Climate change tops risks for Apac banks

An EY and Institute of International Finance (IIF) risk management survey found that for the first time, climate change is the main concern for chief risk officers (CROs) in the region.

The issue heads the list of both long- and short-term risks for Asia Pacific banks, according to the 11th EY and Institute of International Finance (IIF) bank risk management survey, Resilient banking: Capturing opportunities and managing risks over the long term.

As many as nine-in-ten of Asia Pacific bank chief risk officers (CROs) surveyed view climate change as a top long-term emerging risk over the next five years – up from 59% in 2019.

While this is consistent with the global result of the survey (91%), it appears Asia Pacific bank CROs are even more focused on climate change in the near term with 100% viewing it as a top risk, requiring their urgent attention over the next 12 months. This compares with just 49% of CROs globally who view it as a top short-term priority.

“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,” said David Scott, EY Asia Pacific financial services risk management leader

“The greater immediacy that Asia Pacific banks’ CROs are placing on climate change risk over the next year, compared with the global average, reflects the urgency that regulators across the region have placed on climate risk management capabilities, as well as a heightened focus by investors and shareholders on disclosures,” he added.

Learning curve

However, the survey found that Asia Pacific banks in practice are still learning how to manage physical and transitional risk exposures. and that sourcing and managing climate risk-related data remains a challenge.

While 80% of surveyed Asia Pacific banks’ CROs report having a “preliminary understanding” of their climate change risk exposure, just 20% say they have a “somewhat complete understanding”.

The survey of 88 financial institutions across 33 countries, 18% of which are headquartered in Asia Pacific, examined the major risks anticipated over the next 10 years.

Aside from climate change, resilience factors which have been amplified by the Covid-19 pandemic are major concerns for Asia Pacific banks’ CROs.

Covid impact

Cybersecurity is perceived as the second most urgent risk by CROs in the region over the next 12 months (89%), followed by credit risk linked to economic uncertainty (67%) at number three.

This near-term regional priority order also differs from the global results. Globally, 98% of CROs believe credit risk will be the number-one concern for banks over the next 12 months, amid the continuing global economic recovery 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 has brought credit concerns to the forefront for banks over the next 12 months,” said Andrés Portilla, managing director, regulatory affairs at the IIF.

Based on lessons learned from the pandemic, 80% of Asia Pacific banks’ CROs expect to see the introduction of new or additional regulatory requirements on operational resilience, and 70% of CROs expect the same on financial resilience.