Funding Asia’s great green transition

It’s a necessary mark to hit if the world is to reach its stated target of staying below its 2°C warming target (that is, 2°C above pre-industrial levels).

" The pace of change continues to far exceed expectations: a change seen strongly in the climate finance sector."
Emma Herd, CEO at Investor Group on Climate Change

Achieving this is a tall order but the pace of change continues to far exceed expectations - a change seen strongly in the climate finance sector.

A new report released to mark the launch of the new Asia Investor Group on Climate Change(AIGCC) aims to help make sense of the shifting landscape across 12 Asian markets.

By reviewing regulations, industry initiatives and surveying 36 banks, 30 investors and 24 insurers, Investing for the climate in Asia is the most comprehensive analysis to date of climate finance sector activity in Asia.

REMARKABLE

When you consider only three years ago climate risk and opportunity barely existed in the language of many institutions and regulators across Asia the progress, though far from universal, is remarkable.

The report reveals 31 per cent of the institutions reviewed now factor climate change risks into their financing decisions, with 61 per cent of banks referring to green products and 56 per cent providing some quantification of their exposure.

Meanwhile, over a quarter of banks refer to climate change factors as a reason to limit financing and 81 per cent disclose their policy on responsible lending.

Getting to grips with the opportunities and grappling with the risks as the world’s energy system transforms can be a dizzying prospect, not just for investors, but also for regulators.

Today, five of the countries surveyed have banking initiatives, four have sustainability codes and five include sustainability disclosure within the listing rules of their stock exchange.

To take just one example, in 2015, green bond standards were launched from the People's Bank of China (PBOC) and the National Reform Development Committee.

This was followed by PBOCs green bond market opening in January this year, with China’s overall green bond market predicted to reach $US230 billion by around 2020.

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RISKS

While the investment opportunities are undeniable, so too are the risks. Caught in a pincer movement between the irresistible growth of renewable energy and tightening regulations to mitigate climate change, fossil fuel assets will increasingly lose value.

As early as 2013, well before the gavel fell on the 2015 Paris Climate Agreement, the world added more capacity for renewable power than for coal, gas and oil combined. The gap has been widening even since with investment in Asia dominating.

It stands to reason the higher the carbon intensity of an asset or portfolio, the more investors must understand and mitigate the risk they face. Failure to do so in the future will lead to losses as the inevitable transition continues.

In Hangzhou, China, G20 leaders have continued their own drive to smooth the transition by making climate risk a central element of their discussions. The joint China-US announcement they have both ratified the Paris Agreement is also a game changer.

At the same time, an industry led task force convened by the Bank of England Governor Mark Carney, chaired by Michael Bloomberg and established under the Financial Stability Board (FSB) at the request of G20 Finance Ministers, is drafting recommendations for measures to disclose climate-related financial risks. The taskforce is aiming to develop universally accepted standards on climate change disclosure.

By working with Asia-based asset owners, investors, policy-makers and the global community around climate finance and investment, the new AIGCC aims to help cauterise the risk to returns from the old, high-carbon industrial past and seize the opportunities in switching to a clean new economy.

Coming to terms with rapid change is a major challenge for any institution or government. But this is a challenge we must embrace. Because if one thing is clear in Asia today, it is that we are at the epicentre of a great transition. 

Emma Herd is CEO at Investor Group on Climate Change