Environmental, Social & Corporate Governance in Banking: How ready is your bank for ESG

Environmental, social, and corporate governance (ESG) sustainability issues have been receiving increasing attention across different industries globally, and the financial sector in Asia-Pacific (APAC) region is no exception.

ESG concerns, such as biodiversity loss, animal testing, nuclear power, and climate change, have not only triggered high net worth investors to reconsider their portfolio allocation, but also received regulators’ attention.

Both the Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA) have increased their focus on ESG by issuing guidelines on how financial institutions (FIs) could establish and implement ESG framework effectively and how ESG risk management practices could be enhanced.


Hong Kong

In June 2020, the HKMA published a white paper on green and sustainable banking. The white paper outlined HKMA’s approach to promoting green and sustainable banking as well as its guiding principles for building climate resilience in the face of the impending impacts of climate change on Hong Kong’s banking industry.

Some key concerns raised by the HKMA include:

  • While sustainability could lead to business opportunities, the depletion of resources and stricter regulations would impact banks and their clientele.
  • Climate action failure and extreme weather events are ranked as the top two global risks in terms of likelihood and impact. Both have diverse risk implications on banks, including physical, transition, liability, credit, and operational risks.
  • While green and sustainable banking would pose risks to operations and businesses of banks, it brings business opportunities with the reallocation of capital when transitioning to sustainable investments.

The HKMA also shared guidance on governance, strategy, risk management, and disclosure with respect to ESG. This was in conjunction with the recent announcement from the Cross-Agency Steering Group on the next steps to advance Hong Kong's green and sustainable finance strategy.1


The MAS published in June 2020 its consultation paper on proposed “Guidelines on Environmental Risk Management (Banks)". It features MAS’s supervisory approach to environmental risk and its expectations for licensed banks, merchant banks, and related institutions.

MAS’s request for comments on the consultation paper closed in August 2020, and final guidelines were issued in December 2020, with an 18-month transition period. MAS will also start engaging key banks on their implementation progress from Q2 of 2021.

In May 2021, MAS's Green Finance Industry Taskforce (GFIT) issued an implementation guide for climate-related disclosures by FIs2 and published a white paper on green finance solutions.3

Key requirements include:

  • Engaging in green financing to channel capital towards a sustainable economy
  • Incorporating environmental risk into business and risk management strategy
  • Disclosure of environmental risk management approach to stakeholders

While there have been no enforcement actions for a failure to comply with the ESG requirements in the past, market participants will need to be vigilant, as this will be an area of increasing regulatory focus in the future.

Challenges in incorporating ESG in Banking

Unlike Europe, where ESG has been rapidly growing in the past decade, ESG is a relatively new topic in APAC, and challenges may exist in its implementation process, mainly from a lack of relevant experience and expertise.

Lack of concrete standards for banks of various sizes

Although regulators have recommended banks to adopt customised standards on ESG risk exposure and mitigation based on the bank’s size, nature of business, and complexity of the operation, no specific guidance exists on the exact standard for each bank. It can be challenging for banks to set up an appropriate level of ESG risk standard according to their specific setup.

Challenges in measuring risk exposure and assessing impacts

ESG risk exposure and impacts, with their complex nature, are difficult to measure and assess. Environmental and social impacts of business decisions are affected by multiple factors and can be vastly different when the macro situation changes. As a result, complex calculation methodologies, such as quantitative metrics, scenario analysis, and stress testing are warranted. However, these approaches require more time to implement, as banks have limited prior experience.

Difficulty in implementing system controls

Banks are required to monitor environmental risk exposures on both customer and portfolio levels. In order to implement systematic controls embedded in the bank’s system, as required by authorities, a thorough assessment is required to mitigate the exposures to environmental-related risks as well. It will require substantial resources and tools for banks to ensure the ESG strategies are integrated across different banking platforms and lines of business.

Difficulty for international banks to align the local ESG requirements with the global framework

Authorities require local subsidiaries of global banks to adapt their ESG policies in the APAC operation context. This means banks will need to establish ESG practices that comply with both their headquarter strategies and local requirements, posing additional challenges when large differences exist due to business and operational complexities between the global and local offices.

A robust organisation-wide ESG framework is paramount to ensure that ESG practices comply with client and regulatory expectations. Synpulse, with our in-depth ESG experience, can support you in building and implementing an ESG framework that is tailored to your bank’s specific operational circumstance and nature of business. Below is an illustration of the ESG framework that is expected by regulators in Singapore and Hong Kong.

ESG in Banking: How Ready is Your Bank? 2
Figure 1. ESG regulatory expectation framework

ESG regulatory expectation framework

Phase I: Gap assessment

An assessment on the maturity of the adoption of environmental risk framework is performed based on the overall ESG strategy and mission of the bank, with regulatory expectations as a baseline. Focused group workshops and the bank’s existing policies and procedural documentation will be used in the diagnosis to understand the current status in comparison to the target position vis-à-vis governance, policies, and methodology.

The three lines of defence model will also be assessed with respect to the allocation of responsibilities for the management of environmental risks. This assessment identifies any existing gaps in the regulatory expectation on governance and strategy, risk management, and disclosure. Analysis and recommended Environmental Risk framework for Phase II is delivered at the end of Phase I.

Phase II: Development of environmental risk framework

An environmental risk framework is designed and customised for the bank according to its size, nature of business, the complexity of operations, and international ESG circumstances. The customised framework is designed in line with regulatory expectations and industry best practices. Standards for appropriate ESG risk exposure, mitigation, frequency, and the extent of ESG disclosure will also be clearly defined.

Phase III: Vendor analysis and shortlisting

Phase III supports banks in the analysis and shortlisting of all relevant vendors within the ESG methodology segments. Based on the bank’s ESG framework, Synpulse provides support in identifying appropriate vendors covering risk monitoring, risk assessment, and risk management. The tools include, but are not limited to, quantitative and qualitative risk metrics, scenario analysis tools for risk assessment, and other system control tools.

When the potential vendors are shortlisted, validation workshops will be conducted with both business and IT stakeholders — with a comparison framework to highlight benefits and costs for each vendor — in order to select the best fit-for-purpose vendor. The key deliverable in this phase is the Implementation Roadmap, which details the relevant vendors, changes to implement, detailed timelines, and the complexity of the implementation.

Phase IV: Implementation

Phase IV formalises the Transformation Plan and Implementation Roadmap with the relevant stakeholders from senior management, business, and compliance to risk management and operations. It identifies resources for the workstreams, covering governance, policy, and methodology. These workstreams will be carried out in parallel to implement relevant charters, procedural documents, risk measurement and mitigation tools, disclosure requirements, and system controls.

Why work with us

Subject matter expertise

Synpulse is at the forefront of transformation topics, engaging with leading financial institutions to deliver both compliant and commercially viable ESG framework in response to evolving regulations. Our expertise in regulatory compliance and ESG will support you in all aspects, as the new ESG regulation comes into focus, providing you with insights and implementation approaches.

Extensive industry experience in the APAC market

Since 2008, Synpulse has worked with many regional and global banks on an array of successful projects across APAC. We understand the most pressing regulatory challenges faced by the industry based on our extensive experience.

Access to global ecosystem partners

Synpulse works closely with innovative ecosystem partners across a wide spectrum of topics. Our extensive network of partners, coupled with deep experience and knowledge in the ESG landscape, provides us with insights to identify the most suitable technological solution to meet your needs.

Speak to us to find out more about the industry best practices and how these ESG topics may impact your organisation.

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