It is probably reasonable to suggest that at present most institutions and investors focus on the environmental, or E, factor when investing in environmental, social and governance (ESG) compliant financial products.
Record-breaking temperatures, raging forest fires and more widespread episodes of flooding across the Asia-Pacific region are tangible consequences of the climate crisis. As we collectively witness the devastation wrought on humans and wildlife alike it makes the case for investing in environmental factors difficult to argue with.
However, with environmental issues having make their case and achieved critical mass in the consciousness of investors, another equally critical part of the ESG acronym, the S factor, still lags in comparison with the ubiquitous environment-related green finance offerings in Southeast Asia.
And, while the E segment, has numerous and growing assessment criteria, for example, for measuring greenhouse gases or the price for carbon, the S, the social element, is still searching for similar structures or benchmarks to help consistently calculate its value.
ESG specialists and investors define the S in ESG in a number of ways that can include social issues, human rights concerns, workplace diversity and racial equality issues, among many others.
The ESG industry clearly needs an objective standard for reporting on social conditions or factors, and not having a clearly defined value for the S factor is perhaps a major reason why the E factor is far ahead when it comes to attracting sizeable capital inflows.
And yet, getting the social element right can clearly have a positive effect on a company’s reputation and, by association, identify it as an institution with a robust social conscience that, in turn, can also help bolster its bottom line.
So, what can commercial banks do to bring attention to the human dimension of sustainable finance? After years on the ground in Indonesia offering services like micro-loans, Japan’s Sumitomo Mitsui Banking Corporation (SMBC), via its Indonesian unit Bank BTPN, is exploiting financial technology (fintech) to evaluate data and fine-tune its product offerings related to social issues.
Fighting social inequality
This experience has given SMBC the confidence to transfer its technology and understanding of social issues to institutions that it owns or partners with, within the region, that have similar social financing demands.
As the second-largest bank in Japan, SMBC has been forward looking when it comes to sustainable finance. The bank was an early adopter of green bonds and has been recognized by the finance industry for its role as a global lender for green and ESG loans.
In Singapore, SMBC is a founding partner of the Singapore Green Finance Centre, a Monetary Authority of Singapore-backed initiative to build a new ecosystem for sustainable investing in Asia.
Companies seeking to enhance their ESG credentials, says Rajeev Kannan, SMBC’s Singapore-based co-head of Asia-Pacific, have sought to raise debt that links interest rates to ESG performance, with most of these deals focusing on a company’s environmental impact.
“However, we do see a shift as companies are now also considering their impact on stakeholders,” Kannan notes. “This is especially so with the pandemic bringing social issues to the fore and the strong push for a ‘just’ net-zero transition.”
Southeast Asia – as well as needing billions of dollars of investment for its environmental needs – is a region with significant levels of wealth inequality and the Covid-19 pandemic has widened that inequality gap into a social chasm.
One of the key challenges around social, Kannan points out, is the lack of consistent data in terms of identification, scope and collection.
“This is particularly challenging in our region where sectors like agriculture are widely distributed and embedded into community life,” he adds. “Having said that, stronger engagement and incentives will improve transparency on social issues in the region.
“More recently, we did a transaction jointly with the Japan International Cooperation Agency and SMBC in Japan, signing a co-financing scheme of US$135 million for agricultural loans in Cambodia with Acleda Bank. This co-financing helps boost agricultural production and socio-economic development by encouraging the use of financial services in rural areas.”
Acleda Bank, of which SMBC is the largest shareholder, is Cambodia’s biggest commercial banking group and an institution founded in 1993 to provide micro-credits to the victims of the war-ravaged country.
The Acleda network, Kannan shares, makes it easy for Cambodians from all backgrounds in the community – especially those living in rural areas – to access the bank’s full range of financial services, including credit, which are aimed at supporting and growing rural agriculture.
Scale is a major challenge when it comes to social finance. The projects are usually not as sizeable, given the smaller ticket size of social loans and project finance in this area, and hence may not be as attractive to investors.
Nevertheless, if a project is scalable, it could offer good return on investment while providing opportunities for financial institutions to develop loyalty among customer groups that will possess greater financial power over time.
In 2021, Sumitomo Mitsui Financial Group, bought out Fullerton India, the Indian non-banking financial arm of Singapore-based and Temasek-backed Fullerton Financial, for approximately US$2.6 billion.
Fullerton India caters to the underbanked and unbanked, particularly in the tier-three, -four and -five cities of India, a demographic that clearly addresses the intended social aspect of ESG.
Clearly, the type of funding and services wanted by this sort of community is small for a global banking group like SMBC. However, because of its earlier experience in Indonesia, Cambodia and India, the bank understands the key to monetizing this sector is scale and well-disciplined operating costs.
Fortuitously, these conditions coincided with timely advances in fintech and the proliferation of smart phones. There is, Kannan proffers, a strong commercial argument to be owners of these kind of assets or businesses.
“If you're able to cater to those people at the lower end of the banking and financial services sector, then as they progress and step up, we can be part of that journey with them,” he points out. “It can help us quite significantly in terms of customer loyalty.”