Singapore’s central bank proposes engagement, over divestment, for decarbonising finance firms

While experts have lauded the regulator’s transition planning guidelines as one of the most comprehensive for the sector thus far, some said it remains unclear when divestment could be a valid and sound step to take.

"No to coal in Asia": protesters in Asia
The Monetary Authority of Singapore's proposed transition planning guidelines calls for "engagement, rather than divestment" to be the key lever for financial institutions to shift away from carbon-intensive activities. Image:

Singapore’s central bank and regulator Monetary Authority of Singapore (MAS) has said finance institutions should engage with carbon-intensive entities, rather than resort to “indiscriminate divestment” to decarbonise their portfolios.

New proposed transition planning guidelines for banks, insurers and asset managers favour supporting businesses linked to fossil fuels and other climate-related risks over divestment, which MAS managing director Ravi Menon said will not get the world to net-zero.

“Financial institutions must actively support their borrowers, insured parties, and investee companies to progressively decarbonise their activities through credible transition plans,” said Menon in a press statement, highlighting the need for regulators to support financial institutions where short-term increases in financed, facilitated or insurance-associated emissions from these plans are expected.

Building on the central bank’s existing guidance on environmental risk management for the sector, which has been effective since June 2022, the new guidelines are the latest in the wave of frameworks that have been put forth by global regulators and standard setting bodies over the past two years.

“The guidelines move the frontier for transition planning for financial institutions, even beyond what we have seen in Europe and elsewhere,” Mervyn Tang, head of sustainability strategy, APAC, Schroders told Eco-Business.

Earlier this month, the United Kingdom’s Transition Plan Taskforce (TPT) launched its final disclosure framework, which is meant to be the “gold standard” for listed companies and financial firms to report their transition plans.

Tang noted that while the UK TPT is comprehensive for companies in general, Singapore’s guidelines focuses on financial institutions, where elements like portfolio decarbonisation targets and trajectories are included. He said that the British investment management company will look to incorporate nature – which was discussed in the MAS’ guidance – into its existing climate transition action plan.

Other key elements of MAS’ guidance, which is open for public consultation until mid-December, include a multi-year approach to facilitate a more comprehensive assessment of climate-related risks, a holistic treatment of risks that enables better risk discovery, consideration of environmental risks and transparency to support accountability.

Once the final guidelines are issued, Singapore’s central bank will provide a phase-in period of 12 months for financial institutions to implement them.

Moving past disclosures to transition planning

While many governments and regulators in major economies now require firms to disclose climate-related risks and opportunities, there remains a huge gap in sustainability ambitions and detailed plans to realise them.

In an analysis done in February, the non-profit disclosure system CDP found that fewer than one in 200 companies who submit climate-related data to the platform have credible climate transition plans.

As a result, central banks, standard setting bodies and regulators are increasingly turning their focus to transition planning to close this gap. The inaugural climate-related disclosures standard issued by the International Sustainability Standards Board (ISSB) in June, for instance, included several provisions relevant to transition planning.

Last November, the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of financial institutions committed to reaching net-zero emissions by 2050, released its recommendations and guidance for net-zero transition planning for financial institutions, developed in close consultation with ISSB, Taskforce for Climate-related Financial Disclosure (TCFD) and the UK TPT.

Closer to home, the Hong Kong Monetary Authority issued a set of principles to guide banks in their net-zero transition planning last month.

Just last week, the Association of Southeast Asian Nations (Asean) released a new transition finance guidance where companies in the region will need to demonstrate how they intend to transition their operations to access financing for transition activities, in line with the existing Asean taxonomy.

Under the first iteration of this guidance, entities that are not yet fully Paris agreement-aligned but committed to addressing any material gaps in their transition plans within the next two years could potentially be eligible for transition financing.

Clarity needed over when divestment is the next step

While experts have largely endorsed the MAS’ emphasis on active engagement over divestment, they point out that there may come a point where continued engagement – after exhausting escalation processes through bilateral meetings, shareholder collaboration or shareholder resolutions – proves to be ineffective.

In such instances, financial institutions should consider how to best manage these risks, which may include the possibility of divesting, said Sean Tseng, a legal consultant for global environmental law charity ClientEarth, who pointed out that this is something the proposed guidelines do not foreclose.

However, it appears unclear from MAS’ guidelines when divestment should be the next step for financial institutions to take as they work towards decarbonisation.

Divestment has copped a bad reputation, but it is actually a valid and sound step to take.

Christina Ng, debt markets research and stakeholder engagement leader, APAC, Institute for Energy Economics and Financial Analysis (IEEFA)

“Engagement is a means to an end and most divestments take place as a result of a series of failed engagements… A forever-engagement approach without divestment as a consequence is likely to render itself ineffective,” said Christina Ng, debt markets research and stakeholder engagement leader, APAC from the Institute for Energy Economics and Financial Analysis (IEEFA).

Furthermore, Ng noted that an abrupt termination of a client relationship is currently not common practice, even in the case of coal divestment policies. An IEEFA report published earlier this year found that over 200 global financial institutions now have such policies in place and almost all of them include engagement as part of the process.

