3 Reasons Why APAC Banks Must De-risk Now 

By Dharisha Mirando 26 May, 2021

CWR’s Mirando explains why APAC banks must lead & de-risk plus catches you up on latest stats

APAC will bear the brunt of climate impacts: 5 out of 10 countries most affected from 2000-2019, 99/100 top cities most at risk & Asia will lose 15-20% of GDP by mid-century
ECB stress tests show banks are at risk - 80% if euro banking credit exposures to NFCs are to firms with some exposure to physical risk; this could impact capital requirements
More grim news are out yet corporates are not disclosing enough; with credit rating agency starting to factor in climate & water risks, APAC banks should lead the way

New stats are out, and they don’t look good. This is why I’m writing this article. Now to catch you up:

  • It doesn’t look like we will hit our temperature target: Even with the ambitious recent pledges from the likes of the US, China and Europe, we will only get to 1.9°C-3.0°C by 2100. But these are also only pledges; the reality is that saying is not the same as doing – actual policies will get us to a higher 2.1°C-3.9°C. Plus, big polluters like the US may not actually do their part and instead rely on “technologies we don’t yet have”; and
  • Even if we do manage to hit our target, , cost of damages will be US$54-69trn: Many think that if we get our acts together and reach our target through either an orderly or disorderly transition then we’ll be safe. Sadly that’s not true – according to the IPCC, the cost (NPV) of damages will be US$54 trillion in 2100 if we reach 1.5°C and this will rise to US$69 trillion under a 2°C scenario. Given today’s world GDP is US$87 trillion, the losses are clearly substantial.

Why APAC banks must lead…

All of this will create havoc for everyone, and this includes the financial sector. Yet, many banks and investors continue to downplay these risks or are focussed primarily on event driven risks, which they assume insurers will take care of (we disagree) and carbon transition risks, which don’t look too high given today’s carbon prices.

But these risks are already baked in, so we need to act now. All banks must take action, but we think APAC banks must do more and lead the way – here are three reasons why:

1. Multiple new studies show APAC most at-risk

99/100 cities most at risk are in Asia

The Germanwatch Global Climate Risk Index 2021 shows that five of the top 10 countries most affected from 2000-2019 were in Asia. And this trend continues – according to Verisk Maplecroft’s global environmental index 99 out of the top 100 cities most at risk are in Asia.

A recent example of these risks is Taiwan’s drought, which as I wrote last month could impact global electronics. Unfortunately, the sector not only has to worry about droughts, but also floods according to AWS.

Asia will lose 15-20% of GDP by mid-century on the current path

At a macroeconomic level the climate risks will also be felt more in APAC – Swiss Re estimates that by mid-century on the current path Asia will lose 15-20% of GDP. In contrast the US and Europe will only lose 7-8%. Clearly, the latter have less incentive to lead as they have less to lose.

So, if banks with significant presence in APAC are set to lose the most why wouldn’t they lose?

2. ECB climate stress tests show how bad things could be for the financial sector

We predicted in our “5 Trends For 2021: The Year of the Ox” article in February that central banks and financial regulators will lead the charge to ensure the financial system is resilient. Not an easy task!

A good start is to stress test against these risks – so we were happy to see the ECB taking a stab at it. It has carried out an economy-wide climate stress test covering transition and physical impacts for the next 30 years and includes ~four million companies worldwide and 2,000 European banks.

However, to analyse physical risks, only firm head offices and the location of large subsidiaries were used and not the location of all major offices/manufacturing sites etc. Yet the results already show that a whopping “30% of euro area banking system credit exposures to NFCs (non-financial corporations) are to firms subject to high or increasing risk due to at least one physical risk driver” – but actually 80% are to “firms with at least some exposure to physical risks”. And this is for companies mainly in the eurozone, which as mentioned above faces less risks than APAC.

So no wonder the ECB says that “an even more concerning risk for banks and non-bank financial institutions may arise from exposure to physical risks if climate change is not contained and if economies fail to adapt to climate change” compared to transition risks.

25% least well capitalised banks are 6x more exposed to firms vulnerable to high/increasing physical risk

Plus, all of this could impact capital requirements, specially bank CAR like we’ve already said. The ECB study found that the 25% least well capitalised banks are 6 times more exposed to firms vulnerable to high or increasing physical risk compared to the 25% most well capitalised banks. So what will this mean for these banks and their capital requirements in the future?

The pace of work by central banks and regulators is only heating up – in case you missed it last month The Bank for International Settlements released two reports on climate risk drivers and measurement tools for finance.

3. 2021 research shows the risks are only rising yet company action not yet caught up

As we said last year in our series of reports “CWR Coastal Capital Threat Series” there is a lot of grim news about climate change, from hotter temperatures on land and in the ocean, faster ice melt in polar regions to accelerating sea level rise. We hoped that the bad news would peter out but sadly that isn’t the case.

