The responsible investment and lending is a stabilizing force with positive impact on society, and it is also one of the core competencies to increase long-term value for the assets. Cathay has established responsible investment/lending policies and management procedures and actively developed its capacity for ESG analysis to assist investment and lending decisions. Cathay aims to use ESG to provide broader and more profound perspectives for decision-making.

Establish a leading responsible/lending team in Taiwan

Cathay FHC was the first Taiwanese financial institution establishing the Responsible Investment Working Group in 2014. The Working Group is led by the Chief Investment Officer of the Cathay FHC and comprises 7 members of senior executives from the investment teams of Cathay's subsidiaries. The working group is responsible for supervising Cathay FHC's responsible investment strategies, setting up policies, and reviewing implementation performance.

Cathay Life and Cathay SITE have also respectively established their Responsible Investment Task Force which comprises the front/mid/back-offices of the investment team. The task force continuously learns the best international practices, and exchanges ideas with global peers on trends, methodologies and practices in order to establish action plans to refine and improve the ESG integration process. As of the end of 2019, the task force of Cathay Life and Cathay SITE had around 40 and 11 members, in which 2 and 1 members are dedicated to responsible investment.

CUB established the Sustainable Finance Loan Management Section in 2016, which is responsible for reviewing EPs-related cases, and has renamed it as the Sustainable Finance Section in 2017. The Section is now the dedicated unit in charge of promoting corporate sustainability and ESG risks management within the bank.

Delivering ESG training to strengthen capability of ESG risks management

Cathay has actively learned international responsible investment practices from external industrial, governmental and academic institutions. We invited international experts to Taiwan for ESG analysis training since integrating the ESG databases and establishing the investment/leaning task forces in 2018. A total of 656 employees from Cathay FHC, Cathay Life, CUB, Cathay SITE, and Cathay Century participated in the training courses as well as the external conferences; the average training hours per participant was 1.4 hour in 2019. Besides, training lessons and materials of EPs project financing regulations and ESG Regulations for Corporate Loans are also available and updated on an ad-hoc basis.

Provide investment teams the ESG analysis tools to build comprehensive ESG Investment environment

ESG data is one of the basis for continuous improvement of Cathay’s ESG analysis ability. Cathay purchased multiple international ESG databases to provide the investment team comprehensive ESG data and analytical information. Cathay also provides ESG investment analysis tools to support the investment team.


Equator Principles (EPs)

The “Equator Principles” (EPs) is an international risk management framework for financial industry. It categorises risks in large project finance based on their potential environmental and social impact and initiates varying levels of review for different categories. It requires lenders to include human rights and engagement mechanisms, establish an environmental and social management system, and establish action plans in accordance with risks disclosed in environmental assessments. These items are listed in credit contracts for compliance and execution. Banks shall implement continuous monitoring of project construction and operations after funding loans and regularly disclose information on the implementation status.

As of the end of 2019, more than 100 financial institutions from 38 countries have signed the Equator Principles and become Equator Principles Financial Institutions (EPFIs). Cathay United Bank (CUB) became the first EPFI in Taiwan in March 2015. As of the end of 2019, there are five EPFIs in Taiwan, which has more EPFIs than China (3 EPFIs) and trails only behind Spain, the Netherlands, Canada (each with 7 EPFIs) and the United Kingdom, France, Japan (each with 6 EPFIs), and is tied with the United States, Australia, Sweden, and Brazil. CUB’s EPs projects are most in Taiwan.

United Nations Principles for Responsible Banking (PRB)

After becoming the first EPFI bank in Taiwan, CUB announced its voluntary adoption of the United Nations Principles for Responsible Banking (PRB) in December 2018, and became the first PRB bank in Taiwan. CUB established a task force in early 2019 to inventory its core competencies and plan to gradually implement the six major PRB principles: “alignment, impact and target setting, clients and customers, stakeholders, governance and culture, and transparency and accountability”. Through the implementation of the aforementioned principles, the Bank will integrate its own business strategies with the UN Sustainable Development Goals (SDGs) and the Paris Agreement.


Cathay FHC investment and lending ESG integration procedures

Scope of Responsible Investment/Lending

The scope of Cathay’s responsible investment/lending merely excludes the assets (e.g., cash) which are not applicable for responsible investment approaches. Considering the characteristics of the assets, we apply different management policies such as exclusion, ESG integration, and themed investment for the different assets.

Investment and Lending Exclusion Policy of the Group

Cathay screens high-risk industries (e.g., controversial weapons and pornography) and countries (e.g., countries that severely violate human rights or are sanctioned) to define the exclusion list of the group. The Responsible Investment Working Group reviews the exclusion list every year.

 

IResponsible Lending and ESG Integration Management Mechanisms

Expanding the spirit of EPs for E&S (Environmental & Social) post-loan management

CUB follows EPs spirits for focus and management in the project planning and construction stage. For non-EPs loans for which credit limits reach a considerable scale and the purposes of whose funds meet the definition of sensitive industries such as mining/oil refining/metallurgy, hydro/oil-fired power generation, and forestry, CUB lending approval review process must include evaluation of the E&S impact of credit application cases, proposals of post-loan management solutions, and examination and management of follow-up E&S performance through regular E&S reviews.

ESG Regulations for Corporate Loans fully reject coal-fired power plants

Starting from 2017, CUB complies with its ESG Regulations for Corporate Loans in all of its corporate lending cases so that ESG risk management is included in all corporate loan screening, evaluation, and post-loan management. In 2018, CUB added coal-fired power plants with higher greenhouse gas emission to the list of ineligible borrowers (e.g., tobacco products and pornography). It also completely stopped new loans to any coal-fired power plants in October 2019 to demonstrate to customers CUB’s increased focus on environmental protection and corporate social responsibility and that they must improve their performance to obtain loans from financial institutions.

Establishing ESG risk guidelines for sensitive industries

In April 2018, CUB established ESG Guidelines targeting the power generation, paper, chemical materials, general manufacturing, mining and metal industries to further strengthen its ESG risk management mechanism. The Guidelines consider many ESG risks that industries faced in the different operation cycles such as the risks involving water resources, dust, and noise posed by the paper industry in the materials production period, production and processing period, and sales period. The Guidelines specify best-practice principles, provide customers with practical advice on mitigation, and help employees recognize ESG risks in KYC procedures.

 

019 ESG Integrated Mechanism Review and Control Outcomes

Project Financing EPs Review and Control

During 2019, a total of 2 applications reached financial close (1 project was classed as Category A and 1 projects as Category C), and were disclosed accordingly.

Corporate Loan ESG Review and Control

Among the total of 9,043 corporate loan applications reviewed and closed in 2019, 320 applications with ESG concerns (e.g., sensitive industry, pollution issues, and management integrity) were subject to approval with detailed reasons for granting or maintaining business relationships, and 1 were rejected because of Integrity issue of the owner. A total of 3,148 current credit reviews underwent ESG assessment, of which 88 cases exhibiting ESG-related concerns (such as pollution issues and management integrity) were documented with detailed reasons for maintaining business relationships and post-loan management.

 

Themed Investing

Cathay defined four types of themed investing to strengthen sustainable investment aiming to exercise our core competencies to help toward the sustainable society.

 


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