Japan concludes pilot climate scenario analysis, Philippines issues ESG banking expectations

Japan’s trade ministry closes feedback on human rights due diligence guide.

Japanese banks would be able to insulate themselves against potential losses resulting from climate change, according to the country’s first climate scenario analysis exercise.

Results of the pilot exercise were published jointly last week by the Japanese Financial Services Agency (FSA) and the Bank of Japan (BOJ), which concluded that the costs of covering delinquent loans due to transition and physical risks were “considerably lower” than average annual bank incomes.

This is based on assessments conducted internally by Japanese banks using three climate scenarios published by central banking group the Network for Greening the Financial System. In two of these scenarios, decarbonisation was achieved by 2050 via orderly and delayed transitions, while a third assumes no additional global warming countermeasures than those already in place.

Only severe wind and water hazards were modelled in the study using historical data. Other types of climate hazards which may develop in the future were not taken into account.

Both regulator and supervisor have stressed that the exercise was intended to assess the financial sector’s ability to conduct climate scenario analysis, and not the underlying results.

The test itself is a slimmed down version of an analysis mooted in 2020, which would have involved five of the country’s largest banks and been conducted centrally by the FSA. The recently concluded exercise was done with six unnamed financial institutions, comprised equally of banks and non-life insurance groups.

The exercise was unable to find a consistent set of results for non-life insurers besides concluding a general increase in claims. This was due to the different assumptions and risk models used by participating insurers – the FSA said it would need to consider running a standardised analysis in the future to overcome these limitations.

Philippines guidance

It comes as the Philippines central bank, Bangko Sentral ng Pilipinas (BSP), released new supervisory expectations on how banks should integrate ESG principles in their loan and trading books.

Under the guidance, banks will be required to conduct their own due diligence of environmental and social risks of potential clients. Independent assessments, such as those produced by ESG data providers, “may only complement a bank’s own evaluation”, for which they are “ultimately responsible”, said BSP.

Banks have also been told to implement measures to ensure that they do not provide capital to companies engaging in greenwashing – defined as “deceptive marketing used to persuade the public” of an organisation’s green credentials – and are themselves not engaged in greenwashing.

The guidelines set broad expectations on the risk management systems which need to be in place at regulated institutions, such as ensuring that ESG targets have senior management and board oversight, preparing an analysis of exiting strategies for securities with high E&S risks, and adopting policies to achieve institutional sustainability targets.

It is the third tranche of BSP sustainable finance guidance, following its Sustainable Finance Framework in 2020 and the Environmental and Social Risk Management framework issued last year.

The Philippines is one of the leading South Asian jurisdictions on sustainable finance and was the first ASEAN member state to consult on a proposed regional standard for sustainability-focused investment funds earlier this year.

Japanese due diligence

Separately, the Japanese Ministry of Economy, Trade and Industry closed a consultation on the country’s first human rights due diligence guidelines on Monday. In its current form, companies would be required to establish a human rights policy, conduct supply due diligence, and establish a grievance mechanism at corporate or industry level.

The guidelines are not expected to be mandatory or include any penalties for non-compliance. The consultation ran for three weeks after publication of the draft on 8 August.