Risky Business Ahead – Sector Risks To Credit Impacts

Risky Business Ahead – Sector Risks To Credit Impacts: Even at 1.5°C, the IPCC says damages could cost us US$54trn; our global GDP is only US$87trn. Are we prepared for risky business ahead?

This month, we take a look at sector risks in the ICT and bank sectors and talk to experts from Fitch and BNP Paribas on the impacts on credit and the size of the adaptation finance market.  And since disclosure can help gauge risks, we sought CDP’s take on water disclosure and ClimateBert’s (a NLP model) findings on TCFD – is it all just cheap talk or can it help us foretell risks ahead?

We warned that the drought in Taiwan plus lacklustre government actions could strand the ICT sector and TSMC last month; well, the drought is still on-going but it’s not the only risk to consider.

The Alliance for Water Stewardship (AWS) analysed over 3,000 global ICT sector locations and found that too much water is also a problem – 80% of ICT supply chain locations face high or very high levels of flood risk. Where are these locations? What can the sector do to become a water stewardship leader? Sarah Wade shares AWS’ findings.

If climate risks are mismanaged, Swiss Re estimates potential losses of around 10% in total economic value by 2050 on the current climate trajectory.Banks will bear the brunt of this and the ECB’s latest climate stress tests show just how vulnerable banks are – 80% of US$4.2trn of euro area banking system credit assessed is exposed to at least some physical risk.

Banks must act to protect capital, especially in Asia where 99 of the Top 100 cities most at risk are located. On the current climate path, Asia is set to lose 10-20% of its GDP by 2050 compared to the US and EU’s losses of 7-8%. We catch you up on the latest ice stats as well as research from the financial sector/regulators in 3 Reasons why APAC banks must de-risk now.

Water and climate risks will no doubt impact credit; the question is by how much? Here, we spoke to Fitch’s Justin Sloggett on water-related credit issues that are relevant for a wide variety of sectors and asset classes. Is physical risk or government action more important for creditworthiness? Has the way Fitch looks at water risk changed? What should be factored in rating sovereign water risk? Sloggett walks us through the progress and difficulties so far.

Another conversation that is heating up is adaptation finance. Our CWR APACCT 20 Index shows that government action on adaptation can reduce risks. BNP Paribas’ Chaoni Huang and Jonathan Ho share their thoughts on the potential size of the currently laggard adaptation finance market – they say that it needs to increase 5-10x for developing countries. They urge businesses to also step up adaptation, especially in vulnerable sectors – water shortages could threaten the beverage industry to the value of US$247bn.

Relevant disclosure can go a long way in gauging risks to effect appropriate adaptation. So where are we on this front?  Laureen Missaire shares the latest “waves of change” from CDP’s 2020 water report. The good news is that disclosing companies are up 20%, despite COVID. The report also highlighted that the potential financial impact of water risks is >5x than the cost of addressing them – so duh, the earlier we realise the risk, the faster we can act to address it.

Given that we are already at 1.2°C of warming, there is no running away from water and climate risks, so you might as well lean into them. Like adaptation finance, it could be lucrative, companies in CDP’s water report identified water-related opportunities are up to US$711bn. Kerching!

But it is not all positive. Julia Anna Bingler, Mathias Kraus and Markus Leippold used their NLP model ClimateBert to see if TCFD is useful. After analyzing 800+ companies’ TCFD disclosures for a period of six years, ClimateBert came to a sobering conclusion that firms’ TCFD support is mostly cheap talk. The authors warn that firms “cherry-pick to report primarily non-material climate risk information”; actual climate risks reporting only increased slightly by 1.9%. Find out which regions and sectors are doing most “cheap talks & cherry picking”.

Clearly we have a long way to go to assessing water and climate risks. But at least we are travelling in the right direction; and at a speed that is faster than we were before. We are already feeling the impacts now, there is no time to waste – we must be ready.

Those that prepare are more resilient and those that adapt best will survive. It’s better to be safe than sorry, so start prepping now for risky business ahead.