Philippine banks are more vulnerable to physical climate risks because of the country’s insufficient infrastructure, said Moody’s Investors Service.
In a report (“Banks – Asia-Pacific: Climate risks are growing, with large, diversified banks better positioned to cope”), Moody’s said physical climate risks “are a source of substantial economic losses in Asia-Pacific” particularly in the Philippines which has a “weak” infrastructure.
Other countries in the region that are vulnerable to physical climate risks are Vietnam, Indonesia, Bangladesh and India. However risks are low to moderate for developed economies such as Japan, Korea and Australia.
"Asia-Pacific economies with weak infrastructure are particularly vulnerable to physical climate risks, which can hurt banks' asset quality because a natural disaster can damage borrowers' assets or disrupt their cash flow. Many banks in the region also face asset risks from large exposures to sectors susceptible to carbon transition risks," said Moody's Vice President and Senior Credit Officer, Alka Anbarasu.
Moody’s said banks’ substantial exposures to sectors vulnerable to carbon transitional risks is a growing asset risks for Asia Pacific banks especially in the Philippines.
“Asia-Pacific banks also face growing asset risks from large exposures to sectors susceptible to changes in policies, laws and technologies that stem from efforts to reduce carbon emission globally, not only among governments but also financial institutions themselves,” according to the report.
For Philippine banks, 22 percent of gross loans are borrowings of these susceptible sectors, second only to China’s 24 percent exposure.
Other carbon-intensive sectors are coal mining, oil and gas, diesel-intensive transportation and logistics, and production of steel, chemicals and building materials. “Banks in emerging economies in Asia, such as China, Bangladesh, India, Indonesia, Philippines and Vietnam, have material exposures to these sectors,” said Moody’s.
Moody’s said climate change is increasing asset risks but also legal and reputational risks in the region’s banking sectors.
“Climate change is also altering the cost-benefit analysis of banks’ lending and investment options. The need to fulfill new standards and regulations increases compliance costs for banks and exposes them to the risk of fines or litigation in the event of noncompliance. Additionally, engaging in activities with a significant negative environmental impact or facilitating them can inflict reputational damage on banks and tarnish their brands,” said Moody’s.
In the Philippines, policies and guidelines that the Bangko Sentral ng Pilipinas (BSP) has adopted so far including its “Sustainable Finance Framework” incorporates environmental and social (E&S) risks in banks' stress testing exercises. This will be implemented in 2023.
Moody’s said the legal and reputational risks are increasing for banks in Asia-Pacific as governments “advance guidelines and regulations for sustainable financing and disclosure requirements related to climate risks (while) investors are increasing pressure on banks to stop financing carbon-intensive projects.”
As for the large, diversified banks in the region, Moody’s said these are “better able to cope with these risks and preserve their credit strength.”
“Large, diversified banks in the developed economies of Singapore, Australia and Japan, along with major pan-Asia Pacific banks, are better positioned to cope with climate risks and preserve their credit strength. Fundamentally, their exposures are more diversified across different countries and industries, reducing their vulnerability to climate risks from a single location or borrower group. What's more, they have started incorporating climate factors into their strategic plans and operations as they face pressure from stakeholders to take steps early,” said Moody’s.
The BSP currently is proposing other rules for banks’ integration of climate change and E&S rules.
The proposed guidelines seek to ensure the integration of “sustainability principles in the risk management system particularly in the bank’s risk strategy, risk appetite, and risk management policies and procedures” by setting – among others -- E&S objectives covering short, medium, and long term horizons related to the management of specific risk areas.
The draft circular on E&S risk management framework has been circulated among members of the banking industry for comments and other recommendations. They are given until May 31 to submit their inputs.