Big challenges for Asean banks to decarbonizing finance

Countries and corporates in the Association of Southeast Asian Nations (ASEAN) (and banks) are at varying levels of readiness to meet their carbon neutrality targets.

While they are making progress, insufficient data and disclosure pose challenges for banks to incorporate climate risks in loan underwriting, according to Moody’s Investors Service in a new report. These were some of the key findings in a roundtable discussion Moody’s co-hosted with Institute of International Finance on 10 February, under the theme of “Advancing net zero goals: ASEAN views.”

“ASEAN banks will have to navigate a challenging path amid pressure from investors, regulators and social forces to decarbonize their loan books and meet country-level net-zero emission targets that go beyond 2050. Disclosures related to climate risks by companies differ, which make it difficult for banks to assess climate risks for their corporate clients,” says Alka Anbarasu, a Moody’s Senior Vice President.

ASEAN banks and carbon-intensive industries

Across the ASEAN region, 15%-30% of banking system loans are to carbon-intensive industries that have high carbon-transition risks such as coal-fired power generation; coal mining; oil and gas. So far, only a few large banks in Singapore, Malaysia and the Philippines have explicit policies to refrain from financing new coal-fired power plants.

Banks themselves are also making slow progress in disclosing climate risks. Moody’s review of 28 large banks in the US, Europe and Asia in 2021 found that just 21% reported carbon emissions funded through their lending and investments, with very few disclosing how climate change may affect their profit, apart from revenue they expect to generate from developing green products.

The transition to a low-carbon economy will create vast financing opportunities for banks as it will require material investment in infrastructure and technology. In ASEAN in particular, sustainable economic development that requires the protection of biodiversity will entail significant investment from the public and private sectors.

However, a limited supply of green and sustainability-linked bonds due to the lack of standardized taxonomies is a challenge for institutional investors.

Green and sustainability-linked bonds issued by ASEAN countries and companies amounted to just more than $30 billion in the first half of 2021, while more than $190 billion were issued by Chinese firms and more than $490 billion globally in the first half of 2021, according to data from Climate Bond Initiative.

Subscribers can access the report here.