Building a Climate-Resilent Banking Industry for Singapore
Parliamentary Speech for Banking (Amendment) Bill, 6 Jan 2020
Mr Deputy Speaker, I stand in support of this Bill that seeks to remove the two-tiered banking system that has been in place since 1968. It also seeks to consolidate the licensing and regulation of merchant banks under the Banking Act, in an effort to update and strengthen our regulatory framework in light of international and industry developments.
Yet there is one significant and glaring development that we must talk about in updating the Banking Act. As we speak, ongoing wildfires in Australia have burnt through 5 million hectares of land costing A$240million in claims so far. Severe floods have ravaged much of Jakarta last week. With the growing prevalence of climate-induced events in the world and specifically in our region, there is an urgent need to safeguard financial assets yet be innovative in legislative interventions to reduce future risks to Singapore’s banking industry.
Don’t take my word for it, Mr. Deputy Speaker. The Network for Greening our Financial System, or NGFS formed by a group of central bankers and supervisors worldwide, noted that climate risks “could be larger, more widespread and diverse” than any other structural change. Given that it will come from all sectors and geographies, it is clear our financial system is exposed. Regulatory frameworks around climate-related risk management will allow for a systematic adoption of practices for the accelerated transition towards a sustainable banking sector. As a founding member of the NGFS, MAS must lead and contribute in this area.
So Sir, as we consider improving and updating regulations on the banking industry with this Bill, I would like to use this opportunity to raise considerations and suggestions from the groups I work with which we hope will inform the next round of amendments of the Banking Act for a sustainable and resilient financial system.
Regulatory framework and roadmap for a sustainable financial system
In his speech on “Green Finance for a Sustainable World” last November, Minister Ong highlighted three key areas to build a financial industry resilient to climate change risks, namely: measuring, mitigating and disclosing these risks. I agree broadly with the identified areas but the devil, as we know, is in the details.
First, measuring risks. We know that bookkeeping carbon emissions produced by assets on a bank’s balance sheet is always a challenge. However, here in Singapore, existing avenues such as The Carbon Pricing Act already allows banks to obtain carbon emissions-related data and estimate their borrower’s exposure to carbon regulation and transition risks. Facilities with higher than 2,000 tCO2 emissions report their emissions to NEA (National Environmental Agency). Such data should be used for carbon risk assessment and be mandated for reporting by SGX-listed companies. Jurisdictions like Hong Kong already requires this. Mr. Speaker, we should institute this so that our banks have clear and comparable data to measure the risk exposure of their public-listed clients.
As a former corporate banker myself, I would even push for data collection beyond just carbon emissions data. Our bankers must also obtain information from borrowers to understand where business value could be at risk. The 2011 floods in Thailand are a critical example of how risks could be embedded in the supply chain and may not be obvious through a carbon data metric. Operating loss from the floods incurred by Toyota and Honda increased by 37% and 55% respectively in 2011. This magnitude of loss can significantly affect debtors.
Metric selection is also critical. Climate change risk has a long-tail and is widespread. Credit risk metrics have historically been insufficient in addressing tail-end risks. Metrics that simply average potential risk across multiple years underestimate potential impact. Solely focusing on high-carbon assets is a good first step but still insufficient. Stress testing portfolio risk is also an important part of risk management. Stress test scenarios should be centrally-developed, not individually designed, to ensure that there is alignment to the Paris Agreement target and geographically-relevant worst case scenarios.
Second, mitigating risks. We must applaud Singapore banks for moving quickly in announcing policies to cease financing new coal power plants. Two out of three banks will not be increasing their exposure to the transition risks of this industry. As more large banks and insurers decide to divest from coal power development, banks that continue to consider such projects are exposed to increasing risks that will be harder to mitigate.
While The Association of Banks in Singapore, or ABS, has Responsible Banking Guidelines and a haze toolkit, these are voluntary standards. Bangladesh already has a mandatory environmental risk management guideline for Bangladeshi banks. In terms of international alignment, we note that only one Singapore bank is a signatory to the Equator Principles and none have signed the United Nations’ Principles of Responsible Banking. Mandatory standards in Singapore and international alignment are key signposts that our banking industry is robustly equipped to mitigate environmental, social and governance risks, particularly around climate change.
Lastly, disclosing climate risks. As this Bill considers the publication requirements of banks under Clause 12, we should also consider the disclosure of climate risks. The Governor of the Bank of England, Mark Carney, said that “To bring climate risks and resilience into the heart of financial decision making, climate disclosure must become comprehensive”. Investors are demanding more. Commonwealth Bank of Australia was sued for misleading investors by failing to disclose climate-related risks in its 2016 annual report.
According to WWF Singapore’s recent review of ASEAN Sustainable Banking Regulations, only Malaysia has firmly expected banks to assess,mitigate and publicly disclose their portfolio-level exposure to material environmental and social or E&S risks (including climate risk), including information on transactions assessed/escalated/approved with conditions. Singapore should be requiring our banks to do the same. Accounting for climate risks is hard work, but there are existing networks like the Pilot Project by UN Environment Programme Finance Institute (UNEP-FI) on Implementing Recommendations by the Taskforce for Climate Financial Disclosures (TCFD) as well as the Partnership for Carbon Accounting Financials (PCAF) that can support our banks in this process.
Mr. Deputy Speaker, given the above, I would like to seek the Minister’s clarifications on the following:
- Will we consider a timeline for mandatory TCFD disclosures for financial industries as well as listed companies, since voluntary regimes are typically not useful in generating comparable and usable industry wide information?
