Unlocking the potential of sustainable lending in Asia

Aligning lending practices with rising sustainability expectations is gaining traction in Asia, but accelerating the green transition will require open and collaborative data ecosystems.

By Manish Joshi, Managing Director, APAC, Lending, Finastra.

Environmental, Social, and Governance (ESG) principles have transitioned swiftly from being a ‘nice to have’ to an essential component of corporate strategy and sustained business success. The banking sector stands at a crucial crossroad in this context. It's not just about banks needing to evaluate the ESG influence of their own internal operations; they must also be able to showcase their commitment downstream through responsible and sustainable lending practices.

Indeed, the pressure for businesses and their supporting banks to embody ESG principles in all their activities is growing among customers, employees, investors, and other interested parties. Given the rising pressure from stakeholders including NGOs, it's critical for banks to examine the composition of their loan portfolios carefully.

Expanding lending opportunities in Asia
The good news is that there is an expanding pipeline of debt opportunities across the sustainability spectrum for banks in Asia to capture. S&P Global Ratings recently reported that global green, social, sustainable, and sustainability-linked bonds (GSSSB) issuance volume in Asia Pacific could increase 20% to hit US$240b in 2023, outpacing global growth, with China, South Korea and Japan being the most active markets. Moreover, despite a challenging lending environment more generally, market participants expect green bond issuance in regional economies to pick up in the second half of 2023 as interest rates begin to peak around the world.

Asia has also seen some significant and innovative green financing deals in recent years. In 2022, Ant Group announced the conversion of a syndicated credit facility into a US$6.5b sustainability-linked loan, marking the largest of its kind in the region at the time and the third largest globally. In the same year, Sembcorp secured a five-year $1.2b syndicated sustainability-linked revolving credit facility, the first and largest SORA-based sustainability-linked loan for an energy company in Southeast Asia.

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This is not to mention the sheer volume of debt financing also flowing into renewable energy and green infrastructure assets in the region. It was estimated that energy and buildings combined accounted for 79.5% of the cumulative use of proceeds of green-labelled debt, encompassing green loans and bonds, issued from the ASEAN region between 2016-2021.

Many of these projects would have likely found it hard to secure funding a decade ago, but now enjoy lending options with advantageous terms from a variety of traditional and non-traditional lenders looking to position their portfolios for the green transition.

Practical challenges stand in the way
Despite all this momentum, green lending is still just a fraction of total bank lending. For all the assets that can be defined as ‘green’, there are several times more that are ‘greening’ or working to improve their green credentials. Then there is also a proportion that isn’t making any plans for change. To meet ESG objectives, banks must be willing to extend their funding beyond projects that are already deemed green and back industries and companies striving to improve their ESG performance. 

To accomplish this, banks need to document the rate of improvement over time. Assessing a company's position on the ESG spectrum can be challenging, given that not all firms receive a rating from a sustainability agency. Banks need a uniform and systematic evaluation method, eschewing 'greenwashing' by applying definitions too flexibly. Assessments should focus on tangible improvements companies are undertaking presently and in the immediate future. These insights are far more worthwhile than targets set a decade or more in the future.

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Another concern involves lending to companies active in sectors now considered unsustainable. By refusing to finance polluting assets and industries with a lifespan of 20+ years, we risk creating 'stranded assets' that nobody wants to fund. Regulators and governments must prevent the emergence of a parallel industry that neglects ESG principles. They will also want banks to incentivize businesses to reform their practices wherever possible.

This is easier said than done. Assessing a company’s position on the ESG spectrum is like trying to hit a moving target. There are a variety of methodologies to assess ESG performance and even if a company has an ESG rating from a reputable third-party there is little consistency between agencies. Banks need a uniform and systematic evaluation method, that avoids ‘greenwashing’ by applying clear and consistent sustainability criteria to the credit decisioning process.

Assessments should focus on the tangible improvements' companies are undertaking presently and the plans they have for the immediate future. These insights are far more worthwhile than targets set a decade or more in the future and will be imperative in bolstering confidence in the green transition.

The need for consistency and standardization is also reflected in the Monetary Authority of Singapore’s recent proposal for a code of conduct for providers of ESG ratings and ESG data products, stressing the importance of quality, reliability and transparency of ESG ratings and data products in Singapore. 

An open approach to data ecosystems
Looking forward, the data and technology demands being placed on banks is only set to grow. Financial market regulators in countries like Singapore and Hong Kong have already started progressively integrating environmental risk into supervisory frameworks, even rolling out various climate scenario analysis guidelines and stress tests for the banking industry in recent years. As monitoring becomes commonplace in many markets, regularly gathering and analyzing data across a complex international loan portfolio will be an intimidating prospect without the right technology. 

For instance, blockchain technology can monitor a product's lifecycle from beginning to end. This can encompass everything from raw material sourcing, transportation and production processes, and carbon footprint, all the way to the point of sale. Technology can aid companies in demonstrating their compliance with strict ESG standards, thereby earning quality control marks that signify their commitment to specific E, S and G goals.

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Banks need solutions that will help them capture and process all this information so that they can measure and understand the percentage of assets in their lending portfolio that are green or ‘greening’. Embedding this intelligence in their lending process can help them track the ESG performance of each company they lend to, factoring this into future loan pricing and risk management processes. 

To arrive at this future, financial technology companies need to adopt an open architecture approach and work collaboratively with banks, governments, ESG specialists, and other stakeholders to make high-quality data more accessible and facilitate the delivery of solutions that aid in more intelligent lending decisions. With this knowledge at their disposal, banks can ensure future loan portfolios are as sustainable as possible, accelerating progress toward ESG goals for the benefit of all.