KUALA LUMPUR – Climate change has created operational and strategic challenges for banks globally, as governments move towards low-carbon economic models, said Moody’s Investors Service.
Vice-president (senior credit officer) Alberto Postigo said the technological, political and regulatory environment for banks is changing rapidly as a result of climate change, adding to the industry’s other challenges, such as those posed by digital innovation.
“While banks can anticipate these threats and guard against them through forward-thinking risk management and strategic action, lenders that are slow to adapt will face more pressure on their credit strength,” he said in a statement yesterday.
According to the Moody’s report Banking – Global: Climate Change to Force Further Business Model Transformation for Banks, carbon transition and physical climate risks will alter the cost-benefit analysis of banks’ lending and investment options.
“That will put the industry under pressure to integrate climate risk considerations into its strategic decisions, business processes, governance, and risk management frameworks.”
The report said climate change will also affect borrowers’ finances, creating credit risks for banks.
“Credit risks will be greater for banks that fail to adapt, or in scenarios that require a more rapid adjustment.”
In terms of new risks and costs brought on by climate change, the credit ratings agency said banks will need to invest in building climate expertise as policymakers try to implement new environmental policies through changes to banking regulations.
“Regulators will likely balance climate policy objectives with the need to let banks adapt gradually, avoiding financial market dislocations.”
The report said a rapid expansion of banks’ low-carbon asset portfolios may increase their exposure to assets whose economic viability is unproven, and they will also face reputational damage if they are perceived as failing to respond to climate change.
While climate risks are difficult to model, Moody’s expects banks to gradually become better at managing and pricing them. – Bernama, April 21, 2021
