5: Conversation on Climate Governance: Climate Change and the Banking Sector

In this series of Conversations on Climate Governance by ACGN-SFIA webinar, the panelists discussed climate change and the banking sector: new banking requirements and how corporations are going to be ready for them.

The panelists of the webinar were:

1. Dato’ Seri Ahmad Johan Mohammad Raslan – Council Member of Climate Governance Malaysia (Host)

2. Ms. Wong Su-Yen, Chairperson, Singapore Institute of Directors (Moderator)

3. Mr. Anthony Chin, CEO, MARUHAN Japan Bank Lao

4. Ms. Lynette V. Ortiz, CEO, Standard Chartered Philippines;

5. Ms. Suraya Sani–Deputy Director, Sustainability Unit, Bank Negara Malaysia;

6. Mr. Yongyut Setthawiwat–Managing Director, Group Treasurer, Thai Union Group Public Company Limited

The session started with a discussion on the Central Bank’s efforts in the Philippines, Laos, PDR, and Thailand to promote sustainability and climate change as well as the challenges.

Lynette highlighted three main challenges faced by companies with regard to sustainability and climate change.

Companies face increasing pressure from stakeholders:

1. Policy and regulation - policy pressure to decarbonize, uncertainty due to increasing carbon prices and strong public support for GHG regulation. Expected to increase in Asia.

2. Customer - in the West, demand is shifting to green electricity to reduce scope 2 emissions (resulting from consumption of purchased or acquired energy). In Asia, energy security concerns remain but off-takers are under pressure to have minimum green targets.

3. Investors and Activists - more pronounced in the West, where more than 400 institutions together holding 2.6 trillion in assets have committed to divest from fossil-based assets and greening their portfolio. When local companies access the global markets, the ESG lens will be applied to their businesses, impacting access to capital. Capital Markets are increasingly punishing high carbon intensity companies/ issuers.

4. Banks – In pursuit of a low carbon portfolio, some banks have reduced exposure to coal-fired power, developed phase-out deadlines and begun selling existing liabilities with coal exposures. Many banks are facing increasing shareholder pressure to reduce exposure. Banks are increasingly scrutinizing lending through an ESG lens, setting firm emission targets – also following shareholder pressure and rebooting its purpose in communities. This likewise marks a shift from shareholder capitalism to stakeholder capitalism.

Standard Chartered has published its target to become the world’s most sustainable and responsible bank, which aims to reduce carbon emissions associated with its financing activities to net zero by 2050. Standard Chartered is also looking to catalyst finance and partnerships to scale impact, climate, and capital solutions where they are needed most, including a plan to mobilise 300 billion in green transaction finance by 2030.

Zoom in to the Philippines. The Philippines is 2 out of 10 ASEAN countries that have not made a net zero commitment but have nationally determined contributions to decarbonise. However, only 25% of it is unconditional and 75% is conditional. The goal is for renewable energy to deliver 35% of energy and power generation by 2030. The country has also legislated a moratorium on coal power plants as well as pushing the sustainability ESG agenda.

A circular has been issued which requires banks to embed sustainability principles, governance frameworks, and risk acceptance systems into each institution. The policy requires banks to include environmental, social, physical, and transaction factors in the assessment of risks and their client base to incorporate these in determining risk appetite, lending activities, and credit monitoring. These policies will affect how banks decide on credit underwriting and pricing of potential E&S sector transactions. The policies were issued in 2020, and banks are expected to implement them in 2023.

Anthony Chin shared the scenario in Lao PDR. Currently, there are no specific requirements by the Central Bank on ESG, sustainability, or climate change. However, the government has a framework for sustainability. Some of the sustainability goals of the Laos government include:

1. A plan for net zero emissions by 2050.

2. Target to reduce greenhouse gases from deforestation to about 30 million tons of carbon dioxide equivalent.

3. To sell forest carbon credits.

4. Plan to reach 14% of all vehicles throughout the country to use clean energy.

With the recent spike in petrol prices and fuel shortages in the second half of 2022 in Laos, there is a huge renewed interest in EVs. The government has decided to purchase EVs for official government cars. In lieu of using coal power plants, Laos currently has in excess of 200 hydropower dams.

For banks in Laos, while there are no specific requirements or guidelines on climate governance or ESG, the World Bank has started a fund to support MSMEs in Laos as the country moves to the endemic stage. Five banks were selected out of 44 banks that operate in Laos, and MARUHAN Japan Bank is the first to pass all the due diligence of more than 20 vectors of ESG safeguards, which include climate governance as well.

The bank received full approval and funding of 3.2 million USD to support MSMEs. Thus, the bank’s clients who want to enjoy the fund must meet basic requirements of sustainability, ESG, and climate governance and will be able to access the fund at a very low rate, or almost half of what the market charges.

In Thailand, Yongyut mentioned, at the country level, in order to align with the Global Commitment of COP 26, in November last year, Thailand set the target to reach carbon neutrality by 2050 and net-zero carbon emissions on or before 2065.

