Banks in the 10 countries comprising the Association of Southeast Asian Nations (Asean) are not responding fast enough to threats posed by climate catastrophe and environmental degradation, risking financial instability and social unrest in the region, a new assessment by non-governmental organisation (NGO) World Wildlife Fund (WWF) has found.
Of the 35 banks assessed, only four, all headquartered in Singapore or Thailand, met at least half of the criteria used in the study, which indicate whether banks heed environmental, social and governance (ESG) standards and thoroughly assess and mitigate social and environmental risks when deciding who to lend money to. More than 50 per cent of Southeast Asian banks fulfilled less than a quarter of the criteria, the report titled Sustainable Banking Assessment (SUSBA) reads.
On a more positive note, the study rates the three Singapore banks DBS, OCBC and UOB as top performers in the wake of shifts away from coal power lending and no-deforestation commitments, and has found that 74 per cent of the banks have made improvements over the last 12 months.
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But the failure by most banks to thoroughly incorporate responsible financing practices into their business models may undermine such progress and sustainable development in Southeast Asia, the study says.
To ensure that businesses are resilient, and the people of Asean have a secure future, Asean banks need to manage climate and other material environmental risks and opportunities in their portfolios.
Jeanne Stampe, head of Asia sustainable finance, WWF
Jeanne Stampe, head of Asia sustainable finance at WWF, said: “Asean’s economies are very much interdependent, which magnifies the effects of climate change and environmental destruction. To ensure that businesses are resilient, and the people of Asean have a secure future, Asean banks need to manage climate and other material environmental risks and opportunities in their portfolios.”
Southeast Asia, which is heavily dependent on agriculture and other environmentally sensitive industries, ranks among the regions at greatest risk from climate change, with projected impacts on forestry and agriculture set to threaten food security, water supply and socio-economic stability—issues the continued reliance on fossil fuels and rampant urbanisation and commodity production diving deforestation will only exacerbate.
But, according to the study, only 9 per cent of banks assessed have no-deforestation policies, despite Southeast Asia being home to some of the world’s deforestation hotspots, and a staggering 91 per cent continue to finance new coal-fired power plants even as Southeast Asian nations step up efforts to shift towards cleaner alternatives and renewable energy prices fall and technology improves.
And even though Southeast Asia is suffering from more intense and frequent water-related disasters as a result of climate change, only 17 per cent of banks surveyed recognise water risk, the report says. Worse still, not a single bank in Asean requires clients to conduct water risk assessments.
Such reckless lending policies, the study reads, pose a threat to Southeast Asia’s biodiversity, soils, forests and water resources—the natural capital base vital to Asean’s economies and people.
“Natural capital assets are the source of our economic and social wealth,” said Stampe. “In order to ensure the prosperity of Asean’s economies, we must protect and invest in these assets.”
As climate change kicks into a higher gear in the years to come, governments are likely to further tighten regulations and implement taxes to turn the tide on global warming—measures that could upend the economics of whole industry sectors, said Ben McCarron, managing director of Singapore-based ESG risk and strategy consulting firm Asia Research and Engagement.
Banking regulators and associations in Asean, meanwhile, seem to have woken up to the need to decrease capital invested in polluting and environmentally damaging activities, while raising allocations to investing with environmental benefits. In seven out of the 10 Asean countries, regulators and associations will have issued sustainable banking regulations or guidelines by the end of this year, according to WWF’s study.
And with novel and greener ways of building infrastructure, transporting people and goods, producing food and generating electricity gaining traction, banks need a more strategic approach to sustainability and robust risk assessment tools if they want to stay competitive and relevant in a low-carbon future, McCarron told Eco-Business.
Otherwise, he noted, banks not only risk missing green investment opportunities, but also having to deal with stranded assets, credit risk and reputational damage.
For example, there are reputational risks for banks if they finance palm oil growers that clear forests with fire, contributing to transboundary haze, or are notorious for labour exploitation on their plantations, he explained. And as the cost of clean energy continues to fall, banks that still fund coal-fired power plants or mines may end up having to deal with clients struggling to pay back loans as those assets become economically unviable.
As the banks find that green growth is growing in importance and the environmentally and socially challenging industries are falling behind, where do they want to position themselves?
Ben McCarron, managing director, Asia Research and Engagement
A 2017 study conducted by the United Nations Environment Programme and Singapore-headquartered DBS estimates that from 2016 to 2030, Asean will require an additional US$3 trillion in green investment in areas of infrastructure, renewable energy, energy efficiency and food and agriculture to protect its people, environment and economies.
According to the study, total annual green finance will need to increase by 400 per cent to ensure Asean green investment opportunities are met by 2030. In addition, green financial flows currently mostly favour renewable energy and neglect the other sectors, causing huge financing gaps, WWF’s study found.
“As the banks find that green growth is growing in importance and the environmentally and socially challenging industries are falling behind, where do they want to position themselves?” McCarron said.
Most importantly, McCarron said, banks in Asean should redirect financial flows away from businesses and industries with high footprints or dirty assets and towards green growth opportunities.
“Banks in Asean still take a reactive rather than proactive approach,” he observed. “They should start banking what is actually needed across the economy to support the change that sustainable development requires.”
“What is needed is a belief at the most senior level that banks have a role to play in accelerating these fundamental changes. And across the region, we don’t see that belief yet,” he shared.