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New guidelines soon to steer banks on responsible financing

ABS to work with MAS to monitor adoption of guidelines; but academic says guidelines too generic, light-weight
Friday, October 9, 2015 - 05:50
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Eugene Tan Kheng Boon, Associate Professor of Law, Singapore Management University (SMU) and Nominated Member of Parliament (NMP).

Singapore

IN 12 to 18 months' time, banks in Singapore will be expected to disclose policies framing their risk assessment of environmental, social and governance (ESG) factors for lending, under new guidelines set by the Association of Banks in Singapore (ABS).

The guidelines have been in the works since early this year, and were partly prompted by the Transboundary Haze Pollution Act that was passed in Parliament in 2014. A World Wide Fund for Nature report this year also singled out Singapore for dismal disclosures on ESG integration. The haze, which has prompted calls to boycott products from companies fingered for slash-and-burn practice, puts the guidelines in the spotlight.

ABS director Ong-Ang Ai Boon said that she was confident that banks would comply with the guidelines, though they do not carry penalties. She said that banks were wary of reputational risks, and that the Monetary Authority of Singapore (MAS) wants self-regulation. An MAS spokeswoman said that the regulator would work with ABS to monitor the adoption and implementation of the guidelines.

"ABS has always worked with peer pressure," said Mrs Ong-Ang at a press conference. "I'm going to leave it to the banks to feel so responsible, to feel so wretched, that their financing could have caused the haze."

ABS, which has 158 members, set up a task force to review this, led by HSBC and UOB. The fresh guidelines state that banks are to disclose senior management's commitment to responsible financing, and the policy framework that supports this.

ABS cited industries with "elevated risks" including agriculture, defence, forestry, and mining that banks should prioritise in developing responsible financing policies.

Banks should also allocate resources to support the implementation of responsible financing, and ensure that they have governance controls that support it. ABS expects the banks to implement "robust governance systems" by 2017.

And ABS will work with the banks, and relevant non-governmental organisations to raise banking staff's awareness on responsible financing.

Singapore banks are at various stages in their consideration of ESG issues, and have not formalised them in the way that their foreign peers have done, said Mrs Ong-Ang. But from her understanding, any lending to sensitive sectors would already be escalated to senior management.

"This set of guidelines is not a silver bullet," she added. "It will shape long-term changes in the agricultural practices of banking customers."

But Singapore Management University law professor Eugene Tan criticised the guidelines as a paper tiger. "It's too generic and light-weight and only requires banks to demonstrate that they have adopted the three principles on responsible financing in their business models."

Prof Tan added that it was unlikely that banks would be directly caught under the Haze Pollution Act for lending to companies that are found to have engaged in activities contributing to the haze. But it may be possible to take legal action against a bank that provided financial services to a company for the purpose of activities that caused or contributed to haze pollution in Singapore, he said. "The bank could be said to have not exercised a duty of care, especially if the ABS guidelines and/or the bank's own policies are not complied with."

He added that reputational risk was probably the biggest deterrent. "This is where consumer awareness and activism have a vital role to play."

Singapore banks said that they would reassess their banking relationship with clients if they are found to have breached standards such as zero-burning policies. A DBS spokeswoman said that the palm-oil companies that they make loans to have zero-burning policies. "In recent weeks, we had engaged a few of our palm oil plantation customers to reaffirm their zero burning policies. We are monitoring the situation closely."

Bloomberg reported that DBS's Indonesian unit was the biggest lender to PT Provident Agro, the majority owner of PT Langgam Inti Hibrindo. The latter has had its permit suspended over an investigation that it caused forest fires - a claim it has denied. DBS does not finance paper and pulp, and logging companies in Indonesia. In evaluating financing for a project, both DBS and OCBC said that they would consider the impact to issues such as resettlement.

DBS submits integrated reporting, which already covers sustainability issues that are most material to its strategy. It will now enhance disclosures on responsible financing to be in line with ABS guidelines

Vincent Choo, chief risk officer, OCBC Bank, said that ESG considerations related to the haze have been brought "to the forefront" with due diligence of new borrowers. Asked about having greater transparency on ESG standards, Mr Choo noted that the major global foreign banks have put years of effort to reach where they are today, and that international ESG standards are still evolving.

Frankie Phua, head of country and credit risk management at UOB, said that the bank would boost training for staff in the area of responsible financing.

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