Getting Asia’s Banks on the Path Towards Sustainability
(20 December 2021 – Singapore) In the more advanced markets, private banks are adopting more environmental, social, and governance (ESG) factors in their investment decision-making as more enterprises are adopting ESG principles.
There have been fervent efforts to enact real change in how global finance aligns with ESG best practices - including a collective of banks, insurers and investors pledging to combat climate change via their operations. But this move has been met with scepticism, especially on how such measures can be scaled.
With 2021 being noted as the 'make or break' year for managing the climate emergency, COP26 spotlighted both governments and the private sector to take a more collaborative and active role to alleviate the crisis. More concerted efforts are needed from a wide range of stakeholders but - especially due to the impact it has on economies - the financial services sector will play a critical role in helping determine the sustainable path towards a zero-carbon future.
There have indeed been fervent efforts to enact real change in how global finance aligns with ESG best practices. This includes a collective of banks, insurers and investors valued at US$130 trillion pledging to combat climate change via their operations. Still, this move has been met with scepticism, especially on how such measures can be scaled.
This scalability, particularly at the global level, is relevant for regions facing the brunt of climate change such as Asia. This must exert pressure on the region's financial services ecosystem players to do their part for the environment via green financing and broader ESG alignment.
The state of green financing
ESG-led finance initiatives have exploded worldwide since the European Investment Bank issued the first ESG bond in 2007. Today, banks are not only investing heavily into establishing best-of-breed ESG teams and marketing their capability, but also turning away from business opportunities unaligned with their green vision.
With little surprise, some Europe-headquartered banks (or those with strong European linkages) have emerged as among the standout providers of green financing, namely BNP Paribas, Standard Chartered and HSBC. Although the ESG movement among banks is gaining ground, the actual pace of implementation has lagged - even in more developed regions - and banks have to do more to catch up to other private sector industries, especially in markets which are by and large still developing such as Asia.
Asian banks have been falling behind
Though there is room to improve, more banks are aligning with ESG principles. This is evidenced by more banks dropping clients deemed to carry potential ESG risks, such as businesses that depend on unsustainable practices in their operations. However, it has often been the long-established, traditional 'global' banks leading this green banking drive. In Asia, the momentum has been slower.
Based on direct interviews East & Partners has conducted with corporate treasurers and chief financial officers, banks in Asia - including several of the most established lenders in the region - are seen to have the least green credentials or have been slowest to act on ESG and sustainability initiatives. The one primordial challenge (which, admittedly, is faced by the global banking sector as a whole) is the inconsistency of ESG definitions, which is impacted by poor data quality on ESG.
However, the driving force behind corporate ESG financing decisions is defined financial returns. This is a more powerful underpinning for understanding and mitigating risk than outright altruism, with greater appetite in both debt and equity markets for project finance that is sustainable in its application. Disclosing and improving governance around flagged risks will increase existing asset values over time. Concerns over profit losses arising with the need for Asian corporates to invest upfront in ESG with, traditionally, only poor-quality data to guide them, have affected their banking partners' decision to implement ESG principles themselves.
Just like many other businesses, banks are following the lead set by governments and corporate clients. They are generally not going green purely out of the goodness of their hearts and in Asia, this is particularly evident.
The promise of a greener banking future in Asia
Although Asian banks must do more to accelerate ESG adoption, there are hopeful signs. In more advanced markets such as Singapore, private banks are adopting more ESG factors in their investment decision-making.
As alluded to earlier, one major reason is more Singapore enterprises themselves adopting ESG principles. This is evidenced in East & Partners latest Global Insights Report on green banking that shows Singapore enterprises record the second-highest proportion of successful ESG-based requests for proposals (RFPs) - meeting the entirety of scope, cost structure and execution of transaction, second only to the United Kingdom.
This suggests that Singapore-based corporates are highly versed in the criteria required to secure use of proceeds and sustainability-linked finance. Still, observers must be wary to not solely link this movement to altruism; corporates in Singapore are facing increasing scrutiny by regulators, such as the Singapore Exchange wanting to introduce sustainability reporting as part of listing requirements, in addition to growing demand driven by investors and consumers.
Whether ESG decision-making is driven solely by banks or outside factors, banks in Singapore are helping to lead the charge of a movement that is starting to be reflected in neighbouring markets. Such shorter-term pushes towards green financing will likely still be state-driven - especially across emerging regions such as South-east Asia - rather than being driven strongly by the private sector.
The longer-term, private sector-led impact, however, may come from broader scale digital transformation - which has been touted to reduce emissions and inefficient use of resources arising from economic growth. The digitalisation trend has picked up the pace due to the Covid-19 pandemic, as digital products and solutions are becoming more favoured over physical ones, especially in markets where the digital economy has taken strong roots, such as Singapore and China.
Asia needs a concerted private-sector-led shift towards green banking
“Leading enterprises in Asia and their banking providers must take up the call in helping the region transition to a low-carbon economy and ESG-led future. This is not just as issuers of ESG debt but to fully embrace as general adopters of the green finance ethos. Effectively, they must "practise what they preach"” stated East & Partners Global Head of Markets Analysis in The Business Times.
“In Asia, the sustainable financing ecosystem, at large, remains nascent. However, there is optimism to be had by the green push shown by governments and several corporates. Especially within the private sector - whether they truly espouse the ESG spirit or are driven solely by returns derived from it - the drive for banking providers to tailor their products and/or services along more sustainable lines will be the crucial bellwether to Asia's future for green banking.” Mr Smith added.