Thailand’s banks and financial sector must act urgently to improve climate risk management in their operations as regulators start to conduct climate risk stress tests on financial institutions across the region.
Led by the central banks of Singapore and Malaysia, regulators in Southeast Asia are tightening the screws on the industry by developing regulations and issuing guidelines about environmental risk management. Still, the European Central Bank’s (ECB) recent climate risk stress test (CST) found most banks haven’t adequately incorporated climate risks into their credit models.
There’s growing pressure on organisations in all sectors to incorporate environmental, social and governance (ESG) practices in their business models, which emphasises the importance of climate risk management, according to Su Areewronges, PwC Thailand’s Consulting Partner.
“ESG reporting is the world’s best opportunity for businesses and regulators to work together to tighten the regulatory requirements in the private sector and find the best solutions to the climate crisis,” Su said.
“By incorporating climate risks into their existing risk management frameworks, banks will be able to assess the risks more accurately,” she said.
In 2021, the Bank of Thailand (BOT) announced an improvement to the regulations on the supervisory review process under Pillar 2, which incorporates ESG into risk analysis of funds. Su said the changes to the regulations suggest the Thai central bank is looking to incorporate ESG into risk management for banks in the near future.
“Regulators in our neighbouring countries are already applying CST to the banking sector. The tests include assessing the risk factors associated with greenhouse gas emissions and the impact of different global heating scenarios on our future.
“This means that Thai banks have to take the management of climate risks more seriously, including deciding which industries and businesses they loan money to,” she said.
In July 2022, the ECB’s CST found that European banks have a climate risk stress testing framework in place but lack the relevant data needed to respond and adopt good practices.
The CST results showed that, although EU banks are proactive when it comes to adding ESG to their business strategy and risk management, they still encounter challenges when conducting the exercise.
These challenges include data scarcity, complex internal reporting, lack of common disclosure requirements and underdeveloped climate risk frameworks. Su said the ECB considers the stress test to be a learning exercise for banks and supervisors alike.
Banks must embrace climate risk management
According to Su, the Thai banking sector will have to adjust their business strategy to adapt to the BOT’s regulations. This includes conducting ESG risk assessments of their clients, using the findings to adjust interest rates for clients with low ESG risks and issuing green loans.
Currently, more and more banks are starting to release these types of products and engage with clients on ESG risk management methods to obtain data for more in-depth, accurate analyses, she said.
“It’s vital that banks embrace ESG risk management in their business philosophy as an end-to-end framework that improves their relationships with society, partners and stakeholders.“At the same time, they can introduce new tools and new products or modify their existing strategies. This will help businesses better manage the risks and expected returns more efficiently,” she said.
PwC’s Risk and Regulatory Outlook 2022 is a comprehensive guide to help banks in Southeast Asia prepare for the CST. Highlights of their advice are below.
- Build data capabilities for climate and environment data: Besides collecting credit risk metrics, banks should start compiling climate data (such as temperature and water levels) and greenhouse gas (GHG) emissions for projection and statistical analysis in the future. It’s important to classify data by industry, business location and real estate collateral to streamline data use.
- Collaborate with clients for high quality ESG disclosures: Engage clients through questionnaires and study the data. Questions should focus on carbon footprint levels as well as adaptation plans. The collected data could be used to assess climate risk and resource allocation decisions.
- Strategic stance on sustainable financing: Banks with a clear sustainability strategy and purpose can respond better to ESG regulatory changes, including CST requirements.
- Integrate climate risk across existing risk management frameworks: Include climate risks in your risk management frameworks, such as market, credit and liquidity, to improve the analysis of climate risks across all risk types. This will enable businesses to manage their operations more effectively.
- Upskill risk management resources on climate risk fundamentals: For a stronger response to the regulatory changes and climate risks, banks must encourage risk management teams to understand that the climate crisis is also a risk that impacts other risk types.
- Update existing governance structures to address the climate crisis as a new risk type: This involves updating existing risk models, analyses and stress testing frameworks to reflect climate risks and use the results to verify various assumptions that are used to assess the impact. This can better enhance the accuracy of the predictions.
- Use CST to manage portfolios: When banks can identify which portfolios are prone to climate risk, they’ll be able to make smarter business decisions in managing their portfolios, such as assessing risk vs return and improving capital control of funds for which banks bear the risk.
There’s still insufficient collection of historical environmental data, which is a challenge for businesses in Thailand and the Southeast Asia region. This means there are gaps in estimated loss predictions which don’t cover every environmental risk. So, the private sector must consider which data to use for managing ESG risk in the future while the public sector should support data collection to drive ESG practices development across all sectors, Su said.
 Guidelines on Environmental Risk Management for Banks, Monetary Authority of Singapore
 Exposure Draft on Climate Risk Management and Scenario Analysis, Bank Negara Malaysia
 Revision of the Supervisory Review Process (Pillar 2), Bank of Thailand
 Banks must sharpen their focus on climate risk, ECB supervisory stress test shows, European Central Bank