Climate Fight: Finance As Asia’s Most Effective Weapon

By Dr. Jun Ma, Chaoni Huang 17 February, 2020

As regulators step up action, green finance in Asia is set to take off. HKGFA's Ma & BNP's Huang expand

Regulations are key to the evolution of sustainable finance across Asia, from Indonesia's carbon trading pilot & Singapore's carbon tax to mandatory ESG disclosure for all listcos in China
Green finance is also booming e.g. the PBoC revised its macroprudential assessment to encourage green financing by banks; in 2019, onshore & offshore green bond issuance reached RMB350bn
However there are gaps to be closed, especially in HK: only 35% of asset managers integrated ESG factors in investment & risk management processes & more ESG thematic funds are needed

The article was first published in Asia Asset Management in February 2020. Click here to view. 

This is a critical year for climate. All eyes will be on how signatories to the 2015 Paris Agreement on climate change are delivering on their commitments at the national, regional, and institutional levels. But while the European Union is rallying its “green deal” and the US presidential election in November will determine its exit or stay in the accord, questions remain over Asia’s commitment.

While Asia is too big to be generalised…

…the evolution of sustainable finance across Asia has a common success factor – regulation

The war on climate change must be fought on multiple fronts. In Asia, finance may be the most effective weapon. Following in the footsteps of the European and US markets, green finance across Asia has taken off in the last five years. While Asia is too big and too complicated to be generalised, we think the evolution of sustainable finance across the region has a common success factor – regulation.

Regulators have made strong inroads in addressing market failures such as environmental externalities and information asymmetry. Capital flows have responded in kind.

Pricing carbon

China is the world’s largest emitter of carbon dioxide, responsible for 27% of global greenhouse gases.

China’s nationwide ETS aims to cover 8bn tonnes of CO2 emissions annually & may become the world’s largest emissions trading market

China’s nationwide Emissions Trading Scheme (ETS) aims to cover 8 billion tonnes of carbon dioxide emissions annually from around 100,000 industrial plants. The ETS will start with the coal-fired power industry, which is responsible for emitting 3 billion tonnes of carbon per year. The first trade will take place in 2020. China’s ETS may become the world’s largest market for trading carbon emissions, and could link up with other markets.

Meanwhile, Indonesia has committed to lowering carbon emissions by 29% on its own, and by 41% with international support by 2030. It will pilot carbon trading in 2020 as part of efforts to meet the goals committed to under the Paris treaty. We believe Indonesia has significant potential as a carbon credit generator, by restoring and protecting its priceless natural capital.

Smaller countries are also doing their part. Although Singapore has a relatively tiny carbon footprint with 0.11% of global emissions, the city state has rolled out a carbon tax across all industries. The government will collect the first payment of the carbon tax in 2020 at SGD5 (USD3.71) per tonne from facilities that emit 25,000 tonnes or more of greenhouse gases annually. The rate will be reviewed in 2023, with an eye to increasing the tax to between SGD10 and SGD15 per tonne of emissions by 2030.

Information barriers

Investors around the world have been voicing their need for quality data on environmental, social and governance (ESG). But the data may be inaccurate or missing altogether in Asian companies. Regrettably, years of voluntary disclosure requirements haven’t moved the needle.

Over the last two years, exchanges across Asia have made substantial effort to make ESG disclosures mandatory for listed companies.

China is a case in point. Effective 2020, ESG disclosure will be mandatory for all companies listed in China. Companies will better understand material impacts from ESG factors as more effective measurement and reporting mandates discipline and compliance in the system. The regulation will also significantly improve investors’ ability to assess companies through an ESG-focused lens. Growing international investment in China will further reinforce quality ESG disclosure and ESG risk management.

The HK Stock Exchange recently announced an upgrade of its ESG reporting rules…

…from July 2020, HK listcos must assess the effects of climate change

Similarly, the Hong Kong Stock Exchange recently announced an upgrade of its ESG reporting rules. From July 2020, Hong Kong-listed companies must report the role of the board in ESG governance, disclosure, and materiality in ESG reporting. Companies must also include an assessment of the effects of climate change, disclosure of social key performance indicators, and external assurance for ESG data.

The ultimate goal of all these measures is to influence capital flows towards activities that will support the transition to a low-carbon, climate-resilient and sustainable economy.

Credits supporting the green sectors from 21 major Chinese banks reached RMB10.6trn in the first half of 2019

China’s 13th five-year plan covering 2016-2020 mandated influencing capital flows for sustainable development. With a green financial system that now promotes green credit, green bonds and green funds, credits supporting the green sectors from 21 major Chinese banks reached RMB10.6 trillion (USD1.54 trillion) in the first half of 2019. This represents 9.6% of the banks’ total outstanding loans, an annual compound growth rate of 13.9% compared to the first half of 2013, according to the China Banking and Insurance Regulatory Commission.

