Name: Green Finance: Accounting for Climate Risk
Uploaded: 2019-09-05
Duration: 21 min 27 s
Description: Climate change presents material financial risk.

Companies have long claimed to be green but there's a difference between sunny public relations campaigns and concrete corporate corporate disclosure. from China to the US to Europe market regulators are pushing companies to disclose the material financial risk of climate change in a specific and structured way and ramp up greener investment mechanisms including green bonds Nowhere's the shift more potentially sweeping than in China. To share insights on the cost of being green, please welcome [ UNKNOWN ] and [ UNKNOWN ] with Fortune's Jeff Ball. But first, our partner [ UNKNOWN ] has some insights on [ UNKNOWN ]. So let's take a look [ MUSIC ] [ MUSIC ] [ MUSIC ] [ MUSIC ] [ BLANK_AUDIO ] Good afternoon, thank you for being here I know the afternoon is getting late but we are as Clay Chandler say earlier starting to get increasingly to the node of the issue. If we've done this conference correctly you're gonna start to get tired of hearing. The notion that what we're trying to do here is to explore how issues of the environment and sustainability are moving from public relations to core corporate strategy. And the question though, is whether that movement is sufficient to make meaningful environmental change? We've been peeling back the layers over today in various industries. You've heard about energy, you just heard about textiles. And now we're gonna get to an industry that is perhaps the most bedrock fundamental industry in the economy, and that is finance. I want to just take off quickly four things that have happened quite recently that add up to, I think a tectonic change that we're going to explore here in this session. In June. In the United Kingdom, the Bank of England said that it will work. It will require insurance companies to assess The risk that ensures face from climate change as part of what the United Kingdom calls a stress test what the insurance industry calls a stress test the test of the financial health of insurance companies, the same month in June in France, the governor of the Bank of France, Said that central bankers around the world should consider exposure to climate change banks exposure to climate change in deciding how much collateral the central banks will require from banks when the central bank's loan money to banks here in China next year as a result of the decision by a decision by the country's securities regulator All publicly listed companies will have to disclose environmental risk data, including climate risk data. And as a bottom line, if you needed any more persuasion, Moody's the rating agency, has said that in 11 sectors across the global economy, there is 2 trillion US dollars worth of debt outstanding. Trillion with a T. That is at risk because of climate change. So, we have here two people who are really in the middle of this in China, which, as you've heard again throughout this whole discussion is the country that matters most in this and We're gonna start with In Hong. In Hong is at the Industrial and Commercial Bank of China. ICBC which happens to be the world's largest bank by assets, assets totaling about $ 4 trillion US, and In Hong has been engaged for many years in an effort to bring to the fore What will strike you as a buzzword. Green finance. But we're gonna try to unpack that term. We're gonna do two things here. We're gonna talk a little bit about what that includes, and then we're gonna ask the question of whether it's actually doing anything. Is it big enough to actually do anything. And then we're gonna leave plenty of time for your questions. So I wanna start with one question having to do with something called the Stress Test So I mentioned that the UK has imposed a stress test on insurance companies. The CBC has been engaged in essentially looking at how risk from climate change affects the financial health of a whole range of industries including coal and steel. And because, partly because [ UNKNOWN ] is quite involved in coal as well. I wanna ask you to unpack for us, what is the ICBC doing to force the coal industry to look at its exposure to climate change and then what is the ICBC doing with that intelligence that it gathers? Thank you, Mr Jeffrey. Let me Speak Chinese. Yeah, [ UNKNOWN ]. Thank you, Jeffrey. I will speak Chinese to answer this question as Jeffrey has pointed out. ICBC has been the first bank to deploy stress testing to assess The impact on the risk exposure of commercial banks as a result of climate change. Back in 2015 we started using stress tests to calculate the amount of climate and environmental risk faced by a commercial bank like ICC back in 2016. at London Stock Exchange, we issued this report risk receiving a lot of feedback about it and the key Achievement is like this. First, we are using stress test to quantify the risk and environmental risk or environmental exposure to see how big Is the exposure or how severe it is so that commercial banks will be able to take targeted measures in response to the exposure. Second, the methodology of the stress test, technologically speaking Is to conduct the analysis all the way through our customer base. And the conclusion is the credit rating of our customers will be impacted with the presence of environmental or climate exposure. Their data service capabilities might be compromised thus giving rise to a credit risk