WHILE Malaysian banks are committed to lead other industries in advancing the sustainability and green economy agenda, there is still plenty of room for improvement especially on the environmental front.
Hence, banks taking baby steps to manage their carbon footprint via optimising the use of energy and adopting good energy management practices – such as replacing old equipment with newer and more energy efficient models or installing solar cells in their main corporate building. But more forceful actions are needed for more tangible progress.
“For example, in the area of sustainable procurement from suppliers, some contract renewals are subjected to ESG (environmental, social and governance) screening criteria and site visits,” suggested TA Securities Research analyst Lee Hsia Wong in a thematic report on ESG adoption in the banking sector.
More importantly, the research house expects banks to do a lot more by integrating ESG considerations into lending, investment and advisory activities, and incentivising sustainable practices – both within the bank and its customers.
In September 2020, Hong Leong Bank Bhd introduced its ESG Framework which will incorporate ESG considerations in the bank’s credit evaluation of its small and medium enterprise (SME) and corporate customers.
The call for sustainable financing in Malaysia is gaining prominence. In December 2019, Bank Negara Malaysia (BNM) issued The Climate Change and Principle-Based Taxonomy discussion paper aims to provide an overview of climate change and its impact on the financial system.
The paper serves as a guide to facilitate financial institutions in identifying and classifying economic activities that could contribute to climate change objectives.
“That said, we see the need for more proactive engagement with borrowers to ensure that the economic activities are not illegal and does not contravene with environmental laws,” stressed the research house.
“External certification such as Roundtable on Sustainable Palm Oil (RSPO) for agriculture, Marine Stewardship Council (MSC) for fisheries and Forest Stewardship Council (FSC) for forestry, are encouraged for verification of the borrower’s business practices.”
Elsewhere, TA Securities Research noted the need for financial institutions to integrate climate-related risks and considerations into their business strategies and risk management practices.
In this regard, financial institutions can support and reward efforts towards sustainable practices such as investment in renewable energy for power generation, development of energy efficient vehicles and transport, as well as the adoption of green technology in the construction, management, maintenance and demolition of buildings.
“At present, we note that only less than 1% of total loans in the system are channelled for renewable energy and green financing,” the research house pointed out.
Nevertheless, it foresees efforts by some banks to gradually phase out of “dirty industries”. For instance, CIMB Group Holdings Bhd recently announced that it will phase out coal from its portfolio by 2040. The bank had reportedly invested US$2.6 bil in coal in the past decade.
Realistically, however, the drive towards financing more green and sustainable projects will require longer time to materialise given that a sizeable portion of the country’s economic activities are supported by oil & gas (O&G)-related industries, palm oil, rubber and forestry/logging, among others. – March 12, 2021