A senior banker for Southeast Asia’s largest bank by assets, DBS, said Wednesday that it will take time for the company to move away from an investment strategy that supports the expansion of fossil fuels-based energy generation in Asia, and warned that to do so right away would come with a social cost.
The Singapore bank is among the few Asian banks to begin embracing sustainable lending practices in a sector that lags the world on responsible investing, according to a recent study.
The eighth annual Fossil Fuel Finance Report Card found that Asian banks continue to lend billions of dollars - over US$95 billion since 2014 - to the fossil fuel sector, financing some of the world’s most environmentally destructive practices.
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Over the past year, DBS has unveiled numerous measures to strengthen its responsible lending policy, including an end to funding palm oil companies linked to deforestation and the exploitation of carbon-rich peatland in Indonesia.
Last month, it made headlines for being the first Singapore issuer of US dollar green bonds, where proceeds will be allocated towards the financing of green projects or assets.
However, DBS - which uses the advertising slogan “Living, breathing Asia” - continues to provide loans for massive fossil fuel projects in Southeast Asia, such as the planned 1,200 megawatt Nghi Son 2 and Vung Ang II coal-fired power plants in Vietnam.
It is not alone in this regard; rivals Oversea-Chinese Banking Corporation (OCBC), Singapore’s second largest lendor, and United Overseas Bank (UOB), the city-state’s third biggest bank, are also major supporters of fossil fuel projects around the region.
Mikkel Bilyk Larsen, managing director, group head of tax and accounting policy, DBS, and co-chair of the company’s newly formed sustainability council, was asked at the United Nations’ Global Compact Network Singapore event how the company could justify continuing to support a polluting sector that is the main driver of climate change.
We must ensure a safe transition from a fossil fuel-based energy mix to one that is renewable, and it’s not going to happen overnight.
Mikkel Bilyk Larsen, managing director, group head of tax and accounting policy, DBS
Larsen began by saying that fossil fuels are not a “substantial part of our [investment] portfolio.”
But according to its latest financial report ending June this year, the bank’s exposure to oil and gas amounts to S$23 billion (US$17 billion), S$17 billion of which are loans. DBS’s oil and gas exposure has increased by S$1 billion over the last year due to loans.
Larsen noted that DBS, which has chosen affordable and clean energy and climate action as two of four Sustainable Development Goals central to its sustainability strategy, has a rigorous process in place for “financing only those things that we’re comfortable with,” and pointed to a list of conditions the bank has in place for issuing green bonds.
“Every bank in the world could stop funding the things that people do not think are green enough. But there is a necessary transition period [away from fossil fuels],” he said.
“Even if we [banks] did stop all the financing [of fossil fuels] today, we would have a problem. The trick is to do what is responsible - and consider both social and green factors.”
“We must ensure a safe transition from a fossil fuel-based energy mix to one that is renewable, and it’s not going to happen overnight,” said Larsen.
Commenting more broadly on companies adopting green principles and building a culture around sustainability, Larsen said that pressure from investors would help them move in the right direction.
“I don’t think every company will adopt the triple bottom line in the near future, he said, referring to a business philosophy that includes environmental and social factors as well as economic.
“I think we will see the change that we need [to embrace sustainability], but we need to give it a bit of time,” he said.
In January this year, at a green finance event in Singapore, the company’s chief executive Piyush Gupta said that it would be a “very hard decision” for any bank to steer clear of the financing opportunities presented by fossil fuels if a government chooses to include oil, coal or gas in the country’s energy mix.
The need for a quick transition
In response to Larsen’s comments at the event, Julien Vincent, executive director of Melbourne-based environmental group Market Forces, said that if the push to hold global warming below two degrees - in line with the Paris Agreement on climate change - is to be successful, “we need to stop building new fossil fuel-based power plants and transition to zero carbon energy as quickly as possible.”
Companies such as DBS can play a critical role in keeping a lid on global warming and benefit from the rapid global uptake of renewable energy, “but to do so they need to move beyond empty statements,” he told Eco-Business.
“Of course the transition can’t happen overnight. But DBS has the choice of investing in the future of region, or making risky bets which lock in an energy system of the past,” said Vincent.
If DBS and its peers want to be take seriously about a transition from fossil fuels to clean energy, “they might want to take the first step and commit to no longer finance projects that expand the scale of the fossil fuel sector,” he added.
Benjamin McCarron, managing director of sustainable finance firm Asia Research and Engagement, commented that increasingly investors and banks around the world regard financing fossil fuels as risky, as technology brings down the cost of renewables, increasing the likelihood that fossil fuel resources become “stranded assets”.
“Fossil fuel projects in exploration, extraction, distribution, and power all have long asset lives that will come under increasing competitive pressure due to energy innovations, and as government regulators move on global climate agreements,” he told Eco-Business.
“This commercial logic has resulted in an increasing number of banks and investors significantly increasing their scrutiny on fossil fuel activities and in many cases reducing capital allocation to related industries,” he said.
No region in the world can match Asia for the scale of planned fossil fuels power plants. China, India, Indonesia and Vietnam account for three quarters of new coal-fired power plants slated to be to be built globally by 2020.
A study by Harvard University and Greenpeace in January this year predicted that the number of deaths that result from breathing polluted air from coal-fired power stations in Southeast Asia would increase from 20,000 to 70,000 a year if plans for new plants go ahead.
Burning coal releases nitrogen oxide and sulphur dioxide, powerful pollutants that form particulate matter that causes harmful respiratory illnesses.
Southeast Asian economies have coal plants in the pipeline that, combined with those slated to be built in Japan and Korea - countries that are supplying much of the technology for Southeast Asia’s dirty energy power plants - will triple carbon emissions by 2030 to a level that exceeds emissions from the United States and Europe, according to the Harvard study.