Taiwan's central bank to incorporate ESG standards in credit policy frameworks

Judy Lin, DIGITIMES Asia, Taipei 0

Yang Ching-long, Taiwan's Central Bank Governor; credit: DIGITIMES

For the first time, Taiwan's Central Bank mentioned the impact of climate change on financial stability and said it will incorporate ESG (environment, society, and governance) standards into its financial policy framework, integrating sustainable development objectives with its credit line operations to be implemented by commercial banks. This will have significant implications for the vast manufacturing companies which have not paid sufficient attention to ESG.

Central Bank President Yang Chin-long said at a press conference on December 15 after the Central Bank's Q4 joint meeting of supervisors and board members that the Central Bank will announce the complete ESG policy measures by the end of 2022, and that ESG performance of enterprises will be included in the criteria for credit rating in the future.

ESG has been adopted by many multinational enterprises as a hard indicator for international compliance, and companies such as Apple have begun to use ESG standards to regulate their supply chain partners in order to manage their Scope 3 carbon emissions. The Financial Supervision Commission (FSC) of Taiwan has already required listed companies to disclose ESG information, the Central Bank's decision to formulate its ESG policy framework will further the reach to private companies and small and medium-sized enterprises to start paying attention to this important issue.

"Today's information is just a prelude to the full announcement of our policy proposals by the end of December," Yang explained, adding that the Central Bank will have various measures in place to support ESG, such as including ESG in the credit terms granted by banks to enterprises. "If a company does not pay attention to ESG, for example, if it produces serious air pollution and does not meet the standards, then the (commercial) bank may not lend you money... Specific policy details will be announced by the end of the year." In other words, companies that have better ESG ratings may get better terms for their transaction with banks.

The Central Bank said that in order to fulfill its responsibility as a member of the global village, the government adopted the Taiwan Sustainable Development Goals in December 2018 and is actively engaged in sustainable development efforts to achieve the vision and goals of the 2030 Sustainable Development Agenda. In addition, it also announced the goal of 2050 net-zero transformation in 2021 and the 2050 net-zero emissions path in 2022, planning 12 key strategies, integrating inter-ministerial resources, and formulating and promoting specific plans under four major transformation strategies, including energy, industry, living, and society, in order to implement the long-term net-zero transformation goal.

In the reference materials provided to reporters, the central bank mentions in 12 pages the impact of climate change and the future monetary policy of the central bank will incorporate the risk of climate change into the monitoring framework. According to the information, in addition to credit granting, the inclusion of green financial instruments in the management and use of foreign exchange reserves and the construction of investment and financing environment will be part of the policy measures.

In line with the international development trend and the government's 2050 Net Zero Transformation Plan, the Central Bank has set the policy objectives of strengthening the resilience of the economy and financial system to cope with the risks of climate change and helping the economy transform smoothly into a sustainable green economy, taking into account international experience and practices. The three core strategies are to help develop a green and sustainable investment and financing environment, to actively build the Central Bank's professional capacity on climate issues, and to incorporate climate risk considerations into the Central Bank's operations and foreign exchange reserve management, and to adopt five types of policy measures.

The main focuses of the policy measures include: studying the impact and adjustment of climate change on monetary policy, using monetary policy operational tools to assist the development of sustainable finance, studying the overall prudential tools to address climate change risks, incorporating green financial instruments into the consideration of foreign exchange reserve management, and actively participating in international exchanges related to climate change risks.

In the future, the aforementioned policy measures will be gradually promoted and revised on a rolling basis to actively respond to the adverse impact of climate change on financial stability and the effectiveness of the central bank's monetary policy and to strengthen the supervisory cooperation with the FSC on climate change issues to jointly help promote the sustainable development of Taiwan, according to Yang.