In a historic move, banks in Singapore will for the first time adopt standards that govern responsible financing and integrate environmental, social and governance (ESG) issues such as deforestation, human rights and corporate ethics into their lending and business practices.
The Association of Banks in Singapore (ABS), which represents 158 foreign banks as well as the three largest local banks - DBS, UOB and OCBC - on Thursday released a set of guidelines that it says will align the financial sector’s activities to support sustainable development.
ABS said in a statement: “Irresponsible development, unsustainable business and commercial practices have adverse impacts on people and the environment. Financiers have an important role to play in shaping and expecting the responsible actions from their employees and clients.”
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ABS will continue to work with regulators, civil societies, NGOs and other stakeholders to raise awareness of ESG issues and trends as well as help build banks’ capacity and skills development.
This groundbreaking move comes in the wake of the worst haze to blanket Southeast Asia in years, with air pollution indicators hitting record levels and forcing schools to shut, flights to be cancelled and even causing several deaths in parts of the region. The disaster has also prompted calls among the Singapore public for banks to behave more responsibly, especially those who are linked to forest-related companies operating in Indonesia.
The National Environment Agency has sent legal notices to five Indonesian firms it believes are responsible for the burning of peatland that causes the annual haze.
Irresponsible development, unsustainable business and commercial practices have adverse impacts on people and the environment. Financiers have an important role to play in shaping and expecting the responsible actions from their employees and clients.
The Association of Banks in Singapore
ESG guidelines refer to the three main indicators used to measure the sustainability and ethical impact of an investment in a company or business. They include concerns such as greenhouse gas emissions, water, resource efficiency, labour standards, corporate integrity and risk management.
As the haze enters its second month this week, supermarket chains in Singapore like NTUC FairPrice, Sheng Siong and Prime started pulling from their shelves the products of Asia Pulp and Paper (APP), one of the companies implicated in the haze.
It also prompted the ABS to review the lending and investment policies of Singapore’s banks, as there are currently no such ‘green’ rules.
Singapore-based financial institutions, banks and traders that might have financed the Indonesian companies’ activities and benefited have not therefore not been asked to share responsibility for fire and haze.
Jeanne Stampe, a finance and commodities specialist at the World Wildlife Fund (WWF) in Singapore, said that given the importance of the finance sector to the city-state, the move represents a “core mobilizing factor” in the evolution of sustainability. It is also the first time that the finance sector in the country is playing a leading role in sustainable development.
“Sustainable finance is not just about financing renewable energy companies, it is about working with clients and portfolio companies to help advance them along the sustainability journey. This requires proper ESG risk management policies, processes and protocols in place,” she said.
So far, only four major banks in Indonesia, Malaysia and Singapore have embedded environmental factors as part of their credit-decision process, and banks in the region generally perform poorly when it comes to ESG criteria, the WWF said in a May report.
There is now mounting evidence that environmental and social issues present growing risks to economic growth and social stability, Stampe said.
Indeed, the new guidelines issued by ABS have asked lenders to focus their responsible financing policies on industries with “elevated” risk, ABS said. These are agriculture, chemicals, defence, energy especially oil, gas and coal, forestry, infrastructure, mining and metals, waste management.
Developed in consultation with the banks, the guidelines aim to help the lenders integrate ESG criteria into their risk assessment and lending processes. They are also targeted at making banks more transparent and accountable on such criteria.
Under the guidelines, the banks will firstly, disclose senior management’s commitment to responsible financing; secondly, improve governance on responsible financing; and thirdly, build their internal capacity so that bank staff has the ability to implement the guidelines.
Banks are to publish in their annual reports and websites their positioning and support for responsible financing as one of their priorities. They will also publish their chairman’s or CEO’s commitment to champion and implement responsible financing and their policy framework in supporting responsible financing.
To improve their governance, banks will allocate resources to implement responsible financing, with clear roles and responsibilities. They must ensure that there are internal controls to support it by either having a separate set of responsible financing policies and procedures or embedding new practices into their existing policies and procedures.
Finally, banks will raise staff awareness and build management capacity on responsible financing. ABS said it will work with the international organisations, regulators, civil societies and NGOs to train bank staff to make sure that they know the latest ideas in the subject.
The guidelines define the “minimum standards” on responsible financing practices, and banks should publish their ESG policy framework in 12-18 months’ time, ABS said. Banks may adopt higher standards if they wish.
WWF’s Stampe said this move is “very much in line with Singapore’s leadership role in green technology, in overall sustainability and with the banks’ leading positions as world’s safest bank, world’s best bank.”
Financiers here therefore have a strong role to play in sustainability and are increasingly being seen as responsible parties, “not in the legal sense but in the ethical or moral sense”, and are hence accountable to the public for the operations that they finance, she added.
“As Singapore suffers from the haze, it makes sense for our financiers to restrict financing to companies contributing to the haze until they clean up their act. As such, the spotlight has turned to the role of banks and investors in financing the companies that are either engaging in open burning, or buying from or trading products from errant operators,” she said.