on the part of the lenders, the banks. So far, our stress test has incorporated all the key energy- consuming, heavily polluting, and the resource- intensive [ UNKNOWN ] For example, we have covered the thermal power cement, iron and steel. [ BLANK_AUDIO ] Alumina and water risks, the water risks alone cover 15 sub- sectors And also we're also looking at risks associated with carbon trading. And talk for a second about coal. And what have you found in the coal stress test? Have you found a large difference among different coal companies in China in terms of what you regard is their climate exposure? And then number two, what have you done with the bad actors they're paying more for debt from the CBC is that the unresolved. [ FOREIGN ] Yes, we've done that. China, at the very beginning we focus on coal- fired powerplants. And because we believe the consumption of coal is Key contributor to climate change was C02 emission. In China, in the electric power industry, coal accounts for a very big part. For the key commercial banks coal firing power plants are major loan customers. If there is growing risk experienced by that sector, it might worsen our asset quality. So we identified coal- fired power to start using our stress testing. And China is in increasing, is in [ UNKNOWN ] it's environmental protection standards Pushing the overall economy to go green. The green companies and green industries are encouraged to grow faster, while resource and energy and pollution intensive companies are being restricted. The result of this exercise at the ICBC is that coal companies that are seen as more climate Risky, climate riskier, have to pay the ICBC more for debt than other coal companies do. Okay, so do we have a microphone handler in the room and Priscilla Lou, where are you? Could you please bring a microphone over here and we'll come here in just a second. FuChang I wanna ask you You've been involved for many, many years in trying to shift the needle to move the needle in China away from coal and the electricity system. We've heard signs, in fact this morning indications that China's coal use may peak earlier than people thought and therefore its carbon emissions may peak earlier than people thought. Is everything that [ UNKNOWN ] is talking about, green finance with regard to coal, actually behind the shift away from coal in China? In other words, are all these fancy finances really doing anything in the coal sector? Or is what is happening in coal happening for other reasons, and is green finance not doing enough to make it happen faster? Yeah my answer simply is yours. Because .>> Yes Why ?>> Because the banker now they have faced a great risk if they still invest in a coal industry. We understand now China have the token consumption have at least the peak already. By 2030 not after. So, I think that is a give a pleasure you compare to before is now compared to the 2013 and China co consumption reduce the 400 million time already. And so, some small medium And Samoa Komai now is the bank row. I even know that last scale cope company and still facing difficult to get financial support from bankers. And so far is a bankers now are in a high risk and maybe they can not get return of their investment in a co- company Priscilla, I just wanna ask you, can you stand up? So Priscilla Lu is at DWS, an asset management firm, but also is a member of what's called the Green Finance Committee of the People's Bank of China, the Central Bank of China. And Priscilla you seem to be on airplanes all the time. So you have a global context here and I just want you to kind of pull the lens back for us and give us a sense of how Much difference what we're talking about here is making in the finance system and therefore in the energy system, and how what China is doing fits into the broader global picture? So I think something that's in China that's unique is that lead by the PBoC. The banks are working together with an awareness as well as guidelines for issuance of green bonds and also criteria for assessing risks in terms of loans. That is kind of a semi standardization effort. Although is not Lee, you know, technically Stated as standed. But the community of banks that are in this forum, in the Green Finance Committee forum, is sharing the thoughts, the experience, and also the work in terms of the loans that they are issuing and The risk and so on, and that cooperation and discussion and collaboration if you will, in understanding how to continually improve through the experiences of the various plans that are in this committee which is all the things in China Is really moving it a lot faster than anywhere else in the world because there isn't that collaboration elsewhere in other countries. And your sense is that as a result of that the emissions profile in China is different from what it would be otherwise. It's too early to say but I think that That sharing of experience, that sharing of really working together to understand how to improve and help make it better. In general is helping to move the needle faster. But still early days. I believe so because the Green Finance Committee of course still is only let's say five years to its beginning. And I think that the banks have only started to really work together. Their first issuance was 2016. And so I think that it's too early to say, but I believe that, that sharing and that, that collaboration and cooperation and, and working together is very important. Of course ICBC is very