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Why Asian banks need to put sustainable finance clearly in their sights

If the region's finance giants continue with business-as-usual practices over the next 10 years, there is little chance of achieving the Sustainable Development Goals. There will also be clear consequences for the financial sector, writes Bernadette Victorio of Fair Finance Asia.

In Asia, banks play a significant role in the economy, funding many projects, sectors, governments, and micro, small and large companies.

Their funding and decision-making, therefore, greatly impact what is being funded and how that funding affects not just economic recovery and growth, but also climate change, environmental degradation, respect for human rights, social well-being and even political stability.

Over the last decades, there have been many reforms in favour of a market-based financial sector with regulatory requirements to safeguard their stability. However, Asian banks have generally had no binding obligations to prevent negative consequences for workers, communities, customers and citizens as well as environmental degradation and climate change.

With Covid-19 triggering unprecedented economic and societal crises in 2020, whatever hard won progress gained has been set back, and inequality, social unrest, and environmental degradation in the region continue to rise.

Not only will this situation increasingly burden governments’ budgets in Asia, the economic downturn is also foreseen to challenge banks’ existing loan portfolios, with prolonged consequences.

Therefore, if banks continue to proceed on a business-as-usual path over the next ten years, we will not only collectively miss our window of opportunity to meet our shared Sustainable Development Goals (SDGs) and Paris Agreement commitments, but there will also be clear consequences for the Asian financial sector.

No one country will be able to meet their own sustainability targets if they don’t bring others along.

The Fair Finance Asia commissioned report, Asia’s Dystopian Future? Why Banks Need To Put Sustainable Finance Clearly In Their Sights, exposes the problems banks in Asean [Association of Southeast Asian Nations] plus countries will worsen when failing to make strategic contributions to environmentally and socially sustainable development in the next ten years.

The report also underlines that if banks operating in Asia continue with their financing practices, they will themselves be at risk of financial losses.

One of the main reasons for this is because the risk assessment models of Asian banks are not fully informed about the future impacts of climate and social crises described in the report, therefore, continuing their lending and underwriting services with little or no commitment to sustainability.

Using forward looking scenarios, the Asia’s Dystopian Future study points out that such approach only leads to added risks and costs for the banks themselves, such as: the risk of defaulting loans and stranded assets due to the impacts of climate change, environmental degradation and abusive social practices that will ultimately undermine the profitability of corporate borrowers and other bank customers.

What does this mean for Asian financial regulators and supervisors? That it is imperative to level the playing field for sustainable finance and ESG compliance in the form of mandatory policies or legally binding minimum requirements to avoid free riders in this journey.

Smart financial regulation and policies can enable banks to strengthen their risk and impact assessment approach, while also steering lending towards activities that contribute to social and environmental sustainability, and phasing out those that are not aligned with the Paris climate goals and the SDGs.

Moreover, the report recommends that financial regulators provide different supportive tools to banks in order to facilitate the development of comprehensive action plans with clear, time-bound commitments based on forward-looking scenarios that take into account environmental and social impacts.

In recent years, there has been some gradual progress with financial institutions around the world beginning to pay greater attention to sustainable finance and environmental, social and governance (ESGs) compliance.

Asian financial regulators have also been actively leading the development of sustainable finance frameworks that can become the basis for future national regulations.

For this reason, the report also highlights the need for greater regional cooperation and policy coordination to ensure that Asian financial sectors leaders are able to develop a common understanding of sustainable finance taxonomy, regulatory priorities, required support to deliver on nationally determined contributions (NDCs), and the shared action agenda for the next decade.

Overall, Asia is positioned to take a stronger leadership role in the global transition towards sustainability, and hopeful signs of political willingness are already reflected in public net zero commitments made by Asian giants such as China, Japan, and Korea.

But while these are steps towards the right direction, it is just as important to underscore that no one country will be able to meet their own sustainability targets if they don’t bring others along because our communities in Asia are just as intertwined as our futures.

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