Risk Managing Rising Sea Levels

The document "Futureproofing APAC Banks & Savings: Stress test right today to avoid hard landing from rising seas" authored by The Asia Investor Group on Climate Change (AIGCC) and think-tank China Water Risk (CWR) addresses the critical issue of sea level rise and its potential impact on the Asia-Pacific banking sector. The report analyses 17 major APAC banks with loan books totalling $7.9 trillion, finding them highly exposed to sea level rise risks. This exposure stems from a high domestic loan book concentration of 64% ($5 trillion) in vulnerable coastal areas, limited protection from regional diversification due to APAC's overall vulnerability, and significant loan book concentration in sectors susceptible to sea level rises, such as real estate (39%), trade (13%), and manufacturing (10%).

The report argues that banks' current stress testing practices need to be revised to assess sea level rise risks. Most banks use short time horizons of 30 years or less, which fail to capture long-term impacts. Additionally, banks are not incorporating "low-regret" scenarios of 2-3m sea level rise by 2100, as the IPCC warned, nor are they factoring in potential tipping points that could accelerate sea level rise.

Government adaptation action in many APAC cities and countries is highlighted as lagging, further increasing risks for banks. The report contrasts Hong Kong's planning for only 0.5m sea level rise by 2100 with more ambitious plans in Singapore and New York, which are preparing for 2-3m rises.

The report recommends that banks conduct stress tests using longer time horizons and "low-regret" sea level rise scenarios. It also urges banks to engage with governments to push for more ambitious adaptation plans and to develop innovative financing solutions to support transformative adaptation projects.

The report warns of a "Double Blind Maximum Risk" scenario in which banks and regulators' inadequate assessment and mitigation of sea level rise risks could lead to financial system collapse. It emphasizes the urgency of action to properly evaluate and address these risks in the APAC banking sector without being prescriptive of what such an evaluation would entail.

?A 20cm rise in Hong Kong over the past 34 years is significantly higher than global averages of about 3.7mm per year from 2006 to 2018, with a total rise of about 20cm over the entire 20th century. The rapid rise reported for Hong Kong likely involves factors beyond global sea level rise, such as local land subsidence, which the report should have addressed for a more accurate picture.

The report's reliance on a scenario of 2-3m of sea level rise by 2100 requires substantial explanation, which is somewhat lacking given it used in their headline criticism.

Such a focus on an extreme scenario that goes well beyond the IPCC's central projections; even the excessive SSP5-8.5 scenario projects a likely range of 0.63-1.01m by 2100.

Attributing sea-level rise exclusively to CO2 increase, as the report does, is an oversimplification. Sea-level changes are influenced by multiple factors, including ocean thermal expansion, melting land ice, changes in land water storage, and local geological processes. The report would benefit from acknowledging these various contributors to the recent rise in both sea levels and urbanisation in Hong Kong and explaining how they might interact over time to influence sea-level changes.

?A more comprehensive analysis would clearly distinguish between global and local sea level changes, explain the various contributors to sea level change, and provide a range of scenarios with associated probabilities, including more likely moderate scenarios alongside extreme ones. This approach would offer a more insightful and scientifically grounded basis for risk assessment and management in the banking sector.

?While this report is a reasonable piece of academia, significant work remains before banks can use this information to make optimal lending decisions. Developing a range of well-explained scenarios, each with clear probabilities and potential impacts, would provide a more robust foundation for banks to assess and manage their exposure to sea-level rise risks and direct considerable investment to initiatives that have a reasonable return for the environment and the investors.

?Such a risk-based pragmatic approach would allow for more balanced decision-making, considering both immediate concerns and potential medium-term risks without overemphasising extreme, low-probability outcomes that are in the far distance.