Unlike their European counterparts, banks and investors in Southeast Asia are slow to get on the bandwagon of sustainability, with most failing to understand the opportunities that are available and that they actually could play a powerful role in engaging the private sector and smallholders to go the green path, a sustainable finance engagement expert said.
Keith Lee, Sustainable Finance Engagement Manager with WWF Malaysia, said that while many European banks have in recent years already been active in sustainable finance in the region, their Southeast Asian counterparts have remained oblivious to or ignorant of the opportunities and gains offered by this sector.
“Overall banks in the region are not quite getting there and they need to understand that there are opportunities, they need to understand that they have a role to play,” Lee told the Palm Scribe in an interview on the margin of a recent annual roundtable conference on sustainable palm oil in Kota Kinabalu, in the Malaysian state of Sabah.
He said there was a need for banks and investors to understand that on the risk management side when they account for environmental and social issues, it can affect the long-term performance of the companies that they are investing in or the companies that they are lending to. Banks or investors that do not manage the sustainability of their clients may later be affected by their client’s ability to repay them.
There were also opportunities for them to drive sustainability development by looking for smaller projects, less established businesses that are in need of sustainable financing in order to grow in a sustainable way, Lee said.
Lee believed that one of the major factors that prevented banks in the region from getting engaged in sustainability financing was a lack of capacity.
“To start with, they may not understand how environmental, social risks can actually affect their portfolios, they may not understand what the opportunities are out there,” he said.
He added that there was also the risk issue, with banks and investors still holding to the traditional view that the sustainability sector was a high-risk investment. Up to a certain point, many in the private sector, afraid to lose out to rivals, were just waiting for governments to come out with regulations that would require them all to get into the sustainability business, and therefore eliminate the fear that exacting sustainability from clients may prompt them to move to rival banks/investors.
Lee said that the business risks linked to investment in sustainability may now be lowered with a new financial instrument known as Blending Finance. He defined blending finance as taking public money from donors, from multilateral development banks, governments and so on, combine it with private money and lending this money to a particular project.
“Why do you combine the money?… If the project goes bad, you investors would get your money back first because as public institutions, we will take the loss,” he said, adding that such arrangement will allow loans to be made at a lower interest rate and basically attract private investment that would have otherwise not taken place.
He said that the currently available government fund, including the Palm Oil fund, would have a better impact when used in blended finance instruments.
“It would possibly be beneficial to do that because by allocating public money to this kind of blended finance, literally you are attracting private investment and you are literally able to multiply the impact of this public money,” he said.
Taking the example of replanting in Indonesian, government subsidies from the Palm Oil Fund would not only partly help smallholders replant their plantation but any benefit would stop at that.
“But if you put that money into these blended finance then for every one dollar of public money that goes in, maybe you are attracting five, six, seven dollars in private money, then your overall impacts are bigger,” said Lee.
Banks and investors are also more often than not unaware that they are actually in a position to get their client go on a green path.
“They have the power to engage with their clients and show the clients, here are the benefits of managing environmental and social issues, here are the benefits of being sustainable and we will work with you to develop plans to achieve these goals, under which conditions we will give you financing,” he said, adding that in many cases, it also created value for the client “because now we are moving to sustainability being good business.”
According to Lee, to address the risks of investing in smallholders, banks and investors should also start taking jurisdictional approaches and get more involved in jurisdictional approaches where they can work with the government to address governance conditions and work on frameworks to address major smallholder issues such as land tenure. They could also work with buyers and come up with solutions that would benefit all, such as giving buyer cheaper loans if they could persuade their suppliers and smallholders to only deal with sustainable palm oil.
A jurisdictional approach is a type of integrated landscape management, where the landscape is defined by policy-relevant boundaries and the underlying strategy is designed to achieve a high level of governmental involvement.
Lee said that another advantage of working at the jurisdictional level is that there would be more smallholders getting together, so the banks could and may want to give bigger loans.
Not to be ignored is the role that NGOs can play in pushing for sustainability.
As they work on the ground with local communities and local governments, they are able to convene this multi-stakeholder approach to put in together a project that better answer local needs, that has an impact that investors can look at and prompt them to decide to fund it, Lee explained.
NGOs can also help identify how to track the impact on the ground in the case of environmental and social issues, identifying the appropriate kind of metrics or standards, the tools, and indicators that can be used to track the impact of the project.
“Because ideally this would be based on science, that would provide a minimum level of credibility to investors and banks who want greater confidence that their money is actually contributing to an impact on the ground. Because that is what they are often required to report to the people whose money they are managing,” Lee said.
“So there is a big opportunity for Indonesian banks, Singapore banks, Malaysian banks, or banks from all over Asia, to take advantage of this opportunity because in sustainable development there is a big need for private investment to achieve SDGs and government money is only going to get us a small part of the needs. Also, agricultural investment is a key part of addressing climate change. To avoid deforestation and to do landscape restoration,” Lee said.
He pointed out that statistics showed that while agriculture and forestry and other land uses were contributing 24 percent of greenhouse gas emissions, they only received three percent of the climate finance.
He said it was important to make banks understand that sustainability presented opportunities and that they can take advantage through these blended finance instrument.
“More generally, you should be thinking about how your portfolio, overall, what percentage of the portfolio, is aligned with SDGs or aligned with the Paris Agreement and what percentage is not. Ultimately, it is about a transition from the old business model to the new one–sustainable model. Therefore, banks should think about the kind of criteria that they apply when they are lending to big businesses and that they can also be working with big businesses and encouraging big businesses to support smallholders,” Lee said.
When funding a big buyer of palm oil, he cited as an example, banks could offer a discount on loans if the buyers work with the suppliers and make the supplier in turn work with smallholders.
“So, banks and investors, they have this tremendous amount of influence but we are not seeing them take advantage of that really,” said Lee.
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