and gas; dieselintensive transportation and logistics; and
production of steel, chemicals and building materials. Banks in emerging economies in Asia, such as China, Bangladesh, India, Indonesia, Philippines and Vietnam, have material exposures to these sectors. Lenders to palm oil plantations in Malaysia and Indonesia also need to seriously rethink their exposure to the sector, as they could face defaults by producers that lose business because of heightened global scrutiny on deforestation by the industry. Scrutiny in this area is already underway. In 2016, the IOI Corporation Berhad, a large Malaysian palm oil producer, lost several customers because the Roundtable on Sustainable Palm Oil suspended certification of the company. This is in response to complaints filed by environmental organizations, which criticized IOI for clearing peatlands in Indonesia. Whilst the company’s certification has since been restored, small producers in Malaysia and Indonesia continue to face similar risks. Amongst banks in the region, large, diversified banks in the developed economies of Singapore, Australia, and Japan, along with major pan-Asia Pacific banks, are the ones better positioned to cope with climate-related risks and preserve their credit strength. “Their exposures are more diversified across different countries and industries, reducing their vulnerability to climate risks from a single location or borrower group,” Anbarasu said. “What’s more, they have started incorporating climate factors into their strategic plans and operations as they face pressure from stakeholders to take steps early.” Legal, reputation risks Legal and reputational risks are also on the rise for APAC banks, as governments advance guidelines and regulations for sustainable financing and disclosure requirements related to climate risks. Banks face the challenge of complying with these regulations as they are expected to be inconsistent and even conflicting from country-to-country, said Anbarasu. And should lenders fail to comply, they risk getting fined or facing litigation. Investors themselves are increasing
“Climate change is altering the costbenefit analysis of banks, increasing compliance costs and exposing them to the risk of fines.”
