Just as we are prudent in our business practices to ensure financial stability through credit cycles, we are committed to mitigating ESG risks in our operations. We recognise that we have an important role to play through our business practices in helping our customers make responsible decisions and support sustainable development. The Bank has a dedicated ESG team with clear roles and responsibilities to ensure we implement our ESG strategy and comply with related policies.
In the area of responsible financing, we have integrated the principles of The Association of Banks in Singapore (ABS) Guidelines on Responsible Financing into our business model.
The MEC has oversight of ESG matters including climate change risks and opportunities which may impact our financing activities. The Credit Committee approves our Responsible Financing Policy, which is part of the UOB Group’s Corporate Credit Policy. This ensures that ESG considerations are integrated into our credit evaluation and approval processes. Group Credit is responsible for ensuring that ESG risks are adequately addressed and, where necessary, borrowers or projects with elevated ESG risks are escalated to the Credit Committee for further review and approval. Consistent with UOB’s overall risk management approach, ESG risks are managed through our three Lines of Defence control structure.
Our Responsible Financing Policy applies to all borrowing customers of Group Wholesale Banking and to the Bank’s capital market activities. Under the policy, our account officers are required to conduct due diligence on all new and existing borrowers during the client onboarding process and annual credit review. Borrowers are assessed for material ESG risks as well as their capacity for, commitment to and track record in sustainability. We have also implemented sector-specific Credit Acceptance Guidelines and have ESG checklists in place to help our account officers identify, assess and review ESG risks.
In accordance with the ABS Responsible Financing Guidelines, borrowers are subject to enhanced due diligence with sector-specific guidelines if they fall within the following eight ESG-sensitive industries:
Metals and Mining
In 2018, we enhanced our ESG risk classification to identify, to measure and to manage the ESG risks in our portfolio more effectively. Our borrowers are classified as ‘high’, ‘medium’ or ‘low’ risk. This is based on the level of ESG risk inherent in their business operations and the residual ESG risk after taking into consideration their ability to mitigate the inherent risk through policies and measures.
Our Responsible Financing Policy prohibits our financing of companies:
with operations or projects that threaten the outstanding universal value or special characteristics of UNESCO World Heritage Sites, Ramsar Wetlands, forests of high conservation value or that would impact critical natural habitats significantly;
involved in animal cruelty and the trade of endangered species as defined by the Convention on International Trade in Endangered Species of Wild Fauna and Flora;
without measures in place to manage or to mitigate the risk of air, soil and water pollution;
involved in the exploitation of labour, including forced labour and child labour, based on the International Labour Organisation (ILO) standards;
in violation of the rights of local or indigenous communities; and
involved in open burning for land clearance.
These financing prohibitions are cross-cutting commitments that apply to all new and existing clients across sectors and help to bolster our efforts in fostering sustainable development through responsible financing.
We notify our borrowers that they need to adhere to our Responsible Financing Policy and seek their representations and warranties to ensure compliance, including with local ESG regulations in the countries in which they operate. We also encourage them to follow established industry standards, to obtain relevant certifications and to adopt best practices for proper water and waste management, the reduction of greenhouse gas emissions and the management of occupational health and safety risks. The policy references international standards and conventions such as the Roundtable on Sustainable Palm Oil, Forest Stewardship Council, World Heritage Convention, and best industry practices provided by the International Finance Corporation.
We engage with our borrowers proactively and work with them to improve their ESG practices. In addition, we monitor our borrowers on an ongoing basis for any adverse ESG-related news. Any known material ESG-related incident relating to our borrowers will trigger an immediate review with the ESG risks to be addressed and managed appropriately. We require our borrowers to rectify any breach of our policy within a stipulated timeframe with account officers responsible for monitoring their progress. However, if we deem our borrowers unable or unwilling to commit to managing the potential adverse impact of their operations adequately, we are prepared to review and to reassess the relationship, or to reject the transaction.
We review our Responsible Financing Policy periodically in consideration of changing societal and stakeholder expectations.
Recognising the threat of climate change and the adverse effect it increasingly has on the environment, businesses and society, we discontinued all new financing of subcritical coal-fired power plant projects in 2018. We now only support higher efficiency, lower emission coal-fired power plants with maximum carbon intensity of 830 grammes of carbon dioxide per kilowatt hour. We have also adopted a more selective stance on the financing of coal mining projects, prohibiting those that are involved in the production of low-energy density coal.
In 2017, we also incorporated into our policy the requirements of the ABS Haze Diagnostics Kit for the financing of the palm oil, and pulp and paper industries. This reflects our commitment to help address transboundary haze pollution in the region resulting from open burning for land clearance.
In light of the health risks to the community, we have stopped financing asbestos mining and new building projects that use asbestos in the construction process.
We review our portfolio’s ESG exposure periodically. As at 31 December 2018, all applicable borrowers had undergone the ESG risk assessment with relevant risks adequately managed and mitigated, where possible. In the last quarter of 2018, seven borrowers were placed under heightened monitoring due to ESG concerns, two of which were escalated for further review. The Bank had not had a significant concentration in any of the eight ESG-sensitive sectors, which collectively accounted for approximately 10 per cent of our total loan portfolio.
We maintained a strong focus on our capacity-building efforts across the region in 2018 with more than 80 per cent of our colleagues in relevant roles undergoing training on responsible financing. The training programmes enable them to strengthen their awareness of key ESG issues and developments, to keep abreast of changes to the Bank’s Responsible Financing Policy and processes, and to identify and to assess ESG risks more effectively. The ESG Committee, senior management and the Board have also received relevant training and actively participated in sustainability forums and workshops, which enable them to ensure better integration of sustainability considerations into the Bank’s overall strategy.
We are committed to doing our part in driving industry developments. Over the past two years, we have supported ABS and the ASEAN Bankers Association in a number of capacity-building workshops in the region. We are also working closely with ABS and the WWF on an industry-wide e-learning portal on responsible financing, aimed at strengthening the ESG capabilities of banks in Singapore.
The portal is expected to be launched in 2019. Through ABS, we also led efforts among the Singapore banks to incorporate ESG requirements in their loan agreements.
We will continue to engage with regulators and collectively shape a more sustainable financial system. Apart from the regulators, we will also continue to engage with other key stakeholders, including our customers, colleagues, investors, policy makers, the community and non-governmental organisations, to ensure that we keep abreast of industry developments and meet evolving expectations.
Promoting ESG Awareness and Tapping Green Opportunities
At UOB, we endeavour to promote ESG awareness among our clients, particularly those in the ESG-sensitive industries, and to support them in improving their ESG practices. We continued our outreach efforts in 2018. In July, we organised a conference in Jakarta, Indonesia for our clients in the construction sector. At the event, they heard from industry experts on health and safety management and best practices in construction. Another forum on solar energy was also held in Jakarta in December where industry leaders shared insights on the current landscape and future for solar energy.
We helped our clients to gain insights into sustainability topics through events, including forums.
In addition, we are committed to supporting our customers’ transition to a low carbon economy and are actively capitalising on green opportunities. In October 2018, UOB was appointed the facility agent and one of the mandated lead arrangers for Frasers Tower’s $1.2 billion syndicated secured green loan in Singapore. This was the first syndicated secured green loan in Southeast Asia under the Green Loan Principles. We also support viable renewable energy projects such as solar and mini-hydro energy projects in the region as part of our phased approach to transitioning to a lower carbon energy portfolio.