G20's $22 trillion exposure to polluting industries is a cause for concern

The financial institutions in the G20 economies have nearly USD 22 trillion of exposure to carbon-intensive sectors, of which 60 per cent are with banks, 30 per cent with asset managers equity holdings and the rest are weighted towards cash and government securities, according to a report.

While banks exposure is to the tune of USD 13.8 trillion, asset managers equity holdings are worth USD 6.6 trillion, and the remainder USD 1.8 trillion are in cash and government securities, Moody’s Investor Service said in its report.

By sector, manufacturing, power and other utilities, transportation and oil and gas feature heavily among the G20 financial institutions top carbon-intensive exposures, the report said, adding by region, Asia leads with USD 9 trillion followed by the Americas (USD 8 trillion) and the EMEA taking up USD 5 trillion.

The report did not offer country-specific numbers. For banks, the decarbonization task compounds many of the industry’s other risks from transformative forces like digitisation and cyber risks and therefore banks will need to ramp up their climate risk assessment capabilities as well as governance and risk management frameworks, said the report that came ahead of the COP26 or the UN climate change conference in November.

While banks face risks to their franchises and credit profiles from exposures to polluting industries, climate-focused regulations and stakeholder pressure will increase legal and reputational risks for them.

But at the same time, transformation to a low-carbon economy is creating vast financing opportunities for them as well as bank lending, together with green capital market funding, will help banks customers transition to low-carbon business models that require huge investments.

For insurers, climate change is driving up the unpredictability of extreme weather and physical risks, which will lead to more profit volatility and potentially lost premium revenue as some risks become uninsurable, the report said and suggested the need to balance regulatory and societal expectations for affordable insurance protection.

The push to decarbonise also raises the risk of stranded assets in their investment portfolios, while climate change litigation against their corporate clients can elevate claim costs. Insurers also face tougher scrutiny of their carbon footprint from investors, regulators, clients and the public.

For asset managers, their exposure to carbon-intensive sectors is substantial and climate change is severely testing their ability to navigate investment risks. Fund managers who can pre-emptively identify and manage climate risk in their investment process can protect themselves against losses.

They can also considerably benefit from opportunities in developing investment solutions that contribute to a low-carbon economy, meeting investors sustainability expectations. Financial institutions will have to wrestle with decarbonisation as governments, investors, consumers and regulators mandate low-carbon economic models.

While banks and insurers will be more affected than asset managers, firms that fail to transform will face an increasing threat to their competitive positions, Sean Marion, a managing director at the agency, said.

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