Future of green finance in Asia

Sherry Madera | Updated on June 17, 2021

The range of green financing solutions available to investors has broadened significantly in recent years   -  istock.com/RomoloTavani

More collaboration between regulators, investors and industry stakeholders is vital to boost sustainable financial ecosystem in Asia

Sustainable financing has gained significant momentum in 2020 and regulators across Asia have stepped up efforts to promote the development of green finance for a sustainable future. Fund flows into ESG investments in Asia and across the globe saw a sharp increase in 2020 compared to 2019. Sustainable finance bonds hit an all-time annual record of $544.3 billion in 2020 and assets under management for ESG funds in Asia reached more than $60 billion in end-December 2020, doubling that of 2019.

As we approach the second half of the year, we see encouraging trends for sustainable investment in Asia that point towards the deepening of ESG agendas across the region.

China takes the lead

Asia-Pacific deal-making involving sustainable companies accounted for 33 per cent of merger and acquisition (M&A) activities in 2020 by deal value. Based on the number of deals, China took the lead globally during this period, accounting for 20 per cent of total sustainable deal-making activity globally, followed by the US (9 per cent), India and Italy (7 per cent).

With sustainable investing becoming mainstream, China has emerged as a pioneer in green finance. It represents one of the largest markets for green bonds, and is home to a diverse array of other innovative green finance and ESG-themed products such as green funds, insurance products, exchange-traded funds (ETFs) and asset-backed securities.

Alongside China’s national push to achieve carbon neutrality by 2060, regulators are also helping to accelerate the momentum for corporate ESG monitoring and disclosures in China, with Chinese regulators beginning to detail the mandatory disclosure requirements for listed companies on their environmental information. China’s stock exchanges have also issued market guidance for ESG information disclosure.

Evolving green taxonomies

Sustainable finance taxonomies play an instrumental role in helping investors better identify sustainable business amid concerns over green-washing and a lack of standardised ESG regulations and reporting.

China published its green taxonomy (the Green Bond Endorsed Project Catalogue) in 2015, and its central bank announced in late March that it is cooperating with the European Union to push for greater convergence of taxonomies of green finance and investments across the two markets. The aim is to implement a jointly recognised classification system for businesses’ environmental credentials by the end of 2021. Across the region, other Asian countries are also joining the green taxonomy trend.

More specific definitions for sustainable finance is important, and it would be ideal to harmonise these taxonomies and their underlying data set requirements across the region. While complete harmonisation is difficult, a clear mapping of the underlying data sets which are the taxonomy’s building blocks to compliance is achievable and should be prioritised.

Green bonds go social

The range of green financing solutions available to investors has broadened significantly in recent years, with products such as green ETFs, green private equity, green loans, as well as other listed and unlisted products hitting the market. Asia would do well to keep up, innovate and deepen liquidity in local markets for new green financing instruments.

Apart from green bonds, social bonds have also emerged as an alternative funding tool in Asia, useful in the fight against the pandemic by mitigating the socio-economic impact of the crisis. This was largely driven by an increase in capital-raising by sovereigns, multilaterals, and banks to support Covid-19 relief and recovery efforts. The proceeds allow issuers to raise funds for projects with positive social outcomes such as basic infrastructure, affordable housing, micro-finance, food security and access to essential services.

Plugging the data gaps

Despite the encouraging growth in sustainable investment, the lack of standardised, transparent and comprehensive ESG data and benchmarks to guide investment decisions remains one of the key obstacles among investors. According to the latest report by the Future of Sustainable Data Alliance (FoSDA), over eight in 10 institutional investors globally cite data as the obstacle to effective assessment.

To help address this challenge, FoSDA announced the establishment of a Data Council in February 2021 to act as an industry and regulatory sounding board focused on establishing consensus on key ESG data issues and needs for a sustainable future.

The Covid-19 crisis has heightened the focus on sustainable investing and underlined the urgent need to address ESG risks. Sustainable investing has made an irreversible leap into the mainstream, and there is greater awareness that robust ESG practices can help companies in Asia unlock new opportunities and attract new sources of capital in a post pandemic environment.

With Asian markets poised to recover ahead of the rest of the world, the region’s green finance market will continue to grow and expand in the coming years. To help Asia’s sustainable finance ecosystem to flourish, greater clarity, collaboration and convergence among regulators, investors and other industry stakeholders are required to tackle underlying challenges and maintain this positive momentum for the long term.

The writer is Chief Industry & Government Affairs Officer of the London Stock Exchange Group and Chair of the Future of Sustainable Data Alliance

Published on June 17, 2021

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