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Moody’s: Banks face climate risks

Study placed the Philippines in the category of countries in the Asia-Pacific region with a weak infrastructure along with Bangladesh, Vietnam, India and Indonesia

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Ordinary citizens suffer the backlash of stronger typhoons and the consequences from these are problems Asia-Pacific banks share particularly among countries with weak infrastructure.

Banks are exposed to climate change risks and policies meant to address these including those that originate from sudden changes in asset values due to economic priority shifts, a new report by Moody’s Investor Service said.

The study placed the Philippines in the category of countries in the Asia-Pacific region with a weak infrastructure along with Bangladesh, Vietnam, India and Indonesia.

“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,” Moody’s vice president and senior credit officer Alka Anbarasu said.

Compliance costs to rise

The report noted environmental risks could hurt banks’ asset quality as a result of economic disruptions from natural disasters that are considered as low to moderate threats for large economies such as Australia, Japan and Korea.

“New standards and regulations will increase compliance costs for banks while engaging in or facilitating activities with a significant negative environmental impact that can inflict reputational damage on banks and tarnish their brands,” Moody’s said in a statement.

In addition, legal and reputational risks are increasing for banks in Asia-Pacific as governments adopt guidelines and regulations for sustainable financing and disclosure requirements related to climate risks.

Meanwhile, investors have increased pressure on banks to halt financing of carbon-intensive projects.

More green banks urged

The researchers said only a few large banks in Australia, Korea, Japan, Singapore, Malaysia and foreign banks with extensive operations in the region, such as Standard Chartered Plc and HSBC Holdings Plc, prohibit financing new coal-fired power plants. Banks in the rest of the region have yet to articulate such policies.

Other carbon-intensive sectors include coal mining; oil and gas; diesel-intensive transportation and logistics; and steel production, 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, the report added.

However, the study painted a rosy picture for large banks in the region.

“Large, diversified banks in the developed economies of Singapore, Australia and Japan, along with major pan-Asia Pacific banks, are better positioned to cope with climate risks and preserve their credit strength. Fundamentally, their exposures are more diversified across different countries and industries, reducing their vulnerability to climate risks from a single location or borrower group.

“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,” the study said.
Moody’s added that governments’ sustainable development goals would also create financing opportunities for banks.

Bank lending will be the largest source of funding for clean energy projects that will require enormous amounts of investment.

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