Climate Risk Webinar
Questions and Answers
Question: How can financial institutions of developing countries such as Nepal quantify climate related risks of their portfolio? Can climate related risks be also considered while assessing internal capital adequacy of financial institutions ?
Answer: This is a very complex issue within regulators and in the academic community, and the financial sector itself. There are a lot of debates on how to do this. We are currently all learning in the process. Key is to conduct stress tests and to use those results in managing capital adequacy. However, at present, obtaining good data and incorporating it into risk management frameworks is very difficult. We need data at a very granular level on physical risks by geolocation, including historical data. Some data exists, but it is often cost-intensive to collect and manage these data. It is important to keep in mind that physical risks are more long-term in nature. Concerning transitional risks, we also need to collect many more data points on different types of emissions (such as scope 3 emissions) and measure as precisely as possible to better understand the scope of financed emissions and which basically can affect the loan books of the institutions, for instance due to carbon taxes.
Question: Is Standard Chartered Bank facing any challenges when monitoring Carbon metrics in its operations in emerging economies like Nepal and Bangladesh etc.? Is the availability of emission data, and its monitoring and calculation a challenge?
Answer: Overall, we welcome the increasing requirements and guidance for transparency and disclosures. Because one of the challenges that the industry faces is access to quality data across markets of operation and the need to rely on simulations where GHG emissions are not granular which then allows us to engage with our client on their transition plan. However, while various Central Banks want to see our green asset ratio, all apply a varying definition or classification for green activities. For those banks with a broad footprint, engaging the several regulators proactively and in partnership has proven important to move the industry forward.
Question: While considering green finance/green bonds, understanding the real or green sector investment opportunities better is the first step. In this context, should we simultaneously consider overall sustainable business strategies practices as well? Would it be a qualifying criterion or can we accept a gradual adapting commitment, especially in developing economies? What has been your experience regarding the challenges when commitment and cooperation from other stakeholders like the private sector (clients) and even regulators at times are not as expected? What were the way forward solutions you considered in such transition scenario?
Answer: Many of our clients do not yet measure their own emissions. As such we have supplemented this with estimates of client emissions based on statistical regression analysis at sector level. We expect data to improve over time and we intend to integrate it as it becomes available. We use two different global scenarios to assess the evolution of emissions up to 2050. These scenarios are derived from the IEA’s Net Zero Emissions by 2050 scenario (NZE) and Current Policies Scenario (CPS). However, the IEA global scenarios are not sufficiently granular for detailed portfolio analysis. We have, therefore, augmented these datasets with a range of data sources that consider the specific pathways for our markets, consistent with reaching net zero by 2050.
Moreover, we as Standard-Chartered Bank, have drafted a Transition Finance Framework. Our approach is based upon the NZE and has been informed by the best currently available information, including the Climate Bonds Initiative White Paper and Discussion Paper, the EU Sustainable Finance Taxonomy and Consultation Report on Taxonomy Extension Options and our own sectoral Transition Playbook.
(Please find also for further reference the Standard-Chartered-Bank-Transition-Finance-Framework.pdf )
Question: If you could quickly provide a few points on how you would consider E&S risk in the capital adequacy policy document – in line with the Internal Capital Adequacy Assessment Process - ICAAP) - when you are yet to consider capital allocation for ESG related risks?
Answer: Overall, we need to understand the drivers of climate risks and the challenges that we are facing. It is also essential to know how driven your leadership is and what your shareholders expect, but also what civil society is expecting.
We all need to consider physical risks, not only as financial institutions, but ultimately that's the equation that our clients will face. We need to identify where the financial incentives are, e.g., can savings be made? Regulators can help financial institutions deploy capital effectively in the climate risk space. On the other hand, we have to listen to what investors want and require as they deploy their capital into the markets. As financial institutions, we are not only the enablers, we also have to drive through change as well, because, if we do not, we will face real macro geographic issues that were highlighted by Doctor Mönch.
Overall, the climate risk perspective is now definitely within Standard Charted a focus when we look at the directors’ liability through to our group management team, and the individual banker engaging with the client. All need to be well-informed. Thus, we need transparency to drive decisions. Concerning the sort of capital allocation you need to set aside is something that we are still evaluating and evolving internally in the bank, but we recognize it is important due to its impact.
Question: Regarding Carbon Accounting, Nepal doesn’t have its own emission factor and must rely on others for the purpose resulting into inconsistent output. Have there been any initiatives or any plan on behalf of PCAF for further coordinating with Nepal’s concerned regulatory bodies for the development of internal emission factors complementing with our business natures?
Answer: The current PCAF emission factor (EF) database is based on national and international data, the granularity and quantity of EF data is better in more developed regions. We have entered into a strategic partnership with the Joint Impact Model (JIM) to improve the coverage of the database in emerging markets, however, further work is needed to improve data availability.
Question: When talking from a more climate vulnerable country perspective, when the emission from a country is relatively below even 0.5, it is challenging to change the mindsets for making climate-related investments in addition to other business investments. They are rather more willing to take corrective measures for climate related risks. Your views please.
Answer: Both climate adaptation and climate mitigation make sense for several sectors. Climate mitigation, such as renewable energy and particularly energy efficiency do on one hand reduce greenhouse gas emissions, but also help reduce energy usage of businesses/households and consequently can help reduce operational costs of clients
Compared to emission savings that are benefiting eventually the wider society – energy savings are direct (and often quick) benefits for clients. In this sense, usual business investments can be turned into climate adaptation or mitigation-related investments.
Question: : As we see that impacts of Climate Change are gradually materializing and business opportunities are emerging too, are business opportunities meant for climate related mitigation approaches only or are for adaptation approaches too? Can financial institutions do sustainable business for adaptation approaches also?
Answer: Indeed, business opportunities or business cases exist not only for climate mitigation technologies. Climate adaptation can be categorized into following groups that can partly lead to (bankable) business opportunities:
Adopting/optimization (own) processes (incl. supply chains), e.g., introducing climate-smart farming (such as efficient irrigation mechanisms in the agricultural sector) --> potentially, increasing crop yields, reducing water usage and associated costs
Increase resilience of (own) assets, e.g., increased resilience incorporated in building design --> potentially reduce energy costs due to less AC-usage by improved shading /cooling solutions integrated in the building design.
Provide solutions, such as efficient/resilient products and services to others, e.g., extension services provider offers fog catcher, irrigation technology --> well designed products/services can be a business case (for the clients themselves, but eventually also serving other clients to strengthening their resilience).
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