MAS study finds banks will face financial loss under a disorderly climate transition

December 4, 2023|Written by |Monetary Authority of Singapore

A disorderly transition in Singapore would be “potentially destabilising and disruptive”, and banks and insurers could incur a significant financial loss if the region does not undergo a smooth transition to a net-zero economy, a report from the Monetary Authority of Singapore (MAS) has found.

The report found that if climate policy actions only begin in 2026, losses would be higher than if a transition towards a low-carbon economy started this year. The aggregate credit costs under a disorderly transition are 50% higher than a smooth transition that started this year, or 14.2% of banks’ 2022 net profits compared to 6% with a smoother transition.

Meanwhile, banks would have a larger aggregate market loss of 3.1% under a disorderly transition compared to 2.2% in a smooth transition, although their market exposure is smaller compared to credit exposures.

Further analysis found that financial institutions with more exposure to fossil fuels have a greater material risk in a transition to a greener economy.

Insurers fared better, but market losses would still be 4.5% under a disorderly transition and 2.9% under a smooth transition, the report found.

The findings “suggest an urgent need for [financial institutions] to engage their corporate clients to develop and execute credible transition plans to enable an early and orderly transition”, MAS said in its report.

MAS said it would closely monitor the risks and improve its climate risk assessments, as well as engage banks and insurers on their plans to address data and methodological gaps in transition risk plans. MAS added transition finance to its net-zero action plan and recently launched an AI platform to curb greenwashing in sustainable finance.

The analysis was part of the central bank’s latest financial stability review. It reflects similar findings from the European Central Bank, which found that a faster transition period would be cheaper for the economy.

This page was last updated December 4, 2023

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