Navigating Climate Transition: Evaluating Exposure And Resilience Of Indonesian Banks’ Portfolios Across High-Emitting Sectors. A Bottom-Up Analysis

Energy sector contributes significantly to emitting the largest emissions from fossil fuel combustions. Driven by the transition agenda towards a low-carbon economy, the industrial sector is expected to decarbonize its greenhouse gas (GHG) emissions by shifting from fossil fuels to renewable energy sources. This paper aims to assess climate transition risks and their impact on the banking credit portfolios of high-emitting and energy-producing sectors in Indonesia, namely coal, oil & gas, power, and automotive sectors, using the 1in1000’s TRISK framework. Using credit data from 1,567 observations in December 2022, the findings reveal that the majority of banks are expected to experience a notable increase in expected losses (EL) and probability of default (PD) in these sectors. In summary, using the average increase of PD, excluding outlier scenarios, coal sector exhibits the highest increase in PD (45.2%), followed by power (41.5%), oil & gas (0.1%), and, lastly, automotive (0.05%). Although the highest change in PD is observed in coal sector, the highest expected loss is observed in the power sector due to large exposure that the banks have in the power sector. Study signifies the role of banks, including central banks and financial supervisors as the regulatory bodies in facilitating the transition to a low carbon economy and to support the sectoral rebalancing process of high-risk sectors exposures in banks’ portfolio. Additionally, this study also presents several recommendations based on the analysis to guide central banks, financial regulators, and the financial sector at large in managing climate risks effectively.