Singapore’s big three remain the only ASEAN banks prohibiting financing of new coal-fired power plants.
Banks in Southeast Asia, Japan, and South Korea have made steady progress but still has a long way to go to cover their portfolios against risks arising from climate change and nature loss, according to the World Wildlife Fund’s (WWF) 2020 Sustainable Banking Assessment (SUSBA).
Over 75% of ASEAN banks made some improvement in their overall ESG integration, with almost 30% improving on at least a tenth of assessment criteria from 2019. However, the number of ASEAN banks fulfilling at least 70% criteria remains small, at eight—doubling from 2019’s four ASEAN banks.
Singapore’s DBS, OCBC, and UOB remain the only ASEAN banks that have prohibited the financing of new coal-fired power plants amongst the 38 ASEAN banks studied by WWF. Malaysia’s CIMB has also announced its intentions to issue a coal policy by end-2020.
Continued financing of coal leaves banks exposed to climate-related transition risks, such as carbon taxes and technological obsolescence, the report warned.
Less than one in four (24%) of ASEAN banks have a climate strategy—although this quadrupled from the number from 2019, indicating progress despite ASEAN banks remaining behind the curve.
Furthermore, more than half or 53% of ASEAN banks are now engaging with regulators on sustainable finance topics—a major jump from last year, where only 31% or less than one in three ASEAN banks said the same.
Recognition of deforestation and biodiversity risk amongst ASEAN banks also increased modestly, with one in three or 34% indicating the same.
“Many banks made good progress this year. Maintaining this progress into 2021 will be challenging but crucial as the world grapples with the Covid-19 pandemic. Banks have an important role to play; just as they help businesses recover from the pandemic, they are pivotal to navigating the climate and nature emergencies. This crisis has shown that society is more exposed to nature risk than ever, but with the right corrective actions, we can emerge stronger and more resilient,” said WWF’s senior vice president of Asia sustainable finance, Dr. Keith Lee.
Other points of analysis echoed subdued results. For example, recognition of water risks beyond pollution remain low amongst ASEAN banks, at 21%.
“One Japanese bank and a few ASEAN banks recognize water pollution as a risk, but otherwise overlook the threats of water scarcity or flooding. No bank requires clients to conduct water risk assessments or practice water stewardship. However, water risks can be material to businesses, with up to US$425b of value at risk globally,” said WWF in a press announcement.
WWF also analyzed 5 Japanese and 5 South Korean banks in their 2020 report, with the former being hailed by WWF for having scored well on climate-related criteria.
All Japanese banks reportedly disclosed information in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations of climate-related governance, strategy, risk management, and metrics and targets. They also scored well on the Products pillar, with every bank achieving at least 75% of the criteria.
Furthermore, Japanese banks not only offer green finance products and have targets to increase such financing, but also support clients more proactively with consulting services or awareness-raising activities.
Meanwhile, the Korean banks also scored well on disclosing how they have incorporated sustainability into their visions and long-term strategies, at a similar level to ASEAN banks. However, most had insufficient disclosure on the policies and processes used to manage ESG risk in their financing activities.
Amongst Korean lenders, KB Kookmin Bank was noted to be the first South Korean bank to implement a ban on all new coal-fired power plant construction projects. Meanwhile, of the 48 Asian banks assessed, Shinhan Bank is the first to formally commit to setting science-based targets under the Science-Based Targets Initiative (SBTi).
All 5 Japanese banks and 60% of Korean banks have a strategy to manage climate-related risks and are listed as TCFD supporters.
Meanwhile, although all five Japanese banks recognize deforestation risks, none have made similar commitments to eradicating deforestation in their portfolios.
Only 20% of Korean banks recognize water risks beyond pollution; and only one Japanese bank.
In what WFF calls a promising sign, 35% of banks across ASEAN, Japan, and South Korea—4 Japanese banks and 2 South Korean banks—have set quantified targets to increase financing of more sustainable projects or businesses. Achieving these targets should help banks to generate positive impacts from their financing activities, the report noted.
However, banks can adopt a more strategic approach by setting science-based targets to decarbonize their portfolios, which will become ever more important as banks continue to face increasing pressure from investors to manage ESG risks, WWF added.
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