Climate change to force further business transformation for banks - Moody's

Vice-president senior credit officer Alberto Postigo said the technological, political and regulatory environment for banks is shifting rapidly as a result of climate change, adding to the industry's other challenges such as those posed by digital innovation.

"While banks can anticipate these threats and guard against them through forward-thinking risk management and strategic action, lenders that are slow to adapt will face more pressure on their credit strength," he said in a statement on Tuesday.

According to Moody's report, "Banking - Global: Climate Change To Force Further Business Model Transformation For Banks", published on Tuesday, carbon transition and physical climate risk would alter the cost-benefit analysis of banks' lending and investment options.

"That will put the industry under pressure to integrate climate risk considerations into its strategic decisions, business processes, governance, and risk management frameworks," it said.

The report pointed out that climate change would also affect borrowers' finances, hence, creating credit risks for banks.

"Credit risks will be greater for banks that fail to adapt, or in scenarios that require a more rapid adjustment," it said.

In terms of new risks and costs brought by climate change, the credit rating agency said banks would need to invest in building climate expertise as policymakers try to implement new environmental policies through changes to banking regulation.

"Regulators will likely balance climate policy objectives with the need to let banks adapt gradually, avoiding financial market dislocations," it said.

The report added that a rapid expansion of banks' low-carbon asset portfolios may increase their exposure to assets whose economic viability is unproven, and they would also face reputational damage if they were perceived as failing to respond to climate change.

While climate risks are difficult to model, Moody's expects banks to gradually become better at managing and pricing them.