Multiple scientific studies that came out recently show that polar ice and mountain glaciers are melting at a record rate; experts warn that overshooting 2°C will cause irreversible ice melt from Antarctica, and more than a third of Antarctica’s ice shelf area could be at risk of collapsing into the sea if global temperatures reach 4°C. We will cover the new science in more detail in the following months but the gist of it is clear – the risks are only rising.

Yet, corporates are not acting. A recent study showed that companies that are now TCFD compliant are not disclosing any more than they were before. This is worrying especially as Amundi’s research highlights that less than 5% of companies across all investment universes are aligned with “below 2°C” – like the US are they also waiting for “technologies we don’t yet have”?

But on the positive side, CDP data shows that more corporates are now disclosing on water risks. Hopefully, this trajectory only improves because water risks are becoming a larger factor in finance, for example Fitch is starting to incorporate water risks into their credit rating decisions. So those that ignore water risks may struggle to raise funds in the future.

Clearly, this is an opportunity for APAC banks to lead the way

Clearly, this is an opportunity for APAC banks to lead the way. Not only would these banks look great by showing the rest of the world how it’s done, but they’d also be protecting themselves. After all they are exposed to the most at-risk region globally, so they must assess all climate risks, then decarbonise and also increase adaptation financing. This will also ensure that the savings, livelihoods and assets of billions of people will be safer.

Sounds good to me – what are we waiting for?

Further Reading

  • It Happened – Central Banks And Water Risks – Half a dozen new reports by the NGFS means that CWR has achieved a key milestone in embedding water risks in finance. Debra Tan and Dharisha Mirando expand on these game-changing moves by the central banks. The credit evolution has started
  • Wipeout – 8 Reasons Why Stress Testing For Chronic Risks Will Strand Assets – Systemic shocks from water risks are inevitable unless action is taken to reduce emissions. CWR’s Dharisha Mirando & Debra Tan share 8 things you need to know about stress testing your portfolio
  • The CWR Survival Guides to Avoiding Atlantis – Sea levels can be 3m by 2100, putting urban real estate equivalent to 22 Singapores underwater in just 20 APAC capitals & cities. With US$5.7trn of annual GDP at stake, get on top of the new risk landscape to survive
  • Sovereigns At Risk: Lots Of Capital In Vulnerable Spots – Clustered nature of rising coastal threats plus lax govt action put APAC sovereigns at risk. CWR’s analysis of GDP, trade, markets & bank loans reveal intense concentration of risks. As no-sense strategies pervade, see who’s in CWR’s watchlist
  • Existential Coastal Threats: 8 Things You Must Know – Rapid SLR will happen sooner than we think, yet we are still driving investments to vulnerable locations. CWR’s Debra Tan shares 8 things you need to know about the existential threat from SLR – from glaciers in the mountains to ice sheets in our poles, permafrost + more

More on Latest

  • Water Risk In The ICT Sector – Analysing >3,000 ICT sector locations, AWS’s Sarah Wade shares where the water risks are, which type of water risks they are facing & what the sector can do to become a water stewardship leader
  • How Water Risks Will Impact Credit Ratings – Water risks are relevant for a wide variety of sectors & asset classes yet, incorporating them in credit rating decisions is difficult. Fitch Ratings’ Justin Sloggett shares what to do
  • A Wave Of Change: Companies’ Role In Building A Water-secure World – Despite the pandemic, companies disclosing to CDP are up 20%. Their Laureen Missaire shares the latest trends from their 2020 global water report
  • TCFD Support: Identifying Cheap Talk & Cherry Picking – TCFD is championed by many as the gold standard of disclosure. But is it truly effective? Julia Anna Bingler, Mathias Kraus & Markus Leippold, together with the help from ClimateBert, say no
  • Adapting To Climate Change – Like it or not, climate impacts are getting increasingly ‘up close & personal’ yet, adaptation finance is lagging. Banks & investors should get on top of it as it makes business sense, suggest BNP’s Chaoni Huang & Jonathan Ho
Dharisha Mirando
Author: Dharisha Mirando
Dharisha Mirando hails from the finance industry and joined CWR as she believes that climate and water factors are downplayed by the sector despite being significant investment risks. To tackle this, her ambition is to help build consensus, bridge the gap between finance and science, and engage with investors to incorporate these risks into their due diligence and portfolio management. This could in turn lead to innovative Green Finance instruments becoming more prevalent. She has already made strong headway as the lead author of a recently published report with Manulife Asset Management and the Asia Investor Group on Climate change, which highlights the imminent threats to Asian asset owners' portfolios from climate and water risks. Dharisha has also undertaken a number of speaking engagements on these pressing issues at investor and insurance conferences. Prior to joining CWR, Dharisha worked for a long-only public equities fund. She has also worked in the impact investment space in London and Singapore where she provided technical assistance to social enterprises, helped them raise equity investments, and managed a debt portfolio.
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