On 12 October 2022, Climate Governance Initiative (CGI) hosted the Global Summit 2022: Ambition to Action, a 24-hour virtual conference spanning the globe and bringingtogether highly motivated board members and other eminent speakers who champion effective climate governance.
Climate Governance Malaysia is the secretariat for the ASEAN Climate Governance Network (ACGN) – which is supported by all institutes of directors in the region curated a series of 4 sessions for this 24-hour global summit.
The third session of the series is on sustainable financing, sustainable future?
The session featured the following distinguished speakers and panellists:
Natasha Landell-Mills, Partner and Head of Stewardship, Sarasin & Partners (Keynote speaker)
Kulvech Janvatanavit, CEO, The Thai Institute of Directors Association, Thailand (Moderator)
Ephyro Luis B Amatong, Advisor to the Chair of the ASEAN Capital Markets Forum (ACMF) and Consultant for the IFC/Sustainable Banking and Finance Network (SBFN), Philippines (Panellis)
Prof. Veronique J A Lafon-Vinais, Associate Professor of Business Education & Senior Lecturer of the Department of Finance, The Hong Kong University of Science and Technology, Hong Kong (Panellist)
Dr Agnes K Y Tai, Director of Great Glory Investment Corporation and Head of Sustainability & Advisory of Arta Asset Management Limited, Hong Kong (Panellist)
Keynote address by Natasha Landell-Mills, Partner and Head of Stewardship, Sarasin & Partners
"What has been treated as ‘off balance sheet’, needs to come on the balance sheet. global incentive framework will adjust." Natasha Landell-Mills
The climate crisis is not just an environmental phenomenon, it is a social imperative demanding an economic transformation across all sectors. Both physical and transition risks are profoundly changing companies' landscape, so boards need to adapt and demonstrate how their businesses will thrive by delivering solutions. This is what investors want to see – themselves acutely aware of their fiduciary commitments to savers.
What has been treated as ‘off balance sheet’, needs to come on the balance sheet. global incentive framework will adjust. While I believe there is broad agreement on the need to improve reporting on climate change –TCFD and ISSB only tackle part of the market architecture that needs to be upgraded. That is not to say they are not important – they are, and progress towards ensuring these are developed further and made mandatory should be fast-tracked.
But alongside these new standards, companies’ financial reporting should urgently encompass material climate factors. This is because with all the will in the world until companies’ numbers are aligned with achieving net zero outcomes, their capital allocation will not be. Companies need to be rewarded for taking action, not penalised.
Right now, in the vast majority of cases, companies leave climate change out of their accounts – so they are not accurately reflecting the economic impacts from the transition or the physical impacts, which means they have little incentive to change. If you own a thermal coal facility, for instance, impairment testing should incorporate expected carbon taxes, falling demand and prices over the medium term. As long as it ignores these economic realities, too much capital will flow into new thermal coal. The same is true for other carbon-intensive businesses, whether in transport, industry or finance.
Fortunately, both standard setters (IASB and IAASB) and regulators (ESMA, SEC, FRC) have recognised this point and have made clear that under EXISTING rules, material climate risks must be incorporated. It does not depend on ISSB or TCFD. Investors are equally clear – large alliances such as IIGCC, PRI, Asia Investor Group on Climate Change (AIGCC), etc have been calling for climate-conscious accounting since 2020. But investors go further; they ask for a 1.5C pathway visibility in the Notes to the accounts. Investors want to understand how the entity’s financial condition would be impacted by the promised decarbonisation scenario. They want to know whether capital enhancement is predicated on the continuation of non-aligned activities
In the end, we will not get Paris-aligned capital allocation, if we fail to ensure we have Paris-aligned accounting. The latest research of CA100+ focus company accounts by Carbon Tracker published last week demonstrates the failure to deliver this. Only a handful of companies considered a 1.5C pathway – no company fully integrated their 1.5C strategies into their accounting.
Climate needs to be brought back on the balance sheet – and robust strategies and a CAPEX plan developed as a result.
