"Navigating climate risks: 3 strategies for building resilient financial institutions"

" Navigating climate risks: 3 strategies for building resilient financial institutions\u00a0 \r\n\r\n \r\n\r\nScientific evidence shows that climate change is getting worse, with higher levels of carbon in the air causing more frequent and severe weather events. Additionally, there are risks associated with the transition to a low-carbon economy.\r\n\r\n \r\n \r\n\r\nThese changes threaten existing assets and businesses, causing serious economic problems. According to the Potsdam Institute, climate-related impacts could\u00a0 reduce global income by 19% \u00a0over the next 25 years, amounting to $38 trillion in annual losses by 2050. In comparison, the COVID-19 pandemic\u00a0 shrunk global gross domestic product \u00a0(GDP) by 3% over two years.\r\n\r\n \r\n \r\n\r\nThe Asia-Pacific region is particularly vulnerable, with\u00a0 26% of its GDP at risk \u00a0due to rising temperatures. The World Meteorological Organization labelled 2023 the\u00a0 warmest year in history , while\u00a0 2024 has been just as warm . Regions across the globe have witnessed heat waves, droughts and deficient rainfall, impacting output, productivity and livelihoods.\r\n\r\n \r\n \r\n\r\nThese economic impacts translate into risks for businesses and financial institutions. Climate risks can affect business performance through asset damage, operational disruptions and reduced cash flows, ultimately impacting the ability to repay debt and company valuation. For example, a 1% increase in typhoon damage in the Philippines led to a\u00a0 2.3% rise in non-performing loans , jeopardizing systemic financial stability. Hence, financial institutions must manage climate risks as a step towards transitioning to a low-carbon portfolio.\r\n\r\n \r\n \r\n\r\nBesides market forces, regulatory pressures are also increasing. Various regions, including the United Kingdom, European Union (EU), Singapore, Malaysia and New Zealand, are requiring financial institutions to disclose their climate risks and opportunities. For example, the Reserve Bank of New Zealand\u2019s 2023\u00a0 climate stress tests \u00a0showed potential impacts on bank profitability and risk-weighted assets. As a result, banks are working to improve their climate risk management.\r\n\r\n \r\n \r\n\r\nTherefore, financial institutions need effective climate risk management to safeguard against future losses and stay ahead of evolving regulations, focusing on three critical elements: risk identification, measurement and integration.\r\n\r\n \r\n \r\n Risk identification \r\n\r\n \r\n \r\n\r\nClimate risk identification includes these key approaches:\r\n\r\n \r\n \r\n \r\n \t Sector and location analysis \u00a0 using portfolio exposure and climate hazard data, \u00a0 often through maps, helps identify vulnerable areas and risk hot spots. This analysis also considers these regions\u2019 ability to adapt, reducing their vulnerability. \r\n \t Climate materiality mapping \u00a0assesses key risk factors based on their impact and likelihood of affecting business decisions. Using a\u00a0 balanced scorecard framework \u00a0improves this process, helping to identify important business elements that could be most affected by climate risks. \r\n \t The green asset ratio \u00a0shows how much a financial institution\u2019s loans and investments go to \u201cgreen\u201d economic activities. It highlights the\u00a0 potential risk of moving to a low-carbon economy . A lower green asset ratio means that the financial institution might be more affected by policy, technology or market changes to reduce carbon emissions. \r\n \t Estimating financed emissions \u00a0caused by lending or investment decisions helps\u00a0 set a baseline \u00a0for assessing climate risk and guiding efforts to reduce carbon emissions. \r\n \r\n \r\n \r\n Risk measurement \r\n\r\n \r\n \r\n\r\nClimate risk measurement encompasses physical and transition risk assessments including the following\u00a0 dimensions ,\u00a0 respectively .