Green finance is red-hot

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GREEN financing is not exactly a new buzzword, but it is only now that it is gaining momentum both here and regionally.

Put simply, green financing is any financing activity which takes into account the impact on the environment or in other words, it refers to environmentally friendly financial initiatives.

Within the region, efforts are being stepped up in this area.

For example, just this week, it was reported that a group of Singapore government leaders had called for their government to “enhance green financing, create more green jobs, and strengthen corporate accountability, in partnership with the private sector, civil society and community, to advance Singapore’s inclusive transition towards a low-carbon society.”

In Malaysia, Bank Negara recently issued an exposure draft, which it says, sets out the proposed requirements and guidance on climate risk management and scenario analysis.

“The proposed specific requirements and expectations are to ensure that financial institutions strengthen the management of financial risks stemming from climate change to enhance the resilience of the financial sector against climate-related risks and to facilitate an orderly transition to a low-carbon economy,” Bank Negara says.

As part of ongoing efforts, the central bank and the Securities Commission had in June last year hosted a global virtual conference centred around climate change, sustainability and financial institutions.

Broadcaster and naturalist David Attenborough, during the conference highlighted that while Asean is the site of valuable ecosystems, it is also the site of its degradation.

“Borneo has lost its rainforest at the fastest rate in the world, with 30% loss in the last 40 years.

“In the same time period, Thailand and Vietnam lost half their mangrove forests, which has resulted in the loss of protection from tidal waves and storms for their coastal and urban areas,” he had noted, as reported in the JC3 Flagship Conference 2021 Rapporteur Report.

Financial institutions, Attenborough added, are in a strategic position to drive change.

To be sure, lenders in Malaysia are not taking this subject lightly, pledging billions in green financing over the next decade.

Stopping the funding

Most, if not all, have committed to no longer funding fossil fuel, oil and gas or traditional power plant-type activities which can hurt the environment.

Largest bank Malayan Banking Bhd (Maybank) says it has committed to not finance any new greenfield coal activity and has enhanced due diligence requirements in place for this sector.

Chief sustainability officer Shahril Azuar Jimin (pic below) says the bank is working with its clients and are supporting them in their transition to a sustainable fuel mix, as well as working with relevant organisations, and countries within the regions to explore the use of cleaner, more efficient and environmentally friendly energy sources.

Maybank Foundation CEO Shahril Azuar Jimin speaking to the press during The ‘Painting Batik: A Exhibition and Tribute’ art exhibition at Balai Seni in Menara Maybank, Kuala Lumpur. IZZRAFIQ ALIAS / The Star. November 21, 2019.

“This provides the opportunity to transition responsibly and positively in the near to medium-term, without impeding development needs,” he tells StarBizWeek.

“Fossil fuel has been the primary source of power generation for many developing nations, allowing affordable and reliable access to electricity to even the most remote of regions.

“Whilst we are cognisant of the significant ecological impact associated with such activities, to completely stop the financing without a transitional plan in place, would be irresponsible of us and could disrupt the economic progress of developing countries,” he adds.

RHB Banking Group says starting from 2022, the bank will “no longer pursue opportunities or finance new coal fired power plants or new thermal coals mines”.

Hurting the environment: Coal barges are pictured as they queue to be pulled along the Mahakam river in Samarinda, East Kalimantan. Banks are committed to not fund activities such as greenfield coal projects. — Reuters

Group managing director and CEO Datuk Khairussaleh Ramli tells StarBizWeek the lender is taking a “practical and phased approach” in winding down its current exposure, while playing a “nurturing role” in educating its customers to support clean energy, green activities and the transition to a low-carbon and climate resilient economy.

CIMB Group Holdings Bhd group chief sustainability officer Gurdip Singh Sidhu says CIMB Group had in 2020 committed to phase out coal from its portfolio by 2040.

“As part of this commitment, we have already stopped providing any financing for new thermal coal mines and coal-fired power plants since 2021.

“However, while there has been encouraging progress in the banking sector, we need to collectively accelerate the transition towards renewable energy sources and climate-friendly business practices.

“As a society, we will need to achieve peak emissions before 2030 if we are to limit global warming to 1.5°C in line with the Paris Climate Agreement,” says Gurdip.

HSBC Amanah CEO Raja Amir Shah says as providers and facilitators of capital, banks have a social obligation to “catalyse” the market beyond the scope of profitability.

“At group level, HSBC has a thermal coal phase-out policy and is committed to phasing out thermal coal financing, in a net zero aligned timeline,” he says.

As part of this commitment, HSBC will phase out the financing of coal-fired power and thermal coal mining by 2030 in markets within the European Union and the Organisation for Economic Co-operation and Development, and by 2040, in other markets.

OCBC Bank (M) Bhd country chief risk officer Thor Boon Lee says as a group, OCBC has seen a significant increase in demand for sustainable financing in recent years due to greater awareness, and heightened efforts to combat climate change.

“The group has witnessed a strong demand for green and sustainability-linked loans in recent times and has made good progress in the financing of renewable energy projects, especially following our announcement in April 2019 that we will no longer finance new coal-fired power plants,” he says.

RHB’s Group managing director and CEO Datuk Khairussaleh Ramli tells StarBizWeek the lender is taking a “practical and phased approach” in winding down its current exposure, while playing a “nurturing role” in educating its customers to support clean energy, green activities and the transition to a low-carbon and climate resilient economy.

Standard Chartered Malaysia managing director and CEO Abrar A. Anwar says the lender uses “sector-specific position statements” to assess whether to provide financial services to clients operating in sensitive business sectors.

