Why Europe’s green drive is making waves in Kuala Lumpur

One thing to start: BlackRock continues to find itself over a barrel with regards to its environmental, social and governance (ESG) investment policies. Louisiana’s treasurer this week said he will pull $794mn from BlackRock by the end of the year. John Schroder, who has been rumoured to be running for Louisiana governor next year, cited an opinion piece to allege that BlackRock has lost $1.7tn of client money “associated with ESG accounts”. (It’s worth noting that the article he cited, which you can read here, does not mention ESG.)

For today’s edition, I wrote about my recent trip to Kuala Lumpur and how local companies were reacting to new ESG rules emanating from Brussels. And Simon looks at the intensifying debate over the risks that fossil fuel companies pose to banks’ capital cushions. (Patrick Temple-West)

A dispatch from Kuala Lumpur: EU sustainability efforts ripple half a world away

Brussels, London and New York command a lot of attention when it comes to environmental, social and governance (ESG) investing. Increasingly, markets further afield have been feeling the effects of their work and planting their own ESG flag locally.

After the Moral Money conference in Singapore last month, I flew to Kuala Lumpur and met with banks and financiers to discuss ESG. In a meeting at the Bursa Malaysia, I saw first-hand how developing markets were embedding ESG into disclosure requirements for listed companies.

While it may lack globally recognised corporate brand names, the Bursa Malaysia is home to crucial links in the world’s supply chains. Last week, the exchange announced new sustainability reporting requirements to be phased in starting next year, including standards such as the Taskforce for Climate-related Financial Disclosures. Additionally, companies will need to say whether or not their sustainability statements have been reviewed by internal auditors or third parties.

Bursa officials told me they have been closely watching the fate of the EU’s proposed carbon border adjustment mechanism, which will impose new costs on carbon-intensive imports. It is a crucial question for Malaysian companies, which may have to report greenhouse gas emissions and other pollutants. (I confessed I did not have the scoop on the latest developments from the Berlaymont.)

Sustainability was also a hot topic at the halal food convention I attended. Amid tasty treats and recyclable packaging products, one display caught my eye: a business using blockchain technology to track softshell crabs, beef and other food products that need to be halal compliant.

Jonah Lau, co-founder of Sinisana, told me that Europe has been driving changes that could benefit his business. The European Commission last month proposed to prohibit products made with forced labour. It was “a game changer” that Lau said could fuel his firm as companies would need to “clean up their labour practices.”

These discussions made clear that developments in Brussels are having major implications far beyond Europe. (Patrick Temple-West)

Bank capital rules: should new fossil fuel assets have the same risk weighting as crypto?

Last month we featured a conversation with Frank Elderson, the man behind much of the European Central Bank’s work on climate risks, in which he shared his perspectives on the ECB’s first climate stress test for big EU banks.

Elderson was keen to stress that the initiative — in which 41 large banks estimated potential losses from climate and transition risks at a modest €70bn — should be seen as a “learning exercise”. On the crucial question of climate-related capital requirements, he said the ECB had not yet decided which course to take.

But European authorities have been under pressure to move more quickly on this front. This week, Brussels-based NGO Finance Watch published a report that argued bank loans to the fossil fuel sector should be treated as high-risk under capital adequacy rules.

This would force banks to set aside more capital against such loans, and would push up the cost of borrowing for fossil fuel companies. Most importantly, Finance Watch secretary-general Benoît Lallemand told me, it would ensure that the financial system is protected against losses as fossil fuel producers contend with an accelerating energy transition.

“What we’re saying [to banks] is, you can continue investing in fossil fuels all you want — but cover your losses,” Lallemand told me.

The Finance Watch report argued that fossil fuel assets should be given a risk weighting of 150 per cent — the same figure assigned to sub-investment grade bonds under the Basel framework for capital rules. New fossil fuel assets, it contended, should be given a risk weighting of 1,250 per cent — the same figure that the Basel committee has proposed for cryptocurrency assets.

While this might sound like a radical position, “it’s actually a very conservative proposal”, Lallemand insisted. Finance Watch estimates that the additional capital required under its proposals would amount to about $200bn for the 60 largest global banks — equivalent to about four months’ worth of their net income in 2021.

The change would be easier to manage for big EU banks, whose fossil fuel credit amounts to 1.05 per cent of their assets, according to the report, against 1.28 per cent for their counterparts in North America and 1.9 per cent for major Asian banks. And Lallemand is hopeful that a breakthrough in Europe could come soon, with a group of lawmakers in the EU Parliament pushing for a bill that would increase the risk weighting for fossil fuel assets. But as long as banks and their supervisors keep treating these assets like loans to any other sector, he said, “they’re increasing the risk for the whole system”. (Simon Mundy)

Smart read

Companies and state entities destroy millions of data-storing devices each year in the name of data security. But there are less wasteful options available, this FT Big Read explains.