Bank of Singapore factors in ESG in loan quantum assessment

Those secured by a mutual fund with an ESG rating of AAA or AA will have their advance ratio increased by 5 ppt.

The Bank of Singapore has incorporated environmental, social, and governance (ESG) factors in its assessment of loans for investment financing. 

Under the new guidelines, the quantum will be raised when the loan is secured by a mutual fund with MSCI ESG Fund Ratings of AAA or AA. For example, a client with US$10m in acceptable mutual funds could previously get a loan of US$7m. With the addition of ESG factors, the advance ratio will be increased by 5 percentage points, or a US$7.5m loan.

Prior to this, financing against mutual funds was determined based on three factors – volatility of the asset’s value, liquidity of the asset, and the credibility of the fund manager. 

This makes the Bank of Singapore the first in Asia to incorporate ESG factors in assessing loan quantum, the investment bank said in a press release.
 
Investment financing is commonly used by high-net-worth individuals in growing wealth and enhancing investment returns, the bank said. By offering a higher financing quantum for highly-rated sustainable mutual funds, the bank aims to encourage high-net-worth individuals to invest sustainably by integrating ESG factors into their portfolios.

The move to ESG is part of the bank’s bid to further its sustainability agenda and comes at a time when demand for investment financing is rising. Bank of Singapore shared that from 2016 to 2020, its loans for investment financing registered a compounded annual growth rate of close to 10%.

Bank of Singapore currently offers more than 130 acceptable mutual funds with an MSCI rating of AAA or AA.

The funds are reportedly not only ESG compliant, but also likely to perform better than their traditional counterparts. A 2019 report by MSCI shared that mutual funds with better MSCI ESG Ratings are likely to be less volatile as compared to those with lower ratings. Another report published in 2020, this time by PwC, found that ESG-aligned funds outperformed their traditional counterparts by 9% in the period from 2010 to 2019. 

Bank of Singapore defines sustainable investments as those with MSCI ESG Rating BB and above. As of 31 May 2021, more than 50% of the Bank’s assets under management were rated BB and above.  

Photo courtesy of Giorgio Trovato (Unsplash)