Climate risk’s invisible threat: What ASEAN banks aren’t accounting for
Three months ago, I sat in a quarterly risk committee meeting at an Indonesian bank, watching a climate risk update presented in twelve slides over fifteen minutes. The presentation covered taxonomy alignment, sustainable finance commitments, and progress against the bank’s net-zero pathway. It was professional, well-researched, and accurate. It also did not mention the bank’s […] The post…
For years, climate risk has remained an invisible threat to ASEAN banks, largely due to the mismatch between disclosure and provisioning practices. Although major banks now publish annual climate disclosures following the TCFD recommendations, these reports do not directly inform their loan-level loss provisioning, capital adequacy, or pricing decisions.
Three categories of climate exposure stand out within Indonesian bank balance sheets: physical climate risk in property and infrastructure, transition risk in carbon-intensive sectors, and cascading climate risk in adjacent sectors. Physical risks stem from coastal commercial real estate financing that is vulnerable to flooding and subsidence, while transition risks come from loans to coal, palm oil, and heavy industrial sectors that face evolving regulations and phase-out commitments.
The cascading risk arises from credit exposure to borrowers with climate-exposed portfolios, supply chains, or customer bases, such as logistics companies that cater to flood-prone factories.
The existing disclosure framework, while thoughtfully built, fails to reconcile seamlessly with the provisioning framework, resulting in an unpriced climate risk that sits on bank balance sheets. Physical risks are not revalued against forward-looking climate scenarios, assuming the asset retains its current value. Transition risks were priced without considering the potential for stranded assets, and cascading risks remain under-discussed.
However, a few institutions are beginning to bridge this gap. Some banks incorporate climate scenarios into credit committee processes for large or long-dated exposures, and set internal limits on exposure to high transition-risk sectors. Institutions also revalue real estate collateral under multiple climate trajectories, which changes the capital held against the portfolio.
To significantly reduce systemic exposure, three actions are needed: connecting disclosure to provisioning, requiring forward-looking collateral valuation for long-dated exposures, and bringing transition risk into supervisory stress testing. As Indonesia is one of the most climate-exposed major economies, addressing these gaps is crucial for maintaining regional financial stability.
Written by urgent.news from e27's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
