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How Asia-Pacific banking leaders can create a net-zero future
In this NextWave Banking in Asia-Pacific podcast episode, EY leaders and a guest speaker from UOB explore how to accelerate sustainability strategies in the Asia-Pacific banking sector.
In response to the need of moving toward sustainable banking, global banks have committed to bringing down emissions to net zero by 2050.
If we are to truly transform the global economy, we need a sea change in capital flows, and in the financial industry that guides them. Financial services organizations (FSOs) are central to this process. Many are setting increasingly ambitious targets to eliminate their own emissions, achieve net-zero “financed emissions,” support the transition of existing clients and fund new climate solutions.
How can financial institutions in Asia-Pacific set the right leadership vision as well as navigate the complexities of sustainability governance?
Join Eric Lim, Chief Sustainability Officer at United Overseas Bank (UOB); and Wolfram Hedrich, Partner, Financial Services Consulting, Ernst & Young Advisory Pte. Ltd., and EY Asia-Pacific Sustainability Leader; with Clare Sporle, Partner, Financial Services, Ernst & Young, who is based in Sydney, Australia.
Key takeaways:
In part one of this episode, the speakers explore:
Why bank leaders need to be better at articulating their sustainability vision.
What to consider as you establish your governance structures and execute to achieve that vision.
For your convenience, full text transcript of this podcast is also available.
Andrew Gilder
Welcome to the next episode of the EY NextWave Banking in Asia-Pacific Podcast. As many listeners are well aware, sustainability is now higher up on the list of every bank's strategic priorities. Investors, regulators and stakeholders across society are increasingly demanding greater transparency from financial institutions to enable sustainable finance in order to create long-term value.
For today's episode, I'd like to introduce Claire Sporle, our EY Financial Services Partner based in Sydney, who will be leading today's conversation with two special guests. Over to you, Claire.
Clare Sporle
Thanks for the introduction, Andrew. I'm glad to be part of this episode which you can listen to in two installments. Our special guests today are actually seated in Singapore. First, we have Eric Lim, Chief Sustainability Officer at United Overseas Bank, or UOB, as many of us will know it. And Wolfram Hedrich, EY Financial Services Risk Management Partner and our EY Asia-Pacific Sustainability Leader. In part 1 of this episode, we will explore why bank leaders need to be better at articulating their sustainability vision, and what to consider as you establish your governance structures and execute to achieve that vision. In part 2, we will go deeper into the role that data is playing in achieving bank sustainability goals as well as the importance of building trust and avoiding issues such as greenwashing. So, hello, Eric and Wolfram. Thank you for joining me today.
Eric Lim
Hi, Claire. Thanks for having me.
Wolfram Hedrich
Hi Claire. Glad to be here.
Sporle
Wonderful. There's a lot to cover in this very complex topic. I think it's best that we break it down a little bit. Let's start at the very beginning. As banks are focusing on sustainability, how important is it to build the vision? And should that vision be confined to the institution itself, or have a broader aspiration? And while you're thinking about the answer to that question, I'd also be really interested in your views on setting targets. And Eric, I'll pass to you first.
Lim
When we think about sustainability, we know that a lot of our impact and the ability to have either positive or negative levers are related to our financing activities. And in that way, what we try to do is, first and foremost, understand the key stakeholders we have within the ecosystem, what their needs and demands are, and how that relates to the core of our business model and strategy. And then try to ensure that our sustainability strategy and our business strategy are well-aligned to be able to execute from that standpoint.
A couple of the key stakeholders we found to be particularly influential or critical to address within banking, obviously, number one, our central bank regulators — understanding where they're going in terms of a national agenda, what they're hoping to be able to see from the banks that they regulate is important. The second one, is definitely our customers who, across various sectors, are also experiencing the change of transforming toward a sustainable or green economy, and understanding the opportunities, challenges, and risks that they may be facing, so that we can, as best as possible, serve those needs. So, I would say that those are two of the major forces that we found to be most critical when we're thinking about our sustainability strategy within banking.
Hedrich
Well, first of all, banks are part of the greater fabric of society. You have an economic role, and obviously, you need to answer to your shareholders for returns and to the regulator for the stability of the financial services industry. But there's also a broader social role that you play. And I think everything that you do on-plan, needs to keep in mind local necessities. In particular, when we're talking about climate change and decarbonization, that needs to come from a perspective or consideration of local needs. Then it's particularly important in ASEAN or greater APAC, because of the different stages of development that the countries that we're in are at.
