Growing impact of ESG turns spotlight on banks’ capital requirements

London-based Morrison Foerster corporate partner, Matthew Dunlap, is quoted in a recent article, “Growing impact of ESG turns spotlight on banks’ capital requirements,” published by The Business Times.

The article explores the potential for ESG requirements to have an impact on banking regulations in the ASEAN region.

In the European Union (EU), for example, discussions on strengthening capital requirements for banks to steer finance towards ESG-friendly industries are ongoing. The EU’s single institutional framework makes it easier to enact regulations that are applicable to all member states, thereby creating a level playing field. In ASEAN, legal heterogeneity coupled with variances in pan-regional attitudes to ESG makes this more challenging to achieve.

Matthew comments, “The EU’s single institutional framework helps remove the risk of fractionalisation that could give rise to inconsistent, non-comparable, and unreliable ESG regulations as well as ‘race to the bottom’ concerns.”

However, in ASEAN, ESG-related policies have multiplied significantly over the last five years, bringing greater compliance risk. ASEAN countries are also exposed to the physical and financial risks of climate change and financial institutions providing liquidity to companies suffering the adverse effects of climate change may correspondingly face increased credit risk.

Matthew thinks banks should eventually be asked to hold additional capital against ESG risks. “Regulators are concerned that the traditional banking risk categories, credit, market, operational, and liquidity do not fully address climate-related risks.”

Read the full article — subscription required.