The fourth assessment of environmental, social, and governance (ESG) integration performance shows signs of progress, but banks in ASEAN, Japan, and South Korea must step up their ambitions to match global momentum.
WWF’s 2020 Sustainable Banking Assessment (SUSBA), which now includes 5 Japanese and 5 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 6 aspects of overall ESG integration (Purpose, Policies, Processes, People, Products, Portfolio) and a new Sectors & Issues deep-dive analysis on sector policies.
SUSBA 2020 marks the fourth assessment by WWF and it has found a significant level of progress with over 75% of ASEAN banks making some improvement, and almost 30% improving on at least 10% of the assessment criteria from 2019. While there was a doubling of ASEAN banks fulfilling at least half of the 70 criteria, from 4 to 8, this remains a small proportion. 45% of banks fulfilled less than a quarter of the criteria, compared to 51% last year. While Korean banks scored similar to the ASEAN average, Japanese banks performed above this average.
WWF’s Senior Vice President of Asia Sustainable Finance, Dr 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 harmonized 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% 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 Philippine banks assessed all consider sustainable finance and/or climate change a material issue, and 4 out of 7 disclose offering green financial solutions. However, the said banks have yet to disclose any policies or requirements for specific sectors that are particularly sensitive to environmental and social (E&S) considerations. With the new BSP Sustainable Finance Framework in place, 3 Philippine banks are well-positioned to meet new regulatory requirements in terms of having standardized frameworks for E&S due diligence.
The assessment found the following key results across ASEAN, Japan and South Korea.
All 5 Japanese banks and 60% of Korean banks have a strategy to manage climate-related risks and are listed as TCFD supporters. 24% of ASEAN banks have a climate strategy – quadruple the number from 2019, which indicates progress despite ASEAN banks remaining behind the curve.
34% of ASEAN banks recognize deforestation and biodiversity risks, a modest increase of 3 more than last year. While all 5 Japanese banks recognize deforestation risks, none have made similar commitments to eradicating deforestation in their portfolios.
Only 21% of ASEAN banks and 20% of Korean banks recognize water risks beyond pollution. 1 Japanese bank and a few ASEAN banks recognize 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 US$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 5 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% 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 end-2020. Continued financing of coal leaves banks exposed to climate-related transition risks, such as carbon taxes and technological obsolescence.
Encouragingly, 53% of ASEAN banks are now engaging with regulators on sustainable finance topics – a major increase over last year’s 31%.
In a promising sign, 35% of banks have set quantified targets to increase financing of more sustainable projects or businesses, including 4 Japanese and 2 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 decarbonize their portfolios, which will become ever more important as banks continue to face increasing pressure from investors to manage ESG risks. Of the 48 Asian banks assessed, Shinhan Bank (as part of Shinhan Financial Group) is the first to formally commit to setting science-based targets under the Science-Based Targets Initiative (SBTi).
“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 Dr Lee.