“Divestment has copped a bad reputation, but it is actually a valid and sound step to take,” Ng said, adding that research has shown that in some cases, significant and positive steps to decarbonise were taken as a result of divestment.

Going beyond the ‘financed emissions’ metric

Most financial institutions have started setting their emissions baseline for target setting according to the “financed emissions” approach set out by the Partnership for Carbon Accounting Financials (PCAF), an industry-led initiative to enable the consistent measurement and disclosure of emissions associated with financing activities.

However, financed emissions – currently the dominant metric for evaluating progress on decarbonisation – might not accurately reflect how much future emissions reduction an entity is financing, since it only takes into account current and historical emissions, said Yuki Yasui, the regional director of the GFANZ APAC network, who spoke on a panel at the launch of the MAS guidelines.

“If you’re financing the managed phase-out of coal, you would be bringing more financed emissions into your portfolio and it doesn’t look good, but your intention is to finance that so that in the future [emissions] will go down,” said Yasui.

This points to the need for more forward-looking metrics, beyond financed emissions, to account for emissions reduction from financing transition activities.

Yasui said that some investors have started using portfolio alignment metrics, which track how aligned their investment, lending and underwriting activities are with a 1.5 degrees aligned pathway. But she observed that this might not be such a practical measure for banks to take, given the sheer amount of assets they manage.

That being said, DBS Bank’s group head of institutional banking Tan Su Shan, who spoke on the same panel, said that the Singapore-based lender has been applying the “portfolio alignment delta” metric to track the progress for its real estate and shipping assets – two of the seven sectors it has set decarbonisation targets for. 

The portfolio alignment delta measures the difference between an asset’s actual and required carbon intensity to be in line with the decarbonisation trajectory.

Another metric GFANZ has been using is the energy supply investment ratio, which measures how much banks are investing in low-carbon energy supply compared to fossil fuels. In 2021, for every dollar of fossil fuel financing, about 80 cents went into clean energy investments.

This ratio was much higher at 0.92:1 among members of the Net-Zero Banking Alliance (NZBA), an association of banks convened under GFANZ, compared to the 0.64:1 for non-NZBA banks. According to estimates by research provider BloombergNEF, the investment ratio will need to increase to 4:1 at the very least by 2030 to limit global warming to 1.5 degrees.

GFANZ’s guidance on transition planning also introduced the concept of “expected emissions reduction”, which quantifies the emissions return of a financial institution’s transition finance activities.

Another panellist Tomohiro Ishikawa, chief regulatory engagement officer of Japan’s Mitsubishi UFJ Financial Group (MUFG), which currently leads the NZBA’s financing and engagement work track, said that the alliance is exploring the concept of an “emissions reduction return on investment”. 

This concept extends the conventional financial understanding of returns to non-financial emissions reduction and could potentially be used to explain to stakeholders the purpose of financing transition activities.

“These are some of the tools that we are trying to develop to explain what we’re doing, as opposed to just saying here are my emissions, just wait 30 years and we’ll get to net-zero by 2050. Nobody will believe that unless you actually showcase the progress,” said Ishikawa.

Building in accountability mechanisms

To hold companies accountable to their transition plans, which are currently disclosed on a voluntary basis, ClientEarth’s Tseng suggested embedding accountability mechanisms so that future action can be course-corrected where necessary. Having these mechanisms in place “might obviate the need to withdraw such transition finance or divest entirely,” he added.

Examples of accountability mechanisms could include engaging third party assurance, both at the stage of developing the plan as well as at regular intervals during its execution.

Financial institutions could also have a formalised procedure for gathering feedback from key stakeholders, including shareholders, clients and employees, on the transition plan throughout its reporting cycle to create a feedback loop to keep entities accountable.

MAS said that it expects the implementation of transition planning to be an iterative process, which will mature as best practices evolve. In the meantime, experts say more guidance will be needed about which decarbonisation technologies can credibly be included in the transition plans of hard-to-abate sectors in this region.

“We’re observing many unproven technologies to decarbonise as part of transition plans, which is very concerning,” said IEEFA’s Ng, referring to technologies like carbon capture usage and storage (CCUS) and the co-firing of ammonia for the power sector, which have little track record of consistently and significantly reducing emissions.

Kurt Metzger, director, energy transition, Asia Research and Engagement (ARE) raised similar concerns that these nascent and costly transition technologies promoted in the Japan-backed Asia Transition Finance (ATF) guidelines published last September are “possibly unsuitable for Asean”, compared to renewables.

Another potential point of contention is whether carbon credits can be used credibly in transition plans and if so, under what conditions. DBS’ Tan suggested that the purchase of credits could be potentially explored where no available decarbonisation technologies currently exists, such as for the aviation industry.

While the MAS guidance did not touch on carbon credits, the GFANZ and UK TPT guidelines expect greenhouse gas removals from carbon credits to be disclosed separately from its emissions reduction targets and metrics.

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