The Hong Kong Monetary Authority (HKMA) published a research memorandum on the effect of climate-related risk on the pricing of bank loans. The authors of the memorandum assess whether, and to what extent, banks have taken the climate-related risks, particularly the transition risk, into their loan pricing considerations. Findings provide supportive evidence that banks in the region have started to incorporate climate risk considerations into their existing risk management framework. Nevertheless, managing climate risks will remain a key challenge for banks due to the different nature from the traditional risk types and data gaps.
Based on a sample of syndicated loans originated in Asia Pacific, the analysis shows that banks in the region have started to price-in climate transition risks for loans to emissions-intensive sectors since the Paris Agreement, likely reflecting the increased global awareness of climate risks. On average, banks are estimated to charge a higher lending spread to a "high-emitting" firm (that is, “brown” firm) by 23 basis points (bps) when compared with that of a non-brown counterpart. This is economically significant as the transition risk premium is equivalent to a 14% rise in the average lending spread. In addition, the extent of the transition risk premium is also found to be dependent on the environmental attitude of banks. Specifically, “green” banks are found to charge a higher loan spread than other banks, when lending to the same "brown" firm in the post-Paris Agreement period. The analysis shows that a “green” bank would charge an additional loan spread of about 9 basis points compared with other banks, on the same brown firm in the post-Paris Agreement period.
Banks should keep abreast of the latest developments in climate risk management practices to adjust their own risk management approach. Therefore, policymakers in the region should proactively engage with the banking industry and help facilitate banks to incorporate climate risk management practices into their operations. HKMA has been pushing ahead with the initiatives to address climate-related issues and promote green and sustainable banking. For instance, HKMA has invited certain banks to participate in a pilot climate stress testing exercise with a view to assessing the climate resilience of the banking sector. Looking ahead, HKMA will continue to work closely with the government, the financial sector, and other key stakeholders to promote the development of green and sustainable banking in Hong Kong.
Keywords: Europe, EU, Insurance, Reinsurance, Supervisory Activities, COVID-19, Solvency II, Technical Provisions, Reporting, Stress Testing Cyber Risk, Supervisory Convergence, Cyber Underwriting, EIOPA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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