Rising sea levels from melting ice sheets and glaciers due to global warming could put nearly $5 trillion of loans of banks in the Asia-Pacific region at risk, according to a Hong Kong-based think tank.
Asian banks face a "triple whammy" of concentrated sea level rise risks, given their domestically focused loan books, the coastal nature of their geographies and their lending to sectors vulnerable to coastal threats, amid gaps in their stress testing methodology and climate strategies to mitigate such risks, according to a Nov. 7 report from China Water Risk.
Banks must pay attention as the "domestic skew of loan/mortgage books amplifies risk clustering as does the concentration in multiple vulnerable sectors," said Dharisha Mirando, the report's lead author. China Water Risk is a Hong Kong-based think tank primarily focusing on sustainable use of water resources in China and beyond via research and policy engagement.
Seventeen major banks in the Asia-Pacific, including HSBC Holdings PLC, Commonwealth Bank of Australia, Singapore-headquartered Oversea-Chinese Banking Corp. Ltd. and Japan's Mitsubishi UFJ Financial Group Inc., have 64% of their loan books skewed to domestic markets, while 62% of their loans are concentrated in sectors deemed vulnerable to coastal threats, such as real estate, trade, and manufacturing and industry, according to the report.
Rising seas is one of the focus areas for 2022's COP27 in Egypt, the world's biggest conference on climate change, hosted by the United Nations. The rate of sea level rise has doubled since 1993, according to the U.N.'s World Meteorological Organization report released Nov. 6 during the conference. Across Asia, banks have demonstrated commitments to combat climate change via sustainable finance instruments as nations work toward net-zero.
Heating up
The Asia-Pacific is the most vulnerable region globally, with over 200 million people at risk from a 1-meter rise of sea levels. However, under a "cannot be ruled out scenario," sea level rise could reach 2 to 3 meters by 2100, according to the U.N.'s Intergovernmental Panel on Climate Change.
"At 1.2°C of warming today, our 2100 climate future is already here," said Debra Tan, head of China Water Risk. "We now face multiple record-breaking events year on year from heatwaves to mega floods; even mighty rivers like the Colorado, Rhine, Po and Yangtze were running dry this summer."
While central banks are pushing for stress testing of climate risks to ensure financial resilience, banks are not doing enough regarding stress tests for physical climate risks, such as multiple-meter increases in sea levels, the report said.
Banks' ability to adapt to rising sea levels will rely on each government's policies, the report added. Island cities such as Singapore and Hong Kong are especially vulnerable. The Hong Kong Monetary Authority's 2021 climate stress test revealed that 32% of the property loan books of 27 banks analyzed were exposed to physical risk.
The China Water Risk report offered an eight-step checklist for banks to futureproof themselves from risks, including carrying out stress tests to "low-regret" levels and for longer time horizons, considering more innovative financial products to support government efforts to adapt to climate change, and engaging with their corporate clients so that the lenders are aligned with their customers' adaptation plans.
