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Source-This post on Impact of climate change on banking institution has been created based on the article “Climate change’s ‘physical risks’ are increasingly catching up with banks” published in “Business Standard” on 20 April 2024.
UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Context– The Basel Committee on Banking Supervision warns that climate change could impact ” the safety and soundness of banks and the stability of the broader banking system.”
What are the risks posed by climate change to banking institutions?
1) Transition risks– These risks are tied to changes in asset values and other costs associated with the decarbonization of the global economy.
2) Physical Risks- Physical risks for banks refer to potential losses or disruptions caused by climate-related events such as extreme weather events, rising sea levels, and natural disasters.
Why are the banks compelled to pay greater attention to physical risks?
1)Rising frequency of natural hazards– The rise in global temperatures is causing more wildfires, storms, and droughts has compelled the banks to pay more attention to physical risks associated with climate change.
For ex- Floods in Pakistan in 2022 caused a 2.2% loss in the country’s GDP. Canada’s worst wildfire season in 2023 had a significant impact on the local economy. Additionally, a severe drought at the Panama Canal affected a waterway that manages $270 billion annually in global trade.
2) Water crisis-Climate change may accentuate the water crisis across the globe.Thus,it would be important for the banks to know the physical risks that they might face when making lending decisions. For ex-Will a semiconductor company face water stress?
Read more- RBI and the net-zero transition
What is the impact of extreme climate events on companies?
1) Analysts at BloombergNEF released a report stating that extreme climate events can cause companies to lose revenue or even go bankrupt.,
2) It can lead to concerns about credit, liquidity, and operational risks.
What are the issues with companies facing the challenge of climate change?
1) Lack of Pro Activism-As per BloombergNEF published report, 65% of the over 2,000 companies studied didn’t recognize parts of their operations that might be at risk from climate-related issues. Moreover, even fewer companies evaluated the financial impact of these risks.
2) Disregard for the warning- Despite growing concerns about the serious threat of unchecked global warming, American banks are still increasing their investments in the industries most responsible for its acceleration that is oil and gas.
What are the steps taken by banks to minimize physical risks associated with the challenge of climate change?
1) Catastrophe modelers-The bank is hiring catastrophe modelers that can estimate the potential impact of severe weather events on JPMorgan’s real estate portfolios.
2)Climate Risk Heat Map– Citigroup Inc. bank has introduced Climate Risk Heat Map to assess the vulnerability of its credit exposures to climate risks. The map shows the business areas with the highest physical risks and transition risks.
Question for practice
What are the risks posed by climate change to banking institutions? Highlight the steps taken by banks to minimize physical risks associated with the challenge of climate change?
