Chinese banks ahead of US peers when it comes to climate risks analysis, but must do more, MSCI study finds

Just two of the 25 Chinese banks among the banking constituents of the MSCI ACWI global equity index have published analysis on the importance of climate risks to their operations
Chinese banks are ahead of US lenders, but lag behind banks in the EU, Japan and Malaysia, MSCI data shows

Banking & finance

Eric Ng

Published: 5:00pm, 10 Jan, 2023

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Banks in mainland China trail their peers in some developed and emerging markets when it comes to climate risks analysis, according to a study by investment data and analytics firm MSCI.

Just two, or 8 per cent, of the 25 Chinese banks among the banking constituents of the MSCI ACWI global equity index had published analysis on the importance of climate risks to their operations as of October 30 last year, Cody Dong, a financial sector senior associate at MSCI ESG & Climate Research, said on Tuesday.

“In 2023, we look forward to seeing how banks in emerging markets, including China, will meet regulators’ requirements and investors’ calls, to disclose the carbon emissions of projects funded by their loans,” Dong said. “Globally, more regulators are demanding [that] financial institutions conduct climate-risk stress tests. Our analysis of banks’ disclosures has shown that some are better prepared than others, but none are fully ready.”

The Chinese banks were ahead of their counterparts in the United States, where just one in 18 banks, or 6 per cent, had analysed the importance of climate risks to their operations. But they were behind the 31 per cent of 29 European Union banks, 33 per cent of nine Japanese lenders and 29 per cent of seven Malaysian banks that had published analysis on the importance of climate risks, MSCI data shows.

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None of the Chinese banks had, however, carried out analysis of climate scenarios, to estimate the financial impact of various degrees of global warming. This was in contrast with 75 per cent of banks in Australia, 48 per cent in the EU, 39 per cent in the US and 40 per cent in Brazil.

A year ago, the People’s Bank of China (PBOC), China’s central bank, announced the results of the industry’s maiden climate stress test. Conducted on 23 banks’ lending to the country’s three most carbon-intensive industries, the assessment found that under a light stress scenario, higher loan defaults caused by costs likely to be imposed on the borrowers’ emissions would pare the banks’ capital adequacy ratio to 14.3 per cent in 2030 from 14.9 per cent in 2020.

The People’s Bank of China headquarters in Beijing. China plans to expand its climate stress testing of the financial sector to other heavy-emitting industries, the governor of the Chinese central bank says. Photo: Bloomberg

The lowered ratio would still meet regulatory requirements, the PBOC said, since the coal-fired electricity, steel and cement sectors did not comprise a high percentage of the banks’ total loans.

China planned to expand its climate stress testing of the financial sector to other heavy-emitting industries, including aviation, non-ferrous metals and petrochemicals, Yi Gang, the PBOC governor, said in June last year.

Among the country’s big six commercial banks, Bank of China (BOC) was the most exposed to high-emission intensity industries, accounting for 91 per cent of the total emissions enabled by its entire loans portfolio, according to MSCI research.

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It was followed by 84 per cent for Agricultural Bank of China (ABC) and 80 per cent for both Industrial and Commercial Bank of China (ICBC) and Bank of Communications (Bocom).

High emissions intensity is defined as more than 100 tonnes of carbon dioxide equivalent per US$1 million of lending. On a per US$1 million of lending basis, high emissions sectors took up 30 per cent of loans at BOC, ABC and ICBC, compared with 23 per cent for China Construction Bank.

Meanwhile, less than a quarter of the MSCI ACWI Investable Markets Index’s 9,000 or so constituent companies have compiled comprehensive climate adaptation plans, said Wang Xiaoshu, MSCI’s head of Asia-Pacific ESG and climate research.

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