Pushing banks towards green finance

In an earlier article in this space, I mentioned that “the Bank of Thailand should integrate [Thailand] taxonomy into its reporting and disclosure regulations for the financial sector, as the EU has done, because the public scrutiny of activities in the banking sector can and should be part of the learning process on the journey towards greener finance”.
Thailand taxonomy is a green taxonomy that focuses on environmentally sustainable economic activities. A green taxonomy includes a set of criteria (technical or qualitative) defining or listing activities that are deemed green.
Integrating Thailand taxonomy into disclosure regulations should give banks more incentive to seriously plan and publish their transition plans, especially for financed emissions, which are the bulk of every bank’s scope three emissions. That will enable investors and the public to gauge how carbon-intensive each bank’s loan and investment portfolio really is. Therefore, they would be able to come up with better investment and engagement decisions and focus demands on more carbon-intensive banks.
As of September, Thailand still lacks a suite of public policies and regulations that are necessary to propel a meaningful economy-wide decarbonisation and just energy transition. For example, there is no mandatory carbon pricing regime of any kind, no mandatory carbon accounting, no coal phaseout date, and the net zero goal of 2065 is 15 years behind most countries. Finally, the draft 2024 Power Development Plan (PDP2024) makes no mention of rooftop solar and still makes room for 6,300MW of new natural gas power plants by 2037 without factoring in the potential added costs from future carbon tax and carbon capture and storage (CCS) technology.
Even with the lack of enabling public policies and regulations, transition risks are real enough for Thai banks. As Frank Elderson, member of the executive board of the European Central Bank (ECB) put it in a blog post titled “Failing to plan is planning to fail” in January — “Alarmingly, the latest scientific evidence indicates that we are currently on a global heating path of 3C. Through the risk-based lens of a banking supervisor, this is seriously concerning — the longer we wait to transform our economy, the more disruptive the transition and the greater the risks that will materialise on banks’ balance sheets. It is therefore crucial for banks to identify, measure and — most importantly — manage transition risks, just as they do for any other material risk.”
Since Thailand is vulnerable to the myriad impacts of climate change and an open economy that continually tries to court foreign investment, the failure of Thai banks to conduct and implement a credible transition plan for their carbon-intensive loan and investment portfolios could spell disaster not only for their balance sheets but the Thai economy as a whole, since traditional bank financing is still the main source of financing here.
In short, meaningful transition finance cannot exist in Thailand if banks do not develop a credible transition plan.
What should be the first step towards a credible transition plan? Probably not helping to advertise financial products that big banks are offering to help clients decarbonise, as the Bank of Thailand has done in its “financing the transition” project (launched in August). The first logical step, according to Mr Elderson of the ECB, is “acknowledging the materiality of the risks” followed by measuring transition risks “in a forward-looking manner”.
Even though quantifying transition risks is challenging, there already exist numerous guidelines and recommendations to assist banks on their transition journey. For example, as of September, six Thai banks already disclose climate-related risks and opportunities in an annual climate report by applying recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD): Bangkok Bank, Kasikornbank, TMBThanachart Bank, Siam Commercial Bank, TISCO Bank, and Government Savings Bank.
The quality of disclosure varies widely across these six banks, and most banks do not disclose crucial information that are important building blocks for a transition plan, particularly internal carbon prices and the ratio of carbon-intensive assets to total assets. Given this situation, the Bank of Thailand and other financial regulators can join forces with the Thai Bankers Association to invite international financial organisations and alliances to conduct more focused capacity-building activities for Thai banks, with the goal of publishing a credible and practical transition plan.
An interesting bank-led alliance that could assist Thailand in this endeavour is the Net Zero Banking Alliance (NZBA), a bank-led alliance convened by The UN Environment Programme Finance Initiative (UNEP FI). Launched in April 2021, membership of NZBA today includes 145 banks from 44 countries, owning US $74 trillion (2.4 quadrillion baht) of total assets or 41% of global banking assets. CIMB from Malaysia is the only bank in Southeast Asia that has joined this initiative. Interestingly, CIMB was also the first bank in emerging markets to announce its commitment to exit coal by 2040 and the first bank globally to announce a net zero transition plan for its palm oil portfolio.
All banks that join the NZBA must make five commitments signed by its CEO: transition the operational and attributable greenhouse gas (GHG) emissions from their lending and investment portfolios to align with pathways to net zero by 2050 or sooner, set targets for 2030 or sooner and a 2050 target within 18 months of joining, with intermediary targets to be set every five years from 2030 onwards, focus on the most carbon-intensive sectors where the bank can have the most significant impact for its first 2030 targets, annually publish absolute emissions and emissions intensity in line with best practice, and take a robust approach to the role of offsets in transition plans (i.e. using carbon offsets only for carbon removals to balance residual emissions).
Even banks that do not feel ready to join the NZBA and similar initiatives can benefit from the various guidelines that they produce. For example, the NZBA’s “Guidelines for Climate Target Setting for Banks” go a long way in both delineating the steps that banks can implement in setting net zero goals and corresponding transition plans for different sectors and reflecting major changes in climate science, regulation, data, and methodology in recent years.
To make a long story short, getting all major Thai banks to draft and publish a credible transition plan is a prerequisite to propelling meaningful transition finance in Thailand. I believe that anything else is a distraction at best and procrastination at worst, while physical and transition risks continue to materialise to wreak havoc on our economy and well-being.
Sarinee Achavanuntakul is Head of Research at Fair Finance Thailand and Director of Climate Finance Network Thailand (CFNT).