The Security and Exchange Commission (SEC) of Thailand is attempting to combine the reporting requirements for listed companies into a single report for Thai capital markets. A higher level of disclosure on the sustainability or ESG aspects of the business is required. This helps in terms of embracing confidence from all stakeholders. The companies must now disclose information on sustainability topics such as strategy, policy, targets, value chain issues, social issues, environmental impact, greenhouse emission data, etc.

In the banking sector, there is a working group for sustainability finance initiatives for Thailand. It is a collaboration among 43 government agencies, including regulators, policymakers, banks, and investors, who have come up with a joint statement on how to drive sustainable finance and support sustainable development in Thailand. The reason for this set-up is that the financial sector plays a very important role in allocating the fund for an economic transition toward sustainability.

This effort will encourage banks to promote sustainable businesses and projects to sustainable lending and investing among the relevant parties. With clear direction, support, and incentives from the relevant authorities, Thailand is confident in achieving the SDG target of carbon emission reduction target.

In 2021, the Security and Exchange Commission of Thailand issued a new regulation on sustainable link bonds. Thai Union is the first to issue the sustainable link bond under the new scheme. SEC is also currently working on other sustainable finances frameworks as well, for example, transaction bonds and other types of financing that will come in in the future.

As the regulator, Bank Negara Malaysia (BNM) plays the role of an enabler to push the green agenda, said Suraya. BNM's main focus is to promote financial system resilience by ensuring effective climate-related risk management by the financial institutions as well as being responsible for fostering a conducive market environment for green financing and investment.

Among the key initiatives by BNM to push the green agenda include:

1. Development of the Climate Change and Principle-based Taxonomy Guidance Document to guide financial institutions in assessing and categorising economic activities to the extent to which they meet climate objectives as well as promote the transition to low carbon and sustainability practices.

2. Issuance of Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) Sectorial Guides to facilitate FIs in assessing their financing and investment activities, taking into account the ESG requirements. VBIAF Sectorial Guides issued for palm oil, renewable energy, manufacturing, oil & gas, as well as construction and infrastructure sectors.

3. The Climate Risk Management and Scenario Analysis Exposure Draft issued by Bank Negara Malaysia is expected to be finalised by the 3rd quarter of 2022. The paper is intended to facilitate FIs to strengthen the management of financial risks stemming from climate change. Bank Negara Malaysia launched the Low Carbon Transition Facilities Fund in early 2022 to support SMEs transition to low carbon practices.

4. Actively building capacity of the industry and staff within the Bank as well as working on shifting own operations to become greener and more sustainable.

On the regional front, BNM is one of the eight founding members of the ASEAN Taxonomy Board. A group that develops and maintains ASEAN taxonomy. The 1st version of the ASEAN Taxonomy was issued in November 2021 for targeted consultation in conjunction with COP 26. The members are currently refining the 1st version of the taxonomy based on the feedback received and are currently working on developing the threshold for the identified focus sectors.

The next topic of discussion is how ready the companies are to make the shift and transition based on observation.

From the regulator (BNM) observation, smaller companies are struggling to make the shift. However, they are aware of the need to transition to low carbon and sustainable practices. The support systems from relevant authorities by including the small companies in conversation with the bigger corporations allow them to learn the process. In general, companies are facing a lot of challenges regardless of their size.

In the Philippines, companies are at different stages in their ESG journey. The impetus coming from regulators makes it more pronounced because access to credit, the ability to finance projects, and the capacity to access capital markets are all impacted. As companies are at different stages, the challenges are around being able to put together a robust framework that is science-based and being able to partner with a third party who could help in terms of calibrating and measuring emissions and all other activities within the firm that impact the ESG.

When the framework is in place, companies are able to access label bonds and sustainable finance with the knowledge that there will be a regular audience and assessment of the commitment that the company has manifested. All of this involved cost and a lot of money. So, the larger conglomerates may have a way to pursue it, but for medium-sized companies, it will be quite challenging. This is where support from the public sector is needed to bridge the gap.

In Laos, 99.4% of the businesses are MSMEs, so awareness is relatively low when it comes to climate governance and ESG. But there is a growing interest and there are a lot of activities in the area of youth and civil society but not in the commerce and industry sector. After the pandemic, the company’s main focus is on business survival.

MARUHAN Japan Bank as one of the 4 panel banks of the Ministry of Industry & Commerce (MOIC), requires all business owners who want special MSME funding must attend a compulsory training program on business management, money management, and the importance of adopting sustainability and sustainable business practices. However, we find that many business owners attend just to check a box to qualify for funding. MARUHAN Japan Bank also launched a program called BizGROW, a mentoring and coaching program that is open to all interested business owners, not only their clients. The program injects some elements of awareness around sustainability and is endorsed by the MOIC. Participants of the program would also be shown how MARUHAN Japan Bank runs it's fully paperless and fully bank branch.

As for Thailand, between 2014 and 2016, Thailand was hit by the USA on the Trafficking in Persons (TIPs) report on the human trafficking issue. In 2015, Thailand was ranked at the lowest level in the TIPs Report. However, Thailand managed to uplift to Tier 2 recently, which has had a big impact on the country, the industry, as well as companies in Thailand.

