Sustainability continues to accelerate in terms of its importance and level of priority to banks and their clients. It was important as a ‘pillar’ within a corporate or bank strategy a few years ago but now it has moved to being an integral part of every business strategy. When a bank looks at incorporating sustainability into its principles and practices it looks at three broad areas: strategy, operational effectiveness, and regulatory compliance & reporting.
From a strategic perspective, we focus on our path to our net-zero commitments; the quality and breadth of our ESG-connected product range; how ESG is incorporated into our target operating model; and how we, as a bank, are engaging with our clients regarding their transition strategies.
From an operational effectiveness perspective, how ESG is considered while a) developing products and services (including our processes, systems and controls), and b) within functional decision-making.
From a regulatory/compliance perspective, it’s understanding the ‘regulatory present’ and horizon/future requirements. What information of a financial and non-financial nature needs to be measured, reported and disclosed.
Could you provide an overview of the initiatives and commitments undertaken by banks in relation to green climate and sustainable finance?
MUFG was the first Japanese bank to join the Net-Zero Banking Alliance. This industry-led, UN-convened body currently represents 129 banks from 41 countries and 40% of all global banking assets. It is committed to aligning lending and investment portfolios with net-zero emissions by 2050. We are aiming to be net-zero on greenhouse emissions in our own operations by 2030 and our finance portfolio by 2050.
MUFG demonstrates its commitment to sustainability by setting ambitious global targets and meeting global standards. For instance, we have global sustainable finance targets of JPY35tn, including JPY18tn for the environment by 2030. There is also a commitment to reduce our Project and Corporate Finance exposure to coal-fired power generation to zero by 2040.
Additionally, we participate in key global and regional initiatives such as ‘Climate Action 100+’, ‘UN Global Impact’ and the ‘Japan Climate Initiative’.
As part of MUFG’s chairmanship of the Net-Zero Banking Alliance ‘Financing and Engagement’ workstream, we were proud to produce a report – the “NZBA Transition Finance Guide”. This guide outlines what MUFG strongly believes: that engaging with clients and encouraging their emissions reduction is the preferred strategy to reduce our financed emissions. MUFG is working on carbon neutrality for all sectors, including those with high emissions and those that are hard-to-abate, and has already started working with customers in Japan and globally (including Southeast Asia).
There are a number of steps outlined in the guide to facilitate this client engagement. One of the key ones is product development. MUFG is proud to have a growing range of ESG-linked products to help our clients manage their transitions and meet their sustainability goals. Within the Transaction Banking space, we have launched ‘Green Deposits’, where clients have the opportunity to invest in MUFG’s established and growing portfolio of sustainable lending. We provide a broad range of sustainability-linked solutions now including Green Bonds; Sustainability-linked Projects and Structured Finance Loans, Carbon Permit Financing, and ESG Ratings services. In addition, we plan to launch of range of Trade Finance related products during 2023.
There is no one industry framework or standard, and if there was, it would need to cover different financial products, industry sectors and types of bank clients. Instead, different institutions representing different industry bodies have created their own frameworks to aid the finance market. Banks have tended to create their own internal standards and benchmarks based on these. They include the International Capital Market Association’s Transition Finance Handbook; Climate Bonds Initiative (CBI); and the EU Taxonomy.
From a Trade Finance perspective, the ICC (International Chamber of Commerce) recently published its first wave of guidance under its ‘Sustainable Trade Project’. This is a critically important attempt to create a universal definition and standard (including measurement) for sustainable Trade Finance. The influence and central positioning of the ICC in world trade make this a significant and valuable effort that has a high probability of making a difference. The Wave 1 framework was published in Q4 2022 and addresses both environmental and socio-economic impacts against five key components of trading activity. It bases itself on key benchmarks already available in the finance industry such as the International Trade Centre’s Standards Map which does an excellent job of giving guidance on the relevance of certain ESG factors as they relate to different industry sectors.
The Finance industry is working hard to crystalize a common set of standards and benchmarks but more progress and collaboration is required.
The way in which banks wealth and fund managers have created and operated their ESG-linked products in the last few years has not received much attention from regulators. However, this is now changing with notable new regulations such as the EU’s Sustainable Finance Disclosure Regulation (SFDR) which imposes requirements on more transparent reporting for ESG funds. Other countries are following suit and the banking industry is facing mounting pressure not only from regulators but also clients and investors who are increasing their own scrutiny of the effects investment decisions have on the climate and society.
To meet these expectations, banks must adapt their systems to collect and report on a broad range of ESG data. Moving towards this goal will require significant changes to IT infrastructure, from applications to data integration, architecture and governance. However, IT change takes time and, in the meantime, banks are finding alternative ways to manage and capture ESG data on financed emissions models, climate risk models, ESG scorecards, climate stress tests, and climate-adjusted ratings. ESG data must be woven into existing processes such as credit approvals and strategic decision-making; as well as internal and external reporting processes.
This happens on many different levels within the financial services industry. As our clients, regulators and other stakeholders’ centrally position ESG-related objectives and priorities so too it ensures that these points are also central to bank strategies. Banks now employ specialist ESG experts to constantly review, manage and set policies within organisations to ensure sustainability is thought about in everything we do – from product development to making credit decisions.
The Net Zero Banking Alliance is a major step forward in boosting collaboration in the industry. MUFG chaired one of the working groups that produced key proposals and actions on transition finance. Another good example is the ICC working group on Sustainable Trade Finance – again, a collaboration between banks and industry bodies to set a standard framework – and importantly a standard method of measurement – for ESG financing.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now