APAC regulators begin conducting climate risk stress tests: CreditSights

At least seven APAC central banks and supervisory authorities have accomplished at least one version and published the results.

The central banks and supervisory authorities of 11 Asia Pacific markets have begun conducting climate risk stress tests (CRSTs), CreditSights (CS) said in their report.

Out of the 11 APAC jurisdictions monitored by CS, at least seven have accomplished at least one version and published the results.

Meanwhile, Indonesia is about to start its pilot exercise whilst Malaysia will begin in 2024. The Philippines stated that its’ rollout of a pilot test will commence soon. On the other hand, Thailand has shown no developments.

Banks face transition risk primarily due to their exposure to carbon-intensive sectors, which will be significantly impacted by higher carbon prices during the global shift towards a low-carbon economy.

Sectors at the highest vulnerability include thermal energy, mining, energy-intensive manufacturing, and transportation.

Among the completed CRSTs, South Korea's approach appears less strict. South Korea only investigated transition risk in climate scenarios under an "Orderly transition," whereas most other jurisdictions (except India) considered more adverse scenarios such as "Disorderly transition" and "Hot house world."

ALSO READ: 40% of APAC susceptible to scam, youth more vulnerable: Visa

South Korea, China, Indonesia, and India excluded physical risk from their CRSTs, while Japan examined it only in terms of acute physical risk. 

Japan's analysis extended the time horizon for acute physical risk until 2100, which poses greater challenges for banks due to the expected increased impact of climate change towards the end of this century. 

Malaysia plans to include the expected impact of physical risk (both physical and acute) between 2050-2100 in the time horizon until 2050 for its upcoming 2024 pilot CRST.

Furthermore, Hong Kong's ongoing second CRST iteration requires participating financial institutions to assess both physical and transition risks related to their entire on and off-balance sheet exposures. 

Similarly, Malaysia's 2024 pilot CRST mandates banks to consider their entire loan portfolios. This differs from other jurisdictions that focused on selective lending exposures with higher climate risks. 

However, the ongoing Hong Kong CRST allows banks to use a dynamic balance sheet approach in certain circumstances, similar to Australia's bottom-up CRST, which likely reduces estimated climate-related losses by modelling a shift in asset composition away from higher climate risk exposures.