I, therefore, urge you to focus your gaze during this Session not just on TCFD and ISSB but on the more immediate gap in reporting that requires no new rules or standards; just implementation: Ensuring companies’ financial statements are aligned with a sustainable planet, not predicated on its destruction.
The following questions were discussed at the panel discussion:
1. How do you see the development of green financing in the world and Asia for the past five to ten years?
Insurance industry players started to realise that the frequency and severity of the natural disasters were increasing beyond what their models had assumed.
The roots of sustainability movements started a few decades ago. Originally it was mostly a tree hugger movement. In the past, green financing became increasingly important because it will reduce the cost of capital for low-green businesses which has been done on a good financing practice. It originated as a response to the challenges and risks posed by climate change.
Climate change only started to be taken a bit more seriously by businesses and accelerated over the past 10 years. It’s related to businesses realizing the materiality of climate change on business continuity. One of the earlier signs of a shift to a business approach was with insurance. It started when the insurance sector had to deal with Hurricane Katrina and the insurance industry players started to realise that the frequency and severity of the natural disasters were increasing beyond what their models had assumed and started digging into that.
In Asia, climate change poses both physical risks in terms of severe weather events as well as transitional and regulatory risks. To prevent the dire impact of this harsh environmental brunt of weather events, something must be done as these risks will not only affect us as an individual but also companies and businesses.
Green finance is a way to encourage businesses to move down to a responsible pathway towards a lower carbon future as well as to discourage further contributions to a high carbon future. Essentially investors, government and now customers want to discourage companies and businesses from continuing to contribute to climate change. They encourage companies and businesses to mitigate the risk of climate by moving towards a low-carbon future and one way to do that is to provide adequate financing for transition. Thus, initiatives like Climate Governance Initiative are very important to build awareness, educate and ensure that boards realize that they can no longer ignore climate change or sustainability.
Today, China has 111 signatories signing up as responsible investors. The numbers in Hong Kong and the rest of Asia are growing as well. According to Morgan Stanley, ESG investing has grown substantially in 2021. The investment had doubled to USD100 billion. That is a small figure compared to the total assets under management of an estimated USD160 trillion. Hong Kong has been designated as the green finance hub in the Greater Bay Area of China. Last year, according to the Green Bond Initiative, Hong Kong arranged and issued USD57 billion worth of green and sustainable debt instruments, USD31 billion in bonds and USD25 million in loans so everything is growing fast and big in the last 5 years, particularly after COP 25.
2. What are the current challenges of green finance?
Climate literacy is not enough as it will only focus on compliance but Climate leadership will push the agenda forward.
The biggest challenge in South East Asia is the need to build further awareness about green finance as it is growing fast worldwide. ASEAN first started looking at encouraging green finance in 2016. The number of those signed up for the principle of responsible investment was about 21 trillion at that time. In April 2022, it had increased to about USD121 trillion of assets signed up for the Principles for Responsible Investment.
Another challenge in South East Asia is while many are aware of the risks, not many are aware of the opportunities of transitioning towards a low-carbon future. For example, many companies are unaware that there is financing available for new cost-effective technologies that can increase a company’s efficiency.
The ASEAN regulators such as the Capital Market Forum, which is composed of all the capital market regulators in ASEAN, have launched several initiatives including the introduction of the ASEAN Green Social and Sustainability Bond Standards in 2017 and 2018, the launch of Sustainable Capital Market Roadmap in 2020 and recently at COP 26 in 2021, the issuance of version 1 of ASEAN taxonomy for sustainable finance.
The idea behind those initiatives is to guide ASEAN companies on how to tap into the 121 trillion in financing that is available as well as to assure investors that financial instruments carrying the ASEAN label adhere to international best practices and standards. Regulators are trying to facilitate and connect investors and companies to investment opportunities available in South East Asia countries.
Today, an estimated USD30 billion had been issued in ASEAN Green Social and Sustainability Bonds since 2017 across four ASEAN countries, including three sovereign issuances by the Philippines, Thailand and recently, Singapore. There is USD2 billion in sustainable Sukuk issuance from Indonesia. This number will only grow faster in the future but regulators want more companies to be able to access this financing to transition to a low-carbon future.
