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[2023-February-08] WG1: Webinar on Enhancing Financial Institutions' Capacity in Navigating Transition Risks

On February 8th, 2023,  the GIP Working Group on Environmental and Climate Risk Assessment (WG1) held a webinar titled “Enhancing Financial Institutions' Capacity in Navigating Transition Risks”, featuring experts from banks, insurance companies, and asset managers, to share their insights on transition risks.

CHEN You, Sustainability Analyst at Swiss Re, presented the WG1 report, “Transition Risks and Opportunities with the Focus on Belt & Road”. The report analyzes transition risks and opportunities in 4 economies (China, Kazakhstan, Pakistan, and Poland) through a sectoral lens. It examines transition risks and opportunities in five sectors: energy, industries, transportation, building, and agriculture. Despite the growth opportunities in renewable energy, infrastructure development, energy and material efficiency, low-carbon transport, resource-efficient agriculture, and emerging carbon removal solutions, financial institutions should be mindful of transition risks and comply with evolving regulations. The report recommends financial institutions to adopt a four-step approach to manage transition risks: formulate a strategy, establish governance mechanisms, enhance risk management, and actively disclose progress.

JIN Xiufang, Associate Director at PwC, presented the five key findings from a transition risk survey conducted among GIP members. The findings indicate that participating members have a strong understanding of climate-related risks, including physical and transition risks. They have a clear perception of drought, sea-level rise, and river flood as severe physical risks, and policy, legal, and reputation risks as transition risks. They also recognize opportunities in green projects and decarbonization-related products. They have taken actions to address climate-related risks, focusing on climate adaptation and analysis of carbon footprint. However, challenges remain in identifying and monitoring specific transition risks, due to lack of harmonized standards and data gaps. Based on these findings, three actions were proposed by WG1, including: 1) strengthening business innovation and capturing the business opportunities of the transition, 2) enhancing climate risk management tools, and 3) improving carbon accounting and management, and clarifying the transition roadmap.

In the panel discussion session, experts from different institutions shared their strategic approaches to low carbon transition and the concrete measures to manage transition risks and opportunities as part of their wider climate strategy. 

YIN Hong, Vice president of Institute of Modern Finance at ICBC, shared how the bank integrated transition risks into their strategy and governance framework, implemented comprehensive risk management practices, and conducted climate and environmental risk stress testing, covering policy, disaster, and price factors, in key sectors such as coal-fired power, cement, steel, etc.

Martin WEYMANN, Head of Group Sustainability at Swiss Re, introduced three major areas for reducing emissions from the perspective of the insurance sector. In terms of scope 1, 2, and the upstream of scope 3 emissions, it is important to adopt decarbonization technology, explore high-quality carbon removals, ramp up renewable energy, and change employee behaviors. On the investment side of the scope 3 downstream emissions, investments need to flow into enterprises with the best performances and investors need to engage with clients to decarbonize their businesses, while on the underwriting side, Swiss Re is following TCFD guidance and PCAF standards to assess associated emissions. 

TAO Lei, Assistant General Manager at China Pacific Insurance, highlighted three crucial perspectives for insurance 's role during the transition process. Firstly, insurance can have a leverage effect, through credit enhancement, to improve the efficiency of financing for entities in low-carbon transition. Secondly, insurance can help enterprises manage their transition risks through comprehensive assessments in the underwriting process as well as reduction of risk reserve. Lastly, insurance can facilitate the transition through close engagement with clients and tailored insurance products.

ZHANG Youfang, Deputy CEO at BNP Paribas (China), shared the three strategic pillars of sustainable finance in the bank: aligning portfolios with carbon neutrality commitments, supporting clients' transition to a sustainable and low-carbon economy, and strengthening expertise, steering tools, and processes. They emphasize in-house capacity building through pooling technical expertise and providing sustainable finance training for employees. A differentiating range of solutions are provided to support the low-carbon and sustainable transition of clients varying in corporate size.

Stacy XIE, Investment Specialist of Fixed Income at Ninety One, explained the approach that the company is taking to help clients in emerging markets transition, as opposed to simply “divesting”. They prioritize managing portfolio emissions, engaging with companies on their transition plans, and providing financial and technical support in the transition process. Meanwhile, they actively explore innovative financing models, such as dedicated funds for energy transition and infrastructure investments.

In the following Q&A session, Amal BENAISSA, Head of Sustainable Finance at Bank of Africa, and Jirawat PANPIEMRAS, Head of the Sustainability Team at Bangkok Bank, shared their banks' approaches and concerns regarding transition risks. Both banks have been actively involved in financing SME transition projects. Jirawat pointed out certain challenges in identifying transition risks due to the lack of relevant data, assessment tools, and necessary standards, making quantitative risk analysis difficult. Hence their efforts primarily focus on internal and external capacity building to enhance their understanding of sustainable finance. Meanwhile, Bank of Africa is utilizing tools such as the International Finance Corporation's CAFI tool and the UNDP transition identification tool to navigate transition risks.

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