Asian banks need to improve how they track & disclose financed emissions risks

• Investor coalition Asia Transition Platform evaluated Asian banks on their climate governance, risk management and policies
• The report found significant gaps compared to TCFD recommendations and national decarbonization commitments
• Report conclusions are in harmony with RFI Foundation research about the importance of financed emissions risks within Islamic markets, some of which overlap

An analysis of 32 large Asian banks conducted for investor platform Asia Transition Platform has found significant gaps in their disclosures of climate-related risks. These risks were found to be particularly wide in relation to board experience on climate-related financial risks, as well as the banks’ disclosures about their specific financed emissions risks.

The analysis was conducted on the largest banks in Japan, China (covering mainland and Hong Kong-listed banks separately), South Korea, Thailand, the Philippines, Malaysia and Indonesia. It was based on reviewing their disclosures across four areas aligned to the Task Force on Climate-related Disclosures (TCFD): Governance; Risk Management; Policy; and Opportunity. It focused much of the analysis on the power sector as a test case, and found that even where disclosures were made, they were uneven across banks and countries, which inhibits comparisons between banks.

Two of the issues identified included a lack of board member experience on climate-related risks and limited transparency around discussions at board level on climate-related financial risks. The limited experience in climate-related risks at board level is in part responsible for the limited disclosure of the bank’s financed emissions risks, which is where the bulk of every banks’ climate-related risks are concentrated.

The challenges of financed emissions risk calculation and estimation are complex, data are limited, and risk management efforts require significant investment over time. These challenges are responsible in part for the slow pace to date in addressing important climate-related risks. However, the magnitude and pace of risks either materializing in financial losses, or becoming significant sources of regulatory compliance risks, step up the urgency related to addressing them.

One of the discrepancies found within the banking markets across Asia was the concentration of banks making disclosures on their financed emissions metrics. All nine of the 32 banks making these disclosures were headquartered in Japan, South Korea or Singapore. No banks in emerging markets had yet analyzed and disclosed their financed emissions. Two of these countries — Malaysia and Indonesia — were recently analyzed for the RFI Foundation’s financed emissions reports, which found significant interlinkages of climate-related risks that impact the financial sector beyond just high-emitting sectors.

In Malaysia, several banks covered by the ATP survey have subsequently participated in a pilot project of the 2 Degree Investing Institute & WWF Malaysia, which analyzed the transition-alignment of the banks using the PACTA tool, without disclosing bank-level results. The limited public disclosure on the scope of financed emissions for each financial institution was coupled with gaps in disaggregating some of the most important sources of emissions. The ATP report notes that:

“Only 12 of the 32 banks (38%) disclose exposures to one or more carbon-intensive segment, such as fossil fuels, steel, or cement. Bank of the Philippine Islands and KBank disclose the fossil fuel mix of their power utilities financing, although the extent of asset exposure is unclear. In general, when there is disclosure, it is limited and poorly defined.”

As the adage goes, ‘you can’t manage what you don’t measure’, and in the case of Asian banks, there is a significant shortfall in the amount of data available to the banks themselves, and even less disclosed to their investors. Regulators, in the meantime, are beginning preparations in many countries including Malaysia, where the stock exchange is proposing TCFD-aligned disclosure, and the central bank, Bank Negara Malaysia, has concluded a comment period on an exposure draft relating to Climate Risk Management and Scenario Analysis.

Bank Negara’s policy follows the elements of the Basel Committee on Banking Supervision’s Principles for the Effective Management and Supervision of Climate-related Financial Risks, on which RFI Foundation commented earlier this year. This comes at a time when taxonomies are being adopted across Asia on a national basis, as well as on a regional basis within ASEAN. What had become a prudent risk management and element for investor concern is increasingly moving towards the area of regulated disclosures that are likely to be mandatory in the near future.

• This all leads the ATP report towards the conclusions about how they can elevate the profile of climate risks beyond just one of many ‘sustainability’ issues and into their formal risk management process. Many of the recommendations echo those that have come from RFI Foundation’s analysis of financed emission exposures in Malaysia and Indonesia. Some of the most critical elements now that climate-related financial risks are widely accepted as being important and the subject of increased regulatory scrutiny include:Governance: Banks need to form dedicated sustainability committees, and add climate-related expertise explicitly into the board nomination process, and link it to executive pay.
• Risk management: Banks need to add climate-related risks to their risk registers, backed up by scenario analysis that becomes more comprehensive over time, so that it becomes a formal part of the risk management process and climate risks don’t get mispriced.
• Policy: Banks need to more fully align their financing policies to the Paris Agreement and national NDCs, including in relation to the phasing out of coal, which means adopting long-term Net Zero targets as well as interim targets to show a credible pathway to reach Net Zero.
• Opportunities: Banks need to go beyond offering sustainability products and address concerns of greenwashing by addressing the climate impacts of financed activities that are not labeled as sustainable, as well as strengthening governance, risk management & policy around climate risks.