Climate Change Risk Internalization on Providing Financing Evaluation Principle’s
DOI:
https://doi.org/10.70716/emis.v4i3.802Keywords:
climate change risk, financing evaluation, 5C principleAbstract
Climate change has become global concern, including to the business and commercial sector. This phenomenon occurs due to direct impact to financial institutions, especially banks. The risks could be categorized mainly into two forms, namely physical and transition. Banks have a significant role in financing economic activities because the debt portion is generally greater than equity. Banks need to consider the risk of climate change when evaluating financing. Banks can anticipate this from the start in the financing evaluation phase, where one of the approaches used is the 5C principle. This research aims to answer how climate change risks can be internalized in the principal stage of financing evaluation. The method used is desk study research using secondary data sourced from literature and benchmarks conducted by banks. The result of this research shows potential risks arise on climate change that affect the 5C principles, including the financial risk of climate change which results in rising sea levels can affect the value of assets that are collateral for debtors and decrease the debtor's capacity in fulfilling its obligation to the bank. Banks need to prepare their capacity to internalize climate change risks into bank risk management so that financial risks from a commercial perspective are well managed.
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