Banks and Sustainable Finance: A Closer Look at Asian Financial Institutions
Sitting at the global economy’s heart, banks are responsible for steering the world towards a greener economy. Many banks in various economies are realizing the significance of this mission, which is a defining feature of their future as we enter a new era of banking.
Climate change threatens dire macroeconomic consequences to various economies, especially in Asia. According to Swiss Re, the Association of Southeast Asia could lose up to 37% of its gross domestic product (GDP) by 2048 if the world records a 3.20C temperature rise. Singapore, Indonesia, Philippines, Malaysia, and Thailand could lose economic output equaling seven times their 2019 GDP by 2050.
Globally, Europe remains the leader in financial sustainability through climate fintech, supported by policies and government initiatives. Though the climate fintech sector in Asia remains relatively small, government policies, increased awareness of sustainability issues, and dynamic fintech are setting the stage for a thriving climate fintech sector.
Steps toward Net Zero
Many banks aim to change their consumers' behavior, which has a more significant impact towards attaining Net Zero. Studies estimate that 70% of global green gas emissions are driven by consumer behavior. The first step involves monitoring consumers’ carbon emissions. Technological developments such as the use of advanced carbon accounting software and customer data analytics have made it possible for banks to quantify and assess not only their carbon footprint but also those of their customers. Carbon trackers and calculators powered by cutting-edge technologies such as big data analytics, and artificial intelligence, and the blockchain help banks get insight into customer behavior.
leveraged to collect and process data related to the consumers’ carbon footprint with vendors such as IBM and cloud computing service providers such as Amazon are helping banks to implement this technology effectively. The use of AI is also on the rise. Banks use this technology to make the data collection and analysis process faster and more efficient.
Blockchain is increasingly being adopted by banks to reduce carbon emissions. Last year, the International Finance Corporation (IFC), a World Bank affiliate, announced backing for a blockchain-enabled platform for trading carbon offset. The project was seeded with $10 million for buying carbon credits from projects selected by sustainability finance company Aspiration. The credits are tokenized by blockchain technology firm Chia Network and tracked using the World Bank’s Climate Warehouse database. Banks are exploring this technique to track the trading of carbon credits and attract support for crypto-friendly projects. Blockchain is distributed, and immutable. Tokenizing the carbon credit and trading it through such a network enables transparency, accessibility, and accountability.
After understanding consumer behavior, banks can guide their consumers to help them shift their lives towards a more sustainable future . This includes advising on alternative energy sources to those that pollute the environment. Additionally, banks are exploring using incentives to encourage the effort to minimize carbon emissions. Based on their sustainability score, they are developing a range of products, such as dynamic customer credit interest.
While various countries such as Singapore and China are recording remarkable progress with sustainable finance, other countries are still lagging behind. For example, countries such as Vietnam have seen slower progress in this niche since their regulatory landscape is not as supportive as those of the above-mentioned leading countries.
Asia’s Sustainable Heroes
Almost half of the ASEAN banks are yet to fulfill even 25% of environmental, social, and governance (ESG) criteria. However, some banks are spearheading financial sustainability at the top level. Some of the winners include DBS, HSBC, and Bank of China:
1. DBS
The Singaporean multinational bank has expressed its total commitment to establishing financial sustainability. It became the first Singaporean bank to sign up with the Net-Zero Banking Alliance (NZBA), which aims to achieve a net zero by 2050. DBS also committed to aligning its lending portfolio to support the Paris Agreement, which sets a global framework to limit global warming to below 2°C and pursue limiting it to 1.5°C.
Some of the DBS's measures to achieve its goal include reducing the carbon intensity of its lending portfolio and investments and increasing support for green finance and green energy.
DBS also leverages advanced data analytics and carbon accounting tools to monitor and mitigate carbon emissions across its supply chain.
Additionally, the bank has been experimenting with blockchain technology. DBS Digital Asset Ecosystem offers tokenization, trading, and custody services of digital assets. Partior is another blockchain-based cross-border clearing and settlement provided by the bank. These projects aim to improve the supply chains, reducing waste and carbon emissions.
2.HSBC
HSBC gives financial sustainability a holistic approach. The British Banking Institution, with a significant presence in Asia, is committed to collaborating with governments and regulators to develop policies to realize net zero by 2050.
HSBC is working to achieve net zero through banking offerings, trade finance, cash management, interest rate swaps, and recycled PVC credit cards. Additionally, it’s committed to working with clients to decarbonize the entire supply chain. This includes the plan to unlock up to $1 trillion of finance for new climate solutions.
The bank has implemented various innovative deals to help developing countries decarbonize. These include Bangladesh’s first social principles-aligned loan; the first green trade in Malaysia; Indonesia’s first national telecommunications public-private purchasing project; and India’s first skills impact bond.
HSBC is also committed to financing business models and technologies needed for the new net zero economy. It’s helping commercial green technologies such as green hydrogen, sustainable hydrogen fuels, and long-term battery storage.
3. Bank of China
Bank of China, one of the oldest banks in China and the world, has also shown commitment in supporting the transition to a greener economy.
It issued its first Certified Climate Bond through its Parish branch in 2017. The bank has dedicated the proceeds from these bonds to refinance loans that were taken to support two energy projects in Europe and 15 subway metro systems in China.
The Bank of China also has an internal Green Bond Framework to facilitate more issuance in the future as part of the broader Green Bond Program. The bank will channel the funds generated from the bonds to support eligible assets and projects across several domestic and overseas markets.\
Conclusion
Banks in Asia are showing a growing awareness of the need to join the fight against climate change and steer the world toward the envisioned green economy. However, many banks are either at an early stage or have yet to start addressing climate change.
Some governments and regulators in Asia still need to continue creating a favorable environment to encourage banks’ participation in establishing sustainable finance. For example, Vietnam should continue with the key banking reforms that it initiated in 2019. These reforms include requiring banks to assess, manage, and report on ESG risks in their lending operations.
Asia is still lagging behind other regions, such as Europe. However, a continued effort by banks and regulatory authorities will see more banks in the region rise to the top of the most sustainable financial institutions.
