Green Finance: what about Asia?

2020 is a critical year for the world to deliver on our commitments to the Paris Agreement. But questions remain over Asia's commitment.

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All eyes are on how each of us at national, regional and institutional levels are delivering on our commitments to the Paris Agreement. But, while the European Union is rallying its “Green Deal” and the US presidential election will determine its exit or stay in the Paris Agreement, questions remain over Asia’s commitment.

The war on climate change must be fought on multiple fronts. In Asia, finance may be the most effective weapon in its arsenal. Following in the footsteps of the European and American 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 Asia 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.

Putting a price on carbon: From large to small 

China is the world’s largest emitter, responsible for 27% of global greenhouse gases. China’s nationwide Emissions Trading Scheme (ETS) aims to cover 8 billion tonnes of carbon dioxide emission 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 outside China.

Bridge to power plant in Gongyi, China

As a signatory to the Paris agreement, Indonesia has committed to lowering carbon emissions by 29% on its own and by 41% with international support by 2030.  As part of the Paris effort, Indonesia will pilot carbon trading in 2020. “We believe Indonesia has significant potential as a carbon credit generator, by restoring and protecting its priceless natural forests,” said Chaoni Huang, Vice President of Hong Kong Green Finance Association (HKGFA) and Executive Director, Head of Sustainable Capital Markets Asia Pacific, BNP Paribas.

Small countries are also doing their part. Despite Singapore having 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 of Singapore will collect the first payment of the carbon tax in 2020 at S$5 per ton from facilities that emit 25,000 tCO2e or more of greenhouse gases annually. In 2023 the Government will review the rate, with an eye on increasing the tax to between S$10/tCO2e and S$15/tCO2e by 2030.

Addressing information barriers

Investors around the world have been voicing their need for quality Environmental, Social and Governance (ESG) data. In Asia, companies’ ESG data may be inaccurate or missing altogether. Regrettably, years of voluntary disclosure requirements haven’t moved the needle.  

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

A case in point is China. Effective from 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 laws 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.

Similarly, the Hong Kong Stock Exchange (HKEX) recently announced an “upgrade” of its ESG Reporting rules. From July 2020, HKEX-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.

Influencing Capital Flows

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

China’s 13th five-year plan mandated influencing capital flows for sustainable development. “With a green financial system that now promotes green credit, green bonds and green funds, we saw credits supporting the green sectors from 21 major Chinese banks reach RMB 10.6 trillion (USD 1.54 trillion) in the first half of 2019,” explains Dr. Ma Jun, Chairman and President of HKGFA. This represents 9.6% of the 12 major Chinese banks’ total outstanding loans, an annual compound growth rate of 13.9 compared to first half of 2013, according to the latest China Banking & Insurance Regulatory Commission. In 2019, the People’s Bank of China (PBoC) also revised its Macro Prudential 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 issuance of RMB 737.57 billion outstanding.

In May 2019, the Hong Kong Monetary Authority (HKMA) announced a phased approach to promote green and sustainable banking. Phase 1 developed a common framework to assess the “Greenness Baseline” of individual banks, Phase II set tangible deliverables, and Phase III mandated implementation, monitoring, and evaluating banks’ progress. Hong Kong also debuted its USD 1 billion green bond.

Central business district in Hong Kong

Outside Greater China, we also witnessed a surge of sustainable bond issuance from Korea in 2019. Korea impressed with a sovereign sustainable bond issuance of USD 500 million, aimed at supporting the green agenda and social development. Korea’s corporates and financial institutions followed suit, racing to tap ESG capital globally. In 2019, Korean’s sustainable bonds in USD and EURO reached a total USD 5.54 billion, surpassing Chinese issuers.

In Southeast Asia, regulators are walking the talk. The Monetary Authority of Singapore (MAS) has included the 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.

Malaysia’s central bank, Bank Negara Malaysia (BNM), 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 transactions in 2018 and 2019 respectively, with IDR 27.4 trillion (USD 2 billion) outstanding. 

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

Sustainable Bonds originated in Asia
Sources: Bloomberg, BNP Paribas

Beyond debt

Outside debt markets, ESG investing has positive traction but is still playing catch-up. According to the latest International Monetary Fund’s (IMF) Financial Stability Report, there are nearly 2000 funds with AUM of USD 850 billion investing under ESG strategies broadly speaking. 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 Global Responsible Investment Review, Japan is the third largest market with AUM embracing a spectrum of ESG investing strategies. Asset owners like the JPY 159.21 trillion (USD 1.45 trillion) Government Pension Investment Fund (GPIF) and lifers such as Japan Post Insurance are the driving force in making ESG investing mainstream in Japan.
Dr. Ma argues it is clear there is more work to do in Hong Kong. “The Hong Kong S.A.R. 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. Only 23% had processes in place to manage the financial impact of risks arising from climate change.”

There are approximately 20 ESG thematic funds available in Hong Kong, a large contrast to Hong Kong’s position as internationally recognised financial centre. The circular, announced in year-end 2019 by SFC, sent a clear message to SFC authorised funds that more effort is required on ESG integration. The HKMA, which manages a HKD 4 trillion (USD 510 billion) Exchange Fund, has publically committed to ESG investing and recently became a signatory of the UN Principles for Responsible Investment.

In Southeast Asia, MAS set up a USD 2 billion green investments programme to accelerate the growth of Singapore’s green finance ecosystem. Securities Commission Malaysia (SC) introduced the Guidelines on Sustainable and Responsible Investment Funds in 2017, providing detailed information about sustainable and responsible investment (“SRI”) policies and more.

2020 Resolutions

2020 is a make or break year for climate policies, with countries coming back to reassess their National Determined Contributions (NDR) after the historic Paris Agreement in 2015. Asian countries must continue making headway in the global fight against climate change, and their financing policies are a critical piece of the puzzle.

“Policy makers should continue to take the leadership role in paving the way as green bond issuers and ESG investors, to activate more private sector participation,” says Huang.

Asia currently has three sovereign green bond issuers in Indonesia, Korea and Hong Kong. However, as Huang points out, that leaves 51 countries/regions in encompassing 60% of the global population, who have yet to tap green financing to fund their climate transition.

Bain & Company estimate 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 United Nations’ Principles of Responsible Investment has increased by 15 percent.

This is promising news, because the task ahead of us is immense. The Intergovernmental Panel on Climate Change (IPCC) found that the world would have to cut its 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 trillion dollars of capital from all public and private sectors and fund a sustainable transformation across Asia.