The Business Times

UOB sets decarbonisation targets for six sectors; ends financing for upstream O&G

Janice Lim
Published Mon, Oct 31, 2022 · 12:12 PM

SOUTH-east Asia’s third-largest lender UOB announced on Monday (Oct 31) that it will stop financing new upstream oil and gas (O&G) projects from 2023, among its wider net-zero commitments by 2050.

UOB also laid out its targets to reduce emission intensity for five other sectors, which are power, automotive, real estate, construction and steel. This means that these sectors will achieve lower emissions per unit of output or activity, but not necessarily a lower absolute level of emissions.

These six sectors make up 60 per cent of the bank’s corporate lending portfolio.

UOB is the second bank in Singapore to announce its net-zero targets by 2050 after DBS, amid a global push for financial institutions to mitigate climate-related risks within their portfolios.

Eric Lim, UOB’s chief sustainability officer, told reporters on the same day that the bank has decided to adopt a sectoral commitment towards upstream O&G as there was wide variance in net-zero aligned pathways for the sector.

“So what that told us was, within the region, we have not as a collective community figured out the most effective way towards transitioning out of oil and gas... That level of variance gave us very little confidence that there were any oil and gas pathways we could rely upon, which is why then we focus on limiting the upstream,” he said.

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“So we make the strongest commitment we know how to make, which is that of limiting new supply,” he said.

As for the downstream segment of the sector, which is where it emits the most greenhouse gas, Lim said UOB is trying to phase out its use across other sectors such as power and automotive.

“If you address the downstream, you’re essentially going to choke off the need for the upstream,” he added.

Frederick Chin, UOB’s head of group wholesale banking and markets, said the target set is not prescriptive, as it depends on many other factors.

The energy transition takes time, and until renewable energy comes on stream successfully, it is important to allow trade financing of downstream O&G economic activities even as it transitions, he said.

Based on its latest third-quarter earnings, UOB loan exposure to the upstream segment of the sector stood at S$2.4 billion, which is three times less than its exposure to the downstream segment of S$9.3 billion. The O&G sector, as a whole, represents 4 per cent of the bank’s total loans.

Although upstream O&G lending accounts for less than 1 per cent of UOB’s loans, Willie Tanoto, director of Asia-Pacific banks at Fitch Ratings, said the bank’s move to cut this avenue of financing can still be impactful given that it is taking effect in two months’ time and not far into the future.

“It can also exert pressure on other local and regional peers to respond, much like earlier commitments on coal financing by some banks prompted others to follow suit,” he added.

Justin Tan, partner and head of financial services at management consultancy Arthur D Little, said it is more important to understand the nature of activities that the bank loans are supporting rather than just classifying them as “upstream” or “downstream”.

“Our view is that ‘turning the tap off’ for the most impactful activities, i.e. exploration and production, is probably more critical,” he said.

Lim said the six sectors were chosen based on their emission intensity, as well as their materiality to the bank’s portfolio, and hence UOB’s ability to influence its clients in these areas. It had announced in 2019 that it would exit financing for the thermal coal sector by 2039.

The sectoral targets are guided by internationally recognised climate science models and based on regional pathways, though UOB added it has tried to be pragmatic and extracted regional pathways that represent the fair contributions of its key markets.

UOB’s chief executive Wee Ee Cheong said competitive companies would be able to supply to multinational corporations and to different parts of the world, and it’s the bank’s responsibility to improve their capabilities.

“By helping our clients, it’s actually helping ourselves. If my client is competitive, then that will translate into better earnings for the bank. And there could be also a potential opportunity for our client to upgrade, and we can actually finance them,” said Wee.

Compared with DBS, which has set a target to cut absolute financed emissions for O&G, Tan said UOB has chosen to focus on a set of activities it has a more confident handle on, for now at least.

“On a prima facie basis, UOB’s approach may come across as being somewhat less comprehensive and ‘ambitious’ than DBS’. However, one perspective may be that UOB has chosen to focus on a more pragmatic approach which it feels more confident of steering, from the onset at least,” he added.

UOB also recognised that there will be some clients who are unable or unwilling to successfully transit to a low-carbon business model, and it will need to cut support to such clients at some point in time, though that will be its “absolute last resort”.

Chan Kok Seong, group chief risk officer at the bank, said it is difficult for banks to set specific criteria in assessing whether to drop clients, but the bank will be guided by how much of a credit risk companies that do not decarbonise pose to the bank.

Tanoto said that there are trade-offs between what potentially has a large impact on reducing greenhouse gas emissions, and what the bank can finance profitably.

However, given the growing physical and transition risks in some of these sectors, he believes that an early transition to a lower-carbon financing portfolio will help mitigate the bank’s environmental risks in the long term, which is beneficial to its asset quality and profitability, even though they may not be immediately material.

When asked how a reduction in emissions intensity will lead to an overall decrease in carbon emissions, Lim said these targets are not about stopping economic growth, but about how it can be supported with the lowest possible carbon footprint, especially in this region where energy needs are expected to grow.

“By addressing emissions intensity, it encourages the shift away from fossil fuels towards renewable and low-carbon options,” he added.

On why the emission intensity targets of power, real estate, construction and steel sectors are not set to net-zero, Lim said it reflects the reality that there is more work to do in these sectors, and it is likely they will not be net-zero by 2050.

UOB will be joining the United Nations Net-Zero Banking Alliance, and will also be part of the Asia-Pacific division of the Glasgow Finance Alliance for Net Zero.

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