Greening Southeast Asia’s Financial System

We have reached a critical moment in the relationship between our environment, our economies and our financial markets. Across the global business community, the strategic imperative of transitioning to amore sustainable path is becoming increasingly apparent.

But the levels of expenditure needed are huge and beyond the reach of public finances, which is why private finance needs to be mobilised. On infrastructure alone, Asia Development Bank estimates developing Asia Pacific need to invest US$1.7 trillion per year in infrastructure through to 2030 to maintain its growth momentum, tackle poverty, and respond to climate change.¹

And we need to move fast. Over the last five decades, Asia accounted for half of the world’s economic losses from natural disasters, amounting to more than USD$1.3 trillion.²

The fact is, we need to reinvent a lot of the economic activity that has been built up over the past century and a half to tackle the challenges posed by climate change. And clearly, this comes with a huge price tag.³

The Asian green finance experience

Despite rapid economic growth in Asia, ‘green’ financing and investing hasn’t yet taken off in the region as much as it has in Europe and North America.

HSBC-commissioned research found that 85% of Asia investors are familiar with green bonds. But of those who are familiar, 69% are not yet invested, compared with 15% for the rest of the world.⁴

This is ironic given that Asia is particularly vulnerable to the effects of climate change.

Many of its cities and megacities are in low-lying coastal areas that are susceptible to rising sea levels and storms sweeping in from the oceans.⁵ As Asia’s cities expand and global temperatures rise, more and more homes, airports, power plants, warehouses and factories will find themselves at higher risk of weather-linked disasters.

A recent assessment by HSBC found that India and South-East Asian countries are most vulnerable to climate risks.⁶ Clearly, there is an urgent need to funnel more financing towards environmentally-friendly projects and technologies and climate-resilient infrastructure in the region.

But there is some progress is already being made.

The International Capital Market Association (ICMA) Green Bond Principles have given shape to the green bond market by taking abstract terms and giving them substance, as well as social and sustainable bond guidelines. And ICMA has created consensus between issuers, investors and intermediaries – which has helped the market grow.

The ASEAN Capital Markets Forum (ACMF) is working to harmonise standards and regulations around green finance, providing a complete suite⁷ of standards in line with ICMA to accelerate development across Southeast Asia.

In Singapore, the Government initially launched the Green Bond Grant Scheme⁸ offsetting the cost of companies issuing sustainability-oriented bonds, and later expanded this to become the Sustainable Bond Grant Scheme⁹ widening the remit to encourage the issuance of green, social and sustainability bonds in Singapore and is open to first-time and repeat issuers, further developing the country as a hub for sustainable financing.

Since then we have seen a number of ‘firsts’ for the market – last year, HSBC in conjunction with Ho Bee Land secured Singapore’s first green loan, for example.

Role of the financial sector in the low-carbon transition

While there is money available for green projects and technologies, not enough of it is finding its way to the end goal because of three reasons; firstly, a lack of clarity as to what is actually deemed to be “green”, secondly that many companies and issuers are still not seeing the benefit to the bottom line of green financing, and finally that of investor awareness.

As a key intermediary between businesses, governments, investors and the public, banks have a responsibility to direct the flow of capital towards projects and technologies that will help accelerate the transition to a lower-carbon economy.

Equally we have a duty to help shape the green finance markets, and to contribute to the design and development of green-financing products that will help this transition – including green bonds, loans and investment tools.

I expect the focus on fixed income Environmental Social and Governance (ESG) to intensify, which should generate momentum for the asset class and boost demand for sustainability and social bonds and ‘pure play’ green bonds. Moody’s recent acquisition of Four Twenty Seven, the climate data firm, signals the increased focus on climate-related issues when it comes to credit worthiness.¹⁰ The introduction of rating agency ESG scores may also boost investment inflows.

So how can we make sure the green finance market grows at the pace it needs to?

The greening of the overall financial sector requires both the investor base to drive issuers to change their behaviours, and a broader realisation of issuers that ESG generally, and green finance in particular, will become a part of all elements of funding.

Corporates should be cognisant of this waking up of investors to ESG. Large investors appealing to new mandates are being asked to disclose how green their main funds are, not just singular specifically green funds. And banks have a role in helping investors to judge the quality of green finance offerings across all assets.

The severity and the magnitude of climate impacts is becoming increasingly clear. How we go about tackling it is an economic question as well as a moral one, and we are running out of time to find a solution.

Boosting green investment and fighting climate change is a huge challenge for the financial sector. We are making headway, but we need to continue to do more. This is a subject which will affect us all and will take a collective response to confront it.

A contribution piece by Stephen Williams, Head of Global Banking Southeast Asia, HSBC. A version of this piece was first published in The Business Times on 3rd September 2019.