At present when countries in Asia are groping for the right pathway to decarbonization, they have to choose between taking a global or regional pathway, but DBS, Singapore’s biggest bank by assets, is proposing a third option – the country-specific pathway.
In simple terms, the global pathway advocates a one-size-fits-all approach that can be suitable for the more developed regions, such as Europe, where countries are more homogeneous, while the regional pathway can be more suitable for regions where countries are more heterogeneous, such as Asia and Africa.
The global pathway means following the clearer, well-defined, if rather stricter, decarbonization standards set by the European Union. For Asia, the issue with this approach is that many countries are still at the initial stages of their decarbonization journeys and the EU standards would be too onerous for them to meet.
The regional pathway, on the other hand, is currently a hazy concept based on the idea that Asian countries must have their own decarbonization standards that are more applicable to the region as a whole and not set by the EU. The issue with this is that since there is presently no common set of decarbonization standards for Asia, it can be argued that the regional pathway does not exist.
The country-specific pathway proposed by the bank involves each country by itself setting a more localized complement of decarbonization standards.
“Asia is not a region because China is different from India,” says Helge Muenkel, DBS Bank’s group chief sustainability officer. “And so, if you had an Asian pathway, it wouldn't work. You can't even have an Asean [Association of Southeast Nations] pathway. Singapore is very different from Indonesia, very different from the Philippines. So, as I think this through what will really make sense is country-specific pathways, because then you can take into account the specific country’s decarbonization pathway – and they're non-existent at the moment.”
Muenkel, in a recent presentation to the media, gave some ideas on how a country-specific pathway for decarbonization can come about. In the case of Indonesia, for example, it has the Just Energy Transition Partnership (JETP), a US$20 billion agreement to decarbonize the country’s coal-powered economy launched on November 15 2022 at the G20 summit in Bali.
In simple terms, the JETP is a programme by which wealthier countries, particularly the G7 plus Denmark and Norway, will finance Indonesia’s decarbonization programme. Under the JETP, Indonesia aims to reach net-zero greenhouse gas emissions by 2050. This would shorten its target by a decade and allow it to reach its peak emissions by 2030.
To achieve Indonesia's decarbonization goals, the JETP aims to develop a comprehensive investment plan – the JETP Investment and Policy Plan. And this is where the proposed country-specific pathway proposed by DBS comes in.
Essentially, Indonesia needs to formulate a country-specific decarbonization pathway first before it can think about achieving its decarbonization goals. The country-specific pathway will provide the philosophy behind the decarbonization programme and set the direction, standards and goals necessary for achieving net zero.
The difference between a country-specific pathway and regional or global pathway is that in the former Indonesia can set its own standards based on its own requirements and targets, without having to abide by any regional standards (which are non-existent at present) or global standards (which are too strict).
But since decarbonization cannot be accomplished by any country in isolation, Indonesia will have to take into account the ramifications of how its country-specific pathway will fit into the overall regional and global decarbonization efforts.
The JETP, of course, is just the start of Indonesia’s building of its country-specific decarbonization pathway. But once the country-specific pathway is built, it should make the decarbonization process less onerous.
It may come as a surprise to many, but Indonesia’s JETP is not the first such agreement. It comes after the first such agreement, the South Africa JET-Investment Plan, which was announced in 2021 as a partnership with Germany, France, the UK and US. But no country-specific pathway for decarbonization has yet been announced.
However, getting back to Asia, if enough countries can build their own country-specific pathways, these can form the basis for a more regional pathway to decarbonization.
For developing Asia, where most countries are still at the initial stages of their ESG journeys, this approach of building country-specific pathways first before transitioning into a regional pathway can be an alternative approach to decarbonization.
Just to take a step back, DBS is the first Asian bank to choose a global pathway approach to decarbonization, an event that it announced in its Our Path to Net Zero report published during the lead-up to COP26 in 2022.
“We deliberated between a region-specific pathway (which, given our dominant footprint in Asia, typically means a less ambitious near-term target) and a global pathway,” DBS states in the report. “This was determined on a case-by-case basis. “But for all the seven sectors with emissions reduction targets other than real estate, we decided to choose a global pathway.”
Other banks, particularly UOB, chose the regional pathway in a more pragmatic approach to decarbonization. UOB based its regional pathway on the climate scenarios of the Network for Greening the Financial System, a group of 91 central banks, banking supervisors and 14 observers that are committed to sharing best practices that contribute to the development of climate and environment-related risk management.
In Malaysia, CIMB and Maybank also appear to have done some work that is consistent with the regional pathway approach.
Outside Asia, Standard Bank of South Africa seems to be the only bank that has chosen a regional pathway approach, which appears more suitable to the African continent.
However, in practice there seems to be little difference in the way DBS and UOB are implementing their respective pathways to decarbonization.
A close look at specific sectors, such as automotive, oil and gas, real estate, aviation, steel and shipping, according to Muenkel, reveals that both banks use the global pathway. The only difference is in the power sector where UOB uses the regional pathway and DBS uses the global one.
“So, there is one sector for which they use the regional and we use the global pathway, but the 2030 decarbonization target is almost the same,” Muenkel states. “So, it is even more complicated than just regional versus global pathway, but actually, in practice, there is no difference between our two banks.”