Moderated by Michael Grover, Qorus Regional Director for the Greater Mekong area, Hong Kong, Singapore and Malaysia, the 60-minute webinar featured Peter Plochan's ESG and Climate Risk Management at Qorus. The webinar gathered 479 registrants from 35 countries.
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. Trends are:
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.
2. Decarbonization: The Greatest Transformation
Decarbonization is positioned as both a massive challenge and opportunity. 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.
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.
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.
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.
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 such as:
(1) Regulatory Compliance: Financial institutions globally are working to implement regulations on ESG, especially in relation to climate risk assessments.
(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.
(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.
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.
• Disclosures: Significant changes are occurring in corporate reporting, with an emphasis on risk disclosures.
• 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.
Mr. Plochan recommended to bankers two areas that require their attention: Transition and Net-Zero Plans and Carbon Emissions in Portfolios.
The full summary report can be read at www.aba.org.tw