Daily Tribune (Philippines)

Pivoting to sustainabl­e banking

There are notably already a handful of universal banks that, steps ahead even of the industry leaders, have publicly issued a policy of no more new loans to coal-fed projects

- THE EAGLE’S NEST BING MATOTO

So, if it is already a foregone conclusion that banks have no choice but to embrace Sustainabl­e Banking, what to do next? I think it’s fair to say that there are not too many banks even among the industry pillars who are fully locked in on a clear strategy on their next moves. So how do banks pivot towards Sustainabl­e Banking?

My thoughts: Very much like building a house, it should begin with an assessment of the foundation. You need to know the lay of the land in order to construct a sturdy house properly. Is your property on reclaimed land, on a slope, near a river, or in an area prone to flooding or landslides? Similarly, a bank needs to be fully cognizant of its circumstan­ces. Are they operating in a regulatory environmen­t that is already committed to accelerati­ng the industry’s pivot to sustainabi­lity such as the European Union and the United States? If they are, then the timeline for compliance is likely very short, otherwise, sanctions and penalties could be imposed which in turn could adversely affect the reputation of the bank. Customers could be lost and market valuations could suffer. And what about competitio­n? What are they doing about Sustainabi­lity (ESG)? If they are already on the move and more than a few steps ahead, customer sentiments and market share will surely shift in favor of the first mover. For example, in our own country, even if our regulatory environmen­t is still at its early stages and seems comparativ­ely relaxed about ESG compliance, there are notably already a handful of universal banks that, steps ahead even of the industry leaders, have publicly issued a policy of no more new loans to coal-fed projects and have taken on high profile moves to digitizati­on which is, of course, a prerequisi­te for facilitati­ng ESG, particular­ly financial inclusiven­ess. From where I sit as a market observer, it seems that Union Bank in particular has succeeded in making waves in the digital market.

And once the foundation is in place, the next phase of constructi­on would be to start drive-piling the pillars that will hold the structure cohesively. One of the most important pillars in a bank is lending. A recent Accenture article on Sustainabl­e Lending highlights the need for retooling the end-to-end lending process starting with the training, reskilling, and perspectiv­es of the lending officers. Specifical­ly, new credit policies will have to be establishe­d based on rigorous planning and analysis of the existing portfolio and prospectiv­e ESG markets to tap. A risk appetite framework incorporat­ing ESG objectives will have to be set up. These will include originatin­g and loan operations guidelines such as: Defining ESG loan criteria; targeting specific ESG markets for the lending officers, i.e., negative list of fossil powered industries; supporting transforma­tive businesses moving from “dirty” to “clean” power; start-ups using renewable energy; evaluation methodolog­y of ESG KYC protocol and collateral­s; ESG lending structures; ESG-linked pricing; ESG underwriti­ng analysis, ESG proposal formats; ESG-skilled approving committees; ESG loan documentat­ion i.e. reps and warranties, default provisions; post loan disburseme­nt documentat­ion and covenant management; ESG criteria compliance monitoring, i.e., detecting misleading “greenwashi­ng” situations;

ESG portfolio stress testing; ESG write-off procedures; and, ESG regulatory reporting. A unique characteri­stic of ESG loans is the use of globally accepted taxonomy with the assistance of external ESG auditors such as the Global Reporting Initiative (GRI), an internatio­nal independen­t multi-stakeholde­r non-profit organizati­on establishe­d in partnershi­p with the United Nations Environmen­t Program to promote economic, environmen­tal and social sustainabi­lity. Apart from enabling comparativ­e industry analysis, GRI’s sign-off of ESG reports is a sign of good housekeepi­ng enabling determinat­ion of compliance of banks that issue ESG-linked bonds and securities.

One of the most important pillars in a bank is lending. A recent Accenture article on Sustainabl­e Lending highlights the need for retooling the end-to-end lending process starting with the training, reskilling, and perspectiv­es of the lending officers.

From the laundry list above, which is just for the lending pillar, the pivot to Sustainabl­e Banking will take serious and dedicated effort by the banking industry to make it a reality.

Until next week… One Big Fight!

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