CIMB embarks on journey of sustainable financing

This article first appeared in The Edge Malaysia Weekly, on September 30, 2019 - October 06, 2019.

Zafrul: If we have concerns about [lending to] certain companies, we engage them first and give them time to meet our criteria. Photo by Shahrin Yahya/The Edge

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BANKS around the world are increasingly under pressure to create value, not just for shareholders but also stakeholders at large — meaning customers, employees and communities, among others.

Taking cognisance of this, CIMB Group Holdings Bhd has developed a group sustainability policy, which it has embedded in its five-year strategic plan that runs until 2023. The policy will, among others, see it become more careful about the kind of companies or projects it extends loans to.

In an interview with The Edge, group CEO Tengku Datuk Seri Zafrul Aziz says starting this year, it is no longer just the bank’s credit committee that assesses whether a company is viable for a loan. Also required now is the approval of a newly formed group sustainability committee.

“Sometimes, credit-wise, a company is strong and its project may be commercially feasible, but there could be risks involved. We’ve had at least two cases this year, where the credit committee said yes, but when it went through the group sustainability committee, which I chair, and we discussed the risks to the environment, risks to the firm’s reputation and things like that, we rejected them,” Zafrul says.

The two companies that were rejected are property developers.

According to Zafrul, companies that are likely to be more closely scrutinised from now on are those in the palm oil, coal, gaming-only, tobacco and oil and gas (O&G) — particularly mining — sectors.

“The big companies are usually okay as they also consider sustainability issues, but we need to educate the smaller ones. If we have concerns about [lending to] certain companies, we engage them first and give them time to meet our criteria. We don’t believe that we should exit our clients just like that,” he says.

“For us, it’s a journey, a five-year journey. In the first two years, we educate them — we tell them this is coming, and this is what you need to do and we can help you. But if they can’t [meet the requirements] even after we’ve given them enough notice and resources then, of course, we have to let [them] go.”

As at end-June, the group’s exposure to the palm oil sector was just over 3% of its financing portfolio, less than 2% for O&G and about 1% for coal. Exposure to tobacco and gaming-only companies was “negligible”, Zafrul says.

CIMB’s sustainability efforts also extend to retail financing.

“We give a cheaper loan rate to those who buy hybrid vehicles. We’ve given about RM61 million already in hybrid vehicle loans. The other one is mortgages ... any housing that is Green Building Index-certified, we give the buyers a cheaper rate. That one we’ve lent about RM106 million. Our green loans are ten basis points lower. Similarly, for any project that promotes energy efficiency and renewable energy, we’re going to give better rates. There’s more to come,” Zafrul says.

According to him, CIMB is possibly the first local banking group to have in place a group sustainability policy, especially on financing.

Industry observers say the bank’s move towards sustainable financing is good but comes with risks. It is a highly competitive market, and companies whose loan applications are rejected are likely to just move on to the next bank.

Zafrul is well aware of the risks, but believes it is a necessary move in the right direction. “People ask me sometimes how this will affect our bottom line since we’re offering loans that are 10bps lower and so on. But we feel that in the longer term, it creates value [for everyone].”

He believes the journey towards sustainability is something that more banks will embark on. As it stands, the big lenders already address sustainability in their strategies.     

“It will be good if the other banks do the same. Our aim is not to do it alone, but to do it together with all the financial institutions because, collectively, we can make a difference. Banks are seen as one of the catalysts that can effect change because we can influence our customers,” he points out.

Zafrul says CIMB’s sustainable financing efforts will start in Malaysia, and then Indonesia — its two biggest markets — before eventually encompassing its other Asean markets.

“We will, of course, still focus on [delivering good] returns to shareholders, but to be the best among the best, we feel that we need to commit to other stakeholders,” he says.

Interestingly, it was CIMB’s own employees who felt that sustainability should be a key component in the group’s five-year plan. In a survey conducted two years ago, 84% of its staff across the region said that was what they wanted.

“To be honest, it was quite a surprise. We know that investors are asking for this — when we meet them at our quarterly roadshows, especially in Europe, they always ask ‘what’s your sustainability strategy’ because their funds place more weightage on companies that look at these things. So if we can show that we do, then we will have more people investing in us,” Zafrul remarks.

CIMB recently became one of the founding signatories — the only banking group in Asean — of the Principles for Responsible Banking, committing to strategically align its business with the United Nation’s (UN) sustainable development goals and the Paris Agreement on Climate Change.

As a signatory, it joins a coalition of 130 banks worldwide, representing over US$47 trillion in assets, that is committed to achieving a sustainable future.

The World Wide Fund for Nature (WWF), in its 2019 report on sustainable banking in Asean, says most banks now recognise that environmental, social and governance (ESG) risks and opportunities lie within their lending portfolios and can impact their businesses.

All but two of the major Asean banks that it assessed refer to sustainability in their strategy while only four do not recognise that their ESG footprint lies beyond their internal operations. “Twenty-five out of 35 banks identify responsible financing and/or climate change as material to their business activities, compared with 17 banks last year,” it says.

The WWF is one of CIMB’s partners in the latter’s inaugural The Cooler Earth Sustainability Summit in Kuala Lumpur this week.

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