So, I think the regulators, obviously, sea banks, are in a leading role and the catalyst for change, and by putting regulations in place want you to act first and drag the economy kicking and screaming into the low-carbon economy. But ultimately, this needs to be a fair and just transition. So, I think there's a broad group of stakeholders in terms of the general public that needs to be taken along as well. And the needs to be incorporated into that strategy and plan as well.
Lim
I think Wolfram brings up a really good point. When we think about sustainability, net-zero or decarbonization within the context of a developing economy, this very critical concept that Wolfram's talked about, the “just transition”, is the Finance Center for many of governments, real economy players, as well as financial institutions like us. And it very much comes down to defining what we mean by just transition.
And so, when you look at that definition, you begin to, very much to Wolfram's points, see the multiple interrelationships stakeholder groups you need to be addressing, in terms of needs, demands, and wants. And it is quite a complicated piece of work, Wolfram.
Hedrich
It is. So, fundamental transformation of our economic system that we're talking about, right? And that will take quite a long time, huge effort. And the real risk is that we're doing something on one side too fast before we have the counterbalancing parts on the other. What I mean by that is, yes, we can talk about decommissioning, coal power plants, but if we don't think about as well where the new jobs come from, we create more social instability and inequity that needs to be balanced. And disposal opportunity, but also in risk for financial institutions. Again, neo banking with both the corporates and the retail customers. So, finding that right balance I think is going to be the biggest challenge for us all in the coming years.
Sporle
Great. And that vision that you've talked through there is so compelling, in terms of the impact that it has so broadly across our economy. And Eric, you mentioned there — net-zero — and that's obviously a hot topic. That is a phrase that lots of people will hear frequently. So, perhaps we'll focus there next. Can you perhaps share your thoughts as to what net-zero, as a commitment, really means for a financial institution? And in your view, how should these institutions evaluate and implement a strategy to help to achieve that ambition?
Lim
When we talk about net-zero, I think it's important to frame the problem statement first. As of today, our economic model, in order to support everything we do, how we live, work, play, how we generate electricity, how we grow our food, and how we transport ourselves generates roughly 50 Giga tons of greenhouse gases into the atmosphere every single year. So, when we think about net-zero, we can get to net-zero by 2050 by holding our breaths, by not eating food, by not transporting goods or people around the world, as what Wolfram described.
So, the way we think about it is going to be the largest industrial revolution known to man that will cost upwards of $100 trillion of investments, capex, and business model transformations all to be executed within the next 28 years. And when you begin to contextualize it in that frame, you begin to see the huge amount of bursts build an opportunity in transforming the various sectors of the economy toward that net-zero future, but also the tremendous risks of not navigating that transformation adroitly and with great skill and with great speed. So, that's how, first and foremost, an FI thinks about net-zero within the real economy. And we obviously care, because we bank the real economy. So, as a commercial bank, we look at all of our clients across all of sectors. And our job is to help them get future-ready, to be competitive, to be a winner in a net-zero world, to be able to finance the transformations of their business models or to be able to support the growth of some of these new economies.
We have published targets for six sectors within the wholesale bank, and organized around two key ecosystems. The first ecosystem is energy, and the sectors covered there are power generation, oil and gas, as well as automotive being a downstream user of energy. For the built environment, we do completed real estate, we do construction, as well as steel. The reason we picked these six sectors to set on net-zero targets, number one, is they are very high emitting in terms of their greenhouse impact, and therefore, huge opportunity to be able to affect positive environmental as well as social change.
The second thing is these are the portfolios that are material to our portfolio, and therefore it is incumbent upon us to come up with the right go-to-market strategies, and engage our clients in the most constructive way possible to support them in their transformation. It is absolutely critical when we think about a bank and its net-zero journey, that we're not thinking of a cut-and-run approach. Because one of the things that's important for us to understand is you can achieve decarbonization by reshaping your financial portfolio away from hard-to-abate sectors toward the green economy. And that is important. But if you simply achieve net-zero by cutting and running, rather than leaning in and engaging with the hard-to-abate sectors, the real economy is not going to decarbonize, only your financial portfolio has. And that's not a win in the grand scheme of reducing 50 Giga tons of greenhouse gases to zero. So, that's kind of how we think about it.
Hedrich
On this point, I come with my question about the politically charged topic here. You were speaking at a conference on a panel this week, we're listening to your discussions. And at the very end, a member of the audience asked about providing financing to oil and gas industry. So, providing transition finance to fossil fuel companies. And you could see how visibly the entire panel scrummed and sat back, and didn't really want to answer that question. And it's a politically-charged question. Now, I'm not going to put you on the spot to answer this question, but maybe we can talk a little bit about why it is so politically sensitive.
