ASEAN Regulators Are Shoring Up Climate Safeguards: WWF

In a new report, WWF Singapore says ASEAN financial regulators and banking associations are increasing their expectations on banks to assess and mitigate climate and environmental risk.

ASEAN financial regulators and banking associations are shoring up regulatory safeguards against mounting environmental and social (E&S) risks, WWF Singapore says in a new report.

“Based on current national commitments, the world is set for an average warming of at least 3°C above pre-industrial levels, far beyond the 1.5°C targeted under the Paris Agreement,” the report says.

It details fundamentals changes to the climate and environment that have already had “significant financial repercussions” and to which Southeast Asean countries – and their banks – are particularly exposed.

“As risks associated with climate change and natural capital degradation increase, and the availability and cost of insurance worsen, the resulting reduction in credit quality and collateral value of loans will have significant impacts on ASEAN commercial banks,” the report says.

According to WWF, the harmonisation of sustainable banking practices across ASEAN will bring clear benefits, and financial regulators and banking associations have a key role to play.

Taking stock

The report takes stock of recent progress made by financial regulators and banking associations in each of the five ASEAN countries – Indonesia, Malaysia, Singapore, Thailand and Vietnam – using a new assessment framework reflecting WWF insights on what constitutes a robust foundation of regulatory practices.

Some of the highlights include:

  • Indonesia: The OJK (Financial Services Authority) issued the regulations on the application of sustainable finance in July 2017. For large commercial banks, the regulation came into force on 1 January 2019.
  • Malaysia: BNM (Bank Negara Malaysia) issued the value-based intermediation financing and investment impact assessment framework for Islamic banking in November 2019.
  • Singapore: The ABS (Association of Banks in Singapore) issued guidelines on responsible financing in October 2015 (updated in June 2018), and MAS (Monetary Authority of Singapore) last month announced a plan to release environmental risk management guidelines for consultation in early 2020.
  • Thailand: The TBA (Thai Bankers’ Association) issued sustainable banking guidelines for responsible lending with support from the BOT (Bank of Thailand) in August 2019.
  • Vietnam: The SBV (State Bank of Vietnam) issued a directive on promoting green credit growth and E&S risks management in credit granting activities in March 2015, and approved a green bank development scheme in August 2018.

In total, seven out of the 10 ASEAN countries will have issued new or revised sustainable banking regulations or guidelines by the end of 2019. In addition, 27 or 29 ASEAN banks assessed by WWF refer to sustainability in their strategy, while 20 reference sustainability in their leadership statements.

Of the five banking regulations and guidelines WWF assessed, all explicitly mention climate change and environmental degradation, and place expectations on banks to strengthen governance and risk management by fully embedding sustainability considerations and responsibilities within their organisations, including to public report on sustainability strategies.

Banks are largely now also expected to train their staff and build internal capacity on sustainable finance and E&S integration. According to WWF, 17 of 29 banks that it assessed already have such training programmes in place.

In addition, some of the assessed regulators are starting to expect banks to assess and mitigate portfolio-level exposure to client-related or other E&S risks, and have put measures in place to foster the development of green financial products.

However, regulators have not yet performed climate-related stress tests, and they do not yet require banks to report in line with the TCFD recommendations, set targets to align their loan portfolios with the Paris Agreement objectives, or reduce the E&S impacts associated with their business activities.

Enhancing resilience

The report offers recommendations for financial regulators and banking associations to enhance the resilience of the ASEAN financial sector, and to create the necessary conditions to fully mobilise private capital.

Specifically, WWF recommends ASEAN financial regulators and banking associations to require banks to develop policies covering specific E&S issues or industry sectors based on internationally-recognised sustainability standards and certification schemes, and engage proactively with clients to support them in transitioning to low-carbon and sustainable business models.

Banks should also be required to include oversight of sustainability strategy implementation and management of climate-related risks in the board’s terms of reference, and make training programmes mandatory for board members and senior management.

Other recommendations include the introduction of requirements for stress-testing of financial sector resilience to climate-related and environmental risks, portfolio-level E&S risk assessments, and stronger disclosure requirements based on the TCFD recommendations, among others.

While WWF believes the regulations and guidelines currently in place should help address the uneven progress made by banks in ASEAN, regulators can enhance the resilience of the ASEAN banking industry using the report’s findings and recommendations.

The report also provides a country snapshot of China, highlighting the “significant steps” authorities in the country have taken in recent years to develop a green financial system. These initiatives include green credit guidelines for banks issued in 2012, a complementary set of KPIs issued in 2014, and green bonds issuance guidelines which have led to significant growth in the Chinese green bonds market – to name a few.

The full report is available here.

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