Bankers are assessing how these dangers are playing out for their risks and how the so-called” passive” credit risk may be growing as a result of the recent severe storms that have ravaged Asia Pacific ( Apac ).
In early September, Super Typhoon Yagi caused billions of dollars of financial losses and cost hundreds of lives across Hainan, Guandong, the Philippines, Vietnam, Myanmar, and to a lesser degree Hong Kong. Banks need to realize how climate change makes lending more prone to risk because the insurance gap is also significant throughout the area. Banks are currently protected by ( re )insurance against the most extreme weather events, but if that becomes more expensive or difficult to access, the physical risks of climate change become more directly transmitted to the banks.
Tom Mortlock, weather threat expert guide – analytics, Apac, Aon, told FinanceAsia:” Financial institutions and the stream of credit is key to economic development across Asia, but so too is the insurance that sits behind this, that de-risks the lending. Sadly, Asia’s plan distance is one of the largest in the world, with only 14 % of economic costs covered by insurance in 2023, making banking in areas with high climate risk a potentially dangerous task.
Why is climate change important for financial institutions? is a report that Aon has just released.
Mortlock remarked,” Climate change is increasing the underlying risk profile in many locations and over time scales that banks are lending on. Low insurance coverage and high climate risk, combined with low insurance coverage and high climate risk, can pose a” silent” credit risk on lenders ‘ books, which has so far gone unnoticed.
Analytical analysis might be essential to weighing the risks. We are now starting to see a variety of financial institutions use traditional insurance-based analytics to understand their climate risk exposure and incorporate this into their loan origination and risk appetite decisions, according to Mortlock.  ,
Although extreme weather is almost unavoidable in every region, some Asian cities are much better suited to extreme weather than others thanks to investments in drainage systems.
The Climate Risk Group’s Head of Corporate and Financing Sector Engagement, Philip Tapsall, head of the Cross-Department Initiative, stated:” Hong Kong is better prepared than other cities and regions for extreme weather events that are expected to worsen with climate change, particularly typhoons and flooding.”
However, banks operating in Hong Kong are significantly more exposed to less developed regions like south-eastern China and Southeast Asia ( SEA ), where climate change raises financial risks to balance sheets due to direct losses and economic effects.
Exposures can be caused by disruptions to trade, construction delays in supply chains, or direct financial losses caused by bank office shut downs, etc.  ,
In order to help banks assess their physical risks to climate change in the city earlier this year, XDI collaborated with the Hong Kong Monetary Authority and KPMG.  ,
Regulation rising
Aon’s Mortlock also noted a rise in the region’s incoming regulatory issues.
He noted that” we have a raft of climate-related regulation coming in across Asian jurisdictions where businesses will have to start making their climate related risks known to the market.” In fact, according to some analysis we conducted, over 10,000 listed companies will be required to disclose climate information by 2027 for the Asia-Pacific region.
According to Mortlock, “at the same time, regulators are beginning to conduct their own climate stress tests on the financial services sector to make sure there is enough money in the system to withstand climate shocks both now and in the future,”  ,
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