DBS' emissions don't tell the whole story

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??This week: DBS Bank's first emissions results slip since it committed to net zero emissions targets has turned out to be not too shabby .

Despite two of its seven key sectors – shipping and steel – falling behind the bank’s net zero transition pathways, DBS made good progress in more controversial sectors like power, and oil and gas.

But investors should not make too much of the headline financed emissions numbers at this time.?

For a start, although this was technically a "progress" report, there isn't much progress to speak of. The pathways against which the bank's financed emissions are benchmarked were only formalised six months ago, and stretch into 2040 and 2050. Six months of progress on a 15-to-25-year timeline has limited implications.

DBS chief sustainability officer Helge Muenkel said that the past six months were largely spent on building internal capabilities, such as processes around how the bank will embed ESG into underwriting decisions.

In line with Muenkel's focus on foundational issues at the start, it might be more useful at this stage to watch the growth trends in DBS' sustainable finance portfolio.

The premise is that it doesn't matter so much whether a bank's financed emissions are able to meet reference targets at this early stage in the bank's transition journey. Instead, it's more important that the bank's portfolio of loans – and the bank's borrowers – are on an emissions reduction pathway.

If the bank is able to grow the share of sustainable financing clients in its portfolio, those clients and their loans will, by their nature, eventually lead to lowered financed emissions for the bank. Paying heed to the bank's sustainable finance portfolio also mitigates the risk of over-valuing short-term fluctuations in consumption. For instance, emissions from aviation may have fallen during the Covid-19 pandemic, but they are likely to bounce back when borders reopen.

To put it simply, the best performance for a sector would be when emissions are on-track or better, and when sustainable finance's share of the sector's overall loan portfolio increases.

Companies that are able and willing to cut sustainable finance deals at this time are also less risky bank clients. It is worth noting that a Fitch Rating report on Mar 8 stated that almost 20 per cent of global corporates could face rating downgrades by 2035 due to climate vulnerabilities if such risks are not mitigated, versus 2 per cent in 2025.

All businesses will at some point be compelled to spend on decarbonisation as inaction will likely prove very costly. When that day arrives, it is a matter of which bank they intuitively turn to that dictates whether DBS has a bright future in a sustainable world.

?? Top ESG reads:

1. Singapore's National Environment Agency has signed separate MOUs with two more international offset programmes, thus widening its potential whitelist of carbon-credit certifiers and issuers.
2. Vietnam's government is being urged to accelerate changes to the country's renewable energy policies, which currrently risk losses and have left investors unnerved.
3. Thermal coal will continue to underpin the credit quality of Indonesian coal-mining companies for the next four to five years, analysts say.
4. Sembcorp Industries is set to build, own and operate a 500 megawatt solar power plant in Oman. The facility is expected to be operational by 2025.
5. The UK's climate ambitions are under threat as its government is failing to capitalise on the edge it once had in the global green economy, says LSE IDEAS associate Andrew Hammond.

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