The government and regulators play an important role in the development of green finance. One of the roles is to provide standardization in taxonomy and standards across countries. There is a huge amount of work that has been accomplished towards providing taxonomy, standard and convergence between different regulators. Mainland China and Europe have been extremely active in common ground taxonomy which was adopted recently that provides a very useful guide to the participants in the industry.
On the finance and issuing side, there have been several standards developed by climate bond initiatives like ICMA and APML to guide issuers. Regulators must also work on guiding investors. Sustainable finance has gone through a bubble and deflating for some good reasons. There is a lot of sound work that has been done in the emerging of an international sustainability standards boards and it is very important in moving forward.
On the current state of sustainable finance in Hong Kong and perhaps in Asia, there is a recent survey done on 6,000 consumers around the Asia Pacific and the research found that consumers in Thailand (43%), Vietnam (43%), Malaysia (30%) and Singapore (27%) are big adopters of sustainable finance; many consumers are saying that for the banks to entice them to do banking, they must offer sustainable financial products. Currently, for investors and corporates, financial institutions are offering sustainable bonds, sustainability-linked bonds and loans. For consumers, banks are now offering green mortgages, green certificates of deposit as well as sustainable credit cards and debit cards. In Hong Kong, there are 2-3 innovations already in the markets.
In sustainability loans & bonds there are steps up and steps down, in terms of changing the coupon spread. In 2019 Hansen Development in Hong Kong agreed that any step up i.e penalty that they cannot achieve their KPI would go to charities. In 2021, New World Development has a bond where any penalty will go to the purchase of carbon credits. In June 2022, they issued a perpetual green bond of USD 500 million and it was being taken up by investors quickly. This is because investors now have a great appetite for sustainable finance.
There are many investors especially ultra-high net worth individuals and sovereign wealth funds, when they call for requests for proposals to asset managers, a component of ESG or climate-oriented theme investment are mandatory. This is because that capital channelling is to help corporate to decarbonise.
The main challenges for the corporate are:
i. Mindset – Especially in ASIA. Asians are still compliant-oriented, still checking the boxes. The current report from Bloomberg found that less than 50 Hong Kong companies signed up for a science-based target. The mindset has not immediately shifted to adopting and embracing climate and ESG as an integral part of doing business. CLP Holding Hong Kong is the pioneer in sustainability, having started its sustainability journey in 2007.
ii. Board Competency level – Initiatives like Climate Governance Initiative play an important role. Training modules and world-class research will help the boards to understand how to incorporate and how to do strategy, policy and how to deliver. Climate literacy is not enough as it will only focus on compliance but Climate leadership will push the agenda forward.
iii. Capacity & capability – This is a great barrier. Currently, there is insufficient capacity and capability in Asia for sustainable finance and ISSB is going to be acquiring assurance. From limited assurance to full-blown assurance require a lot of capacity to respond as well as data collection inside the corporate. This is slowly developing.
3. If a company do not apply ESG in their business operations, will it be left out?
Regulators are among the stakeholders that want to accelerate the transition on climate change but regulators want the transition to be affordable, just and in an orderly manner.
A company need to understand that this is about surviving. When we talk about small businesses or SMEs it is a very different problem than a large public listed or a big corporation. SMEs have very scant or no access to capital markets. So how do they fund themselves? If they are big enough, they can get a loan from the bank, an exporter can look at the supply chain finance. The exporter also has to meet the requirements of their buyers. The buyers, if they are large companies will be looking at sustainability targets along with their supply chain.
Scope 3 emission is extremely difficult to comply with. Most large corporations, do not know what their supply chain level belongs to. Currently, more banks are offering sustainable finance products. It is not difficult to transform a traditional financial instrument into a sustainable financial instrument. And in the supply chain, companies may adopt the same methods. For example, investors can decide that they will only provide supply chain financing if the client can demonstrate that they meet certain KPIs or the proceeds can only be used to finance the project that falls under sustainability scope or Environment, Social and Governance.
