Banks in Japan, Singapore and South Korea have made notable progress in establishing decarbonization pathways and setting climate-related targets, but they must intensify their efforts to meet the global 1.5 degrees Celsius climate goals, according to a new report.

All the reviewed banks have now introduced decarbonization pathways for financed emissions reductions in priority sectors, a significant improvement since March 2022 when none had such pathways in place, finds the Asia Research & Engagement (ARE) report, entitled Shifting Gears: Key Asian Banks can Accelerate the Energy Transition, which evaluated nine banks across the three Asian economies, identifying several key advancements and areas requiring further action to help guide the banks to better align with the global shift to a low-carbon economy.

Singaporean banks DBS, OCBC and UOB have all set emissions reduction targets for key carbon-intensive sectors that align with a 1.5 degrees Celsius climate scenario. These banks have also adopted ambitious policies for oil and gas financing, including commitments to cease new project financing or setting long-term reduction targets.

Japanese banks, meanwhile, have established medium-term sectoral targets for reducing emissions in the steel and real estate sectors by 2030. However, both Japanese and South Korean banks, the report points out, need to set more comprehensive medium- and long-term targets that align with the 1.5 degree Celsius scenario, particularly for sectors like oil and gas.

Japanese lenders Mizuho and MUFG stand out, the report shares, for their advanced disclosure and engagement strategies, particularly in supporting clients in carbon-intensive sectors to manage energy transition risks.

However, while most banks have board-level structures to address climate issues, the report reveals, few have board members with specialized expertise in climate change. This lack of expertise, it suggests, may hinder strategic management and effective decision-making.

More robust targets

Despite the progress to date, the report provides several targeted recommendations for Asian banks to enhance their climate-related policies, governance, and risk management practices:

On policy and governance, the report urges banks in Japan, South Korea and Singapore to expand net-zero targets to cover more banking activities, particularly facilitated emissions. They should also establish clear policies on new oil and gas projects and adopt stringent coal financing policies.

Additionally, the report advocates for integrating climate change expertise into board nominations and linking executive remuneration to climate-related performance.

Japanese, South Korean and Singaporean banks, the report states, need to continue to develop and disclose tools like a transition risk matrix to help clients navigate energy transition risks, particularly in carbon-intensive sectors. As well, it suggests there should be greater transparency in reporting financed emissions and client-level engagement in managing these risks.

“Banks in Japan, Singapore and South Korea have made significant strides in the last two years, but more decisive action is needed to align with global climate commitments,” says Peter Kiernan, ARE’s energy transition research manager and author of the report. “As the demand for fossil fuels diminishes and the shift towards clean energy accelerates, these banks are well-positioned to lead the region’s energy transition.

“However, to capitalize on this opportunity and mitigate risks, they must continue to strengthen their climate policies, governance and risk management practices.”