The Asia Investor Group on Climate Change, which represents investors with US$32 trillion AUM, and think-tank CWR (China Water Risk) have urged the regions’ banks to overhaul their climate stress tests for escalating coastal threats.
In an open letter to the sector they say banks’ stress tests should be enhanced to keep up with the latest science on the Asia Pacific’s high and rising exposure to climate damage and disruption from sea level rise.
Download the Letter
230 million people in the region are in acute danger by 2050, and global monetary exposure to rising sea levels could be in the realm of US$14 trillion annually, notes the letter.
However, without rigorous and credible data and stress testing based on the right scenarios, governments, banks and others in the financial system cannot rely on their risk assessments to inform them of the full extent of the physical risks ahead. This impinges on the ability to ensure transformative adaptation action to guard against these risks.
AIGCC and CWR recommend improvements to stress tests, summarised here, and covered in more detail in the letter:
- Use an appropriate time horizon of 50-80 years, to ensure that risks are adequately captured, as sea level rise is expected to accelerate beyond 2050;
- Include “Low Regret” scenarios, which “cannot be ruled out” of at least 2m of sea level rise by 2100; and
- Include adaptation actions/plans that governments are or are not taking.
Banks should also use stress testing results to engage governments on adaptation planning needed to protect bank assets and revenues, recommends the letter.
This letter draws on from CWR’s report “Futureproofing APAC Banks & Savings: Stress test right today, avoid hard landing from rising seas”.
Quotes
Eric Nietsch, Head of Sustainable Investing – Asia, Manulife Investment Management and Chair of AIGCC’s Physical Climate Risks and Resilience Working Group said:
“Current stress testing approaches often underestimate sea level rise risks because of a time frame that is too short, and the level of sea level rise used Is too low. We hope that enhancing these assessments will lead to Improved planning and greater resilience.
“We are encouraging banks to review their exposures, particularly in sectors like trade, manufacturing and real estate that are so vulnerable to sea level rise.”
Anjali Viswamohanan, AIGCC’s Director of Policy said:
“Institutional investors in Asia are concerned that the risks of climate damage and disruption may be radically under-priced by many of our regions’ most important banks.
“You only have to look at the human and economic loss sweeping across the world right now to realise that financial institutions cannot afford to be flying blind.
“Banks need to get serious about reviewing and quantifying higher loan books’ exposures, particularly in sectors like trade, manufacturing and real estate that are so vulnerable to sea level rise.”
Dharisha Mirando, Finance Engagement & Water Risk Valuation Lead – CWR, and Lead author of the report the recommendations are based on said:
“We are very pleased to see APAC investors with an AUM of US$32trillion actively engage on sea level rise with banks as it is an important risk that is often put on the back burner. Many don’t realise that we’ve already locked in 6-9m of rising seas and that the IPCC now warns that 2m “cannot be ruled out” by 2100.
“Currently, over US$5 trillion (64%) of loan books of 17 APAC banks are at risk from rising seas. So, ignoring this chronic risk will impact financial stability. Our analysis of the “triple whammy” risk facing banks shows that they continue to severely under-estimate SLR risks because they are not stress testing right.
“Traditional methods of spreading risks won’t work – the only way banks can be resilient is if cities and countries are resilient – and the only way to get there is for banks to stress test right.
“We hope this letter kickstarts a much-needed conversation to catalyse transformative adaptation. This summer has given us a glimpse of “climate hell” and shown us how unprepared we are. Rising seas are virtually certain and irreversible – we must be prepared.”