In Singapore for example, banks like DBS, UOB or HSBC, all have sustainable trade finance facilities. An initiative by the International Chamber of Commerce set standards for trade finance and recently launched digital initiatives to address the challenges in the supply chain through digitalization. If a company can track its supply chain, it can also track its sustainability impact. That makes the whole process easier to adapt to sustainability goals. Digitalization will be able to make carbon numbers transparent throughout the supply chain which means that Scope 3 in future will become transparent.
If a company wants to adopt Net Zero and wants to export to Europe, they must decarbonise their supply chain. This is a huge challenge but technology can be deployed to solve this challenge. It is going to take some time because when talking about the supply chain, companies need to get a consensus from many players and change of mindset.
Europe and New York state last year passed & executed legislation that importers now have to conduct supply chain ESG sustainability due diligence. Companies exporting to Europe or New York State, particularly in the textile and fashion business, are very particular about that. If a company doesn’t have the data to provide to its customer, it may fall out of the procurement suppliers list. Companies have to think about climate from a double materiality point of view, not only on how climate may affect their business. According to the Deloitte report, if you don’t take climate action now, the whole world by 2070 will be suffering at the cost of USD168 trillion.
Regulators are among the stakeholders that want to accelerate the transition on climate change but regulators want the transition to be affordable, just and in an orderly manner. In the value chain of the transition, no one should be left behind including the SMEs. A transition that all countries and all sectors of society can be part of is the objective of the regulators and private sector partners.
4. Any inspiring cases where a company change their business model, energy usage or changed the whole supply chain to change the game and become stronger?
It can be seen in the younger generations. In ASIA a lot of companies are family businesses, and the control is passed to the younger generations, this is significant because younger generations are more attuned to sustainability issues, and sustainability themes. So they are very keen to invest in impact investing, and investment with sustainability themes so hopefully the new generations will take the frontier of the business to sustainability.
China has 30-60 decarbonisation goals. The country is committed to hitting peak emissions by 2030 and carbon neutrality by 2060. So China has made it mandatory for their major SOEs to contribute and report on their progress starting this year, the Chinese listed companies have to report the environmental administrative penalties. China also has recruited foreign litigation lawyers to train their prosecutors to prosecute companies if they violate environmental policies, rules and regulations. That is a very big push in China. In Hong Kong, coming back to the ultra-high net worth family-owned business, we see that many are taking up decarbonisation. However, the majority of the business is still very slow thus, incentives from regulators i.e tax exemption, and lowering capital reserve requirements on green and sustainable loans on the books would hopefully accelerate the transition.
Some regulators are looking at a range of targeted incentives. In Singapore, Malaysia and Thailand there are potential subsidies given for those issuing green social sustainability bonds to help cover the cost of verification and the cost of developing internal green or sustainable selection frameworks. Countries like Vietnam also looking at tax incentives, and fiscal incentives for companies that issue by the national green taxonomy or green finance taxonomy. There are multiple attempts to provide incentives. In the Philippines, the regulators believe taking measures for sustainability is good for the company thus they should do it for the good of the company and not for incentives from the government.
5. Which countries are noted as lacking behind and is there any move to aid vulnerable countries who do not have the funds or infrastructure to make this change?
Each country is at a different stage of development. These issues have been brought up in various intergovernmental group forums/discussions. There is a pledge by the developed countries to support the transitions for vulnerable countries but sadly it has not been followed with any sort of action. In the case of Belize and Seychelles marine consolation, the Inter-American Development Bank and NGOs like Nature Conservancy working with the financial institutions, help to reduce the debt burden of those countries and invest in nature conservation. You can look at creativity & financial engineering to complement government-driven efforts that hopefully will materialise.
World Bank has already started collaborating with European asset managers where if they finance climate/carbon transition, the World Bank will take the first loss, thus fund managers are willing to channel capital to the transitioning economy. Companies especially in ASEAN must tap into green finance as funding and assistance is available.
Please find the recording here.