APAC banks now prioritizing climate change impact for risk management
Risk management sees a new chart-topper, climate change, in terms of long and short-term risks for Asia-Pacific (APAC) banks. A whopping 90% of APAC bank chief risk officers (CROs) are now seeing climate change as a top long-term emerging risk over the next five years that requires urgent attention in the next 12 months.
This is according to the 11th EY and Institute of International Finance (IIF) bank risk management survey titled “Resilient banking: Capturing opportunities and managing risks over the long term.”
“Climate change has climbed to the top of Asia-Pacific banks’ short- and long-term risk agendas for the first time since we began this survey over a decade ago. The greater immediacy that Asia-Pacific banks’ CROs are placing on climate change risk over the next year, compared to the global average, reflects the urgency that regulators across the Asia-Pacific region have placed on climate risk management capabilities, as well as a heightened focus by investors and shareholders on disclosures,” said EY Asia-Pacific Financial Services Risk Management Leader David Scott.
However, while APAC bank CROs have caught on to the emerging risk that is climate change in looking at risk management, the survey also found that, in practice, only 20% of the polled respondents have indicated a “somewhat complete understanding”.
This, according to the survey, is indicative of how, in practice, APAC banks are still maturing in their ability to assess physical and transitional risk exposures, and that sourcing and managing climate risk-related data continue to be a challenge.
“Similarly in Malaysia, climate change risk continues to be a key area of focus of CROs. Driven by increased regulatory focus and expectations, many financial institutions have begun to integrate environmental, social and governance (ESG) principles into their strategy and risk management practices.”
“The issuance of the Climate Change and Principle-based Taxonomy by Bank Negara Malaysia earlier this year has provided a common framework for the classification of climate risk-related exposures,” said Joazral Yusof, Partner of Ernst & Young Consulting Sdn Bhd.
Joazral added that, the more recent update of the Malaysian Code on Corporate Governance by the Securities Commission had proposed that boards and senior management be evaluated on how well they manage sustainability risks and opportunities.
“As such, it is critical for financial institutions to keep pace and continue to build the right capabilities and capacity required to successfully implement ESG strategies and risk management,” Joazral said.
As it stands, climate change as a major issue is nothing new for big tech companies, many of which have already taken the lead in sustainable development in APAC, such as Amazon’s forays into renewable energy in the region, and Australia’s advances into technology to lower its national carbon footprint.
Cloudflare’s target of a zero-emissions internet stands as a more global example of how tech companies have already identified climate change as a significant factor moving forward.
Covid-19 and risk management
Other than climate change, APAC bank CROs also listed resilience factors, amplified by the Covid-19 pandemic, as leading items on the risk management agenda, followed by cybersecurity, and credit risk linked to economic uncertainty.
However, global results differed, with 98% of global CROs seeing credit risk as the top concern for banks over the next 12 months, as the world continues to recover from the pandemic, with cybersecurity following at 80%.
“While cybersecurity has long been the leading immediate concern for CROs, the Covid-19 pandemic changed the game. The breadth and depth of the pandemic’s shock to the global economy have brought credit concerns to the forefront for banks over the next 12 months,” said IIF Regulatory Affairs Managing Director Andrés Portilla.
It was also noted that the pandemic had proven to be an unprecedented and unexpected test of risk management for banks, one that most of the banking sector had passed through building greater and higher-quality capital and liquidity. Another positive is that, with banks accelerating their digital moves due to the pandemic, greater technological resilience was also built.
“The COVID-19 pandemic has shown just how quickly things can change, but it’s also shown us the agility of the banking sector in times of crisis. It’s clear that banks, both regionally and globally, may have to contend with persistent and dynamic disruption not just today, but tomorrow and into the future, and it’s vital they remain resilient to all forms of risk – existing, new and emerging,” said EY APAC Banking and Capital Markets Consulting Leader Douglas Nixon.
Nixon added that, over the next decade, APAC banks would very well survive new challenges and continue to thrive through the combination of talent, data, and technology.
Digital transformation and tech disruption
The survey had also identified that five of the top ten emerging risks according to APAC bank CROs relate to technology and data, including disruption to the industry due to new technologies, the pace and breadth of change from digitization, and model risk related to machine learning or AI.
However, the same CROs also expect banks to further accelerate digitalization through automating processes, modernizing core technology, and delivering enhanced insights to customers.
80% of APAC bank CROs also expect to see the introduction of new or additional regulatory requirements on operational resilience, with 70% expecting the same for financial resilience, based on the lessons learned during the Covid-19 pandemic.
Still, the majority of APAC banks still see rising control costs, mainly attributed to building greater resilience and effecting digital transformation agendas. However, 10% of those banks believe they can manage down control costs over the next three years through the use of data and technology to improve risk management.
Climate change as a risk in coming years is being increasingly accepted across more and more industries, with efforts being stepped up to address the issue in ways that are sustainable to the environment in accordance with the United Nations’ Sustainable Development Goals.
This presents opportunities for companies that can bridge the gap between traditional industries and sustainable efforts, that can aid in the transformation of companies towards sustainable development.
However, this also marks the sector as a crowded competition zone, as more of such companies pop up in the market. The importance of a USP in this regard would serve a company well in standing head and shoulders above the competition.
With consumers also aiming towards greener, more sustainable products, to the point where three-quarters of global consumers are willing to change consumption habits, it stands to reason that this trend can only continue to provide opportunities for growth, providing an organization can stand out from the crowd.
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