Financial regulators in Indonesia, Malaysia, Singapore, Thailand, and Vietnam – representing 85% of the region’s GDP – are shoring up regulatory safeguards against mounting environmental and social (E&S) risks, according to a new report issued by WWF-Singapore.
The report assesses regulations and guidelines issued by financial regulators or banking associations in the five countries, based on a new framework reflecting WWF’s insights on what constitutes a robust foundation of regulatory practices. The framework is based on 25 indicators divided across six pillars: scope, strategy and governance, policies and processes, portfolio risks and impacts, disclosure and transparency, and enabling environment.
WWF believes that the regulations and guidelines currently in place should help address the uneven progress made by banks in the Association of Southeast Asian Nations (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 the 29 banks from the five countries assessed in this new report.
Regulators can build on the report’s findings and recommendations to enhance the resilience of the Asean banking industry, and support the achievement of the Paris Agreement objectives and UN Sustainable Development Goals.
Wong Zeng Yi, executive director (Banking Department II), Monetary Authority of Singapore, says, “This WWF report supports Asean countries’ efforts to better manage environmental risks and develop green finance. The report helps financial regulators and industry associations consider the need for more rules or guidance to measure, mitigate and disclose these risks. It also identifies measures banks can take to support the transition to a sustainable economy. The Monetary Authority of Singapore has been working closely with the industry on both fronts. We are co-developing environmental risk management guidelines, which will set standards of governance, risk management and disclosure for the banking, insurance and asset management sectors. We have also introduced grant schemes to encourage the issuance of green and sustainable bonds, and will be expanding the suite of incentives to cover green and sustainability-linked loans.”
Asean financial regulators are strengthening their expectations on climate and environmental risk management, but banks still need to make more timely progress
The sustainable banking regulations and guidelines assessed in the report provide a good foundation for sustainable banking practices. In all five countries, 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 recognize climate-related risks and 48% recognize risks associated with environmental degradation.
In four countries (Malaysia, Singapore, Thailand and Vietnam), the 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.
In all five countries, regulations and guidelines now expect banks to strengthen their governance around the management of E&S issues. However, only 62% of the banks have assigned responsibility of their sustainability strategy implementation to their board or senior management, and only 34% disclose having a dedicated E&S team.
“Over the past 18 months, financial regulators across Asean have made it clear that addressing the climate and environmental crisis should be a priority for the financial sector. While this positive momentum is heartening, Asean banks should be more proactive and not wait for regulations to address the mounting risks in their portfolios and capture the business opportunities brought about by the transition to a more resilient and sustainable economy,” says Jeanne Stampe, WWF’s head of Asia Sustainable Finance, and founder of the Asia Sustainable Finance Initiative.
Banking associations across Asean have a crucial role to play to facilitate this change at the industry level, notably by building the capacity of their member banks and sharing best practices.
Ong-Ang Ai Boon, director of the Association of Banks in Singapore (ABS), says, “As found in WWF’s review, regulators and banking associations are coming together, raising the standards and creating a level playing field for sustainable banking. The review is timely as it helps sharpen the focus of guidelines and regulations to strengthen the banking sector for E&S risks and mobilize private capital to fund the orderly transition to a low-carbon and resilient economy. The ABS, with the support of our members, has been advancing ESG integration. The ABS Responsible Financing Guidelines, first published in 2015, help frame the pathway to address E&S risks and capture opportunities arising from green financing in Singapore. We have also been collaborating with WWF and our counterparts in Asean to help build E&S capacity.”
Regulators may need to provide more prescriptive guidance to enhance the resilience and attractiveness of the finance industry
Most Asean banks lack the strategic understanding of the E&S risks associated with their business activities and may be dramatically exposed given the lack of robust E&S policies. By conducting industry-wide stress tests, regulators can gain insights into the resilience of the financial industry to inform future regulatory measures.
Steps are being taken in this direction. In three countries (Malaysia, Singapore, 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 portfolio.
At the same time, driven by more stringent regulations, international investors are intensifying pressure on Asean banks and corporates 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 US$118 trillion of assets worldwide.
Yet, only three banks in Asean are TCFD supporters (DBS, OCBC and UOB), and other Asean banks are generally not disclosing against 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.
Regulators can develop further measures to fully mobilize private capital
To shift financial flows away from harmful activities and finance the transition toward a low-carbon and sustainable economy, fully mobilizing private capital is essential. Regulators can support the use of consistent science-based “green” and “brown” taxonomies 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, the financial regulators are considering the development of additional measures to promote green finance.
The Bank of Thailand says: “The Bank of Thailand’s collaboration with the Thai banking industry and the World Wide Fund for Nature have helped us achieve an important milestone this year; the Thai Bankers’ Association launch of the Sustainable Banking Guidelines. This signifies the firm commitment of the banking sector towards a more responsible banking practice. Going forward, the focus will be on enabling the transformation of commitment into action. This challenging task will require the alignment of mindsets and collaborative efforts of all stakeholders, not just in the banking sector, but the Thai financial sector as a whole.”
Financial regulators have a crucial role to play to ensure a resilient financial system that supports both international and national sustainable development objectives. The journey will not be easy, but it is necessary – Mark Carney, governor of the Bank of England, recently cautioned that “the task is large, the window of opportunity is short, and the risks are existential”. Regulators, the financial industry, science-based organizations and academia must come together if they are to ensure the prosperity of the Asean region.
