Banks need to adopt training and change management programmes to ensure employees embrace ESG risk management as a requirement and discipline.
PwC has published a new report outlining key developments in Southeast Asia on ESG, along with an outlook for the year and recommendations specific to the banking industry.
The report points to international, regional and local initiatives aimed at creating guidelines for ESG integration into banks’ strategies, risk management, disclosure and regulatory requirements.
Notably, the IFRS Foundation has proposed the creation of a sustainability standards board, which will leverage existing sustainability frameworks to develop and maintain a global set of reporting standards initially focused on climate-related risk.
According the PwC, most large banks have already been measuring and disclosing parts of their ESG impact in their annual or sustainability reports. However, they still face difficulties evaluating the environmental impact and the related risks in their conventional lending and investment portfolio.
“That’s because banks have traditionally been creating sustainable or green banking products in addition to their conventional banking business,” the report says. “Regulators globally are increasingly encouraging banks to take action and develop proper risk management approaches to measure and manage the ESG risks of their entire business.”
In Southeast Asia, Singapore and the Philippines are so far the only countries that have moved ahead with incorporating environmental and social risk into their supervisory expectations for banks’ risk management systems.
Singapore’s Green Finance Industry Taskforce (GFIT) is consulting on the development of a taxonomy to help classify economic activities as environmental-friendly, subject to a “do not harm” clause, and initially using a traffic light system (green, amber, red) for classification.
Meanwhile, MAS (Monetary Authority of Singapore) has become one of the first regulators in Southeast Asia to formally set out comprehensive expectations for banks’ environmental risk management and disclosures, following the publishing of new guidelines in Dec 2020.
The PwC report outlines the typical challenges banks face as they prepare for implementation of the guidelines by June 2022. These include challenges relating to data availability and quality, uncertainty of climate impacts, and methodological constraints, among others.
Meanwhile in the Philippines, the BSP (Bangko Sentral ng Pilipinas) issued a sustainable finance framework in April 2020, with full implementation required by May 2023. The framework defines regulatory expectations for banks on environmental and social risk management, stress testing, and sustainability disclosure requirements, among other areas.
The report also spotlights initiatives in Malaysia, where steps have been taken to ensure banks integrate climate risk and sustainability in their practices, and Indonesia, where regulators are looking to apply sustainability criteria to banking products and banks’ risk management systems.
The report offers a set of recommendations for banks as ESG and sustainability issues continue to remain in focus throughout 2021, highlighting the need for coherence in banks’ sustainability approaches and the development of new techniques to measure and manage ESG risks.
Among the recommendations, banks will have to identify alternative data sources and proxies that allow for assessment of retail and SME customers who are not typically able to provide sufficient disclosures and do not have ESG ratings.
Potential data sources could include information from NGOs and government, public sentiment data from social media, and geo-spacial sources to map assets to locations to identify their physical risk exposures, the report says.
Banks should also adopt a comprehensive training programme to upskill employees involved in environmental and social risk management processes, alongside a complementary change management programme to ensure employees actively embrace change and that its impact is long lasting.
The full report is available here.