\r\n\r\n \r\n \r\n Physical risk assessment \r\n\r\n \r\n \r\n \r\n \t Hazard: \u00a0Identifying extreme weather events impacting specific regions. \r\n \t Vulnerability: \u00a0Measuring business sensitivity to these hazards in terms of severity and frequency of risk events. \r\n \t Exposure: \u00a0Assessing the extent of asset, workforce and resource impact. \r\n \r\n \r\n \r\n Transition risk assessment \r\n\r\n \r\n \r\n \r\n \t Carbon footprint\/financed emissions: \u00a0Establishing a baseline for risk mitigation and driving investments towards lower-carbon alternatives. \r\n \t Sector and location analysis: \u00a0Identifying hotspots affected by policy, technology and market shifts. \r\n \t Carbon price impact: \u00a0Assessing how potential carbon pricing could impact the finances of other parties involved. A carbon price could hurt counterparties\u2019 finances. \r\n \r\n \r\n \r\n\r\nA probability-based scoring system helps determine physical and transition risks, respectively, at the borrower or investee level.\r\n\r\n \r\n \r\n\r\nAdditionally,\u00a0 climate scenario analysis \u00a0is also used in a risk assessment to assess how different levels of global warming could impact economies, business drivers and financial institutions\u2019 risk ratios.\r\n\r\n \r\n \r\n Risk integration \r\n\r\n \r\n \r\n\r\nIntegrating climate risks into existing risk management processes involves:\r\n\r\n \r\n \r\n \r\n \t Enterprise risk management: \u00a0Establishing an early warning system to flag climate risks and assess their impact on existing risk categories and policies. \r\n \t Risk appetite framework: \u00a0Using clear guidelines to evaluate financing activities in line with a financial institution\u2019s climate strategy. This includes\u00a0 such strategies \u00a0as avoiding certain investments, selling off assets, or setting limits on loans to control exposure on the balance sheet and determine pricing based on climate risk. \r\n \t Conventional risks: \u00a0Incorporating climate factors into\u00a0 existing risk management processes , evaluation criteria and internal ratings to address impacts on cashflows, debt serviceability, asset pricing, liquidity and operational efficiency. \r\n \t Sustainability disclosures: \u00a0Tracking climate risks transparently and accurately, using standards like those from the Task Force on Climate-related Financial Disclosures and the International Accounting Standards Board \u2013International Financial Reporting Standard IFRS S2 \u2013 serves as a scorecard for monitoring progress in strategy formation. \r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n\r\nIn sum, effective climate risk management is essential for financial institutions transitioning to low-carbon portfolios. By improving risk identification, assessment, and integration, financial institutions can enhance decision-making and strategies, build institutional resilience and capitalize on emerging opportunities through sustainable lending and investing.\r\n\r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n \r\n "

"Navigating climate risks: 3 strategies for building resilient financial institutions"

A Crisis of Abundance: Why Ghana’s Grain Farmers Are Burdened by Their Own HarvestAMP

Djokovic and Sabalenka Set for Final Showdowns in Athens and WTA FinalsAMP

Ghana Premier League Matchday 9 PreviewAMP

Lando Norris Secures Pole Position for Brazilian Grand Prix Sprint RaceAMP

Beyond the Headlines: A Love Letter to Journalism AMP

SML Challenges Basis of Contract Termination by President MahamaAMP

Consumer Price Index Projected to Fall Sharply to 6.5% by End-NovemberAMP

Energy Consortium Secures $50 billion to Build Africa’s Second-Largest Refinery in NigeriaAMP

Botswana, Angola eye split in battle for De BeersAMP

A Crisis of Abundance: Why Ghana’s Grain Farmers Are Burdened by Their Own HarvestAMP

Djokovic and Sabalenka Set for Final Showdowns in Athens and WTA FinalsAMP

Ghana Premier League Matchday 9 PreviewAMP

Lando Norris Secures Pole Position for Brazilian Grand Prix Sprint RaceAMP

Beyond the Headlines: A Love Letter to Journalism AMP