Good credit rating, but did you pollute the earth?

As the haze thickened over Singapore skies in the last two months, netizens began circulating social media posts calling for a boycott of products made by companies accused of slash-and-burn tactics that cause the annual pollution.

What started as an online movement has crystallised into action on the ground, with several supermarkets having withdrawn goods made by companies linked to the haze.

Imagine the double whammy such companies would face if, even as their sales were hurt, their source of funding also dried up.

Last month, the Association of Banks in Singapore (ABS) appeared to be aiming to deliver just such a blow, by encouraging banks to lend responsibly. The ABS issued guidelines to get banks to take extra care when lending to firms that might disregard environmental or corporate governance standards.

Cynics may note that the guidelines have no teeth. ABS is not a regulator - it is a body made up of the banks themselves - and so it cannot enforce the recommendations it has set out. However, the move is in line with global trends which call on banks to self-regulate in this area.

For example, 81 financial institutions in 36 countries have voluntarily adopted the Equator Principles, a framework for determining, assessing and managing environmental and social risk in projects.

Banks that have adopted the Equator Principles, such as Barclays, HSBC and Standard Chartered, promise to develop and implement best practices in responsible lending and disclose their policies on their websites.

The ABS guidelines, which reflect much the same principles, are a step in the right direction that, with enough public awareness and support, could garner some real results.


According to the ABS guidelines, responsible lenders take into consideration a company's environmental, social and governance practices. So, for example, a bank assessing a new client would look at factors such as its reputation, whether its practices cause deforestation or pollution and how it treats staff and engages with the community it operates in.

The guidelines highlight eight industries with "elevated risk" that banks should keep in mind when developing their responsible financing policies. These include forestry, infrastructure, mining, chemicals, agriculture and energy.

They provide three broad principles for banks to adopt. The first principle is disclosure - banks have to state in their annual reports and on their websites their commitment to responsible financing and their policy framework in supporting responsible financing, by the end of 2017.

The second is governance - banks should allocate resources to implement a responsible lending framework and ensure internal controls. This means having a separate set of responsible financing policies and procedures or embedding responsible financing practices into their existing policies and procedures.

The third principle calls for capacity building - banks are to raise staff awareness and build management capacity on responsible financing.

To help the banks in this area, the ABS will work with the relevant international organisations, regulatory bodies, civil societies and non-governmental organisations to conduct seminars for bank staff .

By the end of 2017, banks have to have implemented a policy framework to support responsible lending and publish the framework in their annual reports and on their websites.


However, the guidelines stop short of suggesting actual practices that banks could adopt to ensure responsible lending; nor do they include any penalties for banks to mete out on clients that have been caught engaging in bad behaviour.

Rather, it is left to the banks to decide what "responsible" lending really means to them and how they would like to go about making it happen. So it remains to be seen, at the end of 2017, what policies the banks will come up with to strengthen their lending processes.

A look at what banks that have signed on to the Equator Principles have done could provide some clues as to what we can expect.

Take the Australia and New Zealand Banking Group (ANZ).A simple declaration on its website states that "ANZ... will not provide project finance or project-related corporate loans to projects where the customer will not, or is unable to, comply with the Equator Principles".

The bank also issues an annual corporate sustainability review which provides more details about the efforts it made in the past year to promote sustainable development, challenges it faced and areas where it can improve.

In its last report published in December last year, ANZ noted that "if prospective or existing customers do not meet our standards and they are not willing to adapt their practices, we decline funding or exit the relationship".

In some cases, such as high-impact mining activities, the bank says it appoints a technical expert to provide advice.

Different banks present their policies and efforts in different ways.

Visitors to HSBC's website can download documents detailing the bank's policies with regard to seven high-risk industries.

The document on forestry notes, for example, that the bank's policy is not to knowingly provide financial services to customers involved directly, or indirectly, in activities such as illegal logging or deforestation.

ANZ adopted the Equator Principles in 2006. HSBC, Standard Chartered and Credit Suisse, alongside others, committed themselves to the principles even earlier, in 2003.

For Singapore banks, though, it is still better now than never. The addition of Singapore banks to this global movement bodes well for sustainable development in the region over the long term.

Of course, for the ABS guidelines to be truly impactful, local banks will have to form a unified front. They must all commit to financing only ethical and environmentally sensitive companies, and cut off funding to irresponsible clients.

This ideal may take some years to be realised, given the slowing economy that will surely put pressure on bank margins.

Even then, it might still not be very effective, noted Mr Jungkiu Choi, a financial services partner at A.T. Kearney.

"If only Singapore banks do it, what about Malaysian, Indonesian or Thai banks? Those companies could simply go to a different country to get funding," he noted, adding that there would be little incentive for regional banks to boycott such clients too.

"With Singapore banks out of the picture, it reduces competition so those banks in other ASEAN countries could charge higher lending rates to polluters and unethical firms, and profit more off them."


However, this is not to say that the ABS guidelines will have no impact at all.

Singapore is, after all, a regional financial hub. Many regional firms obtain trade and project financing in Singapore or from Singapore-based banks. They may not like to be assessed on more than financial terms when applying for a loan, but they would find it tough to bypass Singapore's financial industry altogether, without hurting their own businesses.

The fact that the ABS has come up with this list of guidelines is a positive sign that banks here are aware of the important role they can play in influencing the behaviour of the companies they finance.

In fact, smart banks dealing with a company with questionable ethics or environmental standards can work towards building a solid relationship with it over time, with an eye towards nudging its managers to adopt better practices. That way, the client does not simply run to a competing bank.

The move to issue the guidelines publicly is also a clear sign that banks recognise how one of their most-prized possessions - their reputation - can be tarred by association with a company caught behaving badly.

When ASEAN governments first signed the Agreement on Transboundary Haze Pollution in 2002, few believed that it would achieve much, especially since Indonesia did not sign it. But with social media spreading news and views faster than ever before, and members of the public putting ever more pressure on their governments to act, corporate culprits are now being named and shamed, quickly leading to product boycotts.

So it is in the banks' best interests to start working with their riskier clients today to get their practices ship-shape or risk being named and shamed themselves if they are someday found to be funding a big polluter or human rights abuser.

As Mr Choi quipped: "Once people start asking, 'Do you want to put your money in a bank that lends to polluters?', there will be trouble."

This article was first published on Nov 4, 2015.
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