Futureproofing APAC Banks & Savings

By Dharisha Mirando, Debra Tan 23 November, 2022

Find out which 17 major APAC banks are on track of sinking loan books totaling US$7.9trn.

CWR analysed 17 major banks across developed APAC from Australia, Hong Kong, Japan, Singapore & South Korea with loan books totalling US$7.9trn; many face “triple whammy” concentrated risks from SLR
Escalating climate risks = finance must wake up, especially in APAC as over 200 million people at risk from just 1m of SLR; yet, the IPCC is warning policy makers that 2-3m of SLR “cannot be ruled out” by 2100
All paths to financial resilience start with stress testing right today so banks have the impetus to 1) support proactive governments to fund transformative adaptation; 2) engage laggard governments; and 3) re-think their own carbon intensive loan book spread

CWR’s new report “Futureproofing APAC Banks & Savings: Stress test right today, avoid hard landing from rising seas”, aims to help the financial sector manage imminent and “virtually certain” chronic risks from rising seas. 17 major banks across developed APAC from Australia, Hong Kong, Japan, Singapore and South Korea with loan books totalling US$7.9trn were analysed to reveal “triple whammy” concentrated risks from sea level rise (SLR). With around US$5trn or almost two-thirds of loan books exposed to escalating SLR risks, the report cautions APAC banks and central banks/regulators to stress test right today to stay afloat tomorrow.

Rising seas could sink banks and over 115 central banks and regulators around the world, under the auspices of the NGFS, have recognised that physical climate risks can trigger systemic shocks that lead to global financial collapse. The report highlights that as SLR’s sector-agnostic and geo-locational nature can over-ride traditional risk spread methods, banks must pay attention – the domestic skew of loan/mortgage books and the concentration in multiple vulnerable sectors amplifies risk clustering. Plus, the coastal nature of APAC means that regional diversification offers little SLR protection.

Across the analysed export hubs of Asia, global trade and supply chains will be disrupted as sector spread offers banks no shelter from rising seas. The financial impact will be significant: CWR’s new report also found that 62% of loan books of the 17 APAC banks are concentrated in sectors vulnerable to coastal threats: real estate (US$3trn; 39%), wholesale & retail trade (US$1trn; 13%), and manufacturing & industry (US$0.7trn; 10%).

Escalating climate risks = finance must wake up, especially in APAC

Globally, the region is the most vulnerable with over 200 million people at risk from just 1m of SLR. Worse still, future projections have shifted: previously, ~1m was considered the high-end worst-case scenario SLR by 2100, but now… the global scientific consensus under the IPCC is warning policy makers that 2-3m of SLR cannot be ruled out by 2100; and 5m by 2150.

In APAC, 200mn people will be at risk from just 1m of sea level rise…

The inclusion of these multi-metre levels indicates the importance of using these levels for “low-regret” adaptation planning as they may well be our reality if emissions and global warming continue. Sadly, according to the WMO, there’s now a 50:50 chance that global temperatures will breach 1.5°C by 2026 instead of the Paris Agreement target date of 2100. Overshooting 1.5°C some 70 years earlier will likely trigger tipping points that could result in rapid SLR by ~2060.

…but now the IPCC warns by 2100, 2-3m “cannot be ruled out”

The world has already reached 1.2°C today and the UN now finds that there is “no credible pathway to 1.5°C in place.” So clearly, as we are playing catch up to impacts, adaptation must be a top priority.

Banks must stress test right – without “seeing” the extent of these risks, they cannot be managed

Most NGFS members cannot see the real risks as their stress tests must improve, so the “triple whammy” concentrated loan book risks is being ignored…

The NGFS has thus urged banks/central banks to perform stress tests under the worst-case scenario. “Seeing” the future risk landscape will help steer banks away from a hard landing and systems collapse. Yet, most central banks/regulators are not prescribing banks to use the multi-metre SLR levels to stress test loan books leading them to underestimate the risk. Indeed, flood maps in CWR’s reports show that impacts between the “worst-case” 1m and “low-regret” levels of 2-3m of SLR are vastly different so banks cannot afford to get this wrong.