Lim
Wolfram, you're talking about, for example, coal, for example, oil and gas. And I think those two asset classes need to be thought about slightly differently also, right? Coal, obviously, is a major source of energy generation, especially within developing ASEAN, which is where we have our footprint. But it's very clear that the more coal you burn and the longer you burn that coal, the more you're going to take investments away from renewables, the less you're going to be effective in transitioning toward net-zero for your economy. So, coal is one of those asset classes where we've basically decided that we're not going to add any more clients. And even with the clients we have, they have to have a strong transition plan.
We have a position on coal-fired power plants being we will not finance any new coal-fired power plants. And as the existing coal-fired power plant book comes up for refinancing, we will try to exit. Now, one of the interesting ideas you then bring up is a financing instrument that's come into the broader market, which is leaning in and actually financing the decommissioning of coal-fired power plants. And that becomes a very interesting and tricky conversation. Because at a time when a bank like UOB is trying to step away from coal and coal-fired power plants, there is actually a movement to finance coal-fired power plants from an acceleration of decommissioning approach. And the larger frame, those two thoughts are congruent. But when you get down to just the headlines, it looks horrific.
Hedrich
It's a real reputational risk.
Lim
Absolutely. So for a bank, like a commercial bank, trying to really do the best in putting forward their sustainability efforts here to come under the reputational pressure and risk of being associated with financing coal-fired power plants, albeit for the right intent, that is a tricky space.
Sporle
So, Wolfram, perhaps a question for you as well, in terms of what you're seeing around how banks best think around their current sustainability governance structures within groups, how much should be centralized versus decentralized, for example?
Hedrich
Yeah, it's a very difficult question to answer, because first of all, given what we just discussed, to say, all of the economy kind of effort, the same holds for financial institutions, internally, it isn't a whole of organization effort. That means you need to involve all stakeholders, from the frontline, from the business, to back office, to obviously sustainability departments, to the risk departments, finance departments, human resources — everybody has a role to play. And it's actually the same for us in EY. We have realized that whatever we do as a consultant in this business, will have a sustainability angle in the future.
So, our core business, there's almost nothing that does not relate to this topic and will have an element. And the same holds true for clients. And that, particularly in organizations, at times, it can be more siloed in their approaches with clearly defined responsibilities is a tough ask because now, you have a new topic that cuts across everything that we do and you need to find ways of handling this together. And a siloed approach, suffering, and responsibility very clearly does not work.
Lim
Wolfram, I'd love to jump in here, because I absolutely agree with you. And to Claire's question, how we set this up from a governance standpoint is actually critically important, and how you set it up as implication. So, let me share a bit of how we've done it in UOB, and we see different approaches across different FIs. We decided to set up a brand-new corporate function called the Corporate Sustainability Office that is led by Chief Sustainability Officer — currently, that's me. And me, together with the function, we report directly to the CEO. And that was important for us to set up straight from the get-go, because we wanted the entire organization, as well as our stakeholders outside the organization, to understand that sustainability was front and center, and fundamental to everything we do.
The second thing that we did was we then set up what we call a very strong Hub and Spoke engagement model, where everything that then happens within the business, as well as the key corporate functions, there is a strong Hub and Spoke partnership between the central office as well as each of our business units or corporate functions. And that's how we ensure that across the organization, sustainability is understood, integrated, actioned, and being held is fundamental to how business units and corporate functions go about their BAU.
But one of the things I then realized, now reflecting back, is we were very lucky, because we had this massive level of alignment all the way from the board, to CEO, the senior team, into then the sustainability team, then flowing out to the organization. And to our listeners on this podcast, just my two cents.
Hedrich
Well, yeah, I couldn't agree more. Particularly, in I would say, smaller institutions — the midsize and smaller institutions that we have here in the region — that might not always be the case right now. Particularly, here in the region, we still have many financial institutions with a strong investor base, that have a single large investor, that have a big traditional interest in that institution and a big say on the board. And then becomes even more important to get everybody on board and on that right target. And I've been involved in discussions on boards where even that fundamental question around net-zero and what do we publicly commit to, when do we commit to that, do we have to commit to that, can we avoid to commit or do we have to do it sooner rather than later, is not aligned at all and there's no alignment at all on that.
And if you start from that position, it's really hard to convince the entire organization that you're on a certain path. So, I completely agreed, the tone from the top needs to be very consistent, very clear, and needs to come from the board, not just from senior management.
Sporle
Thank you for listening to part one of this conversation. We look forward to you joining us for part two.
Gilder
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