Trucost News / 30 Mar 2017

ICBC and Trucost develop environmental stress testing framework for China

The framework seeks to help market participants manage the financial risks of climate change and channel green finance towards clean and low-carbon technologies

Financial institutions in China may benefit from greater clarity on assessing environmental risks from investments in high-impact industrial sectors such as aluminum as a result of new research published today by Trucost, part of S&P Dow Jones Indices, the Industrial and Commercial Bank of China (ICBC) and China’s Green Finance Committee.

The report titled, Internalization of Environmental Costs for Investment Stress Testing, develops a sensitivity analysis tool for investors to assess the potential internalized costs and environmental risks of their investments in China’s aluminum sector. By applying the environmental risk assessment framework to the sector, the research identifies risk factors including regulatory compliance, environmental taxation, emission trading, water scarcity and abatement costs and analyzes existing projects under a number of scenarios that could internalize these risks for aluminum operations.

The research findings show that environmental cost internalization is the most significant for primary aluminum and alumina projects because of environmental taxes that could account for nearly 20% and 13% of the average price of alumina and aluminum ingot, respectively. The findings can be used to support the business case for early capital expenditure in abatement technology to reduce these risks.

The research recommends that a broader range of market participants including banks, institutional investors and insurance companies should stress test their financing of industrial activities for exposure to environmental risks. For central banks, stress testing could provide valuable insight into the financial stability of economies and their resilience to climate change.

Zhou Yueqiu, Director of the Urban Finance Research Institute, Industrial and Commercial Bank of China said: “Environmental stress testing adds tremendous value to commercial banks’ systems for identifying and measuring environmental risks in financing. This collaboration with Trucost in developing a practical and yet robust environmental risk assessment framework and tool for the aluminum sector is another major step forward in green finance innovation for ICBC after our first environmental stress testing of lending to the thermal coal and cement sectors last year.”

Dr Richard Mattison, Chief Executive Officer, Trucost, said: “Environmental stress testing is a crucial first step for financial institutions towards understanding the potential impacts of climate change, air pollution and water scarcity on the performance of companies they finance as a result of tighter regulation, resource scarcity and shifts in market demand.”

Chaoni Huang, Head of Business Development (Asia), Trucost, said: “China’s interest in green finance has continued to grow since the 2016 G20 summit in Hangzhou when China put the issue on the conference agenda for the first time with its plans to establish a financial system that would support its transition to a more environmentally sustainable economy. Commercial banks and the broader investment community are key to deliver the solutions to China’s green transition by directing the flow of capital. We are pleased to work with ICBC to innovate their approach to risk management and product development.”

Media contact

Cecilia Ho, Asia Pacific Communications Manager, Hong Kong, (+852) 2532 8061, cecilia.ho@spglobal.com

Disclaimer

This document does not constitute an offer of services in jurisdictions where Trucost and its affiliates do not have the necessary licenses. Trucost is not an investment advisor, and Trucost makes no representation regarding the advisability of investing in any investment fund or other investment vehicle. A decision to invest in any investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to make an investment in any fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other investment product or vehicle.

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