China has been the leading green bond player globally since 2016, with total onshore & offshore issuance of RMB350bn in 2019

Last year, the People’s Bank of China revised its macroprudential assessment to include green lending and green bonds, which encouraged more green financing by banks. China has been the leading green bond player globally since 2016, with total onshore and offshore issuance of RMB350 billion in 2019, 30% more than in 2018, according to the China Green Finance Committee.

Meanwhile, the Hong Kong Monetary Authority announced a phased approach to promote green and sustainable banking in May 2019. The first phase developed a common framework to assess the “greenness baseline” of individual banks. The second phase set tangible deliverables, and the third mandated implementation, monitoring, and evaluating banks’ progress. Hong Kong also debuted its USD1 billion green bond.

Outside Greater China, we witnessed a surge of sustainable bond issuance from South Korea in 2019, including a USD500 million sovereign sustainable bond, aimed at supporting the green agenda and social development. Korean companies followed suit, racing to tap ESG capital globally. Korea’s US dollar and euro-denominated sustainable bonds reached a total USD9.59 billion last year, almost triple the 2018 issuance, and second only to China.

In SE Asia, regulators are walking the talk…

…Singapore’s Monetary Authority has included banks’ sustainability practices in its supervisory assessment

In Southeast Asia, regulators are walking the talk. The Monetary Authority of Singapore has included banks’ sustainability practices in its supervisory assessment. It has encouraged local banks to adopt industry standards and to enhance ESG disclosure, including completing ESG assessments for their corporate clients.

The Malaysian central bank, meanwhile, seems to take inspiration from the European Union. It has plans for a ‘principle-based’ green taxonomy for banks and insurers to identify and label economic activities that could contribute to climate change objectives.

Indonesia has taken green bonds to its heart with two landmark green sukuk or Islamic bond transactions in 2018 and 2019 respectively, with RP27.4 trillion (USD2 billion) outstanding.

Overall, sustainable bonds originating in Asia grew approximately 48% annually from 2016 to 2019 according to data compiled by Bloomberg, signifying the strong demand and supply dynamic.

Beyond debt

Outside debt markets, ESG investing has positive traction but is still playing catch-up.

According to the International Monetary Fund’s latest Global Financial Stability Report, there are nearly 2,000 funds with $850 billion of assets under management investing under ESG strategies. There is a clear gap that Asian-based investors need to close over time.

Asian securities regulators can look to Japan for inspiration. According to the Global Responsible Investment Review, Japan is the third largest market with USD2.18 trillion of assets under management embracing a spectrum of ESG investing strategies. Asset owners like the JP¥159.21 trillion (USD1.45 trillion) Government Pension Investment Fund and insurers such as Japan Post Insurance and Dai-ichi Life are the driving force in making ESG investing mainstream in the country.

Only 35% of asset managers surveyed in HK integrated ESG factors in their investment & risk management processes

It’s clear there is more work to do in Hong Kong. The Securities and Futures Commission (SFC) recently conducted a survey to determine how licensed asset managers regard ESG factors and climate risks in their investment decisions. Only 35% of the 660 licensed asset managers surveyed consistently integrated ESG factors in their investment and risk management processes. And just 23% had processes in place to manage the financial impact of risks arising from climate change.

Despite HK’s position as an internationally recognised financial centre, there are only around 20 ESG thematic funds available in the city

Despite Hong Kong’s position as an internationally recognised financial centre, there are only around 20 ESG thematic funds available in the city. A circular from the SFC at the end of 2019 sent a clear message to funds that more effort is required on ESG integration. The Hong Kong Monetary Authority, which manages a HKD4 trillion (USD510 billion) Exchange Fund, has publicly committed to ESG investing and recently became a signatory to the United Nations-supported Principles for Responsible Investment.

In Southeast Asia, the Monetary Authority of Singapore set up a USD2 billion green investments programme to accelerate the growth of a green finance ecosystem in the city state. In Malaysia, the country’s securities regulator introduced guidelines on sustainable and responsible investment funds in 2017, providing detailed information about sustainable and responsible investment policies.

2020 resolutions

This is going to be a make or break year for climate policies, with countries coming back to reassess their national determined contributions under the Paris accord. Asian countries must continue making headway in the global fight against climate change, and their financing policies are a critical piece of the puzzle.