active and has been very instrumental in leading the charge in this area. Great. Thank you. How Harvey were you? How could someone get in my cow please? So let me ask while that's happening the two of us something else we We have little time for the session so we're moving quickly, but we talked about essentially a push. A push which is the bank saying you company will pay more if you are dirty than you will pay if you are green. I wanna talk for a second about a poll which is you company will pay less for debt if you are green And there is a fancy term called a macro prudential assessment. This is an assessment that a bank does of the financial health of a company that wants to borrow money from a bank. And there's a really wonky but interesting effort going on, particularly in China. That would integrate in a core way a banks assessment of a company's environmental risk and to the extent that the bank sees that the company's environmental risk is lower. That is that it is a cleaner company. That company would pay less would actually get its lending costs reduced. Futon, do you have any insight into whether that's actually changing anything for instance than in the coal sector or in energy intensive sectors? Yeah, in the coal sector if you use a pay more or less. My question is not that question. My question is the bank, they can curb their investment law May be paid back is zero. So that is a high risk for instance. because you prognosticate the coal may go bankrupt regardless of what it's paying on its debt. Yes. For instance for the medium and small coal mines and many is bankrupt. And so the bank actually with the money. For coal power power pan, now China over build coal power power already. If you invest and that is a huge substance cost which you will not recover. Covered. And Hong, what about that? I mean, is it, Futon is essentially saying that the preferential lending rates for dirty industries are not preventing the expansion of dirty industries. Yes. You agree with that? Yeah, I agree with that. And I have the data could share with Everyone this room [ UNKNOWN ] One data could be shared with you because ICBC realized that co- factor power generation is facing increasing risk. So when we adjust our portfolio, we have been doing portfolio readjustment for a fairly long time. Every year, while we're making investment to yin power generation, 77 % were invested in clean energy. The rest, less than 30 % was invested in co fuel power generation. So in our power generation portfolio, 60 % It's clean energy. The reason. It used to be 60 %. Yeah. Okay, I'm sorry to do this but I wanna cut you off and I wanna go to Hull for a second. So there you are, so do you buy this Hull? Do you buy the notion the preferential leading can significantly move the mill economy like China to achieve the sort of results that you just told us the world need to achieve? So the word one has to be very careful with his preferential capital finds returns and more specifically, it finds risk weighted returns. If coal plants are more risky, they should be priced more highly. I completely agree with your panelists on this. What I find troubling is when you offer concessionary finance for green In other words if you tell people you have to accept a lower return in order to build a solar farm or a wind farm then your self limiting because most people won't accept a lower return over time it has to be a reasonably risk weighted return. Let me turn for one sec what does that mean. There's a bunch of risks you face if you want to build a huge solar farm or huge wind farm. Can you get it cited? Can you get transmission access? Can you get the construction permits? At what price do you sell the power? Those risks raise your cost of capital as they should in a good capitalist economy or good free market economy. But government can drive those risks way down by pre zoning citing, by pre specifying power purchase agreements, by pre issuing construction permits, if you meet all the right criteria. So the way I think to use the financial system is to take advantage of what it does, capital finds risk weighted returns, and reduce all those risks a lot, and then the capital will really flow. You don't have to call that a green bond. You don't have to reduce, you don't have to change the very nature of capitalism. You simply have to restructure the deal, so that more capital flows. Hung, do you want to comment on that? I- That is, the notion that it's actually not so important to reduce the landing rate. What's more important is to create broader conditions, in which the market's wanting the green stuff. [ FOREIGN ] I totally agree. I think what how has been set is completely correct, in my view. For banks when we choose customers, on the one hand, we will check the individual profit profitability of individual product. We will also research into the overall risk of the whole structure Probably one project is profitable now but in the future [ UNKNOWN ] is challenged by climate risks. Then for the overall coal factor or coal feud, power generation in our decision- making, actually we have a prior readjustment towards the sector. [ FOREIGN ] We put in the green bomb or not actually is have to move out Out of the green [ INAUDIBLE ]. Okay, thank you very much. Obviously, more to talk about. Thanks so much for your time. Thank you. [ BLANK_AUDIO ]

Green Finance: Accounting for Climate Risk

Leadership

Climate change presents material financial risk.