Using the CWR APACCT 20 Index to Re-Calibrate Chronic Tail Risks and Re-Assess Long-Term Capital Allocation Decisions Given Rising Locked-In Coastal Threats

Through the Network for Greening the Financial System (NGFS), central banks and regulators globally have acknowledged that chronic climate risks such as the rise of sea levels or sea level rise (SLR) have potential financial consequences. Addressing such risks is especially urgent as the IPCC Sixth Assessment Report from Working Group I warns that the possibility of 2 m to 5 m of sea level rise (SLR) “cannot be ruled out” by 2100 and 2150; this prediction is higher than the previous IPCC worse-case scenario SLR of ~1 m by 2100. These changes to the climate risk landscape make the benchmarking proposed in China Water Risk’s (CWR’s) five-report series “CWR Coastal Capital Threat Series” in 2020 increasingly relevant. These reports highlight just how financially material chronic climate risks are: at 2.9 m of SLR, 28 million people from just 20 capitals and cities in APAC would lose their homes, and urban real estate equivalent to 22 Singapores, and 20 ports and 12 airports would be permanently submerged. These numbers are clearly financially material, yet they are conservative—local tide adjustments were not included in the benchmarking study. Given this materiality and the need for action to prevent financial shocks, central banks are now carrying out pilot stress tests in their domestic markets for both acute event-driven and chronic climaterisks, and the results of these tests reiterate how severe climate risks are for the finance sector. For example, the Hong Kong Monetary Authority’s (HKMA) pilot stress test of its banking sector involving 27 banks revealed that almost HK$1 trillion worth or 32% of participating banks’ mortgage and property lending are vulnerable to climate impacts mainly from flooding and typhoons. Yet, the results could be worse given accelerating SLR as warned by the recent IPCC AR6 WGI. Any asset being submerged earlier could face deep revaluation, similar to property value adjustment from freehold to leasehold. So, the financial sector must understand the risks presented by SLR. The CWR APAC Coastal Threat Index for 20 APAC capitals and economic hubs (CWR APACCT 20 Index) was created to assess the absolute and relative coastal threats facing 20 APAC cities. This index reflects mapped stacked locked-in SLR risks for four climate scenarios (1.5 °C, 2 °C, 3 °C and 4 °C) across key indicators (population, land area and key infrastructure assets) for each city; and also analyses storm surge threats and subsidence. It also considers government adaptation actions to reduce physical risks. This chapter explores the creation of the index with the support of over 100 finance professionals. Although far from perfect, it is a step in the right direction towards assessing coastal threats. Climate risks are rising, and economic, social, and financial shocks can only be avoided if these risks are better understood. It is hoped that the financial sector will build upon and adjust the index so that better stress tests can be carried out, and that potential maladaptation in the future can be avoided. Ideally, more capital would be allocated to decarbonisation and adaptation, as such actions would ensure long-term resilience.