The world of banking and finance rarely looks to the conservation sector for advice on the direction of their industry; but a new report issued by the World Wide Fund for Nature (WWF) on the finance industry in Singapore, Malaysia and Indonesia may prove to be the exception to the rule.
Launched at an event organised by the Singapore International Institute of Affairs last month, WWF’s report - titled Sustainable finance in Singapore, Indonesia and Malaysia - is a ground-breaking piece of research that shines the spotlight on financiers, investors and regulators in these three countries and benchmarks them against their global peers.
The report is both a much-needed critique on the sustainability of the current financial system and a constructive document on how it can be improved.
It is the first ever systematic review of the environmental, social and governance (ESG) standards of financial institutions in these three countries, which were chosen because of their role in the haze pollution and deforestation problems that has plagued Southeast Asia for years.
The term ESG – often used interchangeably with sustainability - was first coined in 2004 by the United Nations Global Compact and refers to the three main indicators used by analysts to assess companies and their investments.
The report’s co-author Jeanne Stampe explains that ESG has become important to financiers and investors mainly because environmental and social issues are increasingly posing risks to economic growth and social stability across Asia.
Global banks and institutional investors are looking at their lending and investment decision-making process through an ESG lens to mitigate these risks and bolster their investments.
WWF’s report, which draws on publicly available information, finds that 18 domestic banks in Singapore, Malaysia and Indonesia perform poorly when it comes to ESG standards.
They significantly lag behind global players such as Westpac, HSBC, Standard Chartered and ANZ, which were selected for comparison in the report as they similarly have a significant presence in Asia Pacific markets.
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.
It may come as a surprise to many that Singapore banks fared the worst.
There was a distinct absence of clear statements or policies on ESG issues from the three local banks - DBS, OCBC and UOB - compared to their counterparts in Malaysia and Indonesia.
And of the 12 sovereign wealth and pension funds in the three countries, only two – Malaysia’s EPF and pension fund Kumpulan Wang Amanah Pencen (KWAP) – disclosed the corporate governance and voting policies that they apply to their portfolio companies.
Temasek and GIC were lacking on the disclosure of these practices.
Regulators in these countries, similarly, are trailing their counterparts in Brazil, China, South Africa and Hong Kong on responsible lending and corporate sustainability disclosure. The Monetary Authority of Singapore (MAS) and Bank Negara Malaysia, for example, do not have banking regulations relating to ESG standards.
Indonesia last year launched a Sustainable Finance Roadmap and is due to announce regulations in 2016.
Lack of leadership
The report’s findings sit uncomfortably with Singapore’s efforts to be Asia’s leading banking hub and not least, a global sustainable city.
Firstly, for a country which professes to be a premium financial services provider, its lack of leadership in this area is somewhat embarrassing.
Ms Stampe says one reason for this is perhaps the misperception that considering ESG is bad for business. Other banks in the report, however, have demonstrated that it is possible to finance responsible and clean businesses and still remain competitive.
There is also well-documented evidence that sustainable investing is not a financial sacrifice.
A Morgan Stanley report in March titled ‘Sustainable Reality’, for instance, showed that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments – both on both an absolute and a risk-adjusted basis, across asset classes and over time.
Secondly, Singapore has articulated an ambition to be a sustainable city with a flourishing green economy by 2030, as unveiled in the Sustainable Singapore Blueprint last year.
A sustainable city requires a sustainable capital market that enables policymakers to plan for the long term and tackle a range of environmental and social issues such as climate change and social equity. Current financial regulations do not seem to reflect this vision.
Finally, Singapore has tried for decades to resolve the haze pollution issue but is not looking at the a possible solution in its own backyard.
It has for years tried to lobby the Malaysian and Indonesian governments to do more to tackle the rampant forest burning and deforestation involving companies that deal in forest commodities such as palm oil and pulp and paper.
It even introduced the Transboundary Haze Pollution Act last year which punishes errant companies that cause haze pollution in Singapore with fines of up to $2 million. But as Darrel Webber, chief of the Roundtable on Sustainable Palm Oil (RSPO) – an industry association that certifies and advocates sustainable palm oil - has pointed out publicly, Singapore has the potential to exert more influence.
It is a major palm oil trading hub, and many of its banks are major financiers of agricultural companies in the region. Singapore, Malaysia and Indonesia bourses account for 90 per cent of the total market capitalisation of grower or plantation companies listed in the world.
Despite this, not a single Singaporean bank is an RSPO member today. The finance industry is an “obvious lever” for Singapore which has largely been untouched, Ms Stampe notes.
To be fair, Singapore is cognisant of this. At the SIIA event, Minister for Environment and Water Resources Vivian Balakrishnan said that there is increasing expectation of banks and investors to be responsible.
“We expect banks and financial institutions to do a hygiene check. It is not just a matter of interest rate but also about how the company is deriving its source of funds, and what its methods of production are… This has to become part and parcel of your standard due diligence,” he said.
Ms Stampe points out that perhaps the local banks do follow some ESG guidelines, but just do not disclose it publicly. If this is the case, it is more constructive for them to disclose it as it allows for external monitoring of progress and increased transparency.
She says that WWF is now working with the banking sector in all three countries, including the Association of Banks in Singapore (ABS) to conduct ESG workshops for local banks, and that ABS might look into setting up a taskforce on ESG.
This is encouraging and more than overdue.
The MAS should also step up and introduce voluntary stewardship codes to promote responsible investment practices. Its current stance that the industry should regulate itself just does not cut it.
It will only perpetuate a waiting game in which the regulator awaits the industry to get their act together, while the industry waits for the regulator to take leadership.
Beyond engagement with the industry, WWF also points to shareholders as playing a key role in accelerating change within the industry.
Investors and consumers can play a part in speaking up on their expectations of behaviour by companies and financial institutions. And this is not simply about employee tree-planting or sending e-statements – it’s about ensuring that banks are changing their investment behaviour and putting money in the right places at the very start.
The benefits are manifold: Banks that have ESG strategies can strengthen credit risk management, reduce reputational risks, and create new financial products. For investors, sound ESG management at the company level is linked to better operational practices and share price performance. Furthermore, as the performance of financiers is linked to the economy, it is in their interest to address risks such as climate change which can impact entire portfolios.
Deforestation and forest degradation are important contributors to climate change, which should put these issues high on the agenda of financiers, says the report.
Dr Balakrishnan, in his speech, was right to observe that due to increased global scrutiny, “banks have also become part of the watch list”.
All eyes will now be on how well and quickly Singapore’s financial institutions respond.