Are More Regulations Ahead For Banks?

One of the most recent researches carried out by the US-based Rainforest Action Network (RAN), Indonesia-based community group Tuk Indonesia and Profundo (a Dutch consultancy), has found that more than US$38 billion of funds generated from financial institutions have gone into companies that might be destroying rainforests in Southeast Asia.

The research has found that many banks around the world have poor controls over how they assess the environmental risk of companies that they served. In Singapore, two banks are named as part of the financial institutions financing “forest-risk sector companies in Southeast Asia”.

The two banks are DBS Group Holdings Limited (SGX: D05) and Oversea-Chinese Banking Corp. Limited (SGX: O39). Together with Malaysia-based Malayan Banking Berhad (KLSE:1155.KL) and CIMB Group Holdings Bhd (KLSE:1023.KL), they are some of the top financiers to these forest-risk clients mainly in the palm oil, pulp & paper, rubber and timber industries.

Moreover, these four banks also scored badly on policy assessment on environmental concerns with regards to their clients.

In a way, the research is saying that environmental issues in the regions such as the annual haze from forest fires could come from Indonesia. But such activities are financed around the world, including banks in Singapore, and with our savings deposited in these banks.

The research group hoped that there would be more regulations in the banking sector regarding these environmental issues.

The change of times

The banking sector is already feeling the pressure, mostly from increased regulations after the global financial crisis with regards to bank capital ratio. There is also a need for more anti-money laundering controls in recent years. And the banks are facing pressure in its non-performing loans, mostly due to the low oil price environment.

So what does it mean if the banks should now have to follow more environmental regulations as well? Does that mean that the operating cost for banks would most likely stay high in the foreseeable future?

I believed that such a push toward more environmental and ethical business practices would not be going away. In the past, most people would not expect banks to care about how its financing practices would impact the environment.

However, with concerns over global warming gaining more urgency every day, the public now cares deeply about the socially ethical business practices, including environmental issues. After all, what is the use of a bank if the world is no longer inhabitable?

So, unless the major banks around the region lead the change for a better future, they might see diminishing support from the public, shareholders and even depositors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any companies mentioned.