Asia awakens to green finance

For many in Asia's finance industry, investment decisions are often based on hard returns and very little else. Factors such as the environment were once left out of the equation, but this is now changing rapidly

27 February 2017

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    For many in Asia’s finance industry, investment decisions are often based on hard returns and very little else. Factors such as the environment were once left out of the equation, but this is now changing rapidly.

    “Green finance is a relatively new field in the region, but it has developed relatively fast in the past few years,” explains Hongbin Qu, Chief Economist for Greater China at HSBC. 1

    Regulators and policymakers across Asia are increasingly focusing on ESG - environmental, social and corporate governance criteria to gauge companies, while asset managers are using these principles to maximise returns on their investments. 2

    A number of countries and economic sectors across the Asia-Pacific region are making commitments to sustainable finance and impact investing. For instance China is now using its presidency of the G20 to leverage green finance. It is keen to stimulate more capital in sustainable development, while reigning in polluting investments. 3, 4

    “The challenge is to mobilise finance, yet the bigger challenge in the developing world is to address issues around risk, rates of return and the size of projects,” says Yvo de Boer, Director-General of the Global Green Growth Institute. “We need to see how we can intelligently use public policy to effectively leverage private finance to address some of these challenges.”

    One issue in developing Asian nations from Bangladesh to the Philippines is that many of the green initiatives – such as rural off-grid solar or greener waste and transport systems – are relatively small scale projects with equivalent levels of investment. These aren’t as attractive to investors as larger schemes.

    “What I often find when talking to financial institutions, is that if something is less than USD50 million they’re not interested, because the project is too small and the transaction costs are too high,” de Boer explains.

    Particularly in Asia, a lot of investors are also squarely focused on thematic issues, in that they’re specifically backing companies that are dedicated to environmental protection, cleaning water supplies or de-carbonising the energy sector. This is different to other areas of the globe. 5

    “What other regions are doing is looking more holistically at corporations across all sectors,” explains Zoe Knight, Head of the Climate Change Centre of Excellence for HSBC. “This means that they’re identifying say companies in IT that have strong sustainability credentials i.e. they’re reducing their carbon footprint - they’re talking to employees about what they can do and they’re now building more products and services that are energy efficient.” 6

    The Asian market has some way to go in order catch up with Europe on the green finance front7. Starting next year, listed companies in Hong Kong 8 will have to make mandatory public disclosures, while Australia 9 has made ESG disclosures mandatory since 2014. Singaporean 10 will have to wait until 2018. While China is just starting to embed green and low-carbon initiatives into its development – see video here.

    Only now are some companies in the region realising that they need to make public disclosures about corporate policies around emissions and resource use, as well as how they affect the environment. It will therefore take a while before green issues are part of the market’s DNA in Asia.

    “For instance, the green bond market is quite new in Asia, we will have to monitor what has actually been done with the funds raised and what kind of projects have been financed,” explains Julien Bras, Co-Portfolio Manager at the Allianz Green Bond Fund.

    “Ideally we want to work out what impact a project will have and if we’ve been provided with enough quantitative and qualitative elements from issuers - this will be interesting to see,” he states.

    Stock exchanges including those in India, Malaysia, South Korea, Sri Lanka, Thailand and Vietnam have all now signed up to the Sustainable Stock Exchanges Initiative. This helps stock exchanges promote sustainable investments in the long term, as well as improve the ESG performance and disclosure of listed firms. 11

    The United Nations-backed initiative also promotes innovation within the capital markets for funding projects that fight the adverse effects of climate change. “There are certainly a lot of opportunities for corporations across the board in green finance, because all corporations will be either impacted by climate change, or can provide solutions to the problem,” explains Knight.

    “A regional law in France has impact on Asia because Asian fund managers will be looking to win business from French asset owners. In order to win business they’ll need to comply with new laws in France which says that French assets have to disclose their climate strategy and how they’re managing their carbon footprint – this has global consequences,” she states. 12

    References

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