Embarking the climate risk management journey by financial institutions

Climate change events and its corresponding risks and impacts are now ubiquitous, and is expected to stay for the long run. The frequency and severity of climate-related events, such as extraordinary rainfall and subsequent flashfloods, has also seen a notable increase. In less than three months after the catastrophic floods in December 2021, Kuala Lumpur once again, experienced severe flood where a two hour rainfall recorded more than half the monthly average rainfall. The December 2021 flood resulted in a total loss of RM6.1 billion, with more than 120,000 displaced from homes.

Failure to recognise and manage climate-related risks will continue to impact households, businesses, and financial institutions (FIs). Thus, the call for action by governments and regulators have intensified. It is imperative for FIs to be more conscious of climate-related risks, its impact towards operations, and focus on how it can help customers and the community build climate resilience, and transition towards a low carbon economy. The ability of FIs to manage risks as well as integrate climate change considerations into its business strategies and operations, help ensure a stable and sound financial system. We saw an increased call for action by regulators with the recent Bank Negara Malaysia publication of the Climate Risk Management and Scenario Analysis exposure draft policy document on 27 December 2021.

“The regulatory landscape on climate risk management has been evolving rapidly, with the establishment of Task Force on Climate-related Financial Disclosures (TCFD) by the Financial Stability Board (FSB) in 2015 marking a key milestone. Subsequently, the Network for Greening the Financial System (NGFS) was formed with groups of central banks and supervisors, and since then we have seen various climate risk management and scenario analysis expectations develop globally across various regulators”, said Justin Ong, Deloitte Malaysia Risk Advisory Leader. Justin also provided an overview of the expectations of 14 principles underlying the BNM Climate Risk Management and Scenario Analysis Exposure Draft.

Deloitte Malaysia in collaboration with United Nations Environment Programme Finance Initiative (UNEP FI) recently organised its inaugural Banking Climate Risk Engagement Series 2022. It is a planned series of events focused on uplifting the capabilities of the Malaysian banking industry to advance preparations in anticipation of growing stakeholder expectations and regulatory requirements related to climate change.

In the first of the series, a robust discussion was held on Climate Risk Management, bringing together a panel of experienced speakers - David Carlin, UNEP FI’s TCFD and Climate Risk Program Lead, Switzerland; Benjamin Wong, Managing Director, Head Group Portfolio Analytics of Risk Management Group in DBS Bank Singapore; Kenji Tani, Vice President of Credit Policy and Planning of MUFG Bank Japan; Dr. Rutang Thanawalla, Risk Advisory Director, Deloitte UK; Yuki Yasui, UNEP FI’s Regional Coordinator of Asia Pacific.

David Carlin, shared perspectives on the emerging set of tools and assessment currently available and in development for financial users to measure and manage climate risk. “Challenges on data gaps in emerging markets, exotic asset classes, and small and medium businesses (SMEs) remain the biggest drivers for improvement. In 2022, we can expect to see greater standardisation of reporting standards both from the regulators, and on the industry level, recognition of expected emissions, and how emissions are calculated,” he said.

The three key takeaways for FIs embarking on their climate risk management journey:

• Consider climate risk from the perspective of both risks and opportunities

• Build strong human capital and climate champions within the FI by education and inculcation within the FIs’ value and culture

• Embrace the concept of double materiality (i.e., consideration for impact of external climate-related risk onto FIs and the FIs impact towards the broader environment and economy)

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