Sustainable finance: Asean falls short

The first report by the global conservation group WWF on sustainable financing in the region has identified the urgent need for institutions here to catch up with the international peers on environmental, social and governance indicators.

Banks in Southeast Asia perform poorly when it comes to environmental, social and governance guidelines (ESG) and are lagging behind their international peers, a new report by the global conservation group WWF (World Wide Fund for Nature) has found.

The region is also falling behind on regulations on responsible lending and corporate sustainability disclosure requirements as compared to their counterparts in Brazil, China, South Africa and Hong Kong, the report noted.

This gap is “alarming” and needs to be urgently addressed, said its authors.

The study, released on last Wednesday at the 2nd Singapore Dialogue on Sustainable World Resources organized by the Singapore Institute of International Affairs, assesses the degree to which capital providers in the region – particularly those in Singapore, Indonesia and Malaysia – are factoring sustainability issues into their lending and investment activities.

Environmental, social and governance (ESG) refers to the three main indicators used to measure the sustainability and ethical impact of an investment in a company or business.

The report “Sustainable finance in Singapore, Indonesia and Malaysia: a Review of Financiers’ ESG Practices, Disclosure Standards and Regulations” draws on information that has been made public by the financial institutions, WWF said.

These include banks such as Singapore’s DBS, Malaysia’s CIMB and Indonesian’s state bank Bank Negara Indonesia, as well as state-linked investment firms Temasek, Employees Provident Fund (EPF) and Permodalan Nasional Berhad.

While there is mounting evidence across Asia that that environmental and social issues present growing risks to economic growth and social stability, banks in Southeast Asia have yet to start taking action to address them, said report co-author Jeanne Stampe, WWF Asia’s finance and commodities specialist, in a statement.

Only four out of the 18 banks analysed disclosed the use of ESG as a tool in their credit processes – three were Indonesian and one was Malaysian – and only one of these four, Bank Negara Indonesia, had a forest sector policy, she said.

In particular, Singapore banks fared the poorest. There was a distinct absence of clear statements or policies on ESG issues from the three main local banks, DBS, OCBC and UOB, compared to their counterparts in Malaysia and Indonesia.

Investors perform poorly too

Of the 12 investors, only two – Malaysia’s EPF and pension fund Kumpulan Wang Amanah Pencen (KWAP) – disclosed their corporate governance policy, and only KWAP’s policies refer directly to ESG expectations for portfolio companies. 

Climate change affects clients’ portfolios and affects performance and operations on the company level. It’s in the interest of these investors to adopt ESG practices and be active and responsible owners.

Jeanne Stampe, Asia Pacific Finance and Commodities Specialist, WWF Singapore

Investment firms Temasek and Khanzanah – linked to the Singapore and Malaysian governments, respectively – are among the region’s biggest institutional investors. They are often the single biggest shareholders of the largest local firms in their countries.

Many of these investors are also big owners of commodities or agriculture-related companies, so it’s even more important for them to adopt ESG principles.

“Climate change affects clients’ portfolios and affects performance and operations on the company level. It’s in the interest of these investors to adopt ESG practices and be active and responsible owners,” Stampe said.

“We recommend that they (investors) start using ESG with some urgency to identify the exposure to systemic risk such as climate change and step up active ownership,” she said.

Up to the individual banks

The benefits of adopting ESG standards are many manifold: Banks can strengthen credit risk management, reduce reputational risks, deepen client relationships and create new financial products, suggested WWF in its report.

For investors, ESG can help underpin investment returns as sound ESG management at the portfolio company level is linked to better operational practices and share price performance, added WWF .

At a discussion on sustainable finance at the event, Vincent Choo, chief risk officer of Singapore’s OCBC Bank said he believes that while the banks in the country support sustainability practices, it is entirely up to the individual lenders to decide how they want to implement such initiatives.

“Banks are at various stages, some are ahead, others are very far behind,” he told the audience comprising about 300 people from government, NGOs, financial institutions and academia.  

“At OCBC, it’s also something quite new to us but we have started incorporating environmental risk factors to our corporate policy. There are cases where we discourage lending to customers that have negative impact on the environment. In some cases we even prohibit lending to them,” he added.

The low levels of ESG integration at banks have prompted calls for regulators to issue “green” credit or sustainable banking guidelines and implement rules that make environmental and social impact assessments (ESIA) mandatory prior to loan disbursements, as is being done in China and Brazil.

“This will level the playing field for banks that are doing more and those that are doing less,” said Ian Hay, HSBC’s head of sustainable business in Asia.

He said that there have been cases where the customers will go to another bank with low or no guidelines in sustainable banking and “there will be no questions asked.”

While the cost to banks such as HSBC is “tiny”, it will be good to bring everyone up to the same standards, Hay said.

Palm oil and pulp industries

The palm oil and pulp industries, which have been linked with deforestation and the annual haze that envelops the region due to the burning of forests, were singled out in the WWF report.

There is a clear case for sustainable production but only a minority of companies disclose their policies and practices, the report found.

For example, amongst timber and pulp and paper companies, only 26 per cent of companies disclose the legality of their base supply; although this is required by major EU and US markets.

Similarly, only 19 per cent of palm oil companies disclose time-bound targets to reduce greenhouse gases emissions.

This is “a glaring omission by an industry central to efforts to combat climate change due to deforestation and planting on peat, and that is vulnerable to weather changes and faces regulatory risk,” the report said.

“The poor disclosure is partly linked to the fact that in these three countries, stock exchange disclosure requirements on ESG issues are too general. As such, the report calls on regulators to require the disclosure of statistical information, as is done in Hong Kong and provide detailed sector guidelines.”

For regional institutions to keep up with international best practices, regulators need to provide national guidelines on ESG integration for banks and mandatory reporting standards for listed companies, WWF said.

WWF is also calling on regional banks, investors, and companies to adopt ESG practices using a structured framework, and to be transparent and report on their progress.

They also urged industry players to join multi-stakeholder initiatives such as voluntary certification schemes or collaborative initiatives to learn about best management practice and get support from peers.

Part of the work that WWF is doing involves working with major soft commodity supply chain and financial institutions such as banks and investors to show that commodities can be produced at affordable costs with measurably reduced environmental and social impacts.

“Global banks and international institutional investors have begun to address these issues in their lending and investment decision-making processes. Global regulators have also provided supporting regulatory frameworks,” Stampe said.

“It´s now time for financial institutions in Southeast Asia and their regulators to play their part.”, she added.

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