1The coal phase-out is APAC’s most prominent ESG issue
No fuel plays a greater role in driving climate change than coal. And APAC occupies the unwanted position at the top of the global leader board for coal emissions.
China is by far the world’s largest consumer of coal – responsible for more than two-thirds of planned additions to coal capacity from new power stations. Several other leading APAC markets, including India, Indonesia, Australia and Japan, continue to depend on coal for a large share of their electricity supply.
On the plus side, APAC governments have committed, with varying degrees of enthusiasm, to the ‘phase-out’ or ‘phase-down’ of coal. Outside China, the number of coal-fired power stations in the planning or construction stages has drastically declined since the Paris Agreement. Meanwhile, many investors in the region are preoccupied with how to deal with the coal phase-out in transition plans. GFANZ’s APAC network began a consultation in June on a set of voluntary guidance for investors to finance the early phase-out of coal assets.
The coal phase-out is a complex issue for the wave of taxonomies in development across APAC. Matteo Bigoni, head of taxonomies at the Climate Bonds Initiative, tells Responsible Investor: “Taxonomies look at activities, projects and assets, not companies. A taxonomy can say there needs to be a transition plan in place, but it doesn’t define what it looks like.”
In Indonesia, a proposal to allow some coal-fired power stations to be eligible for a ‘green’ label in the country’s taxonomy has reignited controversy. To the fury of the sustainable finance community, the taxonomy would allow coal-fired power stations that power EV battery facilities to be labelled as green investments.
2Regulations are ramping up
Leading APAC markets have followed the global trend of tightening ESG regulations over the past year. Key developments in 2023 include India’s introduction of rules requiring ESG funds to invest a minimum proportion of their assets in one of six sustainability themes, along with Australia’s proposals for a fund labelling regime for sustainable investment products.
The publication of the first two ISSB standards in July received a positive welcome from regulators in several key markets. Singapore has already launched a consultation on making ISSB-aligned climate disclosures mandatory from 2025, while Hong Kong is also set to take the ISSB requirements into account when finalising amendments to its Listing Rules.
And the development of taxonomies has continued at pace throughout APAC. In March, the regional body for Southeast Asia, ASEAN, published an updated second version of its taxonomy. It is intended to serve as a baseline on which national versions can build and is one of only a few worldwide to be developed on a regional basis.
Almost all APAC’s largest markets have already developed taxonomies, or are in the process of doing so. Japan is the major outlier, with the Ministry of Economy, Trade and Industry instead preferring to issue a series of roadmaps to help companies raise finance for activities that can be labelled ‘transitional’.
3Supply chains in the spotlight
APAC accounts for just over half of global manufacturing output, and investors are increasingly aware of the potential for serious ESG risks to emerge in corporate supply chains.
Prominent recent examples include the supply chains of multiple Chinese solar panel manufacturers becoming associated with the use of forced labour and other abuses against the ethnic Uyghur minority. Meanwhile, major health and safety failings at garment factories have repeatedly affected the reputation of major apparel companies.
Investors are also increasingly engaging with corporates on the need to report their Scope 3 supply chain emissions and ultimately work with suppliers to reduce their carbon footprints.
4Nature is on the agenda
Globally, nature has been gaining momentum as a key ESG priority since the Kunming-Montreal Global Biodiversity Agreement was signed at COP15 in December 2022. The deal on global targets for protecting biodiversity was followed in September by the Taskforce on Nature-related Financial Disclosures publishing its final recommendations for reporting nature risks, impacts and dependencies.
Investor understanding of nature-related risks remains relatively nascent in many key APAC markets. Almost two-thirds of TNFD forum member organisations in APAC are domiciled in just two countries, Japan and Australia.
But there is no doubt that the subject is rising up the agenda across the region. Indeed, engaging with Asian corporates can play a vital role in combatting nature loss. In September, the investor initiative Nature Action 100 named nine Chinese companies among its targets for engagement on nature-related risks.