OJK to require banks to factor in climate risks starting in 2026

The Financial Services Authority (OJK) is set to require banks to factor climate-related uncertainty into their lending decisions, as experts and international groups say the country’s financial sector may not be sufficiently prepared for the growing risk.

Currently, the OJK only requires banks under its task force for sustainable finance to follow its climate risk stress testing (CRST) program, which will conclude in 2024, but it plans to require all banks to undergo similar testing in 2026.

The stress tests are being used to assess the resilience of individual banks and of the banking sector as a whole against risks from climate change, in addition to more typical economic shocks.

Such testing is in line with calls from international institutions. The Asia Investor Group on Climate Change (AIGCG), which represents investors with a total of US$32 trillion in assets, wrote in August about concerns that climate change risks could be underpriced by many banks in the region.

Anjali Viswamohanan, the director of policy at the AIGCC, also urged financial institutions to “get serious” about analyzing and quantifying their loan risks, especially in industries such as commerce, manufacturing and real estate, which it said were particularly vulnerable to sea level rise.

Yuki M. A. Wardhana, a lecturer at the University of Indonesia (UI), said on Friday that despite the country’s exposure to climate change risk and susceptibility to natural disasters, not many banks in Indonesia had properly accounted for the threats. “It is not a common practice for all banks to conduct stress testing of climate risks, and not all bank workers possess extensive due diligence skills to assess existing risks,” Yuki said.

Yuki said climate risk could be broken down into two factors: transition risk, which related to government and stakeholder policies such as the coal phaseout, and physical risk, the danger of natural disasters and changes in climate patterns. He estimated that Indonesian banks faced a flood-related physical risk exposure value of Rp 526.64 trillion, following tens of thousands of floods recorded by the National Disaster Mitigation Agency (BPNB) over the past decade.

Meanwhile, extreme weather events were believed to account for a Rp 1.9 quadrillion risk exposure to lenders, while landslides were projected to expose lenders to Rp 180 trillion in risk.

Assessing these risks was particularly important, he said, in property mortgages and agricultural lending, for which loan repayment was closely related to crop yields.

“When assessing a mortgage, it is necessary to consider [the environmental risk] factor, as it is associated with both credit risk and market risk,” Yuki said.

“Climate change and rising temperatures could reduce their productivity. Stress testing targets climate change-causing sectors to alleviate environmental issues,” he said.

The Basel Committee on Banking Supervision (BCBS) called for climate stress testing as well, he noted.

Uli Agustina, an executive analyst at OJK, said during a discussion on Thursday that banks were also to take into account emissions reporting and climate change mitigation when making loan decisions, pointing to transition risks.

However, she acknowledged that climate stress testing had been hindered by insufficient collection of emissions data and the lack of a standardized methodology for estimating emissions from borrowers.

Jovitania Soediro, a climate risk specialist at private lender CIMB Niaga, said it was assessing the requirements of climate-related stress testing and developing processes to implement it.

“As for industry, I can only say that the bank is moving in that direction,” Jovitania said in the Thursday discussion.

She added that the bank planned to improve communication with its counterparties to provide a more comprehensive understanding of the risks associated with climate change.

“Our top priority is acquiring data to enhance climate literacy. At the borrower level, this data can be instrumental in conducting climate stress-testing, offering valuable insights,” she said.

Yuki of UI added that banks and the OJK would have to work together to amass the data needed to support climate stress testing and that think tanks and other shareholders could get involved as well.

Source:

This article was published in thejakartapost.com with the title “OJK to require banks to factor in climate risks starting in 2026BMKG issues extreme weather warning in Indonesia”. Click to read: https://www.thejakartapost.com/indonesia/2023/10/30/bmkg-issues-extreme-weather-warning-in-indonesia.html.