Sustainable finance in Asia: Behind but fast-growing
The development of ESG investment is uneven in the global market, with Europe and North America accounting for over 80% of global sustainable investment assets. While in Asia, the journey of sustainable finance is still in its early days, however, it is projected to have the fastest growth in ESG assets under management in percentage terms in future years.
The urgency to address climate change speeds up the investment of Asia countries in ESG-related projects. Before the COP 26, major emission countries in the region joined international efforts by committing to the goal of carbon neutrality. For instance, China outlined the country’s climate plan to peak carbon emissions before 2030 and achieve carbon neutrality before 2060, while India pledged a net-zero emission by 2070.
However, such a transition requires vast investment. According to Tsinghua University’s Institute for Climate Change and Sustainable Development, China would have to invest around US$20 trillion from 2020 to 2050 just for the energy system alone to achieve its carbon neutrality target. To facilitate the transition more efficiently, green finance appears as a key instrument to engage foreign investment and private enterprises through financial products such as carbon credit, green bonds, and ESG ETFs.
It’s all about standardization
Like plants require suitable soil to grow, the development of green finance requires an innovative financial system, an ecosystem of green finance products and services, and a supportive regulatory environment. For Asian countries to catch up, establishing a domestic green taxonomy and standardising ESG data disclosure would be crucial to green finance development.
A green taxonomy is the foundation of ESG investment, in other words, it provides a common framework, setting the bar for investments that can be defined as environmentally sustainable. With a taxonomy, green financial products would be able to be labelled as taxonomy-aligned, therefore, avoiding ambiguous standards and averting investors’ suspicions of greenwashing. Although regional unions such as Europe and ASEAN established their taxonomy, countries are still required to work out their domestic taxonomy that complies with their existing regulations and financial framework. It is a time-consuming consultation process for the regulators and the industry to reach a consensus – where the green taxonomy should be harmonised with the taxonomy of other regimes, while the industry does not want the design of taxonomy to put an additional capital burden on banks in climate risk management.
The establishment of taxonomy will also affect the ESG data disclosure, which is fragmented across Asia. There is a split between developed markets and emerging ones. Developed markets, such as Hong Kong, Singapore, and Taiwan, are leaning toward European standards. Whereas in China, regulators are paying an effort to standardise ESG disclosure to make it connectable with international markets. The inconsistencies of ESG disclosure among companies feed into a lack of coverage from an ESG scoring perspective. It is challenging for investors to assess a company’s ESG performance when there is a lack of a unified set of rules that could apply across the region. Hence, it diminished the willingness of investors to finance ESG projects.
Hong Kong and Singapore in the competition
The long-standing regional competitors in financial services, Hong Kong and Singapore, are both angling to become the regional trading hub for sustainable finance. In terms of the diversity and volume of green financial products, Singapore Exchange is leading no matter the number of sustainability, green, social or transition bonds listed or the market worth of these products.
In designing domestic taxonomy, regulators in Hong Kong have been engaged with the industry in consultation with the Common Ground Taxonomy report established by the International Platform on Sustainable Finance updated in June 2022, which the report resulting an in-depth comparison exercise that puts forward areas of commonality between Mainland China and the European Union’s taxonomies. Meanwhile, Singapore established its second consultation paper on its proposed taxonomy for Singapore-based financial institutions, which featured the compatibility of ASEAN and EU’s Taxonomy.
The intense competition of the two cities more or less provened the huge potential of sustainable finance in Asia as a future growth engine in the financial services. It is believed that the two financial hubs, with well-established financial infrastructure and proactive regulators, will be the pioneer to lead the region’s sustainable finance development.