In conjunction with UTAR Industry Advisor Day, the Centre for Accounting, Banking and Finance (CABF) of Faculty of Business and Finance (FBF) organised a talk titled “Climate risk management from banks’ perspectives” on 16 March 2023.

Invited to deliver the talk was Country Chief Risk Officer of OCBC Bank Malaysia Thor Boon Lee, who shared his insights on climate risk management.

The one-hour talk aimed to understand the risks surrounding economic dislocation that are vulnerable to climate-related risks; identify the principles and specific requirements on the management of climate related risks by financial institutions; and to share scenario analysis to determine the resilience of financial institution strategies to material climate-related risks.

Thor emphasised the importance of climate-related risk management, in particular to the banking sector as the backbone of an economy. He said the concept of risk management has long been integrated into an entity’s policy-making to contain any possible threats arising from adverse impacts of events. “The climate risks are among the emerging focus in contemporary finance, given its potential to destabilise financial institutions and even the entire economy. Hence, it is imperative to banks’ sustainability to devise an extensive risk management framework that integrates all material risks, which extends to climate-related risks and their interactions with other risk types,” he added.

He elaborated, “A well-structured climate risk management approach will allow banks to achieve higher resilience in challenging times; safeguard the banks’ sustainability during shocks, elevate the organisations’ Environmental, Social, and Governance (ESG) efforts and offer many other benefits. In addition, such an approach is in line with the Bank Negara Malaysia’s (BNM) calling for the safety and soundness of banks in the event of adverse climate change impacts. Moreover, BNM, having recognised the risks that climate change poses on financial stability in the long run, has set out 14 principles and specific requirements on how banks should manage climate risks, covering the following aspects, namely Governance, Strategy, Risk Appetite, Risk Management, Scenario Analysis, and Disclosure.”

He continued by explaining the three elements of climate risks, namely physical risk, transition risk and liability risk, and their potential impacts on financial institutions. “For instance, damages from acute and chronic climate-related events that resulted in huge restructuring costs will eventually affect borrowers’ creditworthiness, banks’ lending-borrowing policies, insurance companies’ and asset managers’ reassessment of policies and recovery costs and many more,” he enthused.

In addition, Thor outlined the essential risk assessment methods approved by BNM, which included Climate Risk Management and Scenario Analysis (CRMSA) and Climate Risk Stress Testing (CRST). He also explained how the banking sector should position itself in accordance to the principles set out by BNM on climate risk management.

The talk ended with Q&A session.