Credit experts from across the globe gathered for the International Association of Credit Portfolio Managers (“IACPM”) 2022 Fall Conference in Washington, DC. The three-day conference was a resounding success, with many professionals connecting for the first time since the onset of COVID.
Some of the more salient themes at this year’s conference included the need for reliable and standardized climate impact metrics, maintenance of and threats to portfolio integrity, and the value and growing popularity of credit insurance as a risk mitigation and capital relief tool.
Climate Impact and Measurement
The impact of climate change remains a key opportunity and risk for many credit portfolios. This includes both the physical and transition risks of climate change.
Transition risk (such as policy, technology, and consumer preferences, among others) remains a key focus in credit portfolio management. However, the industry has continued to struggle with the inability to appropriately measure transition risk. This is due primarily to limited and reliable ESG data (banks often ask clients directly for this information), definition and measurement of appropriate metrics, and lack of standardized disclosure standards. There remains a significant and ongoing need for more and better data in the public domain to supplement client-provided information. While the rules are still being written, the challenge remains in modeling and stress testing these risks over both near- and long-term horizons.
Physical risk (such as wildfire, severe storms, and floods) resulting from climate change is another concern among credit portfolio managers. Physical risk has the potential to impact such areas as real estate property values and net operating income (due to uninsured damage, business interruption, and higher insurance costs). Additionally, physical and transition risk are not necessarily mutually exclusive from one another.
Differences exist in how banks and credit managers have chosen to measure and manage climate risk in their portfolios. However, institutions such as the International Sustainability Standards Board (“ISSB”) continue to work on a comprehensive global baseline of sustainability-related disclosure standards that will provide market participants with information about companies’ sustainability-related risks and opportunities. Deliberations for various proposals remain ongoing. While banks have continued to ramp-up their toolkits to identify and measure climate risks, harmonization of climate disclosures would fill a significant industry need.
Banks currently have strong capital levels and liquidity. However, given the current economic environment, institutions have continued to increase reserves. Economic factors that continue to be most impactful include inflation and weakness in the consumer sector. Although current credit quality is generally good, retail credits are beginning to show signs of stress. Additionally, the period of ultra-low interest rates has kept “zombie” companies afloat. Rising interest rates, labor costs, and general inflation could result in a higher number of bankruptcies among these organizations. However, bank risk profiles remain healthy and institutions have generally been better at credit risk management over a 10-15 year horizon.
Risks in the current economic environment have resulted in higher demand for credit insurance as a tool for risk mitigation. According to IACPM’s Risk Sharing and Market Developments panel, credit insurance remains an extremely reliable and effective product. Claim payment history for insurance providers has also been historically strong. Continuing education and due diligence among banks has resulted in higher product comfort. One of the largest global trade and project finance banks noted that they have been using credit insurance for the past 15-years. It has been one of its most widely used products for risk mitigation and also been an important lever to help the bank win more business. While use of credit insurance among banks for capital relief remains a primary motivator, alternative uses, such as credit concentration management, larger ticket sizes, are gaining popularity.
In the Peripherals: Geopolitics, Regulatory Developments, and Synthetic Securitization
Additional themes and topics credit professionals are monitoring include geopolitics, regulatory viewpoints, emerging threats on credit portfolios, and synthetic securitization, among others.
Special thanks to the IACPM for organizing a forum of rich and timely content, distinguished speakers and panels, and the opportunity for industry professionals to discuss practitioner-based viewpoints.
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This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.