Thailand was also hit again especially on seafood industry, which the country was put on the Yellow Card with regards to Illegal Unprotected Unregulated Fishing (IUU). Due to that, the Thai government, industries, companies, and relevant parties went through the whole process of revamping their sustainability activities to align with that development, and currently, medium-sized or large companies have made good progress in improving sustainability activities. In 2015, there were only 13 Thai companies listed on Dow Jones Sustainability Indices (DJSI) and currently, there are 24 companies.

For small companies, there is still a lot more work to be done to promote and encourage them in the right direction. The good thing is that knowledge sharing, education, and exposure are easily available in Thailand.

The discussion continued to discuss how financial institutions help companies transition towards sustainability.

Standard Chartered has a transition acceleration team that helps and provides its clients in carbon-intensive sectors with deep expertise. The team is tasked with helping companies accelerate their low-carbon transition as well as providing tools to measure progress. The challenge for most developing countries is how to balance other issues, i.e., inflation, developing and opening up the economy post-pandemic and at the same time ensuring that there is access to capital, funding, and a transition away from carbon-intensive businesses.

For Laos, the bank is taking a practical and pragmatic approach by not imposing but rather attempting to educate, encourage, and assist companies by creating incentives such as a cheaper fund, providing training, guidance, coaching, and access to the network, all of which will enable the business to grow better in the future in a sustainable and responsible manner. Those who have not started yet still have access to the normal funding.

What steps are being taken to encourage companies that are slow to adapt to the change to begin the sustainability process?

For BNM, the approach is to try to balance both providing incentives and enforcement to the bank to enable it to provide necessary assistance to businesses. At the moment, BNM is not requiring companies to transition because they are facing numerous challenges, particularly due to the pandemic. The approach is to have more conversations with banks and ensure they are aware of the need to transition and the need to support the business transition.

With regards to the box-ticking exercise, BNM is tackling it by building awareness amongst the bankers and highlighting the importance of an annual review and regular engagement with their clients to ensure there is an effort for transition and measurable achievements.

How will sustainability impact employment in the banking sector and in the future?

As finance and banking move towards sustainability, the impact is huge as it will determine whether companies will be able to receive funding.

Although sustainability is driven by regulators, it must be embedded in the corporate strategy. The most senior people in the institution and the board of directors must embrace, understand and embed it in the policy. The senior management team also needs to perfectly understand how to manage E&S risks and how they cascade to credit appetite. Banks will need experts and specialists within the institutions. Chief sustainability officers and industry experts for various verticals are resources that must be made available to everyone. The bankers must also have basic knowledge of sustainability to ensure they understand the topic and are able to share content and ideas with their clients.

New roles will be created. New experiences and skills are required. For example, an expert evaluates the carbon footprint. Employers will also look at those with a good track record. As a result, universities must develop new knowledge, courses, and programs to meet the demands. Learning and development will start growing. Consultants with consulting services on sustainability knowledge will emerge and open up another industry, and the entire ecosystem will start changing as there is a demand and supply for it.

What can the company do to start?

Start small and start now. The urgency and importance of promoting and committing to sustainability should be top of mind. Be part of the conversation. Collaborate with the government, regulators, and industry associations to bring together various sectors of the economy in an effort to commit to sustainability.

Be pragmatic and practical in your approach. Do what is appropriate within the parameters of what we can control and within our sphere of influence. Everyone must play their part as we are responsible for sustainability and climate change. Tie it with a commercial objective and it will drive the motivation differently.

Banks, investors, and regulators are actively moving toward sustainable finance or at least if not, will conduct due diligence on sustainability at the borrowers. Even if it is a tick block, it will have a huge impact on whether the banks will move forward to finance your company.

They also will aim to have an increasing percentage of sustainable finance in their portfolio and reduce the lending portfolio to those brown industries or no sustainability companies. In some industries or some companies, sustainability will become licensed to operate and that increases the risk of maintaining the business in the future.

Currently, it is on a voluntary basis for some measures so that they will allow for transitioning of the participants, but at one point (could be soon) this will be mandatory. It means if a company didn’t do anything sustainably, access to funding will be limited and that will cause the cost of financing.

Considering the trend and the coming challenges, there is no choice at the corporate side to bring this topic as the backbone and as the strategic competitive advantage. At the early stage, it might not have a good return for sustainability investment or the customers still not paying the efforts, but those improving competitive advantage, differentiation made, and good accessibility to larger liquidity pool will provide direct or indirect benefits to the companies in the future.

Su-Yen summarises the discussion as follows:

1. Regulators need to translate the national commitment into regulations and must have a balance between incentives and enforcement.

2. From the financial institution’s perspective, banks are willing to go the extra mile to bring the client and customers along on the journey and be pragmatic in the process.

3. Possible opportunities that arise from this include company that takes the mover approach, which will be in a favourable advantage position in terms of incentives. New opportunities in jobs and careers will emerge to cater to the demand and supply needs.

You can watch the recording here