Financial regulators in Indonesia, Malaysia, Singapore, Thailand and Vietnam -- representing 85% of Southeast Asia's GDP -- are shoring up regulatory safeguards against mounting environmental and social (E&S) risks, according to the Singapore branch of the World Wide Fund For Nature.
The report assesses regulations and guidelines issued by financial regulators or banking associations in the five countries, based on what WWF considers a robust foundation for regulatory practices. The framework is based on 25 indicators grouped in six pillars: scope, strategy and governance, policies and processes, portfolio risks and impacts, disclosure and transparency, and the enabling environment.
WWF believes the regulations and guidelines currently in place should help address the uneven progress made by banks in Asean, as demonstrated by WWF's latest Sustainable Banking Assessment (Susba), published in August 2019. Susba assesses the ESG practices of Asean and international banks, including 29 banks from the five countries assessed in the new report.
Regulators can build on the report's recommendations to enhance the resilience of the Asean banking industry, and support the achievement of the Paris Agreement climate objectives and UN Sustainable Development Goals.
"This WWF report supports Asean countries' efforts to better manage environmental risks and develop green finance," said Wong Zeng Yi, executive director (Banking Department II) of the Monetary Authority of Singapore (MAS). "It also identifies measures banks can take to support the transition to a sustainable economy.
Mr Wong said the MAS has been working with banks to develop environmental risk management guidelines, which will set standards of governance, risk management and disclosure for the banking, insurance and asset management sectors. It has also introduced grant schemes to encourage the issuance of green and sustainable bonds, and is looking at more incentives to cover green and sustainability-linked loans.
CLIMATE RISKS
In all five countries surveyed, climate change and environmental degradation (such as deforestation and biodiversity loss) are explicitly mentioned as part of the E&S issues that banks should seek to address. At present, only 62% of the 29 banks recognise climate-related risks and 48% recognise risks associated with environmental degradation.
In four countries (Malaysia, Singapore, Thailand and Vietnam), financial regulators or banking associations expect banks to develop E&S policies on environmentally or socially sensitive sectors. In these countries, 43% of the banks assessed mention having such policies in place, and only 15% actually disclose these policies.
The three Singaporean banks (DBS, OCBC and UOB) are the only banks in Asean to have adopted "no deforestation" policies and to prohibit the financing of new coal-fired power plants.
Most Asean banks still lack the strategic understanding of the E&S risks associated with their business activities and may be dramatically exposed as a result. By conducting industry-wide stress tests, regulators can gain insights into the resilience of the financial industry to inform future regulatory measures, the WWF believes.
Steps are being taken in this direction. In three countries (Malaysia, Singapore and Thailand), banks will be expected to start assessing and mitigating their portfolio-level exposure to climate-related or other E&S risks. Thus far, only two banks across Asean have conducted and disclosed a climate-risk assessment across their portfolios.
At the same time, driven by more stringent regulations, international investors are intensifying pressure on Asean banks and corporations to improve sustainability performance and disclosure. The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), covering the management of climate risks and opportunities, are backed by 374 financial institutions representing $118 trillion of assets worldwide.
Yet only three banks in Asean are TCFD supporters (DBS, OCBC and UOB), and other Asean banks generally do not disclose information based on TCFD-related indicators. Given the slow progress by banks thus far, financial regulators may need to make it mandatory for banks to report in line with the TCFD recommendations, according to WWF-Singapore.
GREEN VS BROWN
To shift financial flows away from harmful activities and finance the transition towards a low-carbon and sustainable economy, fully mobilising private capital is essential. Regulators can support the use of science-based "green" and "brown" categorisation of economic activities, and of robust standards for green financial products.
In Singapore and Malaysia, additional incentives such as green and sustainable bond grant schemes are in place to further support this transition. In Indonesia, Thailand and Vietnam, regulators are considering the development of additional measures to promote green finance.
The Bank of Thailand noted that cooperation with the WWF had resulted in the launch this year by the Thai Bankers Association of the Sustainable Banking Guidelines.
"This signifies the firm commitment of the banking sector towards a more responsible banking practice," the central bank said in a statement.