Singapore Banks Face Highest Climate Transition Risks in Indonesia: A Deep Dive
Singaporean banks could be the hardest hit by climate transition risks on their loan portfolios in Indonesia, according to a recent study by the National University of Singapore’s Sustainable and Green Finance Institute (SGFIN). The findings, released on March 12, 2026, highlight the increasing financial vulnerability linked to carbon-intensive industries.
Understanding Loss Intensity and the Study’s Methodology
The SGFIN study analyzed lending patterns across Southeast Asia, focusing on exposure to both domestic and international banks, including DBS, OCBC, and UOB. Researchers examined the probability of default for carbon-intensive sectors in Indonesia between 2015 and 2025. To account for potential extreme events, they applied a statistical method known as two standard deviations – a technique commonly used in bank stress-testing.
Loss intensity, defined as the loss per dollar of outstanding loans, is projected to reach around 43 basis points for Singapore banks by 2025. This is slightly higher than the expected loss intensities for Indonesian banks like Mandiri and Bank Negara Indonesia (BNI), and significantly higher than Bank Rakyat Indonesia (BRI) and other assessed banks.
The Rising Tide of Transition Risk
The study reveals a broader trend: an increasing contribution of carbon-intensive sector exposures to expected losses as regional project finance and cross-border lending expand. Sectors heavily reliant on fossil fuels – coal, oil and gas, electricity, and metal mining – are particularly vulnerable due to shifts in technology costs, carbon pricing policies, regulations, and investor sentiment.
As the report notes, “Historical data cannot predict future outcomes of decarbonisation, but it nonetheless offers useful insights on how banks’ credit risk, and hence expected losses, may evolve.”
Exposure Breakdown: Singapore vs. Indonesian Banks
As of January 2025, DBS, OCBC, and UOB collectively held approximately 8 per cent of Indonesia’s total corporate loan exposures. Japanese banks show a greater concentration in the electricity sector, while Indonesia’s largest domestic banks – Mandiri, BNI, BRI, and Bank Central Asia – maintain more balanced portfolios across various sectors.
Interestingly, coal financing remains largely concentrated among domestic banks, as international banks are increasingly reducing their exposure to this fossil fuel.
Beyond Transition: The Threat of Physical Risks
While transition risks pose the greatest threat to Singaporean banks, the study also examined physical risks, specifically flood risks. Projections indicate that losses from flooding are comparable between Singaporean and Indonesian banks, at around 0.4 per cent by 2060. This is based on a “middle-of-the-road” scenario from the United Nations’ Intergovernmental Panel on Climate Change, anticipating a 3 degrees Celsius temperature rise by 2100.
Though, Singaporean banks exhibit greater dispersion in their portfolios, meaning they have a smaller number of highly exposed borrowers alongside a larger group with relatively lower exposure. This uneven distribution could lead to more significant losses if adverse transition dynamics materialize.
Navigating the Future of Climate Finance in Southeast Asia
The SGFIN study underscores the urgent need for banks to proactively assess and manage climate-related financial risks. This includes incorporating climate stress testing into their risk management frameworks, diversifying loan portfolios, and engaging with borrowers to promote sustainable practices.
FAQ
Q: What are transition risks?
A: Transition risks refer to the financial risks associated with the shift to a lower-carbon economy, including changes in policy, technology, and market demand.
Q: What are physical risks?
A: Physical risks are the financial risks stemming from the direct physical impacts of climate change, such as floods, droughts, and extreme weather events.
Q: Which sectors are most vulnerable to climate transition risks in Indonesia?
A: Sectors heavily reliant on fossil fuels, including coal, oil and gas, electricity, and metal mining, are most vulnerable.
Q: What is loss intensity?
A: Loss intensity is the amount of loss per dollar of outstanding loans to carbon-intensive companies.
Q: What is the role of the National University of Singapore in this research?
A: The National University of Singapore’s Sustainable and Green Finance Institute (SGFIN) conducted the study.
Did you know? Applying a two standard deviation statistical method is a common practice in bank stress-testing to assess resilience against extreme events.
Pro Tip: Banks should prioritize engagement with borrowers in carbon-intensive sectors to encourage the adoption of sustainable practices and reduce long-term financial risks.
Explore further insights into sustainable finance and climate risk management on the National University of Singapore website.
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