This is an exciting time for climate finance and responsible investment across the Asia Pacific region. It needs to be. We have no chance of meeting global climate targets if the region is not fully on board.
With this in mind I was delighted when the Asian Investor Group on Climate Change (AIGCC) commissioned me to undertake a piece of research for their September 6 relaunch to summarise activity across the region on green or sustainable finance. ANZ sponsored the report, which is titled ‘Investing for the Climate in Asia 2016’.
It starts with the ‘challenge’ in the form of climate change commitments per market and the structure of current primary energy supply. We reviewed reports on investment needs to get a better sense of the scale of the challenge. The IEA has some of the most detailed scenarios. Their projections show cumulative investment requirements for renewables and energy efficiency between 2014 and 2035. This needs to reach a mammoth USD 7.7 trillion for China, India, Japan, and South East Asia in order to meet energy demand and the two-degree temperature target agreed in Paris.
The main thrust of the report was to assess the finance sector response in the form of domestic regulatory activity and financial institution policy across the 12 largest Asia Pacific markets. It covered regulatory initiatives in banking, stewardship codes, and ESG disclosure rules for companies. It then assessed the policies of 36 banks, 30 investors, and 24 insurers to understand their levels of commitment to addressing carbon or climate risks in their portfolios and identifying new opportunities. Overall, the report found a solid start, but that there is a long way to go.
For me, the best part was the momentum. Six years ago, when I first started work in Asia, there was almost no activity on these issues from domestic institutions or regulators. The last two years have seen a major acceleration.
As at the launch date, five markets had some form of policy on responsible lending. This included China’s Green Credit Guidelines that have driven green banking and climate bond issuance. The Guidelines on Responsible Financing from the Association of Banks in Singapore have also spurred activity: the main domestic banks now have an initial policy statement in this area and hiring has started; know-how is a key barrier for adoption of responsible finance. Indonesia has also forged ahead with a sustainable finance roadmap from the financial services authority (OJK) and a joint commitment on sustainable banking from the eight largest banks.Stewardship codes have sprung up across the region to encourage investors to raise governance and sustainability issues with companies. Four markets have codes or principles – Japan, Malaysia, Hong Kong and Taiwan – and three have draft codes under consultation – South Korea, Singapore, and Thailand. Most of these refer to sustainability. Hong Kong has taken a different approach from the other markets that have presented codes in that it did not include a sign up list with its Principles for Responsible Ownership.
There has also been significant progress on ESG disclosure rules. Six markets: Hong Kong, India, Malaysia, Singapore, Taiwan, and Thailand, have included ESG or sustainability in their listing requirements, while some of the other markets had national regulations or areas of company law that required disclosure of emissions or key sustainability risks. Different markets have taken different approaches in their listing rules, usually creating phased disclosure requirements starting with large capitalisation companies. Hong Kong rules specify disclosure of KPIs including greenhouse gas emissions, whereas Malaysia and Singapore leave it to boards to determine the indicators they will use to describe how their companies manage material risks.
The disclosure at the institutions also showed progress. For the banks, 29 (81%) had a policy on responsible lending. All markets had at least one bank with a policy. Generally, banks were happier to discuss opportunities in green finance – 22 (61%) mentioned green finance solutions – than they were to discuss restricting capital to sectors because of climate change risks – only 10 (28%) mentioned climate change in this context.
From the investors, 16 (53%) included some form of policy on corporate governance. These varied from detailed descriptions of voting patterns over multiple pages to short descriptions of circumstances in which the investor would raise issues with companies. Most policies referred to ESG, but only 9 (30%) of the investors referenced climate change (or high energy/ carbon) as a reason to engage.
Policies are important, but the key question will be the flows of capital. Will the policies drive enough change to reach the USD 7.7 trillion needed for renewables and energy efficiency across the region? Will the banks and the institutional investors step up to fund the required debt, or prompt the companies to which they have exposure to make the required investments? In my view, it really is too early to tell.
Many banks, investors, and insurers are now committed to innovation. The trial projects and spending – even for Chinese climate bonds where the numbers have exceeded USD 200 billion – are still woefully short of the levels required. But Asian financial markets are still at an early stage of the journey. It is like comparing an R&D budget to a Capex budget. At this point it is better to judge progress on the basis of policies and commitments, rather than the size of the projects.
This will change in future years. When the numbers become bigger the question of standards will also become an issue. It will be easier for banks, asset owners, and regulators to efficiently allocate capital to green or sustainable finance when these terms are more clearly defined. It will be difficult to create consistency between different markets that have different features. At this stage, financial institutions in Asia need to innovate and it is natural there will be competing approaches. But there will come a point when it is helpful to harmonise standards for green finance.
Asian companies and boards will also need help to understand the strategic implications of climate change. Compared to Europe and North America, Asia sees far less engagement with companies on the issue. The discussions and company disclosure are not nearly as sophisticated. The Malaysian national power utility, for example, does not disclose greenhouse gas emissions numbers! Both investors and companies will need to develop their knowledge and human capital to have the deeper discussions necessary.This suggest another way to assess progress: look at hiring patterns. There are several hopeful data points from my home markets as well as across Asia. Singapore’s Temasek has just set up a sustainability team; OCBC Bank is hiring an ESG policy executive; and at PRI-in-person earlier this month I met for the first time an analyst from Malaysia with ESG in their title. New hires and new faces are popping up across the region.
Overall we cannot know whether Asia will accelerate its efforts fast enough to keep global temperatures within the two-degree target. But we can say that there is finally some momentum in the Asian financial sector on addressing sustainability and climate change.
Many international banks, insurers and investors are considering how to engage with the issues and the issuers and looking to support developments in the region. If you are working at one and need ideas or assistance, please do get in touch. Alternatively, to find out more about important new regional initiatives like the AIGCC, go to www.aigcc.net where you can download the report and find out how you can get involved.
Ben McCarron is Managing Director at Asia Research and Engagement (ARE)