Climate Risks Threatening Financial Sector... "Joint Response Needed from Financial Sector"

Effective Climate Risk Response Is Impossible by Regulators Alone
It Requires Cooperation Across the Entire Financial Sector

[Asia Economy Reporter Park Sun-mi] The participation of 28 financial institutions in the Climate Risk Forum stems from the fundamental recognition that effective climate risk response is impossible through the efforts of supervisory authorities alone and requires cooperation across the entire financial sector. Following the first non-face-to-face plenary meeting held last week, the financial sector is expected to promote related studies and seminars to expand the currently initial level of climate risk awareness.

According to the financial sector on the 16th, the Financial Supervisory Service operated a sustainable and climate finance study group targeting the financial sector in 2019 to enhance understanding of climate risk. Last year, it developed the first domestic prototype model for climate stress testing and conducted pilot tests. In addition, it is actively participating in discussions on climate risk response at major international organizations such as BCBS, IOSCO, and IAIS, and is closely cooperating with advanced overseas supervisory authorities and domestic and international research institutions.

Last week, in cooperation with the Financial Services Commission, the Climate Risk Forum was established to expand awareness and improve response capabilities related to climate risk in the domestic financial sector, and a non-face-to-face plenary meeting of the Climate Risk Forum, with participation from 28 financial institutions, was held. This is the first time a comprehensive discussion platform for climate risk response has been created in the financial sector. Banks, financial investment firms, life insurance, non-life insurance, card, and capital industries all participated.

Climate risk is divided into ▲physical risk, which refers to the transmission of physical damage in the real sector caused by abnormal climate phenomena to the financial sector through transactions such as insurance and loans, and ▲transition risk, which refers to financial losses occurring during the transition to a low-carbon society.

▲Physical risk factors include the decline in collateral asset value due to flooding and fires caused by abnormal climate, ▲the deterioration of the national economic base due to frequent abnormal weather events leading to a drop in government bond prices, and ▲business continuity impacts such as suspension of operations at headquarters and branches due to extreme climate events. Transition risk factors include ▲increased default and loss rates due to reduced debt repayment ability of high-carbon companies, ▲sharp declines in the value of stocks and bonds issued by fossil fuel production companies, and ▲reputational risks of financial companies related to climate change responses among customers and other stakeholders.

Through this forum, it is expected that related studies and seminars within the financial sector will be promoted to expand the initial level of climate risk awareness in the domestic financial sector. Additionally, each financial sector can promote the discovery and dissemination of best practices for climate risk response to induce the rapid establishment of a climate risk response system.

It will also be possible to discuss in advance with financial companies the main contents and practical applicability of the forthcoming 'Climate Risk Management and Supervision Plan,' maximizing the effectiveness of this plan. Furthermore, during international organization discussions on climate risk response, the forum can actively represent the realities of the domestic financial sector discussed within the forum.

A financial sector official stated, "The increase in financial risks related to climate change can transfer to risks across the entire financial system through the deterioration of financial company soundness and increased uncertainty in financial markets," adding, "This forum is very significant in that it is the first time the entire financial sector has created a comprehensive discussion platform for climate risk response."

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