PETALING JAYA: The adoption of environmental, social and governance (ESG) principles in the banking sector is gaining momentum but its success will hinge on embracing the right action.
Experts and bankers agree that the adoption of ESG principles in the sector is vital and needs beefing up to ensure a healthy bottom line in the long term despite some hiccups.
Ernst & Young (EY) Advisory Services Sdn Bhd director for climate change and sustainability services Arina Kok (pic below) said with the recent issuance of the Climate Change and Principle-based Taxonomy by Bank Negara, many financial institutions have started to integrate ESG considerations into their lending practices and risk management, albeit at an early stage of adoption.
She told StarBiz that EY foresees accelerated adoption of ESG principles in the coming months, given increased pressure from stakeholders and the rollout of capability-building initiatives on sustainable finance and ESG management by the regulators.
According to the EY Climate Risk Disclosure Barometer 2020 Malaysia that assessed the top 100 public-listed companies (PLCs) on Bursa Malaysia, collectively, the top 15 financial PLCs lacked comprehensive climate risk disclosures, scoring only 25% for coverage of climate change-related risks and 8% for quality of the disclosures.
The scores were higher for the coverage of risk management at 40%, followed by metrics and targets at 33%. Coverage of governance and strategy was lower at 20% and 7% respectively.
To deepen the adoption of ESG principles in the banking sector, Kok noted that it would require a mindset shift, both internally and externally. “Banks will need to reconsider how ESG risks and opportunities are being identified, measured and valued, in addition to traditional pricing mechanisms.
“Capacity building is essential to upskill human capital on ESG priorities, in order to successfully implement ESG strategies and risk management, ” she said.
To support and guide financial institutions in adopting leading ESG practices, Bank Negara has launched several guidelines such as the Value-based Intermediation (VBI) implementation guide, Value-based Intermediation Financing and Investment Impact Assessment Framework, and most recently, the Climate Change and Principle-based Taxonomy.
Deloitte Malaysia Sustainability Services director Chin Foong Ling said in terms of ESG adoption, the banking sector was slowly but surely catching up with the other sectors like oil and gas, and energy.
ESG-related efforts are always top down, she said, noting that it was thus crucial for the central bank to take the lead in making ESG the backbone of operation excellence.
“With the central bank’s new policy, ie, Climate Change and Principle-based Taxonomy, we believe that the country’s banking industry is moving forward in this direction.
“Other than legislative framework, there are also funding needs, funding structures, investments, ESG and climate change policies, accounting framework, disclosure requirements, and data infrastructure support that we need to take into account to beef up the adoption of ESG principles in the sector, ” Chin said.
Rafe Haneef, (pic below) who is the chief sustainability officer of CIMB Group, said to optimise ESG adoption, banks need to develop and enhance climate-related risk strategies for the entire portfolio.
This, he said, includes ESG risk assessment and mitigation at portfolio level to consider risks such as deforestation, water scarcity, as well as human and labour rights.
He said this could be supported by the development of taxonomies that would drive positive impact products and services.
Taxonomy is a process or system of classification used to organise concepts into an easy-to-remember framework for discussion or analysis.
“There is currently no taxonomy on sustainable products and services. This makes it hard to compare how each bank is doing in sustainable financing due to the differences in definitions, commitments and targets. Thus, a taxonomy for positive impact products and services is necessary.
“At the same time, there is also no regulatory requirement for ESG assessment for banks resulting in different ways of ESG assessment adoption across banks.
“Having a common ESG risk assessment framework across the banks will ensure that clients have to meet the same basic level of ESG requirements to secure financing.
“There is also a need for more client engagement on ESG for a deeper understanding of what our clients are doing to address sustainability issues within their operations, and how we can be an enabler to support them, ” Rafe noted.
CIMB is a founding member of the United Nations Environment Programme Finance Initiative (UNEP FI)Principles for Responsible Banking and signatory to the Collective Commitment to Climate Action (CCCA).
He said the group had a dedicated sustainability division that oversaw the governance and management of its sustainability risk and opportunities.
CIMB, he said, has also developed a Sustainability Framework consisting of five pillars which looks at sustainability of our direct operations, financing and CSR.
“Underlying these three pillars is a robust governance structure that ensures accountability and transparency, and stakeholder engagement to ensure that we meet and address the concerns of our stakeholders.
The Group has developed five sector guides (Palm Oil, Forestry, Oil and Gas, Construction and Real Estate, and Coal) to support ESG risk assessment of clients.
“CIMB is the first banking group in Malaysia and the first in South-East Asia to commit to phasing out coal from our portfolio by 2040.
“We have developed the Green Social Sustainable Impact Products and Services Framework (GSSIPs) to drive our sustainable financing. The framework provides high level principles for products and services that we will finance to drive sustainable development, where notable examples include its US$680mil SDG Bond issued in 2019, ” he said.
In 2020, CIMB announced a five-year commitment of RM3bil for sustainability-linked loans (SLL), and this has since included Sarawak Energy Bhd’s RM100mil SLL as well as a RM270miln SLL for a subsidiary of the StarHub Group.
Meanwhile, OCBC Bank (M) Bhd country chief risk officer Thor Boon Lee (pic below) felt there should be some form of incentives, not necessarily monetary, which would expedite ESG adoption in the banking sector.
He said this could take the form of awards and recognition.
“There are now even third party ESG rating/ranking providers available. The use of ESG labels would be a viable starting point for helping consumers decide and thus create the demand for sustainable products and services, ” he noted.
As for OCBC, Thor said at Group level, it has set a target of achieving S$25bil by 2025 for its sustainable finance portfolio.
“Our original S$10bil target was surpassed in the first quarter of 2020 – two years ahead of the 2022 schedule.
“As a Group, OCBC has seen a significant increase in demand for sustainable financing in recent years due to greater awareness of and heightened efforts to combat climate change.
“We have witnessed a strong demand for green and sustainability-linked loans in recent times and have made good progress in the financing of renewable energy projects, especially following our announcement in April 2019 that we will no longer finance new coal-fired power plants, ” Thor said.
He said sustainability is very much in OCBC’s life blood and it is looking to embed in every dimension, through the Group’s own operations and also the products it offers.
From a product perspective, Thor the bank is integrating ESG principles into its lending operations and via the investment products it offers such as unit trusts.
Malayan Banking Bhd (Maybank) recently revealed a new five-year plan that aims to make big changes towards environmental, social and governance (ESG) targets as its aims to achieve a return on equity of as much as 15% by 2025.
The five-year strategy named M25 would be steered by three strategic priorities by concentrating more on digital, building new value drivers and focussing on sustainability throughout its operations.