Regional banks need to accelerate ESG efforts amid improvements in sustainability

December 03, 2020 | 17:47
In addition to improvements of regional banks in integrating environmental and social considerations into their financing activities, banks in the region still have large gaps that leave their portfolios vulnerable to risks arising from climate change and natural loss.
regional banks need to accelerate esg efforts amid improvements in sustainability
The WWF's assessment urges banks to accelerate ESG efforts

The World Wide Fund for Nature's (WWF) 2020 Sustainable Banking Assessment (SUSBA), which now includes five Japanese and five South Korean banks together with 38 ASEAN banks, finds that the banks assessed have made progress in integrating environmental and social considerations into their financing activities, but still have large gaps that leave their portfolios vulnerable to risks arising from climate change and nature loss.

The assessment is based on a framework covering six aspects (purpose, policies, processes, people, products, and portfolio) of overall ESG integration (environmental, social, governance) and new Sectors & Issues deep-dive analysis on sector policies.

SUSBA 2020 marks the fourth assessment by the WWF and it has found a significant level of progress with over 75 per cent of ASEAN banks making some improvement, and almost 30 per cent improving on at least 10 per cent of the assessment criteria from 2019.

While there was a doubling of ASEAN banks fulfilling at least half of the 70 criteria, from four to eight, this remains a small proportion. 45 per cent of banks fulfilled less than a quarter of the criteria, compared to 51 per cent last year. While Korean banks scored similar to the ASEAN average, Japanese banks performed above this average.

The WWF’s senior vice president of Asia Sustainable Finance, Keith Lee, said, “Besides banks in ASEAN, this year’s assessment also includes major Japanese and South Korean banks. They play a significant role in financing businesses not just in their home countries but in Southeast Asia as well. The interdependence of Asia’s economies necessitates a harmonised approach to sustainable finance in which all banks contribute to sustainable development, and we hope to facilitate this by including these banks in SUSBA this year.”

The Japanese banks tended to score well on climate-related criteria. All banks explicitly disclosed 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 per cent of the criteria. Most 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.

The Korean banks 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. Notably, KB Kookmin Bank (as part of KB Financial Group) is the first South Korean bank to implement a ban on all new coal-fired power plant construction projects.

The assessment found the following key results across ASEAN, Japan, and South Korea.

- All five Japanese banks and three Korean banks have a strategy to manage climate-related risks and are listed as TCFD supporters. 24 per cent of ASEAN banks have a climate strategy – quadruple the number from 2019, which indicates progress despite ASEAN banks remaining behind the curve.

- 34 per cent of ASEAN banks recognise deforestation and biodiversity risks, a modest increase of three more than last year. While all five Japanese banks recognise deforestation risks, none have made similar commitments to eradicating deforestation in their portfolios.

- Only 21 per cent of ASEAN banks and 20 per cent of Korean banks recognise water risks beyond pollution. One Japanese bank and a few ASEAN banks recognise 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 $425 billion of value at risk globally.

- The Sectors & Issues analysis found that Korean and Japanese banks are taking steps to reduce coal-related financing. Shinhan Bank and the five Japanese banks have policies prohibiting financing of coal-fired power plant projects, though these policies have exceptions for certain types of technology or carbon capture. MUFG, Mizuho, and SMBC have also announced timelines by which to end coal-related financing. However, 91 per cent of ASEAN banks assessed continue to finance new coal-fired power plants. DBS, OCBC, and UOB are the only ASEAN banks to have prohibited the financing of new coal-fired power plants, while CIMB has announced its intentions to issue a coal policy by the end of 2020. Continued financing of coal leaves banks exposed to climate-related transition risks such as carbon taxes and technological obsolescence.

- Encouragingly, 53 per cent of ASEAN banks are now engaging with regulators on sustainable finance topics – a major increase over last year’s 31 per cent.

- Compared to the ASEAN average, Vietnamese banks are expected to see improvement in the disclosure of policies, including sector policies, the training of bank staff, and integration of ESG into products and services. In fact, all ASEAN banks need to improve their disclosure on ESG portfolio assessment.

In a promising sign, 35 per cent of banks have set quantified targets to increase financing of more sustainable projects or businesses, including four Japanese and two Korean banks. Achieving these targets should help banks to generate positive impacts from their financing activities. However, banks can adopt a more strategic approach by setting science-based targets to decarbonise their portfolios, which will become ever more important as banks continue to face increasing pressure from investors to manage ESG risks.

WWF Vietnam has been working with the banking sector and key financial stakeholders to promote sustainable finance practices. Through this initiative, WWF – Vietnam has trained over 500 bankers in industry-wide and bilateral workshops on ESG issues. WWF also assesses five listed banks in Vietnam in their lending activities using the proprietary SUSBA framework. The assessments are used for engagement purposes to help banks understand how they can improve on their ESG integration performance.

“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 Lee.

What the stars mean:

★ Poor ★ ★ Promising ★★★ Good ★★★★ Very good ★★★★★ Exceptional