A major new WWF report finds ASEAN's biggest banks are increasingly aware of the impact that their businesses have on the environment and society but are slow to act on the huge potential they hold in addressing climate change and financing sustainable food, energy and infrastructure systems in the region.
The ASEAN region is particularly vulnerable to climate change which exacerbates food and water insecurity. In a damning assessment, the WWF warns banks that by not considering these issues, banks stand to miss out on 'game changing' opportunities for the region's sustainable development and may face unmitigated climate risks in their own balance sheets.
The report, entitled 'Sustainable Banking in ASEAN 2018', published in collaboration with National University of Singapore (NUS) Business School's Centre for Governance, Institutions and Organisations, finds that ASEAN banks are not disclosing how they manage climate risks in line with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD).
The report benchmarks 34 ASEAN banks in six countries against a set of indicators that represent the fundamental pillars of sound corporate governance practices and robust Environmental Social Governance (ESG) integration pillars. It is an update from a report published in 2017.
Of the 34 banks assessed, only four disclosed that senior management has oversight of climate change risks and opportunities, a key recommendation of the TCFD. Meanwhile, no banks disclosed whether they review their portfolio exposure to climate risks nor disclosed their portfolio alignment with the Paris Agreement or the Sustainable Development Goals (SDG).
"This is an existential issue impacting all of us. Forests and other ecosystems play a critical role in mitigating climate change thereby ensuring resilience in ASEAN food supply chains. Banks must take urgent steps to address key risks within the activities they finance, such as deforestation and water risk, and allocate capital to transform the region's food, energy and infrastructure systems for a sustainable future," warns Jeanne Stampe, WWF's Head of Asia Sustainable Finance.
In a damning analysis, the report finds that many banks' policies on ESG are weak and not even disclosed, leading to concerns about how well these banks are managing ESG risk.
Although some progress on ESG integration has been made, particularly on the part of Singaporean banks and a few Malaysian and Thai banks, disclosure of specific ESG requirements of banks across ASEAN remains limited. Nineteen banks disclosed they have a standardised framework for ESG risk assessment but only seven disclosed that they have specific policies for high ESG risk sectors. Even then, disclosure of the policies themselves is limited, with just three banks disclosing one or two of their key policies.
Regarding specific environmental and social (E&S) risks, only five banks in ASEAN recognized deforestation risks - a key contributor to climate change - in their clients' activities and only two recognized water risks. Given these are key risks for the food and agriculture sector highlighted by the TCFD, the implications for regional food and water security are worrying.
"For countries in ASEAN to meet their climate and sustainability commitments, banks must take further action. They must develop and disclose detailed ESG policies and procedures, including specific science-based criteria for key ESG risks. For example, banks should implement 'no deforestation' policies. Banks should also be concerned about the water risk faced by companies they finance and one aspect of this is requiring their clients to commit to water stewardship," adds Stampe.
WWF urges banks in ASEAN to better position themselves to take advantage of the extensive opportunities offered by the transition to a low-carbon, sustainable future.
Indeed, the WWF does signal some banks out for praise. The report finds that ASEAN banks are capitalizing on opportunities in response to climate change and the need for sustainable development, with 22 banks disclosing they have developed green financial products such as green bonds and sustainability-linked loans.
The WWF insists that these niche products will not be sufficient on their own for the huge investments required to meet the Paris Agreement and the Sustainability Development Goals by 2030. In order to properly capitalize on this opportunity, banks must set science-based targets to align their portfolios to a resource- and carbon-constrained world. The report finds that banks in ASEAN have not yet done this, and may be missing out on opportunities while continuing to be vulnerable to the impending transition and physical risks of climate change.
The urges banks to accelerate the rate at which they fully integrate ESG, including climate, deforestation and water risks, into core business strategies.
However, "capacity gaps and lack of training are still making it difficult for banks to implement robust ESG management and capture the upside via product development" states an executive summary of the report.
The executive summary offers some key recommendations for ASEAN banks, banking regulators and shareholders, including:
· Embed sustainability finance into their core business strategy, employing science-based criteria
· Elevate sustainability to a core part of corporate governance by including it in board-level terms
· Assess portfolio-level exposure to climate risks by conducting forward-looking scenarios
· Disclose sustainable finance practices, portfolio-level risk exposures and science-based targets
· Collaborate with stakeholders to benefit from peer-to-peer learning
· ASEAN banking regulators must facilitate ESG integration in the banking sector by enhancing time-bound national finance regulations
· Support capacity-building for the banking industry by working with NGOs
· Shareholders of ASEAN banks should engage with regulators, stock exchanges and banking associations to demonstrate support for sustainable finance regulations