The Asian Bankers Association (ABA) and Qorus, an ABA Knowledge Partner, held an excellent and well attended webinar on Latest trends in Climate, Environmental and ESG Risk Management on 29 October 2024. The webinar gathered 479 registrants from 35 countries.

Moderated by Michael Grover, Qorus Regional Director for the Greater Mekong area, Hong Kong, Singapore and Malaysia, the 60-minute webinar  moderated featured Peter Plochan’s ESG and Climate Risk Management at Qorus.

 

Summary

Peter Plochan started with an insightful overview of the key trends and developments in the climate environment, emphasizing the interconnectedness of climate risks, opportunities, and regulatory transformations. His presentation aimed to equip bankers with an understanding of the growing significance of climate risk management by dividing the subject into seven areas of importance:

 

(1) Introduction to ESG and Climate Risk

Mr. Plochan began by highlighting that climate risk is not isolated but part of a broader transformation driven by decarbonization efforts. He stressed that climate change represents the “ultimate systemic risk,” impacting banks and their portfolios on multiple levels. As banks’ portfolios are increasingly exposed to companies navigating this transformation, understanding climate-related risks and opportunities is crucial for effective risk management.

 

(2) Decarbonization: The Greatest Transformation

Decarbonization is positioned as both a massive challenge and opportunity. While it requires significant work from all sectors, it is also seen as the greatest investment opportunity of our lifetime. Plochan noted that the banking sector must decarbonize its portfolios as part of global efforts to meet net-zero goals. This process has been officially mandated by regulators, such as the Hong Kong Monetary Authority, which has set a target for banks to decarbonize by 2050.

 

(3) Regulatory Developments and Reporting

There is a rising wave of sustainability disclosures and regulatory requirements. Plochan emphasized that banks must prepare for an influx of climate-related data, which will impact financial reporting and risk management. Climate change is increasingly recognized as the “greatest big data project” for banks. This underscores the need for banks to develop robust data strategies to understand and manage climate risks effectively.

 

(4) Political Risk and Regulatory Push

Mr. Plochan noted that global and regional regulators are playing a key role in driving decarbonization. He referenced the European Union’s Green Deal and the “Fit for 55” policy, which mandates a 55% reduction in emissions by 2030. Political decisions made at international conferences (such as COP meetings) directly influence the regulatory landscape for banks, affecting their portfolios and financial performance.

 

(5) Carbon Taxation

Mr. Plochan pointed out that one of the key tools governments are using to drive decarbonization is carbon taxation. He illustrated how different regimes around the world apply carbon taxes and noted that the price of carbon must increase significantly to meet Paris Agreement goals.  Banks must assess how carbon taxes will affect their borrowers and consider the impact of future carbon pricing when underwriting loans, especially for carbon-intensive industries.

 

(6) The Impact of Extreme Weather

Mr. Plochan also discussed the increasing frequency and severity of extreme weather events, particularly in regions like Asia. He pointed out that these events are becoming more frequent due to rising global temperatures, which will have long-term implications for banks’ portfolios, particularly in disaster-prone regions.

 

(7) Climate Risk as a Core Component of Banking Strategy

Mr. Plochan stressed that banks must integrate climate risk into their core strategies and operations. This includes understanding how exposure to climate risks will impact creditworthiness, asset values, and overall financial stability. He called for proactive preparation, warning that failing to plan for these challenges will result in failure, particularly as regulators and stakeholders demand more climate action from the banking sector.

 

 

Mr. Plochan’s presentation also highlighted some key considerations in underwriting loans that bankers need to encompass such as (1) Climate and Carbon Sensitivity: Banks must consider carbon taxation, which is likely to become more prevalent in the future. Carbon-sensitive areas and loans with long maturities (e.g., 20 years) will face increasing risks from future regulations; and (2) Regulators’ Role: Governments will use banks and regulators to enforce climate-related requirements on businesses, pushing them to adopt sustainable practices. Furthermore, Mr. Plochan also noted that ESG faces five important challenges in the market, among them are the following:

 

(1) Regulatory Compliance: Financial institutions globally are working to implement regulations on ESG, especially in relation to climate risk assessments. Key challenges include integrating climate factors into loan provisioning models and ensuring that banks are compliant with existing regulations, such as the European Central Bank (ECB) and others.

(2) Data Collection and Reporting: A central challenge is collecting and managing ESG data. The importance of incorporating ESG factors into day-to-day banking decisions is growing. However, banks face hurdles in collecting reliable data and understanding how it should be applied in risk management models.

(3) Climate Risk Stress Testing: Climate stress testing is a major challenge for banks, especially in regions like Europe and Singapore. Banks are working to design their own processes while complying with regulatory expectations.

(4) Capital Adequacy: Regulators are pushing for the incorporation of climate risks into internal capital models, linking capital requirements to climate-related risks.

(5) Regulatory Expectations and Deadlines: In Europe, 2024 is a critical deadline for banks to comply with climate risk-related requirements, and regulators are inspecting progress. The push to incorporate these factors is not just for compliance but to ensure better risk management.

 

Fortunately, there are tools and frameworks emerging that will clarify and help into the implementation of ESG framework such as the following:

• Emerging ESG Tools: Tools like Malena, a machine learning ESG analyst from IFC, can help process disclosures and generate insights from ESG-related data. There are also various tools and frameworks emerging for assessing physical risks, such as geolocation-based risk assessments.
• Disclosures: Significant changes are occurring in corporate reporting, with an emphasis on risk disclosures. For example, Australian regulations are now more focused on risk exposure, with 100 pages of disclosure requirements, emphasizing how banks are addressing climate-related risks.
• Modeling and Data Issues: A critical gap remains in having sufficient data to assess climate risk accurately, but as disclosures become more robust, this gap will close. The need to integrate climate factors into risk management frameworks and ensure data is available for stress testing and reporting is growing.

 

Finally, Mr. Plochan recommended to bankers two areas that require their attention:

The first is Transition and Net-Zero Plans: Transition plans and net-zero commitments are becoming mandatory. For example, the Hong Kong Monetary Authority has pushed for mandatory net-zero commitments for banks. While the second is Carbon Emissions in Portfolios: A significant challenge for banks is calculating financed emissions, which make up a substantial portion of a bank’s carbon footprint. Decarbonizing portfolios is crucial.

Equally important to note is the issue of collaboration and Industry Initiatives launched by stakeholders because an increasing push for banks to collaborate on best practices for climate risk assessment and stress testing using the tools and materials are being developed will help better integration of ESG factors across the industry, with the potential for collective industry action.

In conclusion, Mr. Plochan framed climate risk management as a critical priority for banks. He emphasized the need for banks to recognize the dual nature of climate change: as a risk to be mitigated and as an opportunity to be seized. With the push for decarbonization and evolving regulatory frameworks, banks must adapt to a new era where ESG considerations play a central role in shaping their business strategies and long-term viability.

A video recording of the webinar can be viewed at the ABA YouTube HERE.