As countries around the world seek to recover from the Covid-19 pandemic, there is significant risk that the fight against climate change may be deprioritised in the wake of the global pandemic. However, environmental degradation, increasing greenhouse gas (GHG) emissions and rising temperatures must be addressed urgently in the face of more extreme weather and ecological catastrophes.
Climate-related risks - both physical and transition risks - matter more than ever. They can disrupt businesses and economies, and require significant investment and adaptation by companies, households, and governments to mitigate.
Asian countries are disproportionately affected by climate change
A worsening climate drives more frequent extreme natural disasters (such as typhoon and floods), rising sea levels, and ecosystem degradation, leading to enormous economic losses. Asian countries are found to be much more vulnerable to natural disasters induced by climate change. The Global Climate Risk Index (CRI) showed that 6 out of 10 of most climate-vulnerable countries are in South and Southeast Asia. According to the Climate Economics Index (CEI) developed by the Swiss Re Institute, Asia’s GDP may shrink 26.5% by 2048 if no action on climate change is taken, compared to a 18.1% reduction of the global economy under the same scenario.
Many Asian countries also bear greater transition risk given their carbon-intensive economies. Due to their high reliance on carbon-intensive resources, such as fossil fuel and steel, adopting carbon-neutral targets and measures to mitigate carbon emissions will heavily affect the economy, businesses, and financial activities in these countries.
Businesses and financial institutions (FIs) may face climate-related risks
Climate change can disrupt business operations and cause economic losses to customers and markets. A corporation’s resilience to climate change depends on its business plan, risk management ability, and governance.
Both climate change and the responding mitigation efforts can lead to business and financial risks that can be further categorised into physical and transition risks:
Physical risks – acute and chronic impact from extreme weather events due to climate change
Transition risks – financial and reputational risks resulting from policy, legal, technology and market changes in the transition to a low-carbon economy
On the bright side, proactive climate risk management can help organisations mitigate risk and seize opportunities
Incorporating climate risks analysis into business decision-making will better position businesses and financial institutions in Asia to mitigate risks and seize opportunities. Conducting climate risks analysis will gradually become required for internal risk management and regulatory compliance. It is also increasingly expected by investors and clients. Tools and methodologies have been developed to model the range of climate-related risks across sectors, regions, and time horizons. The most common approach is the scenario analysis, a type of stress test under alternative climate scenarios often based on temperature targets.