Singapore banks may need to address indirect exposure to captive coal in their financing policies

Singapore lenders may need to review their overall coal financing policies to clarify how they treat captive coal, and provide granular disclosures on this front as they face increasing scrutiny over their exposure to the energy source.

This is not yet a regulatory requirement, and financed emissions from captive coal are not a data point that ESG rating agencies specifically look at when scoring banks on their sustainability performances.

But more comprehensive disclosures on lending exposures and stronger climate risk management practices do contribute positively to their ratings, agencies told The Business Times.

The three local banks – DBS, OCBC and UOB – have committed to stop financing new coal-fired power plants and thermal coal mining.

But captive coal, which refers to off-grid coal plants operated by industrial companies to power their operations, has generally fallen outside these restrictions.

In February, environmental advocacy group Market Forces filed a complaint with the Singapore Exchange (SGX) alleging disclosure gaps in OCBC’s lending relationship with Harita Nickel. The Indonesian nickel producer operates coal-fired power plants to support its processing activities.

The case highlighted what some environmental groups describe as a loophole, as the financing for transition-critical minerals such as nickel can fall outside coal-exclusion frameworks even when production relies heavily on coal-fired power.

This potentially enables the expansion of coal capacity.

Liang Hao, a professor of finance at Singapore Management University, said: “This is no longer a niche issue, and goes to the heart of transition-finance credibility. Financing ‘green-enabling’ materials is not automatically aligned with climate goals if the production pathway remains heavily coal-powered.”

This does not mean that banks should stop financing all industrial activities that are reliant on coal. But they ought to consider adopting clearer policies on responsible financing that address captive coal exposure, Prof Liang said.

“I think banks should indeed at least review and clarify their treatment of captive coal power, especially in sectors like mining and metals, where transition minerals, including nickel, may still be produced using highly carbon-intensive energy systems,” he added.

Addressing captive coal exposure is also about managing a bank’s transition risks.

This is as industrial facilities powered by coal remain exposed to global decarbonisation pressures, including trade measures and shifting buyer requirements, noted Professor Johan Sulaeman, director of the Sustainable and Green Finance Institute at the National University of Singapore.

“Rather than immediate blanket exclusions, banks could consider requiring credible decarbonisation pathways, setting declining emissions-intensity thresholds, or enhancing disclosure around such exposures,” he said.

“This approach recognises the tension between supporting transition-critical minerals and managing carbon lock-in risk.”

Comprehensive disclosures

When assessing banks, rating agencies look at the sectoral breakdown of their loan portfolio and evaluate the extent of their exposure to high-emitting sectors.

Over the last few years, Singapore lenders have regularly provided updates on their financed emissions arising from several of these sectors, including power, oil and gas, and real estate.

These are some of the sectors for which the banks set net-zero targets. Currently, the steel sector is the only industrial segment for which all three lenders have both set financed emissions targets and disclosed emissions data.

However, they do not disclose financed emissions arising from indirect exposure to captive coal. This is a practice consistent with most global banks.

This is largely because financed emissions are typically calculated using borrower-level emissions data, and granular breakdowns by specific energy source or asset within a company are often unavailable or inconsistently reported, making it a challenge to isolate emissions from a particular captive coal plant.

Even without specific disclosures on captive coal, Sustainable Fitch factors in the indirect environmental impacts of captive coal in carbon-intensive industrial sectors.

It does this by negatively scoring these sectors when assessing banks’ loan books, unless there is evidence that financing is provided to less environmentally harmful processes, said Candice Low, the firm’s director of ESG ratings and opinions.

This is in addition to reviewing a bank’s financing policies for high-emitting sectors.

Sustainable Fitch generally views a coal exclusion policy – which covers all coal-related activities – with a target of completing coal phase-out by 2030 for Organisation for Economic Co-operation and Development countries to be best practice.

For states that are not members of that bloc, the target timeline is by 2040.

Sustainable Fitch also looks at the quality of banks’ disclosures on emissions and other environmental metrics, as well as trends in performance data for these metrics.

“This includes assessing whether they undertake financed emissions reporting,” said Low.

“If financed emissions are reported, we assess whether they are in line with a recognised methodology, if there is a meaningful scope of data coverage, and if reporting is updated regularly.”

On top of evaluating banks on their lending policies and how they measure and manage transition risks, MSCI ESG Ratings considers any financing-related controversies that a lender is involved in when making an assessment.

“Greater transparency from banks, including more granular disclosures on lending exposures, would enable a more robust assessment of their risk profile and practices,” said a spokesperson.

As for Morningstar Sustainalytics, it considers whether the bank incorporates ESG issues into its corporate-sector financing, said associate director Jono Broome.

The firm also factors in how the lender assesses related risks and monitors its clients’ activities, as well as whether it has a programme to support the transition to a sustainable economy when making its assessments.

These research indicators “reward those banks with better disclosure and due diligence around the environmental and social risks faced within their loan books”, said Broome.

“In addition, those with comprehensive greenhouse gas reporting standards, including reporting Scope 3 emissions to best practice standards, are rewarded in our ratings.”

Scope 3 refers to indirect emissions arising from a company’s value chain. In the case of financial institutions, their Scope 3 emissions – which are financed emissions from their lending activities – are their biggest.  

Regulatory requirements

Singapore banks are already facing tighter disclosure requirements, with reporting standards from the International Sustainability Standards Board (ISSB) effective from financial year 2025 for Straits Times Index constituents.

Under ISSB, lenders are expected to disclose absolute financed emissions where material, and provide breakdowns by industries and relevant asset classes in line with international methodologies.

However, the three local banks have not yet fully implemented these requirements in their latest sustainability reports, citing transitional reliefs under the new reporting framework.

Even so, full alignment with ISSB standards does not necessitate specific disclosure of emissions linked to captive coal plants – although sectoral breakdowns can offer a clearer view of where emissions are concentrated across a bank’s loan portfolio.

A similar approach is already in place in the European Union. While banks do not specifically disclose financed emissions from captive coal, they are required to report exposures to carbon-intensive sectors such as mining, quarrying and manufacturing, within which coal-related activities may be embedded.

In their responses to BT queries, all three Singapore banks said they are committed to transparent sustainability disclosures and will continue to refine them to align with ISSB standards, as mandated by SGX.

However, DBS and UOB highlighted that insufficient data quality and coverage remain key obstacles to the comprehensiveness of their disclosures.

OCBC’s group chief sustainability officer Mike Ng noted that the bank discloses its credit exposure to climate-relevant sectors and how it manages its climate-related risks – including physical and transition risks – in its annual sustainability reports.

He added that OCBC maintains a strict policy of non-engagement in financing activities that are under its exclusion list, and that it does not finance coal-fired power plants, including captive plants.

A DBS spokesperson said the decision to lend to entities and assets with captive coal power plants is made on a case-by-case basis, and that these transactions are subject to enhanced due diligence.

The spokesperson added: “We have some exposure to entities and assets that operate captive coal power plants where alternative power sources are not feasible.

“We continuously monitor these exposures to ensure our clients’ compliance with our responsible financing approach and sector policies to ensure risks are appropriately managed.”

UOB’s group chief sustainability officer Eric Lim said the bank recognises that captive energy use remains embedded within certain essential industrial activities and their value chains that underpin economic development and livelihoods.

“In this regard, UOB works closely with our customers to support their sustainability strategies through our sustainable financing solutions, while managing ESG-related risks within our lending portfolio through our responsible financing policies,” he said.

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