Green Finance Advisor of Friends of the Earth (HK)
Asia is highly vulnerable to climate change.
Based on the Global Climate Risk Index 2021,
six of the ten most affected countries from 2000 to 2019 are in Asia. It is
encouraging to see many Asian countries committed their long-term net zero
emission targets. However, the road to net zero is full of uncertainty as it
seems that most of these countries do not have detailed planning and strategies
for reaching the targets. According to the latest study conducted by Siemens
Energy in collaboration with management consultant Roland Berger, the Asia
Pacific region only scored a 25% of readiness for energy transition.
Many countries in the region have younger demographic, larger population and
faster growing economies. They are certainly facing more challenges and are
more resisted in energy transition than the developed countries. However, with
close to 80% of global coal consumption coming from Asia Pacific, the energy
transition of the region is critical to the success of the earth in combating
Coal is not only the primary source of
power for many countries in this part of the world but also a major source of
their national income. The major challenges to enable smooth energy transition
are the current rules and regulations that were initiated to favour coal and
other fossil fuels. One of the primary products of these rules and regulations
is the fossil fuel subsidies. According to a report from Asian Development Bank,
government spending on fossil fuel subsidies, which covers the gap between global
and domestic prices, exceeds public spending on education or health in some
Asian countries. These subsidies accrue largely to the rich and reduce
incentives for investment in renewables and energy efficiency. Comparatively,
financial incentives for renewable energy is just a fraction of the subsidies
given to fossil fuels.
Energy transition is therefore not only about changing the energy mix to more
clean energy and less fossil fuels but also about rebalancing the power and
wealth among the society. We should drive energy transition that would
positively impact both the environment and the people.
Recognizing the importance of just
transition of the workforce in the paradigm shift towards low carbon and
climate resilient economies and society, head of states and governments signed
the Solidarity and Just Transition Silesia Declaration at COP24.
The challenge is the execution of the just transition concept in government
policies. Sadly, just transition is nothing but slow in many countries that
need to diversity its energy supply. Without the acceleration in just
transition, the net zero goals are far reaching. At COP26 the United States, EU
and other developed countries made a joint declaration
to support the conditions for a just transition internationally, including the
developing countries and emerging economies. The help of the signatories and
other developed countries is very much needed to mobilize resources, including
capital, to just transition. Hopefully, we will see some actions before COP27,
not just another declaration at the conference.
Climate, the moment the word comes, our
brain automatically tells us, it’s a global problem and shared responsibilities.
Then, we LOVE to talk about of all the failed initiatives, like; green washings,
bureaucracy, sea-level rise, living condition in Mars etc. Unless there is any
recent typhoon signal, we often do not see climate change is an issue in our
daily life. BECAUSE we know climate change is a global issue, it’s UNFCC’s
problem, perhaps its sort of Financial Institution’s problem and overall, it’s
the next generation’s problem!
In last week, I have got a call from my
bank to do a 121 risk assessment (over phone with set questionnaire). Throughout
my answering time, I tried to give an impression, #am a pretty good financial
risk taker#?#<3. As if, me, as an insignificant individual trying to make
significant change in Bank’s profile! Tell me about it. #?*.
1. Surprisingly, the phone call and all those set questions created a ripple effect in my mind. I wanted to know, what’s the climate risk of banking system? How do they define climate risk? Whether customer risk profiling regular questions covers climate risk perspective, as well? I started digging info, impressively, I have got most of the answers. Like; YES, bank has ESG & Climate Risk covered under their risk section. Then another question ticking in my mind, how are the banks capturing climate risk? This is what I have found, though to share with you all;According to Basel Committee on Banking Supervision Report (Link), Banks and the banking system are exposed to climate change through macro- and microeconomic transmission channels that arise from two distinct types of climate risk drivers. First, they may suffer from the economic costs and financial losses resulting from the increasing severity and frequency of physical climate risk drivers. Second, as economies seek to reduce carbon dioxide emissions, which make up the vast majority of greenhouse gas (GHG) emissions, these efforts generate transition risk drivers. These arise through changes in government policies, technological developments, or investor and consumer sentiment. They may also generate significant costs and losses for banks and the banking system. –Physical risk drivers are changes in both weather and climate that impact economies. Which we are experiencing through more frequent stronger category typhoons in Hong Kong. Quick look – However, transition risk drivers are the societal changes arising from a transition to a low-carbon economy.
Side Note: As you all know, I am a passionate researcher with sole interest on capturing social changes due to climate change impact. Obviously, the transitional risk drivers fastened my immediate attention. Also, I believe, if we can manage transitional risks, only we will be able to manage physical risks. I am eager to learn more about Climate Risk with keen interest to witness low carbon economy.
2. There is a growing consensus among policymakers and supervisors that climate change poses real financial risks. Good amount of evidence showed that transition and physical risks are arising from climate change represent a material risk to the banking system and may even be a source of systemic risk to the financial system (Link). But what extent of climate risks are properly dealt with in banks’ prudential frameworks? According to research, the unique features of climate risk coupled with calls from academia to address possible credit market failures have triggered a debate on whether the current regulatory framework can adequately capture these risks. Both the Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have launched initiatives to explore whether the current banking regulatory framework can sufficiently capture the unique features of climate-related financial risk.
3. The report recently published by IPCC for decisive action to mitigate the already materializing risks triggered by “widespread, rapid and intensifying” climate change. The adequate quantification of climate risks to banks’ balance sheets remains a major challenge, however – due to an unprecedented combination of impacts in the short and medium to long-term horizon inherent in climate risk, and innovation in forward-looking modelling is necessary to identify prospective financial losses.