Policymakers should continue to take the leadership role in paving the way as green bond issuers and ESG investors to spur greater private sector participation. Asia currently has three sovereign green bond issuers – Indonesia, Korea and Hong Kong. But there are 51 countries or regions, encompassing 60% of the global population, which have yet to tap green financing to fund their climate transition.

Bain & Co estimates that 90% of Asian investors have accelerated their effort to invest sustainably over the past 3-5 yrs

Bain & Company estimates that 90% of Asian investors have accelerated their effort to invest sustainably over the past three to five years. Between 2018 and 2019, the number of Asian fund managers that have signed up to the Principles of Responsible Investment increased by 15%. This is promising news because the task ahead is immense. The Intergovernmental Panel on Climate Change found that the world would have to cut global greenhouse gas emissions by a whopping 45% from 2010 levels by 2030 in order to limit warming to 1.5 degrees Celsius this century.

To reach these targets, we will need to mobilise trillions of dollars of capital from all public and private sectors and fund a sustainable transformation across Asia.

Further Reading

  • Can APAC Lead In Adaptation Finance? – After attending two key climate conferences, including COP 22, CWR’s Hu shares why adaptation financing in APAC is crucial though it’s lagging and how the private sector can lead this effort
  • 5 Trends For China Green Finance – Stay on top of China’s green finance trends & opportunities with China Water Risk YuanChao Xu’s 5 key takeaways from China’s Green Finance Committee Annual Conference. From mandatory disclosure to ERA and One Belt, One Road to green buildings
  • Green Finance Revolution: China Can Lead – Can financing required to meet targets laid down in Paris be met? WRI’s Shouqing Zhu & Andrew Steer on how China can lead with five recommendations
  • Hong Kong Green Finance Association Launch: Key Takeaways – What is the Hong Kong Green Finance Association and how can it aid China’s Belt & Road Initiative? China Water Risk’s Dharisha Mirando shares 3 key takeaways from the launch
  • Where Is The E In ESG Disclosure In China? – China is moving to mandatory environmental disclosure with a tentative 2020 deadline, but where are listco’s now? China Water Risk’s Dawn McGregor & SynTao’s Dr. Peiyuan Guo share 8 key takeaways from their newly released joint report, “CHINA PRIORITISES ENVIRONMENT: More Disclosure Needed To Match Rising Risks”
  • Connecting Finance & Water Risk – Natural Capital Coalition’s Mark Gough & Joseph Harris-Confino on their newly launched supplement for the finance sector – see how can this help bankers, investors and insurers alike amidst increasing ESG adoption
  • More Green, More Money? – Companies’ participation is vital to combat climate & water risks – what if they can access to more capital at the same time? CWR’s Ronald Leung illustrates the secret lies in active investor engagement

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Dr. Jun Ma
Author: Dr. Jun Ma
Dr. MA Jun is the Chairman and President of Hong Kong Green Finance Association, and Director of the Center for Finance and Development, Tsinghua National Institute of Financial Research. He is also a member of the Monetary Policy Committee of the People’s Bank of China, Chairman of Green Finance Committee of China Society for Finance and Banking, Chairman of the Supervisory Workstream (WS1) of the Central Banks and Supervisors Networking for Greening the Financial System (NGFS) and Co-chair of G20 Green Finance Study Group. Before joining Tsinghua University, he was the Chief Economist at the Research Bureau of the People’s Bank of China (PBOC) from 2014 to 2017. Prior to that, he worked for 13 years at Deutsche Bank, where he was Managing Director, Chief Economist for Greater China, and Head of China and Hong Kong Strategy. From 1992 to 2000, he worked as public policy specialist, economist and senior economist at the International Monetary Fund and World Bank. From 1988 to 1990, he was a research fellow at the Development Research Center of China's State Council.
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Chaoni Huang
Author: Chaoni Huang
As Head of Sustainable Capital Markets for Global Markets Asia Pacific, Chaoni leads BNP Paribas’ sustainable finance solutions for corporate, financial institutions and investors with a focus on primary asset finance and securitisation. Working with Global Markets in Asia Pacific and the Bank’s global sustainable finance community, Chaoni drives BNP Paribas’ continued expansion and leadership in Asian sustainable debt capital markets. Chaoni is an industry veteran with over 13 years of experience in sustainable finance having held various ESGrelated roles at Natixis, S&P Trucost, MSCI and the United Nations. In addition to her role at BNP Paribas, Chaoni is also deeply embedded in the sustainable finance industry where she is Vice President and Secretary General of the Hong Kong Green Finance Association and a guest researcher for the China Economy and Sustainable Development Centre at the Cheung Kong Graduate School of Business. Chaoni received her Bachelor of Economics from the University of Warwick.
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