While banks refer to sustainability in strategy or vision, only few acknowledge the importance of climate risk for society and businesses, according to WWF-NUS study
By HABHAJAN SINGH
Twenty-one of the 34 banks operating in South-East Asia acknowledged in a study that the activities they finance can have adverse environmental and social impacts, but none of them disclosed how they manage climate or sustainability risks at the portfolio level.
Further, even though 26 banks referred to sustainability in their strategy or vision, only 12 banks acknowledged the importance of climate risk for society and businesses, of which only one had senior level oversight of climate risks.
This is one of the findings of a study led by an international environment group, to explore the sustainable finance regulatory landscape, and the supporting corporate governance codes and sustainability reporting guidelines that pertain to the banking sectors of Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
The study by World Wide Fund for Nature (WWF) and a Singapore university calls for banks to expand their approach to environmental, social and governance (ESG) integration. This requires moving beyond managing short- term risks towards embedding sustainability into their strategy, and aligning their portfolios fully with the Paris Agreement and Sustainable Development Goals (SDGs).
WWF is also urging Asean banks to “act now and develop robust sustainable banking practices within the next 12 months”, to keep on track the goals committed to the Paris Agreement on climate change and to deliver the SDGs.
“Countries will not have any chance of meeting their commitments to the Paris Climate Accord and the United Nation (UN) SDGs without the finance sector playing its part. There remains only four years from now to stay below a 1.5 degree temperature rise as adopted in the Paris Agreement,” WWF head of Asia finance and commodities Jeanne Stampe said in a statement.
Malaysia is a signatory of the Paris Agreement. The 2015 climate accord, engineered by the UN Framework Convention on Climate Change, deals with greenhouse gas emission mitigation, adaptation and finance starting in 2020.
The US has made moves in August 2017; US President Donald Trump’s administration began the formal process to withdraw from the accord, holding true to one of his campaign promises.
Flaws in Banking
The report entitled “Sustainable Banking in Asean: Addressing Asean’s Flaws” found that national commitments to climate change and sustainable development were not well reflected in the practices of Asean banks, nor in the region’s banking regulations.
While governments in the region have committed to climate change and SDGs, more must be done by the Asean banking sector if those commitments are to be reached, WWF said in a statement.
Even as Asean governments gear up to mitigate the impact of worsening environmental issues on their populations, it noted that banks continue to narrowly define and manage environmental risks.
“This contributes to environmental degradation such as climate change, which will exacerbate business risks for these banks and their clients over the longer term,” it said in the statement.
The 55-page report was produced by the WWF and NUS Business School’s Centre for Governance, Institutions and Organisations. NUS stands for National University of Singapore.
Drilling to individual nations, the report noted that Malaysia, at present, does not have specific regulations on sustainable or green finance.
Of the six major banks analysed, the study found that their corporate governance practices are relatively better compared to the addressing of environmental and social practices.
It said this may largely be due to the introduction of a series of Malaysian Code on Corporate Governance (MCCG), which emphasises internalising good corporate governance culture among listed firms.
“The MCCG requires companies to disclose corporate governance practices applied by the companies or alternatives adopted, to reduce the problem of companies being mechanical about their corporate governance practices,” the statement said.
The six Malaysian banks assessed were AMMB Holdings Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd, Malayan Banking Bhd, Public Bank Bhd and RHB Bank Bhd.
In its key findings, the report noted that financial institutions are identified as key players to finance green technologies, promote green sectors and develop sustainable products that are aligned with SDGs.
“In Malaysia and Thailand, the role of the finance sector in achieving sustainability targets has been formally recognised in national development plans,” the report said.
Another interesting finding was that Asean banks are seen as undergoing a paradigm shift in embracing sustainability as a core business strategy. The banks are coming to understand that their ESG risks and opportunities lie mainly within their portfolios rather than in their own operations.
Of the 34 Asean banks, the report said 13 still consider the concept of sustainability to apply only to their own direct footprint via their buildings and employees, and have interpreted the corporate governance codes and sustainability reporting guidelines from that perspective.
“This is slowly changing, with six banks out of the 21 that recognise the ESG impacts of the activities they finance, taking a step further to include responsible lending in their leadership statements,” it added.