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DBS launches transition financing framework to help 'less than dark-green' industries

To bridge the gap between traditional and sustainable financing, DBS’s transition framework will facilitate the move of key industries towards a low-carbon economy. But transition financing risks fossil fuel lock-ins, experts say.

Singapore’s largest bank has rolled out a finance framework and taxonomy to guide carbon-intensive clients towards a low-carbon economy. 

With its latest framework, DBS will evaluate the economic activities and strategy of their clients to assess if they are in line with the Paris Agreement.

“There are many interpretations of what constitutes transition finance. The bottom line is we cannot afford to dismiss clients who carry out activities which are less than dark-green but are nonetheless part of the mainstream economy instrumental to getting us below a 1.5-degree temperature increase,” said Yulanda Chung, DBS’s head of sustainability finance, in a statement.

Transition finance refers to any form of financial support that helps high-carbon companies implement long-term changes to become greener, while dark-green describes companies that are in line with a low-carbon future. 

“Green finance is still a niche market. If we look at green bonds for example, the majority of issuers will be looking at underlying assets, for instance green buildings and renewable energy projects. We haven’t seen many other types of economic activity and assets that are able to tap into green finance, and for good reasons, because we don’t want to adopt the practice of greenwashing,” Chung told Eco-Business. 

Research has shown that 83.7 per cent of Southeast Asia’s current and planned fossil fuel generation assets are incompatible with the Paris Agreement, leaving a large market eligible for transition financing.

Under DBS’s framework, projects will be classified under three categories—”green”, “in transition”, and/or “contributing to the United Nations’ Sustainable Development Goals (UN SDGs)”. The third category specifies which UN SDGs and targets that the project contributes to.

“Take the example of a steel producer that is installing a more energy-efficient blast furnace to significantly reduce greenhouse gas emissions at the plant. We might consider that in transition, but not green because fossil fuels are still being used,” said Chung.

DBS will conduct the evaluation and categorisation of each client project through an internal three-tier process, and said it would enlist the help of external consultants “when necessary”.

Risks of fossil fuel lock-in or rebound effects

DBS has received a second-party perspective for its transition framework from independent research-based organisation CICERO Green, which has published a qualitative review of the environmental strategies and risks companies can take.  

In its report, CICERO Green highlighted that some “project categories contain a risk of fossil fuel lock-in that will require active follow-up during implementation”.

Some of the transition projects such as the shipping, aviation, automotive industries and technologies that use oil, natural gas, shale gas, biofuels and alternative fuels may not promote the scale of ambition needed to achieve the Paris agreement climate goals, CICERO Green opined.

Echoing similar concerns, Helena Wright, vice president of Asia Sustainable Finance at World Wide Fund for Nature (WWF) said: “To further strengthen this approach, it will be important to ensure that financing for incremental improvements does not inadvertently lock in emissions, but leads to improvements over time towards the overall goal of reaching net zero emissions.”

Projects that focus on energy efficiency improvements and pollution control technologies may also lead to rebound effects, CICERO Green reported. With reduced costs due to power pollution levels or emissions intensity, companies might be incentivised to do more of the same activity. 

Chung explained that DBS is aware of these climate risks, and that what is considered “in transition” is contextual. The taxonomy takes different considerations into account, such as the type of asset, location and lifespan before labelling a project as in transition.

“Rather than looking at the economic activity in isolation, we will also look at the company’s overall strategy. So the categorisations are based on a combination of both asset-specific and strategic evaluation of the company as a whole,” Chung said.

“Take the example of a gas fired power plant. What is the system-wide transformation that is needed for that country to make the transition to clean energy? When it comes to power generation, we’ll look at the transmission and distribution network. How well equipped is the existing grid to accept intermittent renewable energy?”

Under the framework, DBS will report the aggregated data of individual transactions tagged under each of the three labels, and the associated details, such as the greenhouse gas emissions avoided and loan amount.

CICERO Green urged DBS to consider reporting on a project-by-project basis rather than on an aggregate level for extra transparency, as some projects may have potentially large climate impacts due to “the broad and sometimes vague selection criteria”.

More work to be done

Beyond introducing sustainable finance frameworks, Wright said that regional finance groups like DBS needed to make science-based commitments to decarbonise “in order to prevent the most catastrophic impacts of climate change.” One way to do this would be banks to sign up to the UN’s Principles of Responsible Banking, she said.

The UN PRI, a set of voluntary pledges to take environmental, social and corporate governance issues into account when investing, has scarce Asean signatories.

Among banks in Singapore—the world’s fifth largest finance hub—only United Overseas Bank Limited (UOB)’s investment arm has signed up to the UN PRI. Last year, DBS adopted the Equator Principles, a framework for responsible financing in infrastructure. 

Banks around the globe have been moving away from coal, the world’s dirtiest fossil fuel. DBS announced that it would stop financing new coal power plants in 2019 after honouring existing commitments.

When asked if DBS still funds new coal power plants, Chung answered, “Our commitment is not to finance any new thermal coal power plants anywhere in the world, regardless of technology. We announced that commitment last year, and also acknowledge that we have existing mandates that we’re going to fulfill.”

“We believe that the existing mandates are still compliant with the trajectory to achieve the climate pledges of the countries concerned. We know that developing markets need more time to make the transition compared to developed markets,” she said.

But as part of its existing projects, DBS continues to fund the 2,000-megawatt Jawa 9 and 10 coal power plant in Indonesia, which has drawn criticism from environmental activists and health experts alike.  

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