“For example, we will only provide financial services to clients who are less than 5% dependent on thermal coal (based on revenue) by 2030. We are also aware that some clients will not meet all of our requirements all of the time.

“This may be due to operational issues outside of anyone’s control, or due to changes we have made which a client will need time to implement – such as requiring clients to become a member of an industry body or get certain certifications,” he tells StarBizWeek.

When this happens, there will be a series of engagements to address the issues, he says.

Abrar says with growing awareness of sustainable practices, banks are also facing the pressure to deliver enhanced data transparency that sustainability requires.

“They need to bring data to the fore and provide information about progress and outcomes as clients and society demand for more transparency,” he adds.

AMMB Holdings Bhd group CEO Datuk Sulaiman Mohd Tahir says undeniably, gradual implementation is key when it comes to environmental, social, and corporate governance (ESG) issues.

“This is a conscious decision on our part. We understand that time is required to transition for our customers and for the economy and we too need time to strengthen our technical and assessment capabilities to undertake effective risk assessment and customer due diligence,” he says.

He says the lender has established an exclusion list, which indicates activities where no additional or new loan or financing will be granted.

“Of course, existing contractual financing commitments will be met until maturity,” Sulaiman says.The implications

AMMB Holdings Bhd group CEO Datuk Sulaiman Mohd Tahir says undeniably, gradual implementation is key when it comes to environmental, social, and corporate governance (ESG) issues.

While it is good and important for financial institutions to focus on ESG, will this impact their business and profits?

Maybank’s Shahril says while some may see this as doing just that – impacting profitability – the bank sees it as an “area of opportunity.”

“From our perspective, how organisations embed sustainability within their business, risk management practices and the offerings of solutions to customers will ultimately determine their viability.

“While the requirement for sustainability related practices may seem daunting to some organisations, many of them do eventually realise the value created in adopting good ESG practices and pursuing responsible profit,” he says.

Given the greater emphasis by regulators on the adoption of sustainable practices which is being seen through the Climate Change and Principle-based Taxonomy, Malaysian Code on Corporate Governance and more recently the Exposure Draft on Climate Risk Management and Scenario Analysis, there will be more developments in the sustainability space as well as new technologies and approaches that will channel investments into assets with high ESG value.

“Hence, our view is that sustainable-linked finance can actually present significant opportunities for banks.”

Citing past research data by Bank of America Securities, Shahril adds that firms with a better ESG record than their peers, produced higher three-year returns, were more likely to become high quality stocks and were less likely to have large declines or go bankrupt.CIMB’s Gurdip says generally, there will not be a negative impact on the bank’s returns as a result of the growing focus on sustainable finance lending.

“Our view is that the growth of new sectors as well as the pace of adoption of sustainable practices among our existing clients will more than cover any impact arising from a reduction or exit from specific sectors or clients.

“We believe the potential growth and opportunities presented by sustainable sectors such as renewable energy outweigh the opportunity costs,” he says, citing the lender’s exposure to coal as of September 2021 which was around RM3bil.

“In comparison, we have committed to mobilising RM30bil in sustainable finance by 2024. So even as we progressively reduce our exposure to coal for instance, we will double down on our efforts to tap into growth areas like renewable energy,” Gurdip adds.

HSBC Amanah’s Raja Amir says the transition to net zero offers a significant business opportunity.

“Making the most of this opportunity will be key to positively impacting our return on assets and return on equity.

“In addition, by incorporating the risk of transition – banks can protect themselves from exposure to industries and companies by identifying and facilitating their transition to low or no carbon emitting activities.”

Still nascent

With all these said, how are Malaysian banks faring in comparison with their global and regional counterparts?

RHB’s Khairussaleh says much more can be done especially in extending financing opportunities for newer technologies.

He says RHB is guided by local and regional developments, and will continue to assess reliable approaches, or methodologies, as well as the latest developments in environmental best practices which includes exploring the adoption of science-based approaches.

“There is still much for us to learn and do to improve our sustainability practices”

Maybank’s Shahril says based on the World Wildlife Fund’s latest Sustainable Banking Assessment or Susba analysis, Singapore banks are ahead of the curve on sustainability related initiatives, including financing.

However, he notes that there has been more progress by Malaysian banks with respect to participation in sustainable finance initiatives and policy advocacy with regulators, relative to its Asean counterparts.

CIMB’s Gurdip admits that sustainable finance is still relatively nascent in Malaysia, but it has gained momentum and made considerable progress in recent years.

“Our regulatory bodies have been proactive and supportive in driving the shift towards sustainability and climate-resilience within the financial sector,”

HSBC Amanah’s Raja Amir also notes that green finance is still at a nascent stage but with the increasing push from stakeholders, particularly regulators, greater global scrutiny and increasing public awareness, there has been a notable uptrend for Malaysian financial institutions in providing or facilitating green finance.

“A main barrier in Malaysia is due to the fact that banks are still building their capacity and capabilities to be able to better assess the viability of green projects, given the complexity of the financing technological and regulatory developments.

“Limited technical know-how on the part of Malaysian banks on the green sector can also lead to hesitation to provide funding or any form of protection or guarantees due to perceived risks,” Raja Amir says.

“However, the opportunity is there.

“The Malaysian government has rolled out schemes such as the Green Technology Financing Scheme and the funding opportunity in the renewable energy sector should encourage Malaysian banks to do more, faster,” he adds.

“While there is now a stronger demand for green financing, it is still not matched by the supply side, due to the capability and information gaps.

“Having said that, we are seeing some banks in Malaysia allocating capital and steering financial flows towards more low-carbon, climate resilient activities.”