SINGAPORE: Companies with poor environmental practices will find it harder to get financing in future, as banks in Singapore will soon incorporate environmental, social and governance (ESG) criteria in their lending and risk assessment.
Amid the recent backdrop of hazy skies, there have been calls for banks to play their part by making sure the companies they lend to behave responsibly.
The latest set of guidelines released by the Association of Banks in Singapore (ABS) on Thursday (Oct 8) comprise three main elements - disclosure of senior management's commitment, internal controls that support responsible financing and raising staff awareness on ESG issues.
Said the director of ABS Ong Ai Boon: "This set of guidelines is not a silver bullet. We cannot guarantee that in the short term, it will solve this haze problem. Nevertheless, over the long term, with all these ESG criteria in the lending policies of banks, it will moderate and it must transform the operating procedures of the customers of banks. Hence, we hope that in the near future, these issues can be resolved with the concerted effort of all the stakeholders."
The ESG standards cover not just environmental practices, but also include labour standards, health and safety as well as corporate ethics and integrity.
As Singapore is a major Asian financial centre, the new governance criteria will have an effect on companies across the region. Observers have said that some banks already have sustainable lending practices in place and these standards can help formalise them. Overall, they said that it can help encourage more sustainable development, as banks have a central role in shaping responsible actions from their clients.
Ms Jeanne Stampe, Asia Finance and Commodities Specialist at WWF International, said: "If the cost of and access to capital is tied to sustainability performance, and you have banks that have sector policies in place, it effectively starves the fire of the fuel, because operators will find that they are locked out of certain pools of capital.
“All banks typically look to syndicate part of their loans especially the larger loans. If you have some of the larger banks not wishing to lend to a particular operator who is refusing to accept ESG covenants in the loan agreement, then the smaller banks may decide that they do not have such policies and take on the client, (but) will find themselves saddled with the entire loan, they can't syndicate it out."
In response to queries, the three local banks said they are strengthening policies to comply with the new standards. Some said they will reassess or even refuse financing to companies that are in breach of standards.
Going forward, banks in Singapore will be expected to disclose the senior management's commitment to responsible financing in their 2015 Annual Report. ABS said it hopes to see the banks fully comply with the guidelines by 2017.
The Monetary Authority of Singapore said in a statement that it welcomes the guidelines, and it will work with ABS to monitor the adoption and implementation of the guidelines.