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Regulations
Asia banks must move beyond mere net-zero commitment
Regulators uniquely positioned to align, enhance ESG risk management, disclosure
Tom King 13 Jan 2023

In 2022, the number of banks committed to achieving net-zero financed emissions by 2050 doubled over that of 2021, according to a recent report.

However, the report – published by the Singapore unit of the World Wide Fund for Nature (WWF) entitled 2022 Sustainable Banking Assessment, which now includes 36 banks from the Association of Southeast Asian Nations region and 10 major Japanese and Korean banks – also discovered that although a number of leading banks continue to enhance their environmental and social (E&S) risk management policies and processes, half of the banks assessed have made little or no progress since 2021.

And, when it comes to nature risks, banks need to go beyond recognition and commitment, the report notes, and expand their capacity to manage these risks within their policies.

Crucially, with nearly half of the planet’s biodiversity hotspots located in the Asia-Pacific region, the WWF says, preserving this region’s biodiversity is critical to meeting global climate and nature ambitions.

Managing nature-related risks

Singaporean, Indonesian and Malaysian banks, on average, meet at least 70% of the criteria for recognizing nature-related risks, the report points out. However, this recognition of risk is not reflected in client expectations and policies on nature-related issues.

Only 40% of the criteria is met by Singaporean banks for setting client expectations on nature-related risk while banks in other assessed countries meet only 20% of the criteria or lower.

“Developing capacity to identify, assess and manage nature-related risks will be crucial for banks given the targets set by the recent Kunming-Montreal Global Biodiversity Framework and the Taskforce on Nature-related Financial Disclosures framework,” says Kristina Anguelova, WWF Singapore’s head of Asia sustainable finance.

Banks’ climate responsibility

Financial institutions in Asia, the WWF report claims, have an important role to play in safeguarding ecosystems and steering client expectations towards sustainably sourced commodities.

Of the 46 assessed banks, 11 disclosed palm oil policies, an improvement from 2021, when only three banks reported. Similarly, in the energy sector, 49% of banks developed and disclosed specific energy sector policies, an increase from 29% in 2021.

But, despite increased coverage of bank policies within the palm oil sector, the need for greater traceability and increased requirements of certification and supply-chain traceability solutions, and compliance from palm oil exporters, are required to ensure that commodities are genuinely deforestation free.

The gaps within the supply chains present opportunities for financial institutions to help clients with portfolio risk assessments and minimize bank exposure to future regulatory risks.

Regulators’ critical role

WWF Singapore’s analysis of the energy sector, the source of three-quarters of global greenhouse gas emissions, emphasizes a greater need for more banks to set science-based targets to transition their energy portfolio, irrespective of current incentives from regulators.

In addition, an analysis of energy transition-related regulations also suggests that most regulators from the countries assessed are not yet requiring banks to set science-based targets and develop transition plans.

The 2022 assessment underscores the pivotal position of regulators within the finance sector to implement and align E&S risk management requirements, and to ensure financial stability for banks.

There is still wide variation in assessed banks’ E&S integration performance across the region and within most countries.

As such, regulators are uniquely positioned to raise the bar and level the playing field by aligning and enhancing ESG risk management and disclosure requirements throughout the region.

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