Asean financial regulators stepping up environmental and social commitment while regional banks lag behind
FINANCIAL regulators in Indonesia, Malaysia, Singapore, Thailand and Vietnam are improving regulatory safeguards in light of increasing environmental and social (E&S) risks faced by the financial sector, according to WWF Singapore.
All five countries explicitly mention climate change and environmental degradation, such as deforestation and biodiversity loss, as part of the E&S issues that banks should address. At present, only 62 per cent of the 29 banks surveyed recognise climate-related risks and 48 per cent recognise risks associated with environmental degradation.
In all five countries, banks are expected to strengthen their governance around the management of E&S issues. However, only 62 per cent of the banks have assigned responsibility for their sustainability strategy implementation to their board or senior management, and only 34 per cent have a dedicated E&S team.
Further, the financial regulators or banking associations in these countries expect banks to develop E&S policies on environmental or social issues. But 43 per cent of the banks assessed have such policies in place, and only 15 per cent actually disclose these policies to stakeholders.
Singapore and Malaysia also hand out additional incentives such as green and sustainable bond grant schemes to shift financial flows towards a low-carbon and sustainable economy, away from harmful activities.
As for Indonesia, Thailand and Vietnam, the financial regulators are mulling additional measures to promote green finance.
All three Singaporean banks, DBS, OCBC, and UOB, meet or exceed expectations set by the Association of Banks in Singapore (ABS).
They are the only banks in all five countries to have adopted “no deforestation” policies and to prohibit the financing of new coal-fired power plants.
Notably, these banks apply their sustainability strategy beyond lending activities. They have put training programmes in place for their senior management, and have set minimum E&S requirements in their sector policies including references to international standards and certification schemes, such as the Roundtable on Sustainable Palm Oil.
They are also the only banks in Asean to support the Task Force on Climate-related Financial Disclosures (TFCD), which is an international campaign to promote disclosure of information on banks’ exposure to climate risks and opportunities.
ABS and all three local banks are working with stakeholders including civil society representatives or non-governmental organisations (NGOs) to improve their sustainability. In particular, ABS collaborates with partners such as WWF to support capacity building efforts on sustainable banking practices across ASEAN.
The eight Indonesian banks assessed demonstrate varying degrees of compliance with the country’s financial regulations.
Seven of them have incorporated sustainability in their overall strategy with clear commitment from top management. Five of the eight banks assessed have published sector policies, though those policies are usually limited to the palm oil sector. Six of them report taking the results of E&S risk assessments into account during their client approval processes. Six of them also work with civil society representatives or NGOs to understand the E&S risks associated with their business activities.
On the other hand, only three of the eight banks assessed recognise climate change- and deforestation- related risks. Five of the eight banks did not report providing green or sustainable financial products to their clients. Seven of the eight banks disclose some information about their sustainability strategy and vision, yet without annual reports on the strategy implementation.
Malaysian banks surveyed appear to be generally non compliant with the regulations, with none of them taking the results of E&S risk assessments into account during their client approval processes, assessing their portfolio-level exposure to climate-related or other E&S risks, disclosing statistics on the implementation of their E&S policies, and reporting their exposure to climate risks.
The seven Thai banks assessed are generally non compliant as well, with none of them pledging specific commitments to water or ocean-related risks, referring to internationally recognized sustainability standards in their E&S sector policies, or proactively engaging with clients to support the improvement of their E&S performance.
The five Vietnamese banks assessed generally do not comply with the country’s regulations, as none of them has a dedicated sustainability team, E&S sector policies in place, three lines of defence to manage E&S risks, or statistics on the implementation of their E&S strategies.
The latest “Sustainable Banking Regulations in Asean” report assesses regulations and guidelines issued by financial regulators or banking associations in five Asean countries, to determine how resilient the banking industry is in light of the climate and environmental crisis.
Correction: In a previous iteration of this article, we stated that "one bank failed to comply with the Monetary Authority of Singapore Risk Management Guidelines on Internal Controls." This is incorrect. The WWF Singapore's finding stated that "2 of the 3 banks mention having put in place three lines of defence to manage E&S risks". While MAS’ Risk Management Guidelines set out the need for three lines of defence for risk management, the authority does not mandate banks to say this in their disclosures. MAS has further clarified that all three local banks have this basic mechanism in place.