- Is the Minister looking at a supervisory engagement roadmap on climate change? The Bank of England’s Prudential Regulation Authority outlined in April 2019 that it is intending to embed measurement and monitoring of climate risks into its supervisory engagement.
- Will MAS support the banking industry with centrally-developed stress test scenarios that incorporate the views of experts and civil society?
- Will the Minister consider leading an ASEAN taskforce that embarks on a bottom-up modelling of business risks from climate change across our region, including the supply chain impacts across borders?
Green Financing Development
Mr. Deputy Speaker, the UNEP and DBS released a report called “Green Finance Opportunities in ASEAN” in 2017. Green investments needed in ASEAN region amounted to US$3 trillion between 2016 and 2030. Beyond this being a business opportunity, accelerating the growth of green finance reduces instability to our financial system in the future. As NGFS noted, “the impacts of climate change could be irreversible, if not mitigated.’’
According to their 2018 Sustainability Report, DBS provided 2.4 billion Singapore Dollars of sustainable funding. While our Singapore banks have all been highly positive on the green finance opportunities, there is still much we can do.
A number of countries have established national green banks to provide initial funding to develop clean energy, transport, energy efficiency markets. The Green Bank Network, based out of Washington D.C, currently consists of 15 national, state or city level member banks that aim to catalyse green financing. This includes the Clean Energy Finance Corporation (CEFC) of Australia. In its latest annual report, CEFC has made A$2.3 billion of commitments, and every A$1 spent, has brought in A$2 of accompanying private investment. The UK government seeded the UK Green Investment Bank in 2012, now a commercially-owned entity under Macquarie Bank, that continues to deploy green capital successfully.
Mr. Speaker, as we debate today on improving and strengthening our banking industry with this Bill, I would like to seek the Minister’s clarification on our plans for national green banks and green financing, including the standards for green loans much like we have in ASEAN Green Bond Standards which recommends disclosure and external review of impact.
Digitisation of finance and sustainability
Mr Deputy Speaker, the financial industry has been all abuzz with the opening of 5 digital bank licenses by MAS, the deadline was just last Tuesday! In our licensing considerations for these digital banks, we have made provisions to enable new players that have regional reach and diverse customer bases. We must therefore incentivise and harness the innovative essence of these new digital partnerships. Not only to encourage the collection and use of new data but also to create new sustainable financing solutions.
For example, ING Real Estate Finance and a partner launched ING REF Sustainable App in 2016. Within 2 years, it helped identify 35million Euros of potential energy cost savings within its real estate portfolio.
In Sweden, “Green Asset Wallet” built by a consortium of financial institutions, research institutes and fintech partners will help validate green claims of green debt.
Can the Minister please clarify if sustainable finance will be a key component of our digital bank roadmap for Singapore?
Prime Minister Lee noted in his recent New Year message that “A Singapore turned inward cannot survive”. Indeed, we are and always will be an open economy. Financial services directly contribute a significant 13% or S$64billion to our GDP in 2018, its indirect contribution fuelling the rest of the economy is clearly way more. The development of Singapore as a sound and reputable international financial centre is underpinned by the consistent high standards of financial regulation that allows well-managed risk taking and innovation.
Mr. Deputy Speaker, the eminent economist Professor Hyman Minsky, famous for predicting the subprime crisis and the ‘Minsky Moment’, noted that financial crises are caused by hidden risks building up on balance sheets. Given what we now know of climate change and its impact from science and data, we absolutely cannot let such risks build up with little or no visibility.
Large institutional investors like Aviva Investors share the same view. Aviva’s Chief Investment Officer said recently, quote “[understanding climate risk] isn’t an exercise in trying to save species and habitats — this is also about protecting people’s retirement income and their investments.” (unquote)
Smart regulation has allowed MAS to be nimble and adaptable as a world-class regulator and central bank. The Authority is also known for its “regulatory sandbox” approach, or sometimes described as “regulation running alongside innovation”. I am aware MAS is planning a public consultation exercise in 2020 (earlier than later, I hope) to inform the upcoming Guidelines for Environmental Risk Assessment.
We must act with the fierce urgency of the now. I look forward to the Minister’s clarifications on what I’ve outlined above, and his assurance that the Authority’s regulatory roadmap is running alongside, if not ahead of, this climate crisis so as to build a climate-change resilient, robust and responsible financial industry for Singapore.
Thank you.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Anthea Ong is a Nominated Member of Parliament. (A Nominated Member of Parliament (NMP) is a Member of the Parliament of Singapore who is appointed by the President. They are not affiliated to any political party and do not represent any constituency. There are currently nine NMPs in Parliament.)
The multi-sector perspective that comes from her ground immersion of 12 years in different capacities helps her translate single-sector issues and ideas across boundaries without alienating any particular community/group. As an entrepreneur and with many years in business leadership, it is innate in her to discuss social issues with the intent of finding solutions, or at least of exploring possibilities. She champions mental health, diversity and inclusion — and climate change in Parliament.
She is also an impact entrepreneur/investor and a passionate mental health advocate, especially in workplace wellbeing. She started WorkWell Leaders Workgroup in May 2018 to bring together top leaders (CXOs, Heads of HR/CSR/D&I) of top employers in Singapore (both public and private) to share, discuss and co-create inclusive practices to promote workplace wellbeing. Anthea is also the founder of Hush TeaBar, Singapore’s 1st silent teabar and a social movement that aims to bring silence, self care and social inclusion into every workplace, every community — with a cup of tea. The Hush Experience is completely led by lovingly-trained Deaf facilitators, supported by a team of Persons with Mental Health Issues (PMHIs).
Follow Anthea Ong on her public page at www.facebook.com/antheaonglaytheng