SOUTH-EAST Asia’s largest lender DBS has adjusted its policy to accommodate the financing of the early shutdown of coal-fired power plants, and is already working on a deal, said its chief sustainability officer Helge Muenkel.
This means that DBS’ financed emissions in the power sector may go even higher over the next few years with this change in policy.
In fact, the bank’s financed emissions for the power sector actually went up slightly in 2023 compared with 2022, without any coal phase-out deals on its balance sheet yet.
But DBS said in its latest sustainability report released on Wednesday (Mar 6) that it is still on track to meet its decarbonisation goals in the power sector. That is because the increase is a result of expanding the scope of its power-sector clients to include critical power and utility players that contribute to energy security in Asia-Pacific.
Besides the power sector, the bank stated that its decarbonisation goals for four other sectors – oil and gas, automotive, aviation and real estate – are also on track. However, the shipping and steel sector continues to lag.
Financing coal retirement
Muenkel said on Tuesday that there is currently no industry consensus on how banks are to report financed emissions arising from early coal retirement, though he believes that this would be a very different type of exposure than the bank’s existing thermal coal financing, and would not mind separating them into two different buckets.
“At the moment, nobody in the world has done it… So it’s a bit of an evolving field… I think we need to have this ecosystem approach because I would like to be very transparent. And we’ve got to discuss it with regulators and other stakeholders,” said Muenkel. He added that DBS will be “super transparent” about these deals, and will release information such as the bank’s exposure to future projects and their emissions intensity.
Muenkel said that the bank’s decision to tweak its internal coal-financing policy came about over the last few months to align with shifts in the wider financial sector, which has been pushing to ramp up transition finance in the coal space.
Transition finance refers to capital that will facilitate the decarbonisation of carbon-intensive companies.
The release of two Asia-based taxonomies that accommodated early coal phase-out as one of the eligible activities that qualify for sustainable financing reflects the industry’s softening approach towards coal, though with parameters and conditions attached.
DBS also worked with the Asia-Pacific chapter of the Glasgow Financial Alliance for Net Zero (GFanz) – a global coalition of financial institutions working towards net-zero – on a set of voluntary guidelines on how early coal retirement can be funded in a credible manner.
This has provided banks with more confidence to participate in early coal retirement, an activity that would have otherwise garnered heavy criticism amid growing international pressure on banks to cut financing for fossil fuels to curb global warming.
The Business Times had previously reported on how Singapore’s local banks are caught in a grey zone as they are unable to pursue such deals due to their self-imposed coal policies.
DBS’ prior coal-financing restrictions, which also include its capital market activities, will remain. The bank will still not finance any new thermal coal-mining projects, and its plans to gradually reduce thermal coal exposure are still in place.
However, DBS was among the participating banks underwriting a US$409 million bond issuance by Adani Green – the renewable energy arm of Indian conglomerate Adani Group – which has been accused of channelling its funds to other companies under the Adani umbrella that have coal ties.
While Muenkel did not comment specifically on the deal, he said that DBS has a fairly robust process of conducting credit and ESG (Environmental, social and governance) assessments of large corporates before structuring a deal for them.
“Now, what we assess are things like physical climate risks, transition risks, we look at human rights and many, many other things. And there is a score that pops out of this… So there’s no way that somebody can game the system here and get something through without proper due diligence,” he noted.
Decarbonisation progress
The inclusion of critical power and utility players in the region had pushed DBS’ financed emissions in the power sector marginally higher to 234 kg of carbon dioxide per megawatt hour, compared with 229 the year before.
But its exposure to thermal coal has declined to S$1.8 billion in 2023, compared with S$2.2 billion in the previous year, while its renewable energy financing has increased to S$10 billion from S$7 billion over the same period. Muenkel noted that renewable energy financing is about half of the bank’s power portfolio.
DBS had previously stated that it would exit thermal coal financing in 2039, when the last of the deals it has legally committed to run out.
The bank’s absolute financed emissions for the oil and gas sector have gone down to 26.2 tonnes of carbon dioxide equivalent in 2023, compared with 28.9 tonnes from the year before.
Its outstanding exposure to the entire in-scope oil and gas portfolio has decreased by about 10 per cent, putting the bank on track to achieve its target of a 28 per cent cut by the end of the decade.
Muenkel said that the bank is making “very good progress”, especially on reducing its financed emissions of fossil fuels.
Similar to the previous net-zero update provided in March 2023, steel and shipping continue to be the sectors that have not been able to decarbonise at the same pace as the sector’s net-zero reference pathway chosen by the bank.
The weighted emissions intensity of DBS’ shipping portfolio was 15.6 per cent above the recommended target in 2023, higher than 5.4 per cent the previous year, which reflects a growing gap from its reduction path.
The bank said that this was primarily due to additional drawdowns on facilities used to finance shuttle tankers, which were facilities already committed before the bank set its sectoral decarbonisation targets in September 2022.
As for steel, the emissions intensity improved to 1.95, compared with 1.99 in the previous year.
Despite the improvement, it is still above the reference target of 1.83 from the Mission Possible Partnership’s Tech Moratorium scenario.
Muenkel said that its steel portfolio is tilted towards steel makers in Asia, especially China, where steel is largely produced using blast furnaces and where the facilities are still very young.
“The actual pace of decarbonisation in the steel sector is slower than anticipated, and we will need to strike a balance between honouring our existing commitments to clients and approaching our net-zero goal,” read the report.
DBS also shared that it has committed S$70 billion in sustainable financing, after taking into account repayments, as at the end of December last year, an increase from S$51 billion a year ago.
The share of sustainable finance relative to its whole lending portfolio has also gone up quite materially, though Muenkel declined to reveal the ratio.
The bank also facilitated S$18 billion in environmental, social and governance bond issuances in 2023.
