The growing pressure on financial institutions to mitigate climate-related risks in their business models has made it clear that banks need standardized methods to assess their corporate customers’ decarbonization efforts
As regulators in Singapore and Hong Kong implement increasingly detailed regulatory requirements for climate-related risk management, banks in the region face challenges in engaging customers in data collection, risk assessment and transition planning.
Singapore issues guidelines
The Association of Banks in Singapore (ABS) recently released a standard questionnaire template that banks in Singapore can use in discussions with corporate clients about environmental risks, collect data and identify opportunities to fund efforts to transition to a lower-carbon economy.
The ABS Environmental Risk Questionnaire originates from the Green Finance Industry Taskforce on Risk Management, which includes a group of international and regional banks. The taskforce is responsible for embedding environmental risk management policies from the Monetary Authority of Singapore (MAS).
The questionnaire is designed to set out best practices for banks to work with clients to assess and mitigate their environmental risks, which will be critical for banks to meet the increasingly granular regulatory requirements of MAS on environmental risk management in the financial sector.
Currently, the questionnaire applies to five high-risk sectors identified by the taskforce:
- agriculture, forestry and land use;
- construction and real estate;
- transportation and fuel;
- Energy (including upstream); and
Banks in Singapore should use the questionnaire with clients that have a credit exposure of US$10 million or more and are encouraged to incorporate the questionnaire into their existing internal risk assessment frameworks as soon as possible.
The questionnaire covers a range of environmental risk assessment questions including governance, metrics and identifying opportunities for sustainable financing. Banks that are part of the taskforce working group have welcomed the initiative, citing the need for a more consistent approach to collecting environmental risk data across different sectors of the economy.
Hong Kong aims to align with international standards
Efforts are also being made in Hong Kong to develop guidelines for climate-related risk management for financial institutions. The Hong Kong Monetary Authority (HKMA) issued guidance on proposed governance and risk assessment guidelines last summer and is expected to issue final guidance shortly. Authorized institutes have a period of 12 months after implementation to comply with the new regulations.
The draft guidelines are in line with recommendations from international standardization bodies such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Network of Central Banks and Supervisors for Greening the Financial System. The HKMA has adopted guidance from the TCFD on classifying climate-related risks and has formally endorsed the implementation of the recommendations set out by the organization. Authorized institutions are expected to make their first TCFD disclosures by 2025 at the latest.
Engaging corporate clients to collect data on climate risk and discuss longer-term planning to manage transition risk will be an integral part of Hong Kong companies’ efforts to meet the HKMA’s regulatory expectations. However, Hong Kong regulators have yet to offer more detailed guidance on how financial institutions should assess data from customers across different industries as part of their broader risk management strategy.
Despite regulatory pressure to do more to support regional and international initiatives in the transition to lower-carbon economies, banks across Asia-Pacific could face resistance. For some companies and even governments, mitigating climate risk is taking a backseat to supply chain disruptions, food shortages and rising inflation.
Countries like South Korea and China are expected to prioritize economic growth and consumption in the coming years, possibly at the expense of environmental protection. South Korean President-elect Yoon Seok-yeol is expected to deregulate the private sector and favor policies that allow manufacturers to work around the clock.
China, widely regarded as one of the world’s top carbon emitters, has pledged to transition to a lower-carbon economy and invest in renewable energy. The Chinese government has announced plans to peak carbon emissions in 2030 before moving to net-zero emissions by 2060. Greenhouse gas emissions and coal consumption are expected to increase year on year through 2030 as the Chinese economy struggles to recover from the pandemic.
In Malaysia, policy makers have set a national goal of achieving carbon neutrality by 2050. However, the Malaysian government’s near-term priorities are heavily focused on boosting economic growth post-pandemic. Under the 12th Malaysia plan, the government will spend 400 billion ringgit (US$95.53 billion) on development projects between 2021 and 2025, compared to a previously budgeted 260 billion ringgit (US$62 billion) in the 11th Malaysia- Plan. These projects include many resource-intensive initiatives such as the construction of new highways and rail networks.
What banks should know
Banks with corporate clients in Asia Pacific face a growing regulatory burden for climate and environmental risk management. At the same time, macroeconomic conditions and shortages of essential materials are putting pressure on governments in some regions and private sector companies to prioritize growth in higher carbon emitting industries.
Aligning risk appetite frameworks between these two extremes could pose a challenge for banks and will require supervisors to offer more policy tools, such as the Singapore Questionnaire, designed to standardize and support risk assessment efforts.