Climate risk advisory of the year, Asia: PwC

Energy Risk Asia Awards 2020: Banking clients in the region are turning to PwC to tease out unfamiliar climate risk exposures

The surprise announcement by President Xi Jinping that China is to reach net-zero emissions by 2060 has provided a shot in the arm for the international effort to address climate change. But the goal – even if four decades distant – will have profound implications for the Chinese economy, requiring massive investment in its already-huge renewables sector and into a nascent hydrogen economy. It also implies the withering of a fossil-fuel sector that meets around 85% of the country’s primary energy demand.

The finance sector will be central to this transition, says James Chang, managing partner of PwC China and Hong Kong – and it requires new ways of thinking about lending and risk management. 

“Understanding what climate change is and what it means for a banking business, this is fairly new to Chinese banks,” says Chang. But he says those with whom PwC has been working are receptive to encouragement from domestic regulators to review and begin to reduce their lending to carbon-intensive borrowers.

“We’re helping a number of Chinese banks to look at their potential climate-related risk exposures,” says Qian Wu, director in ESG advisory at PwC’s Beijing office. “The first step is to get them aware of these potential risks and to conduct scenario analysis which, secondly, allows them to begin to make decisions to change their portfolios.”

She cites a project with a banking client in response to the Hong Kong Monetary Authority’s Common Assessment Framework on Green and Sustainable Banking. The self-assessment framework, published in May, is designed to help both the regulator and bank management understand the climate and environmental risks faced by a particular bank, and ensure it has the governance in place to manage those risks.

However, a lack of data is complicating the effort. “Banks don’t tend to collect data to assess [clients’] resilience to climate change – it’s beyond their normal practice,” says Wu.

Nonetheless, PwC was able to undertake a climate stress-test for the bank, looking at how various scenarios for physical and transition risks would affect the probability of default across a number of climate-exposed sectors.

She notes that the exercise is very different to typical stress-testing, which usually considers risk over a short timeframe. “Climate change brings uncertainties to the financial system, so it’s part of our responsibility to educate clients and prepare them to look at more medium- to long-term impacts,” including modelling of climate scenarios out to 2050.

PwC is also helping lenders in the region develop climate risk management processes for China’s flagship Belt and Road Initiative, a state-backed US$1 trillion programme of investment in infrastructure across Asia and into Europe. PwC is responsible for helping implement the Green Investment Principles, a set of voluntary principles to promote green finance and green investments along the Belt and Road (B&R).

PwC has drawn up a toolbox to enable the 37 signatories to undertake climate and environmental risk assessments for their lending to B&R projects, “ensuring investors have the tools and methodologies to allow them to measure carbon risk in a consistent manner,” says Wu. However, the goal is for the banks involved to set “ambitious targets” for green and/or non-fossil fuel investments across their total portfolios to be reached by 2025, she adds. 

Certainly, Wu sees pressure building on Chinese financial institutions to respond to climate risk, with the 2060 announcement upping the ante considerably. “It’s really picking up,” she says. “It’s not an easy issue to adopt, but once [climate change] is translated into measurable targets, and is integrated into policy or technology uptake, [lenders] should get serious about it.”