Expect more climate-change related regulations directly aimed at banks
Politicians are increasingly likely to work with banks in implementing climate change policies to ensure that the financial system is resilient to climate change risks
Politicians and regulators are increasingly likely to work with banks in the implementation of climate change policies. As investors are more actively integrating ESG factors into their asset allocation decisions, taking ESG risks into consideration has become more significant for banks’ investment and lending decisions, according to a new Moody’s Investor Service report.
Signatories to The Principle for Responsible Investment (PRI), which take ESG consideration into account in their investment decisions, had combined assets under management of US$82 trillion in 2018, an increase of 19% from the previous year.
Currently, there are limited environmental regulations directly aimed at banks. But this will change as more regulations are expected to be drawn up to ensure that the financial system is resilient to climate change risks and can support the implementation of environmental policies.
Banks are encouraged to incorporate climate-change risks into their risk management frameworks including scenario analysis and capital stress testing processes. New regulations are expected to be applied to capital charges and credits, and mandatory environmental risk criteria in lending and investment decisions.
The European Parliament and the UK’s Prudential Regulation Authority have already taken the leadership role and proposed incorporating environmental considerations into banks’ prudential frameworks. The EU’s non-financial reporting directive (Directive 2014/95/EU) requires large corporations to publish reports on the ESG impact of their activities.
However, new ESG regulations mean that banks are more likely to be exposed to capital constraints, asset stranding, and fines or litigation in the event of non-compliance with new regulations. For instance, new ESG regulations will add compliance costs, engaging in negative environmental impact projects will inflict reputational damage on banks, and increased credit risks can also arise from new ESG regulations as they have the potential to distort risk measurement.
Social Media Links (This section can be seen in office only):
Twitter : https://www.theasset.com/article-single.php?id=38127&social=twitter
Linkedin : https://www.theasset.com/article-single.php?id=38127&social=linkedin
Facebook : https://www.theasset.com/article-single.php?id=38127&social=facebook