The Industrial and Commercial Bank of China (ICBC), the world’s largest bank by assets, has released a new report on its own “environmental stress testing” model to incorporate negative externalities (i.e. climate change) into its own credit risk models. ICBC claimed it is the first bank in China to have done so, and it might as well be true. According to the Fair Finance Guide, ICBC has the highest exposure to the fossil fuel industry through loans and underwriting activities among Chinese banks, closely followed by Bank of China.
ICBC accurately pointed that environmental risk poses credit risks to lending institutions. It devised a model using two industries, to integrate environmental factors in the credit risk process. It describes its stress testing model in detail here. It would be interesting to see other banks test this model. This model might end up working only for ICBC but is evidence that it is possible to quantify environment risks and in the future, price them into loans.