KENANGA INVESTMENT BANK BERHAD SUSTAINABILITY REPORT 2024 BASIS OF THIS REPORT OUR APPROACH TO SUSTAINABILITY KENANGA AT A GLANCE GOOD GOVERNANCE LEADERSHIP STATEMENTS SUSTAINABLE ECONOMIC GROWTH ENVIRONMENTAL STEWARDSHIP EMPOWERING PEOPLE AND COMMUNITIES APPENDIX 63 62 Climate Risk Type Impacted Risk Category Potential Impact to Kenanga Time Horizon Transition Risk – Compliance Cost Operational Risk, Credit Risk Rising compliance costs due to new climate policies and carbon taxes in high-emission industries may lead to supply chain disruptions and higher capital expenditure for adopting cleaner technologies. This could increase credit risk for banks and result in potential loan defaults from clients in high-emission sectors. Short-term (1-5 years), Medium-term (5-15 years) Transition Risk – Financed Emissions Reputational Risk, Regulatory Risk, Credit Risk Significant exposure to carbon-intensive sectors poses reputational risks and regulatory challenges. High-emission industries such as industrials, energy, and transportation face stricter disclosure requirements, leading to higher capital demands, stranded assets, and potential penalties and litigation issues for regulatory non-compliance. Long-term (15-30 years) Transition Risk – Market Risk Market Risk, Liquidity Risk Rising volatility in commodity and carbon credit prices driven by shifting climate policies results in energy price fluctuations and changes in asset valuations. This can lead to market losses and reduced investor confidence on clients that are not transitioning as per the market’s expectations. Medium-term (5-15 years) Transition Risk – Credit Risk Credit Risk Higher likelihood of default for clients in carbon-intensive sectors due to high transition and physical risks. This affects loan books with significant exposure to energy, manufacturing, and transportation, leading to increased Expected Credit Loss provisions, capital adequacy concerns, and higher regulatory compliance costs. Long-term (15-30 years) Transition Risk – Strategic Risk Strategic Risk/ Market Risk Changes in expectations, preferences, and behaviours from stakeholders and clients towards more climate friendly investments or association. This leads to potential loss of business due to company’s business practices, products and services that are not meeting clients’ and stakeholders’ expectations on climate considerations. Medium-term (5-15 years) Physical Risk – Flooding (Acute) Credit Risk Increased flooding risk for corporate borrowers, especially in coastal and riverine areas, may result in damage to property, infrastructure, and inventory, along with business disruptions. This could lead to higher insurance costs and reduced collateral values. Long-term (15-30 years) Physical Risk – Heatwave (Chronic) Credit Risk, Operational Risk Rising temperatures impact productivity, asset durability, and energy consumption, particularly in sectors like manufacturing and agriculture. This leads to productivity losses, higher cooling costs, and increased energy expenses, which can result in reduced profit margins and higher credit risk for vulnerable industries. Medium-term (5-15 years), Long-term (15-30 years) Note: These examples represent our initial assessment and do not encompass all potential risks. A comprehensive climate risk identification exercise will be conducted in 2025, and the findings will be used to further update and refine the risks outlined in this table. Physical Risks Arises from acute (event-driven) and chronic (long term shift) climate-related events that may: • Damage property • Reduce productivity • Disrupt trade • Increase financial risk to the Group • Impact collateral values Transition Risks Occurs due to adjustments in the shift towards a low-carbon economy. The adjustments may result in: • Financial risk • Reputational risk • Change in public policy and strategy • Increase in operational cost • Refinancing risk Liability Risks Stems from legal risk and claims on damages and losses incurred from inaction or lack of action that results in the effects of physical and transition risks: • Legal • Claims We have begun our climate risk identification process to understand how climate risks translate across other risk categories. The following table below illustrates a preliminary view of the potential climate risk impacts across these categories at Kenanga. We are continuously enhancing the climate risk identification and assessment process to ensure it is comprehensively integrated across our business: Climate Risk Type Impacted Risk Category Potential Impact to Kenanga Time Horizon Transition Risk Credit Risk, Operational Risk Sectors such as oil and gas are particularly impacted by decarbonisation policies, carbon pricing, and the shift to renewable energy. These changes can lead to stranded assets (e.g., oil fields, refineries), regulatory penalties, reduced consumer demand, and asset devaluation. As a result, companies in these sectors may face higher operational costs, capital expenditure for transitioning to renewable energy, and potential credit rating downgrades. Short-term (1-5 years), Medium-term (5-15 years), Long-term (15-30 years) Reputational Risk: Failure to act responsibly and manage climate-related risks could damage KIBB’s public image and erode customer and investor trust. Potential Financial Loss: Climate risks, including physical and transition risks, could result in substantial losses in lending and investment portfolios if not managed effectively, especially for clients within climate-vulnerable sectors. Risk Management Climate risk is an indirect risk that refers to potential losses or disruptions resulting from climate change. Changes in the climate can negatively impact the Group’s credit, market, operational, and reputational risks if not appropriately managed. At Kenanga, climate risk refers to the potential impacts arising from both our direct exposure to climate-related events and the risks embedded within our financing and investment activities. These risks can be categorised into risks as below: ENVIRONMENTAL STEWARDSHIP ENVIRONMENTAL STEWARDSHIP Impact of Climate Risks on Kenanga At Kenanga, we recognise that climate-related risks have the potential to impact various aspects of our business and operations. These risks can arise from physical and transition-related factors and liability, which can affect our financial stability, reputation, and overall resilience. To safeguard our long-term sustainability, it is crucial that we actively identify, assess, and address these risks, ensuring that we are well-equipped to manage and mitigate the potential impacts on our operations. Climate change may affect KIBB in two (2) key areas:
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