Asia is ramping up its bid to combat climate change. Headlines from the recent COP26 climate summit include a new net-zero target for India and China’s pledge to increase cooperation with the US on climate issues. COP26 also secured a range of new commitments from global leaders, such as deals to limit the use of coal, reduce methane emissions and set global standards for carbon trading.
However, the conference also highlighted the scale of the challenge world economies still face to limit temperature rises to 1.5 degrees Celsius above pre-industrial levels, and Asia’s critical role in accelerating the transition.
Two weeks before COP26, experts gathered at BNP Paribas’ 2021 Sustainable Future Forum to discuss the evolving regulatory landscape in Asia and the action needed by policymakers to create the right environment for private finance to support the transition.
Translating ambition into action
“The world is taking action towards building a sustainable society, and the role of the finance industry is paramount,” said Hideki Ito, Vice Commissioner for Policymaking at Japan’s Financial Services Agency (FSA), at the Forum. “I believe it is very important to create an environment where growth funds are provided both domestically and overseas in order to achieve a net-zero society.”
The world is taking action towards building a sustainable society, and the role of the finance industry is paramount. I believe it is very important to create an environment where growth funds are provided both domestically and overseas in order to achieve a net-zero society.Hideki Ito, Vice Commissioner for Policymaking, Japan’s Financial Services Agency (FSA)
Ito’s comments are echoed by governments and regulators across Asia, who are focused on enabling investment in green projects and clean technologies that will put the region on the path to a net-zero future.
A key part of this is the need for rules governing eligible projects and corporate disclosure.
TCFD is on the way
Stricter climate disclosure standards are coming to Asia. In Japan, beginning in April 2022, the FSA will require companies listed on the Tokyo ‘prime’ market to disclose greenhouse gas emissions and climate-related risks, in line with the recommendations of the global Taskforce for Climate-related Financial Disclosures (TCFD).
Japan is already ahead of the curve, with more companies endorsing the TCFD than in any other country, according to Mana Nakazora, Chief Credit Strategist, Chief ESG Strategist and Vice Chairperson for Global Markets at BNP Paribas Securities (Japan) Limited.
As of 30 September 2021, the number of TCFD endorsers had grown to 2,529 organisations worldwide, with 509 of these in Japan. The FSA plans to expand the requirement to all listed companies in fiscal 2023.
“Japan must improve the quality and quantity of disclosures based on the recommendations of international organisations such as TCFD,” said Ito.
Other major markets are not far behind. Hong Kong is working towards mandatory TCFD reporting by 2025 and Singapore has proposed a phased approach beginning for some sectors in 2023. The Monetary Authority of Singapore (MAS) is also supporting efforts to create harmonised standards for climate disclosures through the International Organization of Securities Commissions (IOSCO).
Something where central banks in the financial and non-financial sector can work together is to form a unified, harmonised climate-related disclosure.Bey An Lim, Head of the Sustainability Office, MAS
“Something where central banks in the financial and non-financial sector can work together is to form a unified, harmonised climate-related disclosure,” said Bey An Lim, Head of the Sustainability Office at the MAS. “I do hope there will be a more concerted effort towards that.”
These efforts are bearing fruit. At COP26, the IFRS Foundation announced the creation of a new accounting body to oversee climate-related disclosures and combat greenwashing.
Local standards are important
“On the one hand I think the purpose of the taxonomy is really to enable the classification of activities so that it’s easy for everybody to be aligned in terms of what’s green and what is brown and in transition,” Lim said. “But at the same time it’s also important that we take into account the region’s context and try to be inclusive and just.”
In Southeast Asia, low-carbon alternatives in certain countries and sectors may not yet be feasible for technological or economic reasons. A local or regional taxonomy should enable transition activities and set a sensible timeline, but also ensure that less developed markets are not left out. “We need to bring everyone along on this journey,” said Lim.
Japan’s FSA is working on its own framework for green bonds that is likely to differ from standards used in the European Union, for instance, around the eligibility of nuclear energy. It is also studying a code of conduct for ESG rating agencies. “Europe’s standards will not necessarily resonate in the Japanese market,” said Ito.
China introduced local taxonomies, disclosure requirements and some incentives four to five years ago, to steer investment into cleaner industries. More recently, Beijing’s commitment to peak carbon emissions by 2030 and reach net-zero by 2060 has prompted regulators to re-think their goals.
“All of these are being refined to be more consistent with carbon neutrality,” said Dr. Ma Jun, Chairman of the China Green Finance Committee. “For example on the taxonomy side, the PBOC [People’s Bank of China] revised its green bond taxonomy earlier this year, removing coal-fired power generation from that catalogue.”
On the disclosure side the PBOC is now emphasising the need to disclose more carbon and climate related information, including setting up a mandatory requirement for banks to disclose carbon-related information.Dr. Ma Jun, Chairman of the China Green Finance Committee
These steps are bringing China closer to international standards. China and the EU are currently working on a common ground taxonomy for sustainable investments, which will highlight the common features of the two definitions and set a basis for greater global harmonisation.
“On the disclosure side the PBOC is now emphasising the need to disclose more carbon and climate related information, including setting up a mandatory requirement for banks to disclose carbon-related information,” said Dr. Ma.
The regulators shared a common goal: enabling investment in green infrastructure and new technologies that will be crucial to Asia’s transition.
Lim at the MAS is studying ways to make transition projects more attractive to private sector investors, who currently are not comfortable with the technology or country risks involved: “One thing for us is to see how we are able to support the mobilisation of capital, not just in activities that are commercially bankable.”
China also needs to catalyse investment. Ma cited a recent report from the Green Finance Study Group that estimated demand for green and low-carbon investments will reach CNY487 trillion (US$76 trillion) over the next 50 years. “It is a huge amount. We need not just domestic financing but also international financing, [which is also] bringing technologies, expertise and other resources.”