KUALA LUMPUR, June 30 — The transition to a low-carbon economy presents new risks and opportunities for financial institutions as a result of regulatory developments, technological advancements, and shifting market preferences, said Moody’s Investors Service.
The firm said banks may be adversely impacted by these transitional risks due to the magnification of liabilities on their balance sheets that are at risk of impairment over time.
“However, the associated need for financing for the transition also presents opportunities for banks to develop new offerings focused on low carbon business strategies and investments,” it said in its ESG Insights report.
It elaborated that in addition to understanding their counterparties’ emissions as a baseline for identifying their financial risk, banks are also facing increasing pressure to accurately assess and disclose their financed emissions.
“Banks can leverage a multitude of derived metrics such as carbon intensity, which can be assessed based on the volume of operational emissions per the unit of revenue generated. This approach normalises greenhouse gas (GHG) emissions of high Scope 1 - 2 emitting sectors by size within sectors,” it added.
Moody’s explained that banks are primarily exposed to transition risk and associated opportunities through their portfolios, which means there are layers of complexity when it comes to both assessing their transition risk and opportunities and implementing strategies to address them.
“There is a growing focus on accurately accounting for banks’ financed emissions, which requires both a comprehensive understanding of portfolio companies’ emissions as well as detailed information on the financing.
“At the same time, banks also need to understand how those companies they are financing may face risks due to the transition which may affect the viability of their loans,” it added.
Leveraging data on companies’ GHG emissions and their risk management provides an important first step from which banks can develop lending strategies that minimise their risk and embrace opportunities as well as take steps to determine their financed emissions.
— Bernama
