ASEAN banks need to better manage climate risk to ensure region’s food and water security
WWF Sustainable Finance Report 2018
Kuala Lumpur: A 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 region is particularly vulnerable to climate change which exacerbates food and water insecurity. 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, 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). 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 SDGs.
“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,” said Jeanne Stampe, WWF’s Head of Asia Sustainable Finance. “How we use land to meet society’s needs, for example for food, clothing, paper and fuel can no longer be part of the problem; sustainable land use must be part of the climate solution.”
Focusing on investors’ expectations in relation to ASEAN banks and the food sector, Peter Ferket, Head of Investments for Robeco (which has EUR 167 billion assets under management), said, “We are advancing sustainability in the palm oil sector by not only engaging with companies producing palm oil but also engaging in a constructive dialogue with ASEAN banks that finance the palm oil industry. This strategy allows us to arrive at industry-wide solutions to halt deforestation, prevent exploitation of workers and ultimately contribute to sustainable economic development in the ASEAN region.”
Despite these drivers, 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 E&S risks, only five banks in ASEAN recognised deforestation risks – a key contributor to climate change – in their clients’ activities and only two recognised 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. Jeanne Stampe added, “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.”
For Malaysia, the report finds that all six banks which were assessed have been making slight progress, especially in terms of disclosure and transparency, and stronger commitments to sustainability than they did last year. This progress, although slight, shows positive acceptance and effort amongst these banks in managing ESG risks and integration. According to Dr Henry Chan, Conservation Director for WWF-Malaysia, “Malaysian banks are making incremental progress in their environmental and social scores, compared to 2017. Nonetheless, even though we are observing varied levels of strategic planning and efforts among these major banks, we hope that they will continue to progress in the coming years as a reflection of their contribution in supporting the Natural Capital of Malaysia and ASEAN, the SDGs and the Paris agreement”.
Banks in ASEAN must better position themselves to take advantage of the extensive opportunities offered by the transition to a low-carbon, sustainable future.
The report finds that ASEAN banks are capitalising 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. However, these niche products will not be sufficient on their own for the huge investments required to meet the Paris Agreement and the SDGs by 2030. In order to properly capitalise 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.
If the ASEAN region is to experience resilient and sustainable development, banks must accelerate the rate at which they fully integrate ESG, including climate, deforestation and water risks, into core business strategies. Banks play a crucial role in financing the transition to sustainable food, energy and transport systems in ASEAN and must be part of the solution. Responsible investors, as stewards of capital, need to ensure that their portfolio banks are making timely progress on this, and engage actively with them to support the transition.
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About the report
This is an update of WWF’s 2017 ‘Sustainable Banking in ASEAN: Addressing ASEAN’s FLAWS’ report. 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 ESG integration pillars. The report is supported by an online interactive platform (www.susba.org) which allows users to compare selected banks and indicators based on their preferences.
Only publicly available disclosure in the English language in the form of 2017 annual reports, sustainability or CSR reports released before 3rd July 2018 and information posted on corporate websites were taken into consideration for this assessment.
For more information, please contact:
Dora Hashim
Communications Manager, Sustainable Markets Programme, WWF-Malaysia
Tel: +603-7450 3773
Email: shashim@wwf.org.my
WWF Sustainable Finance Report 2018
