Key Asian Banks’ Stress Tests Miss Coastal Threats, Say Investors and Think Tank

The Asia Investor Group on Climate Change (AIGCC), which represents investors with US$32 trillion AUM, and think-tank CWR (China Water Risk) have urged the regions’ banks to overhaul their climate stress tests for escalating coastal threats.

In an open letter to the sector, they say banks’ stress tests should be enhanced to keep up with the latest science on the Asia Pacific’s high and rising exposure to climate damage and disruption from sea level rise. 

230 million people in the region are in acute danger by 2050, and global monetary exposure to rising sea levels could be in the realm of US$14 trillion annually, notes the letter.

However, without rigorous and credible data and stress testing based on the right scenarios, governments, banks and others in the financial system cannot rely on their risk assessments to inform them of the full extent of the physical risks ahead. This impinges on the ability to ensure transformative adaptation action to guard against these risks. 

AIGCC and CWR recommend improvements to the stress tests, summarised below, and covered in more detail in the letter:

  • Use an appropriate time horizon of 50-80 years, to ensure that risks are adequately captured, as sea level rise is expected to accelerate beyond 2050;
  • Include “Low Regret” scenarios, which “cannot be ruled out” of at least 2m of sea level rise by 2100; and
  • Include adaptation actions/plans that governments are or are not taking.

AIGCC said banks should also use stress testing results to engage governments on adaptation planning needed to protect bank assets and revenues, recommends the letter.

This letter draws on CWR’s report “Futureproofing APAC Banks & Savings: Stress test right today, avoid hard landing from rising seas”.

Eric Nietsch, Head of Sustainable Investing – Asia, Manulife Investment Management, and Chair of AIGCC’s Physical Climate Risks and Resilience Working Group said: “Current stress testing approaches often underestimate sea level rise risks because of a time frame that is too short, and the level of sea level rise used Is too low. We hope that enhancing these assessments will lead to Improved planning and greater resilience.”

“We are encouraging banks to review their exposures, particularly in sectors like trade, manufacturing, and real estate that are so vulnerable to sea level rise.”