Closing the gap: how well have regulators and banks driven climate actions in Asia Pacific?

To see how regulators and banks have progressed alongside each other in response to the climate crisis, WWF Singapore has conducted a new analysis, combining results from two of its sustainable finance assessment frameworks for regulators and banks – the Sustainable Financial Regulations and Central Bank Activities (Susreg) assessment and Sustainable Banking Assessment (Susba). We have matched indicators between the two frameworks to see how well Asian regulators and banks have integrated climate considerations into their decision-making, and discuss the findings below. Then in a second article, we present a range of recommendations to address issues emerging from the analysis.

Overall, we found that there is a large scatter between leaders and laggards banks in the region and, for some countries, bank performance was not aligned with regulation strength. Given the systematic nature of climate risk, there is a need to progress together and regulators are well positioned to push banks to increase the minimum standards, especially for banks who might not respond as well to market-led initiatives.

This review covered 41 banks across seven countries – Indonesia, Malaysia, Singapore, Philippines, Thailand, Japan and Korea – and their respective regulators and supervisors. Indicators used included select matching indicators from the Susba energy sector framework and Susreg climate-related indicators, and banks were assessed against four criteria:

• sector-specific approaches: do regulators require the banks to develop and implement specific sector policies outlining minimum environment and social requirements, and do banks implement and disclose those sector policies?
• disclosure: are banks expected to report publicly on the material negative environment and social impacts associated with their business relationships at the portfolio level, as well as on their climate transition plans?
• target setting: do regulators expect climate targets to be set and have banks set those targets?
• monitoring: do regulators and supervisors expect internal processes to monitor and address situations in which clients are not compliant with the banks’ environment and social policies, and do banks have those processes in place?

Overall results

In comparing the Susba and Susreg scores for banks and regulators respectively, the spread of banks’ performance for most markets is scattered with clear leaders and laggards (see figure 1). The exception is Singapore where banking scores are quite aligned. These results demonstrate that there is still wide variation in banks’ climate and energy integration both across the region and within most countries.

Regulators are uniquely positioned to raise the bar and level the playing field by enhancing and aligning climate-related risk management requirements throughout the region. They can also help banks to meet these requirements by supporting capacity building efforts and raising the minimum requirements.

From the latest Susba report, at an indicator level it was found that banks show progress in developing their sector-specific approaches (see figure 2).  For example, banks have increasingly developed and disclosed specific energy sector policies (49% of banks in 2022 versus 29% in 2021) and offered financial products and services to support sustainability improvements in the sector (70% of banks in 2022 against 54% in 2021).

Disclosures improved as well, particularly for financed greenhouse gas emissions (23% of banks in 2022 against 5% in 2021). The main gap in disclosures continues to be setting science-based targets with only 11% of banks setting such targets for the energy sector.

 

A further look into energy transition-related regulations shows that while regulators are providing banks with incentives to develop energy-transition plans, most do not yet require such plans, and none require banks to set science-based targets (see figure 3). This may explain why assessed banks have implemented products and services to support sustainability improvements in the sector but are relatively behind in setting science-based targets.

Sector-specific approach

In the mandate to require sector-specific approaches on carbon-intensive industries, the picture is quite fragmented across the region (see figure 4). Three trends were observed:

• in Korea and Japan, we see that on average, banks are ahead of the regulatory standard;
• in Indonesia, Malaysia and the Philippines, the opposite applies and regulation is ahead of banks;
• and in Singapore and Thailand, performance of banks and regulators are more or less aligned.

Disclosure

In terms of disclosure, banks are expected to report publicly on the material negative environment and social impacts and their climate transition plans (see figure 5). Banks are moving ahead of regulation in Korea, Japan and Singapore. In the case of Japan and Korea, this could possibly be due to a more market-led approach pushing bank performance, as seen through the relatively higher membership of the Net Zero Banking Alliance in these countries.

In the Philippines, we saw that the regulatory standard is far above the average for the country’s banking performance. This could be attributed to the transition period before sustainable finance action plans need to be submitted which does not come into effect until May 2023.

For Malaysia, Thailand and Indonesia, we observed that a lot more could be done to push for disclosure on climate-related impacts.

Target setting

For both banks and regulators, we observed the lowest performance in climate target setting (see figure 6). For this indicator, we analysed whether regulators/supervisors mandate banks to set climate science-based targets and align their portfolios with the objectives of the Paris Agreement. On the bank side, we analyse whether the bank sets specific targets to reduce fossil fuels exposure (thermal coal, oil & gas, etc.), sets Science Based Targets for exploration, extractive and energy sectors, and has a specific target allocated for renewable energy financing (number or portfolio share).

Monitoring

On internal processes to monitor banks’ environmental and social policies (and whether banks have those processes in place), Singapore has led in both banking and regulatory performance (see figure 7).

According to guidelines published by the Monetary Authority of Singapore, in cases where customers pose higher environmental risk banks should:

• encourage customers to improve its environmental risk profile;
• consider the use of financing conditions or covenants in loan agreements;
• and when a customer does not manage its environmental risk adequately, the bank should consider a range of mitigating options. These can include reflecting additional risk costs in loan pricing, applying limits on loan exposure, and reassessing the customer relationship, including declining future transactions and exiting the relationship.

At the portfolio level, the guidelines also provide that banks should develop quantitative and qualitative tools and metrics to monitor and assess exposures to environmental risk, where material. For example, these metrics may be used to assess a bank’s portfolio exposure to geographical areas and sectors with higher environmental risk, measure the carbon intensity of customers in high-risk sectors, or consider the impact of environmental risk on its collateral valuations.

Conclusion

Our analysis shows that against most metrics there are wide variations both between and among banks and regulators when it comes to addressing climate-related risks.

In some jurisdictions, banks have outpaced regulators while in others there are gaps between expectations and performance. Also, there is often a reliance on incentives and voluntary options, instead of regulation and mandatory requirements. As a result, progress is uneven and slower than is needed to align with the Paris climate goals.

So in the second half of this article, we present a range of recommendations which will close that gap and help Asia Pacific nations meet their obligations under the Paris Agreement.