Mostafa Monira Firdouse, Green Finance Advisor of Friends of the Earth (HK)

Key Words: Climate RISK, ESG, Financial Institution, risk management framework, policy, society, NET ZERO.

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.

Monira’s blogs and videos:
● Energy Transition comes with Net Benefits to Society and the Economy
Hong Kong: Prospect To Become Green Finance Hub
BONDS: How far we are to be the Global Green Bond Hub
【Friends of the Earth(HK)】Green Finance Connect (08 July 2019)