Transition math: Wait now, pay later

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??This week: Delaying climate action to 2026 instead of starting immediately could cost the Singapore financial system about 50 per cent more in the short and medium term, the latest analysis by the Monetary Authority of Singapore (MAS) has shown.

In its latest Financial Stability Review report, MAS analysed the impact of two climate transition scenarios over the eight-year period from now until 2030.

The first scenario – the “smooth transition” – assumes that “decisive policy action” by governments to reduce greenhouse gas emissions begins in 2023. That action spurs competition to be greener, accelerating global decarbonisation, and economic and financial adjustments manifest more gradually.

The second scenario is an “abrupt transition” where concerted climate policy only begins in 2026. Because of the delayed start, carbon prices increase more sharply as policymakers try to make up for lost time, and economic and financial adjustments are more sudden and disruptive.

In a smooth transition, Singapore’s banking system could incur credit costs that are 1.63 per cent of its aggregated portfolio that is exposed to sectors that are vulnerable to transition risks, also known as “climate policy relevant sectors”. In an abrupt transition scenario, those costs go up by 50 per cent to 2.43 per cent. In dollar terms, the credit losses could work out to about S$10 billion in a smooth transition and about S$15 billion in an abrupt transition.

Banks’ market portfolios could lose 2.2 per cent of value in a smooth transition, versus 3.1 per cent in an abrupt transition.

For insurers, a smooth transition could lead to market losses of 2.9 per cent, growing to a 4.5 per cent loss under an abrupt transition scenario.

There is significant variance among the banks, largely due to differences in the make-up of the banks’ portfolios. For credit costs, for instance, individual banks’ potential losses range from 0.37 per cent of their exposed portfolio to 4.6 per cent.

MAS had undertaken a longer-term assessment a year ago that looked at potential impact through to 2050, and the new scenario analysis is meant to complement that earlier work. After all, planning for tomorrow is meaningless if you can’t get past today.

In the long-term analysis, median estimates of banks’ credit costs were between 5.87 per cent and 6.09 per cent of their vulnerable portfolios across three scenarios, with the disorderly outcome being the most costly.

Taken together, the analyses show that climate transition will be a costly event for the financial sector, regardless of which path the world takes. However, beginning climate action earlier lowers those costs.

On a separate note, the annual United Nations Climate Change Conference – better known as COP28 – has begun in Dubai. Business Times correspondent Janice Lim is on the ground to cover the developments when she’s not exploring flatbread-based food options. Follow BT’s COP28 coverage at bt.sg/cop28

?? Top ESG reads:

1. Japan’s Mizuho Financial Group has made an undisclosed investment in Singapore carbon exchange Climate Impact X, which already counts DBS, Singapore Exchange, Standard Chartered and Temasek’s GenZero as its shareholders.
2. UOB’s energy and chemicals sector solutions head says the amount of concessionary capital in Indonesia’s comprehensive energy transition plan may not catalyse enough private funds.
3. Financing and a “just transition” are among key issues for South-east Asia as COP28, the UN climate conference, gets underway.
4. Climate negotiators at COP28 launched an historic loss and damage fund, with more than US$500 million already pledged from developed nations.
5. ABN Amro, HSBC, Societe Generale and Standard Chartered will stop subjecting their climate goals to scrutiny by the Science Based Targets Initiative, Reuters reports.

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