We reached out to 15 listed banks with substantial wholesale banking operations in Indonesia, Malaysia, Thailand, the Philippines and Singapore. We have engaged with some of these banks on sustainable banking issues for five years or more.
Our research for this project drew from the Sustainable Banking Assessment (SUSBA) tool3 developed by the World Wide Fund for Nature (WWF). In its 2019 update, the tool shows how 35 listed ASEAN banks perform in integrating ESG considerations in their corporate strategy and decision-making processes.
In our engagement, we asked companies to:
- Strengthen existing risk management systems by establishing client onboarding, due diligence and transaction-level environmental and social policies and procedures – with particular attention paid to clients in industries with high sustainability impacts, e.g. extractives, agriculture, food and beverages.
- Involve multiple expert teams across the bank, including from the sustainability, risk and client-facing teams, in the development and implementation of environmental and social risk procedures.
- Incorporate sustainability factors to guide financing decisions at the portfolio level.
- Investigate and develop dedicated climate risk management procedures, making use of the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD).
- Establish internal procedures for sustainability-related regulatory monitoring.
- Develop innovative products and services to address sustainability challenges.
- Improve disclosure on the management of material environmental and social risks and opportunities.
- Establish adequate governance to ensure accountability on sustainable banking issues at the highest levels.
Every bank that we spoke to acknowledges that exposure to ESG risks embedded in their commercial and corporate lending portfolios can impact the credit quality of those portfolios. However, only a handful of leading banks have developed and implemented robust measures to manage those risks. These include dedicated policies and procedures, including due diligence and monitoring tools; internal capacity to identify and manage environmental and social risks; and good disclosure.
We found Singaporean banks to be at the forefront of environmental and social risk (ESR) management, with practices that are increasingly aligned with those seen in leading European and North American banks. Banks in other ASEAN countries still lag what is considered best practice; however, some of them have started to take action to catch up.
Our high-level findings include:
- The importance of setting up ESR management practices has clearly shot up management’s and the board’s agenda. We attribute this to increasing regulatory, investor and civil society pressure, along with the realisation that the impacts of economic, environmental and social megatrends are rapidly materialising.
- All the banks we spoke to have developed frameworks for ESR management to different levels of sophistication. In general, we found that most still need to address gaps in implementation – particularly around procedures to monitor compliance with their own ESR policies and action plans in case breaches are found.