On top of this, the new report highlighted that banks are using the wrong timeline, with most NGFS members running stress tests for a 30 year timeline or less whereas SLR only manifests in a rapid manner after 2050. As a result, most banks remain blind to the “triple whammy” concentrated loan book risks highlighted in the report.

…yet the HKMA reveals that 0.55m of SLR by 2050 will put HK$1trn (US$128bn)/32% of property loan books of 27 HK banks at risk

Even at much lower levels of SLR, the consequences for finance are severe. For example, the Hong Kong Monetary Authority (HKMA) pilot climate stress test in 2021 revealed that around HK$1trn (US$128bn) or 32% of property loan books of the 27 Hong Kong banks analysed would be at risk from around 0.55m of SLR by 2050. The HKMA warned that devaluation from physical damages could be more than 50% for some properties in vulnerable areas. These numbers are worryingly high, yet banks could face more stress as seas are rising faster than we’d originally thought, outpacing most governments’ adaptation efforts so far.

Given that traditional methods of spreading risks won’t work for SLR, government action on transformative adaptation can help bank loan books be resilient. Yet this is also not being assessed and governments are not being engaged to draw up attack/defend/retreat adaptation plans.

Government adaptation action is important, but it varies…

Hong Kong and Singapore are island city financial hubs but have very different adaptation strategies. Singapore is adopting a “low-regret” approach: adapting for 2-3m of SLR by 2100 and is raising critical infrastructure to 5m+ above mean sea levels. In comparison, Hong Kong lags, adapting to a 1.5°-2°C future of at most ~0.5m of SLR by 2100.

24x more residential, commercial & industrial bldgs at risk in HK by 2100 if the gov’t adapts for wrong levels

The report’s deep dive case study on Hong Kong clearly shows that adapting to only 0.5m by 2100 instead of 2-3m as warned by the IPCC will put 24x more residential, commercial & industrial buildings at risk. This huge adaptation gap brings high exposure and could trigger systems collapse.

All paths to financial resilience starts with stress testing right today

Banks and governments must align their adaptation strategies, which can be done if they start stress testing right. The new report shows that their mismatched strategies fall into four broad pathways with different outcomes for the financial system. CWR hopes that the analyses in the report will help central banks steer away from a “Double Blind Maximum Risk” path toward “Transformative Adaptation”, the path that provides banks with the highest chance of staying afloat despite rising seas.

All paths to financial resilience starts with stress testing right today…

There is no running away from SLR risks; even if we manage to cut to zero emissions today, seas will continue to rise. Moreover, escalating risks and lagging adaptation mean that banks could be left carrying the risk, especially as the threat of “no insurance” also looms with compounding climate events; all the more reason to stress test right today. To facilitate this, the report includes a 3-Step Guide to Stress Test Right for SLR Risks and an 8-Step Checklist to Futureproof Banks from SLR Risks. Also provided is a 5 must-do checklist for central banks & regulators to avoid systemic shocks triggered by SLR.

…Banks then have impetus to
…1) support proactive gov’ts to fund transformative adaptation; 2)engage laggard gov’ts; & 3) re-think their own carbon intensive loan book spread

CWR hopes these will help banks “see” the real risks, for when they do, they will understand why they need to act to 1) support proactive governments with funding for their transformative adaptation plans; 2) engage laggard governments to better their adaptation plans and avoid maladaptation; and 3) re-think their own carbon intensive loan book spread. Without stress testing right, banks will not have the impetus to change their behaviour. Right now, 9 out of the 17 banks analysed in the report rank within the top 60 most polluting banks globally; together these 9 APAC banks have provided US$560bn in fossil fuel financing since the Paris Agreement.

As the individual factsheets for the five countries/territories in the report show, each location faces unique risks be it physical or related to government action/inaction. Thus, there will be no one-size fits all solution. The road towards “Transformative Adaptation” is long – for both banks and governments – but it is a journey that must start immediately as SLR is here to stay.

Hopefully, the banking sector and regulators are listening. Otherwise, we are all in for a hard landing from chronic risks stemming from rising seas.

For more information on how rising seas will affect the 17 APAC banks from Commonwealth Bank of Australia and Mitsubishi UFJ Financial Group to HSBC, OCBC and KB Financial Group see the full report here.

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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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Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
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