Putting the brakes on haze financing

OCTOBER 30, 2015

In all the finger-pointing over the transboundary haze, some banks in Singapore have come under the spotlight for allegedly financing the culprits behind Indonesia’s forest fires.

Now the Association of Banks in Singapore (ABS) has a new set of guidelines for banks to incorporate responsible financing practices into their business model. While the guidelines, announced this month, are not specific to the haze, their announcement is timely and commendable.

Currently, banks typically assess their clients’ creditworthiness solely on financial grounds. By broadening the credit-approval criteria to include the client’s social and environmental impact under the new guidelines, it could help prevent irresponsible business practices such as the land-clearing fires that cause the haze.

With this, Singapore is moving beyond intergovernmental cooperation and legal action against companies responsible for the haze. It is exerting influence through its financial institutions, a significant move given its financial hub status in the region.

After all, Singapore is the top foreign investor in Indonesia, according to the Indonesia Investment Coordinating Board (BKPM). From January to September this year, Singapore invested US$3.5 billion (S$4.86 billion) in Indonesia, making up 16.4 per cent of total foreign direct investments.

Financial institutions can make a positive contribution to broader economic growth and stability. As the haze has shown, the economic penalties from environmental damage can be severe and long-lasting with Indonesia estimating that it could be set back by as much as 475 trillion rupiah (S$47 billion).


RESPONSIBLE FINANCING

Singapore has long established itself as a financial hub serving the many rapidly emerging markets in the Asia -Pacific. In the September 2015 Global Financial Centres Index, Singapore came in fourth — behind London, New York and Hong Kong — in terms of global competitiveness.

For a long time, however, the environmental impact of business was rarely a determining factor in whether a local bank approved credit. This contrasts with their international counterparts that consider environmental, social and governance (ESG) factors alongside traditional finance criteria, according to the World Wide Fund for Nature (WWF)’s report on Sustainable Finance in Singapore, Indonesia and Malaysia.

The WWF report, launched in May, also showed that Singapore banks fared the worst — compared with Indonesia and Malaysia — for not disclosing the use of ESG in their credit processes. Thus, local banks are often seen as providing easy financing options, exposing financiers to some degree of threat in the form of reputational damage and loan defaults.

This threat is increased when financing high-risk industries such as the agriculture and forestry sector, which is often plagued with controversies such as deforestation, land conflicts and biodiversity loss.

In the case of transboundary haze pollution, large companies and small-scale farmers are often blamed for fires on peatlands that produce dense and acrid smoke. While the use of fires for land clearance is nationally outlawed, they continue to be favoured because they are cheap and effective.

Yet, fires and haze can also destroy crops and lower labour productivity while demanding resources for remedy. This not only harms large companies’ — and by extension their banks’ — branding and image, but could also lead to lower profitability and possible loan defaults.

However, how banks offer credit may change with the new ABS guidelines. It mandates disclosure of senior management’s commitment to responsible financing, the formation of a governing body as well as capacity building for staff on responsible financing. The guidelines also cover ESG issues.

Investors are also increasingly encouraged to consider ESG issues in their decision-making. Last year, the Singapore Exchange announced it will soon be compulsory for listed companies to publish sustainability reports that will include the environmental and social impacts of their businesses.

But Singapore can do more in this area, or risk becoming a destination for companies that cannot meet ESG standards in other parts of the world.

As it is, some Asian countries are moving ahead in implementing sustainable financing. For instance, the Indonesian central bank mandates banks to integrate certain ESG-related factors in their credit-quality assessments while China has adopted “Green Credit Guidelines” to help banks manage environmental and social risks.

Elsewhere, financial institutions are also increasingly looking to adopt international standards such as the Equator Principles — a risk management framework to “determine, assess and manage environmental and social risk in projects”. It offers a minimum standard for screening and is used by around 80 banks and financial institutions to date.

The Transboundary Haze Pollution Act should also compel banks to tighten their lending process. The Act attributes liability to entities that conduct or condone an act that causes or contributes to haze pollution in Singapore. Although it is not clear what constitutes condoning, this could possibly extend to investors and banks that fail to screen and assess investees and borrowers beforehand.


WHAT ELSE CAN BANKS DO?

The new ABS rules are just a start. Financial institutions in Singapore can consider adopting a range of short- and long-term measures to strengthen sustainable financing.

First, the ABS could develop an industry-level roadmap that defines expectations for member banks with respect to sustainable lending practices. This will encourage individual banks to adopt a long-term view towards profit-making as they make internal adjustments or reorganisation.

Second, where gaps exist in the current lending guidelines, international standards such as the Equator Principles can play a complementary role. This will strengthen financiers’ risk management.

Third, financial institutions would do well to be more discerning in lending money, especially to clients that fail to meet their ESG standards. Instead, banks and investors should engage these companies to improve on their environmental and social performance before any loan disbursements.

To engage meaningfully, banks can prioritise training on sustainable financing among employees. Employees should be equipped to raise awareness on issues including international certifications — such as the Roundtable on Sustainable Palm Oil, which sets a global standard for sustainable palm oil — and how they will benefit clients.

Fourth, financial institutions can encourage clients from the agriculture and forestry sector to create value through improved management practices. This includes favouring innovations that raise productivity without compromising on environment and human rights. The sustainability bar can be raised by giving priority financing to outstanding firms , for instance.

The imperative to stop the haze is clear. Financial institutions can and should aspire to do more — not only for their own interests but also for the region’s sustainable development.



ABOUT THE AUTHORS:

Lee Chen Chen and Lau Xin Yi are respectively, Director (Policy Programs) and Executive (Sustainability) of the Singapore Institute of International Affairs (SIIA). This is the final of a three-part series on what governments and corporations can do to tackle the haze. On Nov 23, the SIIA is hosting a public seminar ‘Fighting the haze: Insights from Indonesia’s worst-hit provinces’ where visiting experts and NGOs from Indonesia will share their insights on the haze crisis.