DBS sets carbon targets for clients as well as itself
The Singaporean bank has launched sector-specific decarbonization commitments it says are industry-leading. For them to be achieved, the bank’s corporate client base is going to need to make changes, too.
DBS has launched a set of decarbonization targets covering not only the bank but its own client base in what it says is among the most comprehensive set of commitments by any bank worldwide.
DBS says the idea is to provide an actionable plan to get to net zero emissions, following the bank becoming a signatory of the Net-Zero Banking Alliance in October 2021. Delivering upon that plan is going to require a redirection of the bank’s financing towards less carbon-intensive industries – an ambition long underway – but also persuading clients to change too.
“It is our responsibility to reduce GHG [greenhouse gas] emissions from our own operations and, more importantly, to engage with our clients to reduce their GHG footprint through the activities we finance,” the bank says.
Across seven high-emission industry sectors, between them representing 31% of DBS’s outstanding loans but accounting for the majority of the institutional bank group’s financed emissions, the bank has set specific targets either for outright emissions (in oil and gas), or intensity of emissions.
I wouldn’t have done this if we hadn’t talked to 3,000 clients and built a degree of confidence that our clients are on the same path
The sectors with emission intensity targets are power, automotive, aviation, shipping, steel and real estate. Two others – food & agribusiness, and chemicals – had been set to be part of the programme, but the bank found available data insufficient, and so has instead set data coverage targets for those.
DBS describes the targets for each sector as “science-based”, benchmarked against “internationally recognized and industry-accepted glidepaths” such as the International Energy Agency’s Net Zero by 2050 scenario.
“When we made our commitment last October, I mentioned that we’ve taken our time about it,” says Piyush Gupta, chief executive. “One reason for that was that we wanted to make sure that we knew what needed to be done. It is not an idle commitment for 30 years from now.
“We had some broad ideas, but in the last year we’ve done a significant amount of work, working bottom-up with large numbers of our clients across multiple sectors, as well as top down to try to ensure we understood the carbon intensity of our portfolio.”
The result, he says, is “something that is meaningful, that we can start tracking and reporting against. We think it’s an important milestone being able to get a set of commitments of this nature out.”
Tuesday’s announcement was accompanied by a 76-page document explaining the methodology behind the targets and the reporting commitments DBS will undertake around them.
Yulanda Chung, head of sustainability in the institutional banking group, cites steel as an example of the rigour DBS has attempted to use, committing itself to a target per unit of production rather than relative to revenue as some others have done.
“Revenues are very dependent on the fluctuating prices of commodities,” so that “a bank doesn’t have to do anything for the number to go up or down,” she says.
Tracking against units of production, she says, is a tougher but more impactful target.
The chosen pathway for steel aligns with something called the Mission Possible Partnership, a coalition of public and private-sector partners supporting the global transition to Net Zero, and specifically the MPP’s idea of a tech moratorium, under which only near-zero or zero-emissions steelmaking technology will be invested in.
This is particularly difficult for DBS and its client base, given that China and India account for about 60% of global steel production and a high proportion of DBS’s steel book.
So for DBS to be successful in this initiative, it needs its clients to change. But what if they don’t, or not at the speed or quantum DBS needs in order to meet its targets? Will DBS cut off clients for failing to make the grade?
“That’s the last resort,” Gupta says.
I’m convinced that the transition is going to be a trillion-dollar industry... it’s a tremendous business opportunity
But he believes it will rarely come to that.
“I wouldn’t have done this if we hadn’t talked to 3,000 clients and built a degree of confidence that our clients are on the same path. They just need some help,” such as incentive structures in their financing.
“I have a high degree of confidence that our clients are pretty much aligned to what we want to get done; if I thought there was a huge disconnect between where the clients are and where we are, I’d have been very cagey about making this commitment.”
Gupta adds that many clients have climate-transition ambitions but don’t know how to deliver them, and that a large part of DBS’s path to achieving its targets will involve assisting clients to do so, through the bank’s relationship manager force.
“As a bank we see the best technologies and the best transitions that some people are doing, and we can successfully transfer that quite well… clients are quite receptive.”
Gupta says DBS is “not going to be dogmatic” or cut adrift clients that are on the right track but perhaps not at an intended pace.
“If they’re in the right direction and it’s going to take another year or two, we’re not going to turn off the tap,” he says.
But he accepts some clients will be axed.
“There will be a bunch of clients who either are not aligned or are not willing to make the steps that we want to make, and then we will move on,” he says. “And we’ve already done that: if you look at our thermal coal agenda, we were able to get some clients to move in terms of their energy mix, renewable versus non-renewable, and those are clients we continue to work with. But there were clients which would not [make that move] so we moved on from those clients.”
Su Shan Tan, head of the institutional banking group at DBS, says: “With our clients who are heavy carbon emitters, they realize the train has left the station and they have to do the right thing.”
Pointing to DBS’s previous efforts in sustainability, she notes that clients have generally helped the bank beat its targets and expects them to continue to do so.
DBS’s sustainable finance portfolio was worth S$52.7 billion ($37.8 billion) by June 30, 2022, well ahead of its target to hit S$50 billion by 2024.
DBS adopted the Equator Principles in 2019, was an early adopter of the Task Force on Climate-Related Financial Disclosures, and has committed to achieving net zero operational carbon emissions across the bank by the end of 2022. It is one of the main backers of Climate Impact X, a carbon exchange, though that has not yet achieved critical mass.
One measure where the bank has been called upon to do more is around coal. DBS ceased financing new thermal coal assets in April 2019 and has gradually phased down its thermal coal exposures since, but won’t be fully out of coal exposures until 2039, which is when the last of its loans to the sector mature.
Gupta explains that position: “Here’s the thing: we’ve got coal loans on our books, and the maturity of the loans extends up to 2039. We don’t do any more coal, we don’t finance coal, but we have these loans. So I have two choices.”
One is if DBS can get somebody to conduct a project that involves shutting down the coal mine. Failing that, it can sell off the coal.
“But that doesn’t change anything for planet Earth," he says, "if it’s just going to move from party A to party B, I can look great and say I’ve sold my coal portfolio, but does it achieve anything is the question?”
DBS’s renewables portfolio is around S$10 billion, Gupta says, and coal around S$1.5 billion.
“The real challenge with coal is: what do I do with a coal company who wants to do a renewable project? Should I, or should I not? This is where it starts getting into issues of ethics.”
DBS’s position, Gupta says, is that if a polluter wants to do something like a solar project that is going to be good for the planet, and if the bank can ring-fence its money specifically for that project, it will fund it, “because it’s the right thing to do for the Earth.”
But lending a corporate finance line to such a company, where it’s hard to delineate where the money from that facility is going, “we won’t do that kind of stuff, because of the chances of leakage and slippage.”
The right thing
Gupta, who acknowledges scepticism about bank behaviour on climate and concerns about greenwashing, is adamant the bank is adopting these new targets and publishing the methodology because it considers it the right thing to do, but he also suggests that it’s essential and beneficial for banks to be proactive on climate transition, for two reasons.
The first is risk management.
“There’s no question that policy frameworks are changing," he says. "As carbon taxes come into play, cashflows will be impacted, regulation will change, rules will change, and we’ve got to be very mindful of what each of these means to our clients.”
And the other is profit.
“I’m convinced that the transition is going to be a trillion-dollar industry,” he says. “Without a doubt. Evolving infrastructure from a carbon-intensive to a low-carbon intensive infrastructure means tremendous opportunities for financing, for advice, for advisory services flows. So, if you do this right, it’s a tremendous business opportunity.”