In the next 20 years, at least USD 7.7 trillion is needed for renewable energy and energy efficiency markets to meet the demands of China, India, Japan, and South-East Asia if the world is to reach its target of staying ‘well-below’ the agreed 2°C warming target.
Achieving this is a tall order, but the pace of recent change continues to far exceed expectations: a change being mirrored in the climate finance sector.
New research released today 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.
When you consider that 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.
For instance, the analysis reveals 31% of the institutions reviewed now factor climate change risks into their financing decisions, with 61% of banks referring to green products and 56% 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% 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 US$230 billion by around 2020.
Whilst 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.
And it stands to reason that 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.
This weekend 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 that 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 and 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 cauterize 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.
CEO Investor Group on Climate Change
Investing for the climate in Asia was undertaken for the AIGCC by Asia Research and Engagement (ARE), with the support of Australia and New Zealand Banking Group Limited (ANZ),
AIGCC’s founding members include Cathay Financial Holdings, BlackRock, Armstrong Asset Management, AustralianSuper, Generation Investment Management, Brawn Capital, International Financial Corporation, as well as Impax Asset Management (participating observer).
The AIGCC is part of the Global Investor Collaboration on Climate Change (GIC), a collaboration of four regional investor groups focused on climate change, including IGCC (Australia and New Zealand), AIGCC (Asia), IIGCC (Europe) and Ceres INCR (North America).